Differences between Spot Exchange and Currency Pair Trading

Kraken is both a "spot exchange" for exchanging between currencies you own, and a Forex-like market for "currency pair trading" (CPT) on leverage (borrowed funds).

Spot Exchange

While utilizing Kraken as a "spot exchange", you must have adequate funds in one currency to exchange for another. For example, depositing USD in order to exchange for XBT on the XBT/USD pair.

After executing a spot exchange between currencies the funds are available to be exchanged again or withdrawn.

When using the order forms, if you select "None" for leverage, then you are spot exchanging between currencies and must have adequate funds in one of the pairs. For most spot exchange orders, the Simple order form is sufficient.

For more information on Spot Exchanging, see: Trading Basics.

Currency Pair Trading (CPT)

In "currency pair trading", however, the leverage feature is used. While trading on leverage you are only required to hold collateral currencies and are able to trade any of the margin pairs even if you do not hold the currency on that pair. This is possible because when placing a leveraged trade you are borrowing funds for the entire value of that trade.

Only currency pair trading results in creating a long or short "position," meaning you will only see open or closed currency pair trades under the "Positions" tab along with your Profit/Loss (P/L). Once a position is open, the amount of funds used as collateral are not available for trade or withdrawal until the position is closed.

While it's possible to go "long" without leverage, trading "short" is only possible with leverage, which means it's only possible on margin pairs.

When using the order forms, if you select a level of leverage (2, 3, 4, 5) then you are opening a CPT position with borrowed funds. Leverage can only be selected from the Intermediate and Advanced order forms.

Note that some pairs will only be available for spot exchanging and not leveraged trading — you will not be able to select leverage for pairs that are spot exchange only.

For more information on Currency Pair Trading, see: Leverage and Margin.

Summary

A "Spot Exchange" is exchanging one currency you own for another.

A "Currency Pair Trade" involves leveraging collateral to borrowing funds on your account in order to open up a position to short or long a currency against another currency in hopes of profiting from short-term price swings.

Examples

Example of a spot exchange:
Exchanging $500 for ETH on the ETH/USD trading pair.

Example of currency pair trading:
Using $500 as collateral in order to borrow $1500 worth of BTC and short it on the BTC/EUR trading pair using 3:1 leverage.