Kraken is both a “spot exchange” for exchanging between currencies, and a Forex-like market for “currency pair trading” (CPT) on leverage. While utilising Kraken as a “spot exchange”, you must have adequate funds in one currency to exchange for another such as 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 After executing a spot exchange between currencies the funds are available to be exchanged again or withdrawn.
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 since when placing a currency pair trade you are borrowing funds in order to place a leveraged trade. Currency pair trading allows you to open short or long positions using leverage. Trading short is only possible with leverage, which means it’s only possible on margin pairs.
Only “currency pair trading” results in creating a "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 funds used as collateral are not available for withdrawal until the position is closed.
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. But 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 . Also, there can be currency pairs that can't be exchanged on spot, but can be traded as a positions using leverage, so you may only have the option to select a level of leverage for some currency pairs.
To summarise, a “Spot Exchange” is defined by exchanging one currency for another while “Currency Pair Trading” is borrowing funds using collateral on your account in order to open up a position using leverage to short or long a currency against another currency.
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.