How to Trade Bitcoin
As the world’s first cryptocurrency, bitcoin (BTC) was the earliest to meet widespread success and, to date, it remains the biggest and most popular cryptocurrency in the world. People are increasingly trading cryptocurrencies and viewing the cryptocurrency as a viable investment option. However, while buying bitcoin from a bitcoin exchange may be difficult for many people due to the high costs, trading Bitcoin CFDs is making it easier for them to enter into the bitcoin space.
Beginner's Guide to Bitcoin Trading
Cryptocurrencies are encrypted decentralised digital currencies that are transferred between individuals. These currencies are not tangible and exist only in the electronic form, it is a digital asset that exists and remains as data. They allow a person to send money in the same way as sending an email, with much lower transaction times compared to doing it via your bank account, minimal fees, no credit cards and no middleman. The joint bookkeeping process is called a “Blockchain”.
Bitcoin trading involves capitalising on the opportunity to buy low and sell high using cryptocurrency CFDs. CFDs are contracts that track the price of an underlying instrument, and in the case of bitcoin trading, the price of bitcoin and this is done without having to actually own the underlying asset - bitcoin.
Unlike investing which requires buying and holding the actual bitcoin for the long run hoping its price will ultimately increase, the aim of bitcoin trading is to try and profit from predicting the cryptocurrency’s price movements.
Essentially, bitcoin trading is about buying and selling bitcoin in the short term whenever you think you can profit from any price movement. On the other hand, investing is about trying to achieve long-term gains regardless of the price fluctuations that may occur along the way.
What Influences Bitcoin Price Movement?
Bitcoin is a decentralised currency and so government regulations that cover fiat money don’t apply to it. This means that most geopolitical and economic issues that affect traditional currencies are not likely to affect bitcoin price. However, several factors influence the cryptocurrency’s price including:
1. The supply of Bitcoin
The maximum supply limit for bitcoin is capped at 21 million coins which are expected to be mined by 2040. This means that when this number is reached, bitcoin mining will no longer create new bitcoins. On the other hand, other cryptocurrencies have higher
maximum limits – already, the ether limit has crossed the 100 million coins mark, litecoin has an 84 million coins limit while the one for Ripple is 100 billion coins. Bitcoin’s lower supply limit makes it more valuable than all the other cryptocurrencies.
2.User adoption
The popularity of bitcoin and user adoption can drive its prices up. Conversely, low demand for the cryptocurrency can decrease value. Put simply, the higher the perceived value of bitcoin, the higher its price is likely to be. For instance, governments, multinational corporations, and institutional investors adopting bitcoin tend to push the price up.
3. Competition with other cryptocurrencies
There are now over 2,000 cryptocurrencies and all of them are vying for people’s attention. While bitcoin is still the option with the highest market capitalisation, other cryptocurrencies (also known as altcoins) such as bitcoin cash, Ripple, litecoin, ethereum and EOS have become top competitors that are piquing people’s interest. A higher number of competing cryptocurrencies are likely to affect the value of bitcoin.
4. Media coverage
All currencies are affected by public perception and bitcoin is no exception. The type of media coverage bitcoin gets can affect its prices and contribute to its volatility. For example, bad press questioning the security and longevity of bitcoin tends to decrease the cryptocurrency’s value.
5. Key events
Any major events including security breaches and regulation changes can have serious implications for the value of bitcoin.
6. Integration and use cases
Just like other cryptocurrencies, bitcoin is still in its nascent stage – there is still a lot of uncertainty regarding how it will be used in the future. Consequently, an increase in the number of bitcoin use cases and integration with wider networks tends to increase demand, and with it, value. For instance, if there’s an announcement that a
country is adopting bitcoin as legal tender, people may buy more bitcoin to benefit from any potential future increase in value. The increased demand will probably increase the value of the cryptocurrency. On the other hand, if a reputable source questions the usefulness of bitcoin in the future, demand is likely to decrease and so will price.
7. Security
Bitcoin thefts and crypto exchange hacks affect the price of the cryptocurrency. Security breaches drive investor fear and decreased demand for bitcoin, in turn causing a decrease in price. This fear is heightened by the fact that bitcoin transactions mostly take place on the internet and cybersecurity threats are a big concern, especially with the increase in the number of hackers.
Bitcoin is the digital currency with
the
largest market
capitalisation and price levels since its inception in 2008
It dominates 50% of the total crypto market cap
The highest that Bitcoin price has ever
reached was in
December 2017, when it hit the $19,783 mark
Experts believe the currency can reach
much
higher price
levels in the future and bitcoin cfd trading is on the rise
How is Bitcoin Traded?
How you trade bitcoin will depend on what you want to gain from cryptocurrency trading and how much time you can dedicate to cryptocurrency trading. There are four main ways you can trade bitcoin.
1. Swing trading
Swing trading is the practice of catching trends in price movements when they form and holding on to the trend until it experiences a reversal. This strategy is ideal for traders who want to take advantage of market momentum and don’t have hours to spend monitoring their trades.
2. Day trading
Day trading involves executing intraday strategies to open and close positions within a single trading day. This type of trading is ideal for traders who have more time compared to swing traders but still want to take advantage of short-term opportunities in the bitcoin market. These opportunities may come from certain factors such as emerging market patterns or developing news.
3. Scalping
Scalping is a trading style in which traders profit off several intraday trades on small price movements. This trading style is for traders who would like to make frequent small profits rather than waiting for big opportunities. Scalping does require that a trader have a strict exit strategy since one big loss may eliminate all the small gains the trader has accumulated.
4. Passive trading
Passive trading involves buying bitcoin with the goal of holding the position for a long period. The idea with passive trading is to wait for the price of the asset to drop to a certain level before buying in then waiting for the price to go up to a certain level before buying out. Unlike the other forms of trading, the time between when a trader opens and closes their position can span from several days to years.
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What Are The Steps To Placing A Trade?
Step 1 | Understand Bitcoin
As with any instrument you want to trade, it’s important to have an understanding of how things
work.
With bitcoin, you have to take time to study the fundamentals including what influences the
cryptocurrency’s price and how margin calls work. You will have to know the latest bitcoin news
and
have an idea of what’s next for the price of bitcoin. It will also be vital to know how to
analyse
bitcoin price movements.
The main methods for analysing the bitcoin market are technical and fundamental analysis.
Traditional fundamental analysis may not work for cryptocurrencies therefore bitcoin traders tend to favour technical analysis to predict future price movements. However, it’s important to stay up to date with any news that can impact bitcoin price regardless of the analysis method you choose.
Technical analysis focuses on the cryptocurrency’s price movement and historical patterns. Analysing past data and comparing timeframes can reveal emerging trends and patterns. Technical tools such as trend-following, support and resistance levels, Fibonacci levels, and Elliott waves, are favourite tools of bitcoin traders.
Fundamental analysis tries to determine the price of bitcoin by looking at the internal and external forces that can affect its value. This means that fundamental analysis for bitcoin can involve the evaluation of major bitcoin and macroeconomic news, regulation updates, and technical developments. For example, if a large economy decides to ban bitcoin, fundamental analysis will probably predict a price drop.
Step 2 | Create a Plan
A good trading plan is essential. It will help you to make objective and educated decisions that increase your chances of becoming consistently profitable. Some of the key things to include in your plan are:
An outline of your short- and long-term trading goals and expectations.
A description of your risk appetite and preferred trading style.
A robust trading strategy with clear rules for entering and exiting trades.
A risk and money management plan. This plan should outline all the elements that are central to good risk management including how much overall risk you are willing to take, a risk/reward ratio, and the use of orders to minimise losses.
Sticking to your plan, even when it may be more profitable not to, will give you discipline and an edge that increases your chances of succeeding in bitcoin trading.
Step 3 | Open an account
To trade cryptocurrency, you have to open an account with a CFD or Forex broker who offers CFDs on bitcoin. Select a broker with a good reputation for providing a reliable trading platform and support. The broker should also have trading terms and conditions that align with your trading style and risk profile. When choosing an account, it’s prudent to start with a demo account before moving to live trading.
Step 4 | Place a trade
Once you have opened an account you can place your first trade. You do this by specifying the amount you are staking on your trade and choosing to buy (go long) or sell (go short) depending on how you expect the market to move. If you expect that the price of bitcoin will rise, you buy, and if you expect a price drop, you sell. You can also define your close
conditions using stop-loss or limit orders before opening and monitoring your position. To close the trade, you simply do the opposite of what you did when you opened the position. So if you buy initially, you sell to close the trade. If you sell initially, you buy to close the position.
Why Trade Bitcoin?
Bitcoin is a decentralised currency and so government regulations that cover fiat money don’t apply to it. This means that most geopolitical and economic issues that affect traditional currencies are not likely to affect bitcoin price. However, several factors influence the cryptocurrency’s price including:
1. Volatility
The value of bitcoin has been historically volatile. For instance, its volatility reached almost 8% between October 2017 and January 2018. High volatility means there is a higher earning potential if you manage to anticipate the market movements correctly.
2. Unlimited market access
Most traditional markets such as commodities and stocks have opening and closing times. With bitcoin and other cryptocurrency markets, there is no central exchange. Instead, there are hundreds of cryptocurrency exchanges worldwide making it possible to trade bitcoin 24/5.
3. Low trading costs
In most cases, bitcoin traders enjoy very low trading fees which represent the spread on bitcoin CFDs. The spread is the difference between bid and ask (buy and sell) prices of the CFD.
4. Access to leverage and margin
Trading CFDs on bitcoin comes with access to high leverage. This means you can gain exposure to a large position by only depositing the margin while retaining the ability to profit according to the actual size of the trade. For instance, a leverage ratio of 30:1 means you can open a position size that’s 30 times bigger than your trading account. With this leverage, you would require only 2% of the total value of a trade to open a position. Nonetheless, leverage is double-edged and can easily magnify losses the same way it magnifies the gains. It’s important to use it cautiously.
5. Ability to gain in both rising and falling markets
Similar to other cryptocurrencies, you can trade CFDs on bitcoin in both bullish and bearish markets. In a rising market, you can go long, buying bitcoin for a lower price and selling it later when the price has increased. In a falling market, you can short-sell, selling bitcoin and buying it back when the price has dropped.
Just like trading any asset, bitcoin trading involves some risk and it’s possible to make some mistakes as you go.
Bitcoin trading is not a get-rich-quick scheme – going in with the wrong expectations and trying to make large gains without putting in the time and work may see you get out of trading in very little time.
To increase your chances of succeeding, you need to go beyond any hype and plan your crypto trading strategy carefully. You will also need to start small, stay up to date with the market, and be patient as you learn and improve your skills.
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