The hype train for cryptocurrency and blockchain technology grows longer with each passing day, and for good reason. 2017 showed that depending on how investors play it, digital currencies can be very profitable investment vehicles, even more so than traditional stocks. Those who invested even small amounts of money at the beginning of the year were able to earn huge returns by December due to the peak in several currencies.
Bitcoin especially showed unexpected highs that have been difficult to replicate ever since. By shooting up to $20,000 per unit, the pioneer cryptocurrency motivated new investors to enter the crypto space in hopes of turning high profits, even as far as altcoins were concerned. This resulted in further adoption and the creation of even more profitable ways to invest.
Although Bitcoin trading and the trade of other digital currencies were around before 2017, transaction volume saw an increase. Statistics show that in 2017, about $12,000 per second was transacted in Bitcoin, compared to about $2,000 per second in 2016. Also, Bitcoin has become more open and accessible to the public. Where it was initially dominated by software engineers and developers, a larger portion of the general public is now knowledgeable enough to partake in trading Bitcoin.
Bitcoin is easily the most popular digital currency in existence, with a market capitalization of $70,735,428,301. Unlike traditional currencies, which are backed by reserves in physical commodities like oil, gold, and silver, it relies solely on cryptographic computing.
It is decentralized and does not need to be managed or distributed by a central authority. Instead, its coins (units) are earned and distributed by miners, a group of computing nodes that secure the network and confirm all transactions in exchange for a reward. As a result of the constant buying and selling of Bitcoin, it is highly volatile. This allows users to buy BTC at lower price points and sell it at higher ones and forms the basis of Bitcoin trading.
How Bitcoin Trading is Done
On a basic level, people who wish to trade Bitcoin are expected to fully research what they are about to do. As simple as it may seem, digital currencies can be wildly unpredictable, and it is just as easy to lose money as it is difficult to gain it. Basic knowledge of BTC price history and chart reading is important.
Next, users will have to create a Bitcoin wallet on a site like blockchain.com or Bitcoin.com. After doing this, BTC has to be bought and put into the wallet where it can be transferred to an exchange for trade. To buy BTC using fiat currency, users can sign up on Coinbase and verify their accounts, after which they will be able to exchange fiat for BTC and transfer it to their wallets. Now it can be moved to the desired exchange to begin trading different currency pairs like BTC/ETH or BTC/XRP.
Why Trade Bitcoin?
Bitcoin trade is a common practice in the cryptocurrency space but, what incentives does it offer? Why should anyone trade it? Before going into trade, it is important to know how advantageous the practice can be, what to expect and what comes off as unrealistic expectations. It is beneficial for several reasons:
1. It Can Be Done from Any Location
Unlike fiat currency, Bitcoin is not governed by the policies of any particular country. It is free from country-specific economic demands and fines. As a result, its users can trade from any location as long as they have a PC and internet connection. BTC can be exchanged for other currencies without being monitored by a central figure.
2. It Can Be Done at Any Time
Since Bitcoin is traded from most countries in different time zones, the market never stops moving and it can be done 24/7. Bitcoin exchanges are also fully digital, not fixed in particular locations, so they operate continuously. Since there are no fixed exchanges, there is no fixed price, and this is advantageous for traders. However, all exchanges tend to stay within the same price range.
3. Bitcoin is Volatile
Like other cryptocurrencies, the price of Bitcoin is known to fluctuate frequently and rapidly due to many different factors. A study by undergraduate students at the University of Missouri showed that BTC price has fluctuated in the past due to any of the following reasons:
- Changes in Bitcoin structure, such as a fork
- Personal opinions by industry experts and big names in financial business and investing
- New developments in government regulation
- News concerning other cryptocurrencies such as forks, upgrades, and partnerships
- Bitcoin exchanges under investigation
- New investment opportunities like BTC lending
- Cybersecurity news such as exchange hacks and coin theft from wallets
Bitcoin's price has always reacted to major events. For example, it fell after the Winklevoss twins proposal for a Bitcoin ETF was rejected by the SEC in late 2018. In 2016, BTC saw a 16% decline after Mike Hearn called it a failure. There was also another decline when China announced that it would begin investigating exchanges in Beijing. Generally, bad news leads to declines while good news has positive effects on the BTC price.
Bitcoin Trading vs Investing: Is There a Difference?
Bitcoin trading and investing are often used interchangeably but, they are very different approaches to dealing with cryptocurrency.
Bitcoin investing is usually a long-term undertaking. This means that a person buys BTC with the intention of holding it for a long time. Investors typically believe that its price will rise and fall continuously and are not fazed by this volatility. They usually have a portfolio of other cryptocurrencies as well and are unlikely to give up their investments when there is a market crash.
Just the same way an investor in a large company is unlikely to give up their investment due to a bad quarter, BTC investors HODL until the very end. Short term price trends are unimportant where investing is concerned. Instead, long-term trends are considered.
Bitcoin investors are also motivated for different reasons than traders. They believe in the ideology, team or technology behind the cryptocurrency.
Investors tend to do the following things:
- Create a long-term position with their digital assets based solely on long-term trends
- Create a position based on a lower price than the target sell price (if any)
- Hardly sell except if they think it will be instrumental in gaining more long-term returns
- Keep their digital assets through both bullish and bearish markets even when the price margins are huge
- Add to their position with time
By contrast, Bitcoin trading is carried out based on the short-term behavior of the markets. Traders typically buy and sell Bitcoin whenever they think a profit can be made. They view it primarily as an instrument of short-term profit and do not bother about the technology or ideology behind it. They also tend to avoid sentiments towards a particular coin in case they have to drop it later.
A trader will usually enter the market and trade for a few months during peak season before abandoning the coin when it becomes unprofitable. For these groups of people, short-term price trends and profit matter more than the future or fundamentals of Bitcoin.
Traders tend to do the following things:
- Shoot for short-term profit based solely on short-term trends and technical analysis
- Buy low and sell high in the short term before peak periods
- Take risks and losses without fear
- Only buy high to follow a trend
- Care very little about the current price of an asset and focus on its movement and potential for gains
- Leave a lot of money on the table while chasing profit
A Comparison Between Bitcoin Trading and Investment Risks
Although both trading and investing are risky, the former is far worse. While investors can wait out any market crash knowing that the prices will rise again in the long term, traders do not have the luxury. Where investors already have resources to keep them going through a rough patch, traders are usually all-in. They always have to know when to get in and out of the markets to avoid losing money.
Since trading focuses on short-term gains, a bad market crash can cripple a trader's operations, especially if they have to wait a long time to recover their funds.
Bitcoin investors do not need to have an in-depth knowledge of Bitcoin market movements. They can also start with small amounts that increase over a long period. Since it is held for long, it can grow into a large sum of money within years. It is also easier since investors do not need to worry about BTC price volatility, because they usually enter the market prepared for long waits.
Traders, on the other hand, mostly work by closely following trends and carrying out technical analysis on the market movements. It is difficult for people to excel at it without understanding the technicalities of the market. It is also difficult to start with small amounts since traders aim for percentage gains over a short period.
The constant fluctuation of Bitcoin is only for those who understand and accept the possibility and implication of loss.
Although all traders aim for the short-term profits, they do not all achieve it the same way. While day trading is the most common type, there are other types of Bitcoin trading, including Scalping and Swing trading.
Day traders carry out multiple trades throughout the day and try to turn profits on daily price movements before the market closes. They spend a lot of time in front of computers, monitoring the market charts on an exchange platform, until they close their trades for the day.
Day trading has several subcategories but, the core idea is to spot daily trends and buy and sell BTC. Several exchanges have trading sections that make things easier for day traders. Time is the most important thing to a day trader since a few minutes can change the outcome of their entire trade due to the extreme volatility of Bitcoin.
In traditional investing, scalping is the process of placing multiple trades with the aim of making profits off small price changes. It is extremely time-sensitive short-term trading which can easily go wrong. This is why it is reserved for the shrewdest traders.
The general idea behind scalping is that making small profits reduces the general risk of losing all of one's money at once. Profit also comes in through different trades as a contingency plan in case a few trades go sour. In contrast, normal trade involves buying and selling high in just one trade position which can go bad and lead to a loss of bulk funds.
Scalping can involve hundreds of daily trades by a single trader, which are easier to catch than larger price movements. Combined, several small profits make up significantly large gains as long as a trader has a strict exit strategy and is not pushed by greed. The loss is also greatly reduced.
Generally carried out on the intraday 1-minute and 5-minute intervals, scalping aims to use larger position sizes for smaller gains in the shortest possible holding time. The goal is to buy or sell a number of BTC at a current price and then quickly sell it a small percentage higher for profit. Traders can hold off for anywhere from a few seconds to several hours but usually close the trade at the end of the day.
Scalping is a fast-paced high-pressure activity that requires precision and accuracy to be executed well. Momentum indicators such as moving average convergence divergence (MACD), stochastic, and relative strength index (RSI) are commonly used to determine the most advantageous trends. Price chart indicators like Bollinger bands, moving averages, and pivot points are also used to view good levels of support and resistance.
Bitcoin price usually swings in cycles which traders can benefit from. Swing traders take advantage of this natural swing by holding overnight, until a price movement dies out. This means that unlike day traders, they do not have to constantly monitor the charts. Typically, swing trading may take as little as overnight or as long as weeks to perform. Unlike day trading, trends become more apparent in swing trading and the volatility of BTC is enough to support it.
Swing trading is flexible and does not take up as much time as day trading or scalping. New swing traders may find this quality appealing since not everyone takes on trading as full-time work. It is better suited for those who hold other jobs and would rather not focus fully on Bitcoin trade but still wish to make some profit.
Success in swing trading heavily relies on following the direction of weekly and monthly trends, not just by looking at charts, but by checking exchange order books to see what other traders are doing. This will greatly increase a trader's chance of making a profitable trade.
Swing trading also relies on industry news, since price cycles — especially those in one to three-week time frames — are affected by ongoing events. Traders have to monitor the news and be ready to pull out of the market in anticipation of anything that can disrupt it negatively, such as regulatory developments and exchange hacks. They also must look out for good news that can influence the market positively, to access whether a change of position will guarantee a higher profit percentage.
Like day trading, swing trading is extremely risky, and traders must have a contingency plan in place to manage risk and limit the loss of funds in a bear market. This can mean cutting losses quickly to avoid forced liquidation.
Swing trading is a great way to conserve time while still earning profits, but traders must research all trends and ensure that they are certain of them before jumping in.
Analysis Methods Used in Bitcoin Trading
The price of Bitcoin is unpredictable, but traders and investors use certain methodologies to discover movement patterns. These instruments allow them to make informed trade decisions with minimal risk. The two main methodologies used for Bitcoin trade and investment, are fundamental analysis and technical analysis.
Fundamental analysis is used to predict trade odds by looking at the big picture. It can be used to view Bitcoin value, in terms of its technology and external factors, to determine possible changes in price. These factors include the cryptocurrency industry as a whole, news concerning Bitcoin, technical changes, regulatory developments and general events that may affect the price of BTC negatively or positively.
This type of analysis is often successfully used in the traditional stock trade since there are many different fundamentals to base the market on. Some examples are dividends and earnings. Unfortunately, cryptocurrency is fairly new and still a developing market, so it is more difficult to carry out fundamental analysis for several reasons:
- Unlike their traditional counterparts, cryptocurrency markets do not have a lot of data to base its trades and fundamental analysis upon. For example, stocks can see related price movements when a company's earnings are released. Depending on this, there can be an increase or decline in the stock price. Other factors can also push the price in either direction based on the company. Bitcoin is not a company, so it is difficult to collect specific data that can point to future price movements.
- Bitcoin is decentralized, so buying BTC does not give a trader ownership to any part of it. The value of the coin does not have a direct relationship with how Bitcoin performs technically, because traders are not concerned about it. Its Projected Earnings Growth, Price to Earnings Ratio, and Return on Equity cannot easily be calculated.
- The cryptocurrency market is largely speculative, as Warren Buffet has said before. Cryptocurrencies generally have no intrinsic value and a lot of them do not have working products yet. This means that the market is driven by the actions of traders and investors.
- Since the market is new, it is difficult to give digital currency companies an accurate valuation. Because there is no historical benchmark, it is difficult to say just how valuable they will be.
- Often, coins are not used for their intended purposes so there is no way of analyzing their performance accurately.
Technical Analysis (TA) looks at the historic price and volume trends of Bitcoin, and in other digital currencies, to predict their future price movements. To predict the future price of BTC, it studies market factors including past price movements and trading volumes. This helps traders to identify price patterns that can help them deduce future odds.
Unlike fundamental analysis, technical analysis does not consider the fundamentals of an asset like Bitcoin. Instead, it focuses on charting and mapping out technical indicators to predict the possibility of short-term, medium-term, and long-term trends based on past and current data. This means that it is not necessarily certain, but points traders in the right direction.
Mathematical calculations known as "technical indicators" are used to carry out this type of analysis on the past and current BTC price and volume data (even when performing "trend analysis"). Technical analysts usually study this information visually in the form of candlestick charts. Some common technical indicators used in the technical analysis include Elliott Waves (EW), Moving Averages (MA), and the Relative Strength Index (RSI).
The main assumption behind technical analysis is that price movement can point to future changes, no matter what events occur globally. In trading, both types of analysis can fail but, using both gives traders a higher chance of accurately predicting future price changes.
Human behavior in markets is predictable and shows that new investors will always tend to follow the trends of past investors. This is why studying past price factors is a great pointer to future price behavior.
Popular Bitcoin Trading Terms
For those who would like to start trading Bitcoin, it helps to be familiar with certain terms that one is bound to come across constantly. These terms include:
A Bitcoin exchange is an online platform where buyers are matched with sellers who want to exchange one currency for another. Depending on the exchange, fiat currencies can also be exchanged for cryptocurrency. Although most popular Bitcoin exchanges are automated and automatically match users and execute trades depending on their orders, some are peer-based. This means that they only match users with similar buy/sell orders and leave them to handle the trade themselves.
While there are other sources of BTC, such as Bitcoin ATMs, exchanges are the most common place to buy and sell it. Before choosing an exchange, traders must consider several qualities such as its reliability, quality, security, fees, liquidity, spread, purchase and withdrawal limits, trading volume, insurance, support, and user interface.
Exchanges like Coinbase and Binance rank high in such qualities, with high levels of security, high trade volumes, and good insurance. After choosing an exchange, a trader will be expected to verify their identity. Trading pairs can be viewed, and each exchange will have a buy/sell tab where orders can be placed. On Coinbase for example, BTC trading can be done in the following steps:
- Click on the Buy/Sell Bitcoin' tab
- Select a payment method
- Enter an amount
- Click ‘Buy Bitcoin Instantly'
- View Bitcoins on the user dashboard
An order book is a ledger that contains a complete list of users' buy and sell orders on an exchange platform. Normally, an order to buy BTC is known as a "bid", while an order to sell is known as an "ask." When the requirements of matched bids and asks are fulfilled, a trade has occurred.
Order book depth refers to the total quantity of orders in the book and can be used to measure the market's buy/sell intentions. It can be viewed using a depth chart that records cumulative bids and asks in the current market. This way, traders can see the total ask/bid volume in the order books from the latest transaction.
Bitcoin price is the price of the last trade conducted on a particular exchange, and changes quickly with time. Bitcoin volume, on the other hand, is the total amount of Bitcoin that is traded within a given timeframe and is typically used by traders to determine how significant a trend is.
Bitcoin price is only one of several factors used to see how the coin is performing and currently, it is the cryptocurrency with the highest price. In December 2017, BTC reached its peak price of more than $20,000 and has since been on a lengthy correction. Other cryptocurrencies have also seen massive corrections since their prices are somewhat tied to Bitcoin.
A Market Order is a type of buy/sell order that is fulfilled immediately, at market price. Traders simply set the amount of BTC they wish to buy, and the trade is executed immediately. One major drawback of this type of order is that traders can end up buying a little higher and selling a little lower than the market price. Normally, this may not do so much damage, but in a volatile market, it becomes apparent.
Market orders buy and sell available limit orders sitting on the order books at a given time, and traders are expected to pay an extra fee to execute them. While it is the easiest order to execute, it is risky in volatile markets. Market orders are best executed when there are a lot of buyers and sellers on the platform and there is very little spread, thus ensuring that a trade can be carried out at market price.
Limit orders allow traders to buy or sell BTC at specific prices that they choose and allow them to set buy or sell limits. They usually create an order in the order book that will hopefully be filled by someone else's market order. When the market price reaches the trader's chosen price, the trade is executed. Unlike market orders, limit orders do not have the risk of buying higher or selling lower than the market price.
One major drawback of limit orders is that traders can easily miss an opportunity when they set their buy/sell limits too high or low.
Stop Loss Order
A stop loss order allows a trader to set a specific future sale price as a contingency plan, in case the BTC price drops unexpectedly. A stop order places a market order only when a preset price condition is met.
Basically, it functions as a limit order in the book but executes trades like a market order, therefore it is subject to the same fees as the latter. This also means that stop orders are subject to slippage, in which traders buy higher or sell lower than the market price. Stop orders are a great way to manage losses but can also be risky.
Maker and Taker Fees
Maker and taker fees are charged by exchanges to encourage people to trade. They are paid by traders whenever particular orders (market, limit, or stop-loss orders) are made.
When a trader places a market or stop order that is immediately filled, they are referred to as a "taker," and are expected to pay a taker fee for it, since such traders are essentially "taking" the price they want by buying or selling limit orders on the order books.
When a trader places a limit order that is not filled immediately, such as a limit order, they are referred to as a "maker," and are expected to pay a reduced "maker" fee for it.
"Takers" generally pay a higher fee while "makers" pay a reduced fee.
Common Trading Mistakes
Although losses are commonly due to issues with the volatility and unpredictability of Bitcoin, traders can also lose money as a result of their own mistakes. Some common mistakes include:
1. Risking More Than One Can Afford
This is one of the biggest mistakes that a trader can make. The promise of profit can be so tempting that people begin to consider putting all their money into cryptocurrency. The risk of loss associated with trading makes this a bad idea. This is why traders must only trade with spare cash that will not leave them stranded after a loss.
Trading with more than one is comfortable with, may also negatively affect their decision-making process and drive them to make bad trade decisions. There is also more fear and anxiety due to the looming possibility of losing all the money.
2. Not Having a Trading Strategy
Before going into Bitcoin trading, users must have a comprehensive plan, showing their short-term and long-term trade goals, as well as how they hope to achieve them. Everything should be drawn out to the last detail, including the type of trading they wish to carry out, as well as the exchanges they hope to use.
Not having an actionable plan is a problem because traders will have no definite way of knowing if they've made any significant progress. Planning also helps traders develop a backup plan for losses, as well as record all cash flow, in and out of exchanges. This way, it is more difficult to give into greed since a roadmap is being followed.
3. Leaving Money on an Exchange
The bout of exchange hacks in 2018 have shown that it is unsafe to leave money on these platforms. One major reason is that exchanges use password systems which can be hacked or mistakenly given away through phishing sites. Bitcoin cold wallets, on the other hand, are secured with private keys that are much harder to collect.
Another reason to never leave money on an exchange is that wallets on such platforms are not managed by the trader. This means that there is a possibility of another party accessing the BTC in that account. Cryptocurrency on exchanges is also exempt from some of the benefits of hard forks at the given time. For example, Bitcoin users who did not have their BTC on exchanges received Bitcoin Cash tokens after the August 2017 hard fork.
4. Giving into Fear or Greed
Fear and greed are the major drivers of bad trade decisions that lead to loss of funds. It is important to be aware of the natural tendency towards both qualities, especially under high-pressure situations. The high volatility of the Bitcoin market makes it easier to fall prey to them. This is especially apparent in situations where traders put in more than they can afford. Making a plan and sticking to it, helps to avoid being in this situation.
5. Not Learning a Lesson
Losses happen. It is difficult to get to the point of making money without losing some on the way. The real problem begins when traders do not learn from the past mistake that led to a loss. Losing money as a trader can be painful, and even shameful in some cases. However, both good and bad experience contributes to making a trader better over time, and the ability to learn from it determines how well one can bounce back.
A Bitcoin trade can be extremely profitable but, whoever said it would be easy? There are a lot of technicalities that new traders must become familiar with but, at the end of the day, practice makes perfect. The same thing goes for Bitcoin investing, which is a lot easier and less risky than trading. Most importantly, users must decide which they are best suited for. Trading takes a lot of commitment and without a genuine interest in Bitcoin price movements, the profits are difficult to earn. As for investing, there may be no short-term yield, but it requires less commitment and may yield even higher returns. Choose wisely.