How to Trade Bitcoin
The rise of Bitcoin has created speculative interest among investors who are experienced in trading stocks, Forex, and commodities. Exchanges have been created where individuals can trade Bitcoin like any other financial instrument. The world of cryptocurrency trading can be a scary place, however, with extreme volatility that produces wild swings in value.
Before you make a decision to plunge headfirst into the waters of Bitcoin trading it is beneficial to do research and devise a trading strategy. You should know what the process entails, and you should also be familiar with trading tools and charts. Short and long-term trading goals should be clearly defined. Above all, understand that trading cryptocurrency involves a significant amount of risk. You could lose the capital you invest.
Understanding How the Cryptocurrency Market is Traded
Right now there are literally hundreds of cryptocurrencies in existence. Bitcoin remains the most recognized, but it has inspired the creation of so-called altcoins like Ethereum and Litecoin. The most successful of these end up on cryptocurrency exchanges where they can be bought and sold. Some exchanges permit traders to purchase crypto tokens with cash. Others only allow exchanging one token for another.
In the world of cryptocurrency trading Bitcoin is regarded as a sort of base currency, similar to the USD or EUR. Many investors trade cryptocurrency pairs similar to the manner in which Forex pairs are traded. A simple view of this would be buying Ethereum in the hopes its value will rise, or selling it with hopes that the value will fall.
The difference that you need to understand rests in the essential nature of Bitcoin and other digital currency. These decentralized instruments are generally assigned value in terms of physical currency. In other words, a monetary value expressed in the USD is assigned to a digital token. This value can increase or decrease multiple times during any given trading day. These fluctuations, known as swings, are what Bitcoin traders look to take advantage of. The volatility of the market and fluctuations in value are what produce opportunities for profit.
Day Trading Vs. Long Term Trading
There are generally two philosophies which motivate most traders. The philosophies are expressed in day trading and long term trading strategies. While the precise method is the same for both strategies – buying or selling cryptocurrencies – the motivation is much different.
A day trader is looking to capitalize on very short term swings. These traders often use what are known as candlesticks on a chart to look for patterns. Traders can choose an hourly chart to guide their decisions, and there are even five minute charts. The longer the period displayed in the chart, the more accurate the trading signals tend to be.
Precisely, the definition of day trading is to leave no open positions at the end of the trading day. So, a day trader will look to enter and exit the market quickly, sometimes within the span of a few hours. Obviously, this type of trading carries a high level of risk. With great risk comes the potential of a great reward, and many day traders make an excellent living scalping the market for quick gains.
A long term trader is more inclined to view Bitcoin as an investment like a mutual fund or stock. These individuals take a position – usually a buy position – and hold it. If you have ever seen the letters HODL, this means Hold On for Dear Life. That’s what long term traders do. They are hoping that the market trend they support will continue for a long period of time.
Defining Your Trading Goals
Before you can begin to trade Bitcoin or other digital tokens on the cryptocurrency markets, you should define what your personal goals are. You should know whether you intend to day trade or trade for the long haul. That is going to determine your initial capital requirements, your strategy, and which tools you will want to use.
If you are the kind of person that needs the satisfaction of making winning trades, and you want immediate returns on your investment, day trading is probably right for you. This type of mentality requires more capital. To make the kinds of profits you need to see on a daily basis means that you will be buying and selling a lot of Bitcoin. You’ll use leverage (something we’ll discuss later) to make trades and your time will be consumed by the market when you are in a position. Day trading also requires a lot of emotional control. It is the financial equivalent of gambling in a casino.
If you are a patient person and want to build something for the future, your goal might be to invest in currencies for the long haul. Not a bad strategy. If you had purchased a lot of Bitcoin in 2009, today you might very well have a portfolio valued at over $1 million. Granted, those types or returns are an outlier. But, buying and holding can be profitable when you get in at the right time.
Choosing a Cryptocurrency Exchange
To trade Bitcoin you will need to choose a cryptocurrency exchange. Cryptoswede has reviewed many exchanges. It is advised that you do your research before deciding which exchange is best for you. Some exchanges only focus on facilitating the purchase of Bitcoin and other tokens between individuals. Other exchanges are just like a Forex exchange. They allow traders to trade cryptocurrency pairs by taking long or short positions.
If you are going to trade pairs, finding a cryptocurrency trading platform that offers leveraged trading is a must. In this scenario you will be able to control larger amounts of cryptocurrency with a smaller deposit. The risk is much higher, though, and there are also fees which are levied on each trade. Making many trades in a day can severely cut into profits.
The long term trader only needs to find an exchange that will allow them to hold Bitcoin. Many exchanges provide a cryptocurrency wallet. You simply open the account, buy the cryptocurrency you want, and leave it in the wallet. If the value of the cryptocurrency increases, so will the value of your portfolio.
Understanding Leveraged Trading of Bitcoin
Leveraged, or margin, trading of Bitcoin is not for everyone. It should be stated up front that this type of trading carries the most risk to the trader. It allows traders with limited resources to control much larger amounts of cryptocurrency. The trader is essentially fronted the capital by the exchange at an interest rate which is called the spread. The spread is how the exchange makes money off of leveraged trading.
Let’s say that you open a margin trade with 2:1 leverage. If your position yields a gain of 10%, the return will be 20% because of the leverage. The important thing you need to know about leveraged trading is that the fees you pay for the privilege of leverage are taken out the moment you submit the trade in the form of the spread. The spread is the difference between the bid and ask price of digital token on the exchange.
You have two choices when it comes to trading on margin. You can choose to go short or you can choose to go long. To short a cryptocurrency is to sell it. You are betting that the value of the cryptocurrency will decrease. To go long with a position is to buy. You are betting that the value will increase.
Leverage is a difficult concept for many individuals to understand. Here is a simplified explanation. You open a cryptocurrency account and fund it with $1,000. We will assume that the value of a Bitcoin is $1,000. The exchange gives you 2:1 leverage and you buy 1 Bitcoin. Because you have leverage, you control 2 Bitcoins. But, a liquidation will occur if you lose $500 in value because you owe interest and fees. At that point of loss you will have actually lost your $1,000 because of the leverage.
On the other hand, if the price of Bitcoin goes up you will receive twice the return. Lets say the value of one Bitcoin goes to $1,200. You will achieve a profit of $400 because you are effectively trading two Bitcoin instead of one.
Leverage is what many investors have used to become millionaires, but it is a tricky and difficult concept to understand. You should read books on the subject and study before you jump into the world of leveraged Bitcoin trading. There is potential for great profits, but there is also a very real possibility of loss.
These are the basics of trading Bitcoin. You might also want to check out the articles on Cryptoswede about RSI, Bollinger Bands, candlesticks, and support and resistance before you begin to actively trade. Take your time, devise a strategy, and be patient.