The Beginner's Guide to Bitcoin Trading
Bitcoin is one of the most exciting new assets to trade. Novice investors love being a part of a whole new technological revolution, while experienced traders are drawn in by the epic returns on the cryptocurrency market. However, trading Bitcoin is unlike trading any other kind of currency or asset. This guide will take you through the most important things to know before you start trading Bitcoin and other cryptocurrencies.
What is Bitcoin?
Bitcoin is a type of digital currency that uses cryptography to make sure transactions are valid and nobody is cheating. This cryptographical protocol is called the blockchain. When you trade Bitcoin, you are simply making transactions on the Bitcoin network. When you buy Bitcoin, you are receiving the cryptographic ‘key’ (kind of a password) that you can then use to spend that Bitcoin. It doesn’t have any tangible value. Rather, it has value because everyone agrees that Bitcoins have value - similar to other government-issued currencies like US dollars or Euros.
Bitcoin isn’t the only cryptocurrency that uses this technique. In fact, there are many.
What are the other cryptocurrencies?
Since the invention of Bitcoin, many cryptocurrencies have been launched using the same basic idea but with slightly different characteristics. Some are very similar to Bitcoin, and some are completely different. For example, Bitcoin Cash is a cryptocurrency similar to Bitcoin but with slight changes to the blockchain protocol to increase scalability. It actually uses most of the same code as Bitcoin but split off from the Bitcoin blockchain back in 2017.
Ethereum, on the other hand, is very different to Bitcoin. It uses blockchain technology to build a global computer that can execute smart contracts. Ether, the cryptocurrency of the Ethereum platform, is the currency used to power smart contracts on the Ethereum blockchain. Ether can be traded just like Bitcoin.
What are the risks?
Bitcoin trading comes with risks. Sometimes, big risks. It’s a good idea to limit the amount of cryptocurrency you buy. There are many things that can lead to you losing some or all of your money. Here are some of the most important risks to look out for:
- Hacks- Cryptocurrency transactions can’t be reversed like credit card transactions. If hackers get a hold of your funds, they’re gone.
- Fraud- Cryptocurrency is valuable and almost always bought online. Take a careful approach wherever you are buying to avoid fraudulent vendors.
- Market crashes- The cryptocurrency market is extremely volatile. Be prepared for prices to plummet at any time.
- Collapsing companies- Even big companies and Bitcoin exchanges can fail. Mt. Gox used to be a top Bitcoin exchange before it suddenly failed, losing most customer’s funds.
- Losing your Bitcoin- Yes, you can lose Bitcoin. If you lose the password to your Bitcoin wallet or the hard drive where your cryptographic keys are stored, it’s gone, with no way to get it back. Some people found this out the hard way.
Trading Tools: Margin trading and Leverage
Bitcoin trading can get much more sophisticated than just buying and selling. Some exchanges like CEX.IO offer traders additional tools, such as margin trading and leverage.
Margin trading is where you borrow money or Bitcoin to increase your exposure to a trade. For example, if you buy $1,000 worth of Bitcoin, the price goes up 10%, and then you sell, you have made $100 profit. Using a margin of 1:2, you could use your $1,000 and borrow an extra $1,000 to get $2,000 worth of Bitcoin, and double your profit to $200. This is a great way to increase your profits from trades. Of course, the flip side is that you are taking double risk and stand to lose twice as much in each trade.
How to buy bitcoin
The easiest way to buy Bitcoin is at one of the reputable exchanges. These exchanges let you buy with a credit card, bank transfer, and other convenient methods.
How to sell and cash out
It’s important to have a plan to cash out before you start trading as it isn’t always simple with Bitcoin. Cryptocurrency exchanges often let you withdraw to a bank account or the credit card you bought with. You might want to test this actually works for your bank/card before you invest too much of your funds in Bitcoin.
Fees and commissions
One key factor that will affect your ability to profit from Bitcoin trading will be keeping your costs low. Check the fees and commissions of whatever Bitcoin exchange you decide to use. Around 5% is a common price point. You can expect to pay more for paying with a credit card.
One common ‘hidden’ fee is in the spread of the exchange, i.e. the difference between the buy and sell price. If there is a huge difference, you are getting ripped off. There should always be some difference but definitely shop around. You can compare the current price on different exchanges through various charts and graphs available in the internet.
Factors that affect the price
To trade Bitcoin effectively, you’ll need to learn what drives the price up and down. That way, you can predict where it’s going to make the right bets. Buy when it’s going to go up and sell when it’s going to go down. Some of the most important factors to look out for are:
- News and hype- The price of Bitcoin is extremely susceptible to new stories, hype, fear, uncertainty and doubt.
- Regulations- Any news on regulation, good or bad, affects the Bitcoin price. Especially news from key Bitcoin countries like China, Japan, South Korea, and the US.
- Exchange listings- When an exchange decides to list or remove a cryptocurrency, it can have a big effect on that currency.
- New applications- Cryptocurrency still lacks great applications and ways to spend it. Exciting new applications tend to drive up the price. E.g. Crypto Kitties was a hugely successful game on the Ethereumblockchain that drove up the price of Ether.
- Software upgrades and forks- Blockchains like Bitcoin and Ethereum commonly undergo upgrades in the form of forks. These can have a positive or negative effect on the price.
Getting started with cryptocurrency trading is easier than ever, but that doesn’t mean you should dive in with no prior knowledge. Make sure you’re familiar with all of these concepts and rules before you enter the world of Bitcoin trading.