THE BEGINNER’S GUIDE TO BITCOIN TRADING
Every time that the Bitcoin price surges, the subsequent flurry of press attention seems to bring in more and more people interested in getting their piece of the Bitcoin pie. While there are multiple ways to make money off Bitcoin, such as investing and mining, trading Bitcoin can be another way to participate in the Bitcoin ecosystem.
Trading is a bit more difficult than just buying some Bitcoin and holding it; however, Bitcoin trading can potentially be very profitable, even for beginner traders that are just starting to learn.
Types of Trading
There are different types of trading strategies people use when trading Bitcoin.
Day trading is more frequent and involves taking advantage of short-term price movements (throughout the day).
Scalping is even more short-term than normal day trading as it focuses on shorter trading periods. The belief is that by making continuous, small profits throughout the day, one can make more profit in the long-term while mitigating risk from longer-term price swings.
Swing trading can be thought of as “medium-term” trading and involves taking advantage of swings in price cycles. For example, when you think that price is swinging up or down, you buy or sell until you believe that the swing is over.
Margin trading involves trading with borrowed funds. It is only recommended for experienced traders. While margin trading lets you trade with higher amounts (and potentially profit more), it is dangerous because losing money also means having to pay back the lender.
Trading Analysis – Fundamental vs. Technical
Traders also perform different types of analysis to determine the best trades.
Fundamental analysis involves looking at the overall crypto market, news about Bitcoin, Bitcoin’s underlying technology, Bitcoin’s team, and so on – these “fundamentals” affect Bitcoin’s value, which thus can be predicted by traders.
Technical analysis bases price predictions more on market statistics, such as past price movements and patterns as well as trading volumes. Believers in technical analysis look for patterns and trends when making trading decisions. It’s not the fundamentals or events that matter as much as what the price action is telling you.
Of course, many traders employ both fundamental and technical analysis in making their trading decisions. Once you’ve carried out enough research and analysis on the Bitcoin market and decided on the type of trading to get involved with, it is high time to move further.
Getting Started with Bitcoin Trading
Choose an Exchange
There is no official exchange for Bitcoin. Instead, users have to choose one from the many options that are out there. Here are some factors that you should consider when choosing an exchange for trading Bitcoin:
1. Location. Certain exchanges are more popular in different regions. For example, some exchanges are popular amongst traders in Europe mostly, while others can be in high demand among the US citizens. Moreover, exchanges may only be open to citizens of certain countries, which limits your options.
2. Liquidity. Liquidity is also important to consider if you are trading large volumes. The higher the liquidity in the market – the easier you can buy or sell Bitcoin.
3. Fees. Look for exchanges with relatively low fees, especially if you are trading frequently. Most trading platforms base their fees on the taker-maker model. “Maker” is someone who “makes” liquidity by putting an order on the market, such as by placing a sell order. “Taker” takes an order off market, such as by placing a buy order.
4. Trustworthiness. Of course, since you are entrusting these exchanges with actual money, it’s important to find the one that you can rely on. For example, choose exchanges that haven’t been hacked and are reliable during times of peak trading.
One of the platforms that fulfills the above criteria is CEX.IO, a UK-based exchange with over 5 years of operation. In order to start trading at CEX.IO, you need to sign up for the exchange and fund your account with any preferable fiat currency, such as USD, EUR, GBP and so on. There are different ways that you can deposit money to your CEX.IO account – credit card and bank transfer. Once you’ve funded your CEX.IO account, go to the Trading page and make use of the many advanced features that CEX.IO presents.
Study the market and place an order
Once you get to the Trading page for your appropriate trading pair (e.g. BTC/EUR), you’ll be presented with a candlestick trading chart, a type of price chart that can be adjusted for different time periods. This is a good way to study a short-term behaviour of traders within the particular platform and predict further market trends.
Next is a market depth chart. Market depth shows supply and demand for Bitcoin at different prices. One side shows demand (the buy or bids side), while the other shows supply (the sell or asks side). Hovering over any single point on the chart will show how many people are willing to buy or sell at a certain price. For example, hovering over a certain point on the bids part of the chart might show that there are 500 bids to buy Bitcoin at $5,000 per BTC. Thus, you could technically sell 500 people some $5,000 BTC.
Basically, this information will be enough to make a balanced decision and proceed to placing an order within the trading platform of your choice. Any trading platform features an order book which lists the current bids and asks for Bitcoin, any active orders you have, and the market’s trade history.
That’s about it! The first steps to Bitcoin trading are taken, though…
Words of Wisdom to the Beginner Traders
“Don’t Leave All Your Funds on the Exchange”
Don’t leave all your Bitcoins on an exchange; transfer them to a hardware, desktop, or other form of a more secure Bitcoin wallet. Just leave a small amount on the exchange for further trading.
“Many (or All) Cryptocurrencies Could Fail”
Many compare the cryptocurrency to the dot-com bubble, which popped after most investors realized that many early Internet-based companies were worthless. Bitcoin and other cryptocurrencies, too, could suffer from a huge drop in value.
Be sure to take some of your profits off the table eventually unless you are 100% sold on the future of Bitcoin.
“Research Tax Considerations”
Other issues that could affect the market include regulation, such as governments taking an anti-Bitcoin stance or imposing tax on Bitcoin trading. Tax considerations for Bitcoin trading are beyond the scope of this article, but still do your own research.
Please note that nothing in this article is meant to be tax advice and is only informational in nature.
Of course, Bitcoin trading is vastly complicated and we’re just scratching the surface. While this guide might have been easy to read, Bitcoin trading isn’t easy. Like anything else, you have to invest time and money to get good at it.
Good luck out there!