What is bitcoin trading and is it safe?
Bitcoin is an open-source decentralised digital currency launched in 2009 by an unknown group of people. The generation and exchange of this currency are verified by digital cryptographic signatures using blockchain without any central body governing the process. Interestingly, the only resource required to generate new bitcoins is electricity.
Due to bitcoin’s highly volatile rates, it is a very popular digital trading channel for experienced and new traders alike. However, for that very reason, you should make all the right preparations before venturing into these new waters. Read on to learn more.
Bitcoin trading is fundamentally similar to all other currency trading. The bitcoins are kept in a cryptocurrency wallet and bought or sold at a bitcoin exchange or with other peer-to-peer bitcoin traders. As with forex trading, your fundamental objective is to buy for less and sell for more to make a profit.
Theoretically, bitcoin trading is safe as long as best practice is being followed by all traders. However, there is less room for user error in bitcoin trading due to the lack of central arbitrating authorities that are available with traditional currencies.
Bitcoin, unlike traditional currencies, is not regulated by any central bank or authority. For this very reason, there are both benefits and pitfalls to bitcoin trading. Unlike other currencies, Bitcoin is not affected by geopolitical instability or policy changes, and can be used as a safe-haven during periods of instability. However, many countries and their central banks still do not support a bitcoin trading platform and, as a result, bitcoins are not part of their formal financial transaction system.
Due to this lack of government recognition, many businesses are reluctant to accept bitcoin as a payment method. Some countries even consider bitcoin transactions to be illegal due to their lack of control in tracing the flow of funds.
Bitcoin trading’s legal status is still unclear in many major countries around the world hence there is no specific license needed to open and run a bitcoin exchange. However almost all the major money exchangers these days allow their users to trade in cryptocurrencies.
Having these money exchanges, being government-licensed institutions, allow bitcoin exchange is currently the closest thing to regulatory approval that bitcoin trading has got. Apart from these reputable exchanges, some smaller exchanges also claim to offer bitcoin online trading. However, without a Money Transmitter License and KYC, these exchanges are risky.
Live Chart Bitcoin
How to carry out bitcoin trading online
In this next section, we’ll delve deeper on how to go about trading Bitcoin online, from choosing a platform, to the different ways in which you can trade this cryptocurrency.
Choosing an exchange platform and opening a crypto trading account
Bitcoin can be traded on many different exchanges that offer various features in terms of payment methods, service fees, privacy, processing times, limits, etc. It is difficult to name the best bitcoin trading platform as each one has its pros and cons.
Therefore serious attention needs to be paid before choosing a platform. After you have selected a platform it is time to create an account. For account creation, you will need a valid email address/phone number, password, PIN, photo ID card, proof of address, occupation, and source of funds for KYC purposes.
Bitcoin trading in UK
Bitcoin can be purchased from many sources. One of the most reliable sources is buying it directly from the official bitcoin website. Then if you have a bitcoin.com wallet you can also buy bitcoin from within that wallet using your preferred currency.
There are also peer-to-peer bitcoin trading platforms that allow you to buy bitcoins directly from another trader who already owns it. You may also choose to place a buying request to which sellers can respond. Finally, you can also buy bitcoins using your wallet at any of the established cryptocurrency exchanges.
Bitcoins can be traded in several ways. Some of the most popular channels are the official bitcoin website, peer-to-peer trading, and trading at any of the third-party established crypto exchanges.
Whichever channel you choose, generally you will have to first specify the amount that you want to transfer and the currency you would like to convert it into. Then you have to provide your crypto wallet address for the transaction to be completed. If you are converting to another crypto, you must provide your destination wallet otherwise providing your bank account details is required.
Today, you can also trade Bitcoin Contracts for Difference (CFDs), without even needing to purchase the currency. With Bitcoin CFDs, you can go short or go long and take advantage of higher volatility without even having a Bitcoin wallet.
Trading bitcoin CFDs
If you’d rather not buy the cryptocurrency itself, you can trade Bitcoin CFDs (Contracts for Difference) without even owning a bitcoin wallet.
You can use your bitcoin CFDs to open long (buy) and short (sell) positions whenever you want. In this way, you could speculate and then profit from the difference between your entry price and your exit price.
CFDs come with a higher volatility and therefore, a higher level of risk, but can be very attractive if you’re looking for flexibility and shorter-term investments.
Profiting from bitcoin
Cryptocurrency trading is one of the most popular forms of online trading these days. Crypto trading is very similar to forex trading or stock trading in nature and, as a result, the ground rules for profiting from bitcoin trading are fundamentally similar in each form of trading.
The main principle here is to buy bitcoins when the price is low, hold them, and then sell when the price increases to a point above your purchasing price. The only difference in profiting from bitcoin trading is perhaps the highly volatile nature of crypto trading.
Close your position to take profit or cut your losses
As mentioned already, it is very critical to know the best time to close your position because, bitcoin trading, as with most other crypto trading is highly volatile in nature when compared to traditional hedging channels.
As a result, it is very common for bitcoin traders, especially the new traders, to take a hit when they make a wrong move on impulse. If any such loss has ever occurred to you, you should not always aim for making a straight profit over your purchase price for that lot, instead, focus on the bigger picture.
You should concentrate on making a profit over the long term and not get too preoccupied with short term gains or losses. Sometimes, inexperienced investors hold on to their purchases even if they get strong enough information sufficiently ahead of time that the price will go further down.
Unfortunately, novice investors often decide not to close their position because the market price is already lower than their purchase price. In situations like this, you must see the bigger picture and attempt to cut your losses by closing your position as soon as possible.
Tips for bitcoin trading
And now, here are some tips that will help you trade Bitcoin successfully. As with any other kind of trading, knowledge is key, as is choosing the right trading style and strategy for you.
Learn what moves bitcoin’s price
The bitcoin market is a relatively new market when compared with traditional currencies. The daily trading amount and trading volumes of bitcoin are a lot lower than those of traditional currencies, despite bitcoin having a significantly higher total market value than a traditional currency. This lack of depth makes bitcoin and other cryptocurrencies very volatile. In addition, every day new users are joining the market with different intentions and motives. Governments around the world have also taken different stances for and against bitcoin trading. All these factors, and more, combined, move bitcoin’s price.
Bitcoin trading style and strategy
As with stocks, forex, and other similar trading markets, bitcoin trading also needs the right attitude for long-term success. On the whole, there are two main styles of bitcoin trading: passive trading and active trading.
People with other businesses and disposable money tend to prefer passive trading. Whereas, people whose primary occupation is trading, engage in an active trading style.
Active trading is more demanding on both traders’ time and knowledge. More often than not, active traders beat the earnings of passive traders by taking greater advantage of micro-price fluctuations than passive traders do.
If you are new or a passive-trader by choice and are not in need of immediate returns on your investment, then if the price falls, you may decide to hold onto your bitcoins and wait for the price to rebound. This is usually a safe strategy, to just wait it out, instead of making an impulse wrong move. But if you are an experienced and active trader, you might sell off your position before it hits rock bottom and then try to buy back when the price actually hits bottom for greater profit later.
Decide whether to go long or short
Going long versus going short depends on the traders’ perception of market price movement. As with other trading businesses, bitcoin traders also need to stay on top of world news and events that may affect demand for cryptocurrencies like bitcoin.
Depending on this publicly available information, as well as technical analysis, a trader should decide whether the market will fall or rise and whether they should go short (sell) or long (buy), respectively. A wrong move in either direction will result in magnified losses or missed opportunities to make a profit for the trader.
Set your stops and limits
The bitcoin market is active round the clock and prices are fluctuating every second as we speak. It is not humanly possible for a trader to monitor and act upon every change 24/7 and some serious fluctuations may happen when you are not around. You should set sensible stops and limits to address this situation precisely.
Stop limits refer to a price-point that a trader sets for their bitcoins to sell or buy at. Once this price point is reached, buying or selling starts automatically and stops when the set stop limit is reached.
Bitcoin trading, happening in a largely unregulated currency market, can be a risky business for the uninitiated and veterans both. Firstly, this is a new technology that is still unproven in the long run.
Even at present a small fraction of businesses accept bitcoins as a payment method. Due to its very high current value, bitcoin is a lucrative target for cybercriminals.
If proper security measures are not taken, it is possible to lose all your funds to cyber-theft in an instant. Bitcoin is also highly volatile due to the thinness of the market.
Bitcoin trading comes with both advantages and disadvantages. The currency’s volatility is highly attractive, as is the fact that bitcoin still retains a very high value. In the past few years, trusted online brokers have opened up vast opportunities by accepting bitcoins for currency trading and offering Bitcoin CFDs with zero spreads and access to significant leverage without even needing to manage a wallet.
However, the market is largely unregulated, and only a small portion of businesses actually accept Bitcoin. This brings with it certain risks that one should be aware of before venturing to trade this popular cryptocurrency.