Trading bitcoin has been a very attractive investment during the past few years due to the skyrocketing gains in a relatively short time. Bitcoin, the world’s top cryptocurrency, managed to catch the attention of investors worldwide, leading to the widespread use of virtual currencies. However, some investors are still skeptical about the future of cryptocurrencies arguing that the large price swings define what a price bubble is.
What is Bitcoin?
Bitcoin is a cryptocurrency, a virtual currency, or a digital currency. It is the premier cryptocurrency yet created. Cryptocurrencies in general are digital assets that lack intrinsic value. Unlike traditional currencies, bitcoin and other cryptocurrencies are not issued by central banks or official authorities.
Bitcoin can be used to purchase products and services, but it’s not widely accepted as a payment method yet and some countries have banned using it altogether.
However, some leading companies have initiated bitcoin payments due to its growing influence. For instance, PayPal recently announced that it would be allowing its customers, mainly in the United States and the United Kingdom, to buy, sell and hold bitcoin and other cryptocurrencies.
The first cryptocurrency was first released online in 2009, and it has been growing in popularity ever since. Two years later, a digital exchange for trading bitcoin was launched which resulted in the emerging of numerous cryptocurrencies. Today, the crypto market has a daily volume of more than $100 billion, with most of that going through exchanges.
The virtual currency operates on a peer-to-peer network, blockchain, allowing users to make digital financial transactions without the need for a financial institution. Blockchain is simply defined as a decentralized database, managed by multiple participants known as Distributed Ledger Technology or DLT. A Distributed Ledger records the origin of a digital asset and transactions, like the exchange of assets or data, among the participants in the network.
What is Bitcoin Trading?
Bitcoin has been growing in popularity as a financial instrument, and the market of cryptocurrencies is booming recently as a favorable investment. Trading bitcoin is the process of speculating on the price movements of the cryptocurrency. Investors can speculate on both rising and falling prices to make the most of the price volatility. Read also Forex vs Crypto Trading: What Is Your Best Choice?
What You Need to Know Before Trading Bitcoin
1. Know what moves the Prices
Since cryptocurrencies lack the economic fundamentals, price movements are usually subject to market forces and sentiment levels. The price of bitcoin is generally affected by:
- Supply and demand: The total number of coins and the rate at which they are released, destroyed or lost. The higher the demand and lower the supply, the higher the price of a crypto.
- Market Capitalization: Which is the value of total existing currencies, and individual currencies as well. In April 2021, the cryptocurrency market cap topped $2 trillion for the first time.
- Reputation: The way the cryptocurrency is portrayed in the media and how much attention it is getting, especially by major investors.
- Integration Level: The extent to which the cryptocurrency easily integrates into existing financial transactions such as e-commerce and online payment systems.
- Regulatory Changes: As the regulation of cryptocurrencies has yet to be determined, value is strongly influenced by expectations of future regulations. Banning decisions, for example, can hit the prices badly.
2. Do your Research
Like any investment, you should spend some time doing your research about what you’re investing your money in. Before trading Bitcoin or any cryptocurrency, consider getting sufficient knowledge about the technology, strategies, risks, and volatility.
3. Choose your Trading Strategy:
There are several strategies for bitcoin trading to choose from. First, decide the trading style you prefer. For example, bitcoin day trading will protect you from overnight volatility by opening and closing your position within a single day. Also, you will avoid overnight funding charges. This style can fit your goals if you’re looking for short-term profits from daily price volatility.
Another style in trading bitcoin is trend trading, or following the trend. This means entering long positions in the bullish trend and going short in a bearish trend. Should the trend start to slow down or reverse, you’d go for closing positions and trade with the emerging trend. Read more about trend analysis.
Hedging is a common strategy in bitcoin trading, which mitigates the risk exposure by opening an opposite position to the one you already have when the market is moving against your investment. For instance, if you have a long-term buy position on bitcoin and expect price falls in the short term, you could open a short position so that you profit from falling prices.
HODL strategy means holding bitcoin for the long term if you have a positive outlook for the currency’s price in the long term.
4. Choose the Trading Instrument
Trading bitcoin can be performed in many forms. Bitcoin derivatives allow you to speculate on the price without owning the currency, and you can trade both bullish and bearish trends. Benefits of trading bitcoin derivatives include the leverage because CFDs are traded with leverage, so you’ll only have to deposit the margin to get full market exposure. The derivatives provide high liquidity trading with hedging features against volatile prices.
5. Decide your Position
After doing your research and choosing what you like to trade and how now it’s time to decide whether to go long or short. Based on the market trend, trading volume, and price analysis you should buy if you expect higher prices and sell when expecting lower prices.
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