Bitcoin trading made simple
Don't swap your Bitcoins for magic beans – understand the basics of trading with this simple guide.
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Learning to trade Bitcoin successfully can be a powerful way to grow your investment without spending any additional money (i.e. buying more BTC).
However, becoming a successful cryptocurrency trader isn't easy – which is why we've put together this overview of the basics to help you work out whether trading Bitcoin is the right move for you.
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Trading vs investing
The main difference between a trader and investor is in how they approach making profits. A trader is frequently buying and selling an asset (i.e. BTC) in order to make a profit in the short term, while an investor purchases and HODLs (cryptocurrency slang for holding) the asset for a long period of time to eventually sell for a profit at a later date.
The goal of trading Bitcoin then is to learn how to increase the amount of BTC you own through a cycle of buying low and selling high. This will prevent you from having to spend additional capital to grow your investment.
But keep in mind that the opposite can happen just as easily – your BTC holdings can shrink when trades are unsuccessful and the market moves against you.
Trading is about the law of averages – not every trade has to be a successful one; as long as the value of successful trades outweighs that of the unsuccessful ones over time, then you will still be in profit.
Despite its apparent simplicity, trading is a high-risk activity and requires a thorough amount of learning and preparation. While amateur traders may have a string of successful trades early on, especially in bull markets, profits can easily be lost without suitable planning and discipline.
How to trade Bitcoin
Bitcoin functions like most other assets in that it is bought and sold on exchanges where traders can use a range of tools and techniques to turn a profit, just like they would in equities or forex markets.
Below are some of the most popular methods for trading Bitcoin.
Day trading is one of the most common approaches to trading. Day traders look for buy and sell opportunities over short timeframes, ranging from hours to sometimes days. Typically a day trader is making small profits over many trades executed over the course of a day, potentially across several markets.
Day trading takes lots of experience to master, as a successful trader will need to use technical analysis and charts in order to time their entry and exit prices. A successful trader will also need to learn to identify losing trades and determine when to close them to prevent further losses.
Trading Bitcoin is a lot more accessible than it once was, thanks to the development of advanced cryptocurrency exchanges which offer products like margin, futures and options to allow traders to go "short" on a trade. Going short, or short selling, means that a trader is betting against the price of Bitcoin and makes a profit when the price drops, instead of only being able to profit off upwards price action. Short selling is a fundamental part of day trading.
Swing trading focuses on identifying when the price is trending towards one extreme and is likely to return in the other direction if given enough time – a reversion to the mean. In terms of Bitcoin, a swing trader is looking for moments when the price is unusually high or low and makes a profit when the price returns to the mean. Let's look at an example of how this works.
Linda has been watching Bitcoin for several weeks now, with the price being range-bound between $11,000 and $12,500. Over one week, the price breaks out to reach a top of $16,000. Given the rapid ascent, Linda suspects that the market will correct and that the price will come back down. As such, she opens a swing trade by selling 1 BTC for $16,000 and placing an order to buy back in at $14,000.
If the price of Bitcoin eventually declines back to $14,000 or less, Linda will have made a successful trade by buying the same amount of BTC for less than what she sold it for, either pocketing the profit as cash or keeping the BTC to grow her trading fund.
Swing trading tends to rely on longer timeframes which makes it a more casual process than day trading. As such, it may be more suited to traders who are still getting a feel for the market or looking for a hobby rather than a full-time commitment.
Scalping is a very short and quick trading strategy that aims to take advantage of tiny price movements over very quick timeframes, as short as a few seconds. To make this strategy worthwhile, traders typically make lots of these rapid trades over a day or use leverage to amplify their returns.
One of the ideas behind scalping is that it can be a relatively low-risk strategy, by exposing the trader's account to the market for only a few seconds or minutes at a time, limiting exposure to big price swings.
Bots and automation
An increasingly popular approach to Bitcoin trading involves using a computer program, known as a bot, to do the hard work for you.
Bitcoin trading bots essentially come in two flavours – those with pre-programmed trading strategies, or instead with a toolkit to build your own strategy.
Regardless of which you choose, you will have to have some knowledge about how markets work in order to select the right strategy and maximise the bot's efficiency. Because market conditions are dynamic and change over time, you may need to monitor how your bot operates, despite the bulk of the work being automated.
Want to learn more about cryptocurrency and trading?
Features of Bitcoin trading platforms
Once upon a time the only way to trade Bitcoin was to buy and sell coins using a specialised cryptocurrency exchange.
While this is still the most popular method for retail investors, there are now a range of investment vehicles available for cryptocurrency traders to take advantage of such as CFDs, margin trading and futures contracts.
Knowing the various options available is important as it will affect which trading platform you choose and may influence your trading strategy.
Buying and selling coins
The stock standard method of trading Bitcoin is through buying and selling coins, or fractions of a coin (known as satoshis) on what is called a spot market.
A spot market is where buyers submit how much they want to pay per BTC to the exchange orderbook along with the amount of money they want to spend. Sellers do the same, submitting how much BTC they want to sell and for how much.
Matching prices are then automatically traded by the exchange.
A standard cryptocurrency spot market with the orderbook on the left and price graph in the middle.
Contracts for difference, known as CFDs, are a financial tool that allows traders to bet on whether an asset's price goes up or down. It's basically betting whether the price of Bitcoin will go up (go long) or down (go short), and profiting accordingly.
Bitcoin CFDs are rarely found on cryptocurrency exchanges; instead, they are found on more traditional digital trading platforms which usually deal in stocks such as eToro, Plus500 or IG markets.
A key thing to know about Bitcoin CFDs is that you never own the underlying BTC. Instead, you are purchasing a contract that exposes you to the value of Bitcoin, with profits settled in fiat currency.
CFD trading platforms tend to include leverage, which allows you to trade with more money than you have through the use of a margin account.
Bitcoin margin trading
Margin trading is a feature available both on cryptocurrency exchanges and traditional trading platforms which allows a trader to amplify their gains or losses by multiplying the purchasing power of their account. This is done through a loan which is borrowed from other users (lenders) or the platform itself, purely for the sake of trading on said platform. As such, this is not like a loan from the bank which can be withdrawn and spent.
The borrowed money is known as leverage and the amount of leverage available is expressed as a multiple, for instance 2x, 5x or 50x.
Margin is a powerful tool for traders as it allows them to earn profits in excess of the limits of their own capital. Keep in mind that margin also amplifies losses.
Using a margin account on a cryptocurrency exchange also enables the trader to go long or short on a trade. This is important because going short, or short selling, gives the trader the ability to make profits in a bear market, by betting the price of Bitcoin will go down. Without a margin account, short selling is not possible on a cryptocurrency exchange as it requires borrowing funds to execute.
Keep in mind that every platform has its own rules for margin accounts and leverage, so it's important to read them thoroughly before placing any trades.
Bitcoin futures contracts
Futures contracts allow traders to speculate on what they think the future price of Bitcoin will be, by a given date. Futures contracts are uncommon on retail exchanges, with only a handful such as Kraken and Binance offering them.
Risk management is a mixed bag of rules, tools and strategies unique to each trader to help mitigate any losses while trading.
Some effective risk management strategies include:
- First and foremost, never risk more than you can afford to lose. Bitcoin trading is not a get rich quick scheme, and even experienced traders can lose their account in one go when the market moves against them.
- Making a plan and sticking to it. If changes need to be made, make them outside of your trading window, not during.
Start a trading diary and log your trades. This will help you refine your trading strategy over time.
- Using stop-loss orders. These help prevent further losses by setting a lower limit at which a trade should close if the market moves against you.
- Setting a take profit limit. Set a profit target for each trade and stick to it. This helps ensure you take a profit instead of letting the trade run and risk losing any gains.
- Staying unemotional. By creating your own set of risk management strategies and rules, you will help prevent emotion creeping into your trading, which can affect your judgement.
- When and when not to use margin. Margin is one of the most effective tools in a trader's arsenal; however, it can amplify losses just as much as gains and is not recommended for beginners.
Watch: Risk management 101 with eToro
What to watch out for when trading
Cryptocurrency exchanges vary in terms of security and funds insured. Given you will likely be leaving your coins in your account while you trade, you will want to opt for an exchange with a good security record. Additionally, some exchanges guarantee user funds up to a certain amount in the case of an exchange-wide hack.
Every time Bitcoin grows in popularity, so do the scams surrounding it. Beware of social media influencers selling trading courses promising guaranteed returns and large profits. If you branch out beyond trading Bitcoin into other cryptocurrencies then you will need to avoid altcoin pump and dump schemes. WhatsApp and Telegram groups can be valuable places to learn more about cryptocurrency, but beware of unsolicited trading "advice" from strangers.
Cryptocurrency regulations vary greatly across the globe and laws are constantly being reviewed and adjusted. The cryptocurrency industry in Australia has a solid track record and healthy dialogue with policy makers; however, keep in mind that you are also affected by the laws of whichever country the exchange you use is based in.
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