Since its inception in 2009, Bitcoin has become one of the most popular cryptocurrencies. It is a digitally-encrypted, decentralized currency with unique characteristics that make it an unorthodox market, causing a lot of volatility in its price. Traders look to that volatility to fnd short-term trading opportunities, speculating on possible spikes and falls.
In this guide, we’ll introduce you to the world of Bitcoin trading. We will cover ways to:
• Keep you focused on your long-term trading objectives
• Play to the strengths of your trading type
• Aid you in your risk management
• Minimize emotional decisions
• Provide you with clear strategies
• Measure your success
What is a Cryptocurrency?
A cryptocurrency is a digitally-encrypted, decentralized currency that is not connected to nor controlled by any government or central bank, unlike traditional currencies such as the US dollar (issued by the Federal Reserve), euro (European Central Bank), or Japanese yen (Bank of Japan), among many others.
Like these traditional currencies, cryptocurrencies generally fill two primary roles:
• Payment systems for goods and services
• Speculative instruments for trading and investing
POPULAR CRYPTOCURRENCIES:
BITCOIN
Since its inception in 2009, Bitcoin has grown rapidly in prominence as the world’s frst and most popular cryptocurrency.
LITECOIN
Launched in 2011, Litecoin is used primarily as a payment transaction cryptocurrency that has been called “silver to Bitcoin’s gold.”
ETHEREUM
Released in 2015, Ethereum has rapidly gained popularity on the heels of Bitcoin, and currently has a market capitalization second only to Bitcoin among cryptocurrencies.
CENTRAL BANKS
RIPPLE
CENTRAL BANKS
RIPPLE
Created in 2012, Ripple difers from Bitcoin in that it does not require mining to create the cryptocurrency.
Our services include products that are traded on margin and your capital is at risk.
The products may not be suitable for everyone - please ensure you fully understand the risks involved.
DASH
Launched in 2014, Dash, or Digital Cash, was initially known as “Darkcoin,” and is unique in that it is considered a highly anonymous and secretive cryptocurrency that specializes in virtually untraceable transactions.
How Bitcoin Works
As the world’s frst and most popular cryptocurrency, Bitcoin eclipses all others when it comes to public usage and recognition, market capitalization, and trading volume. The payment aspect of Bitcoin has continued to grow at a brisk pace since its 2009 inception, as both individuals and institutions have increasingly come to view the cryptocurrency as an accepted method for executing payment transactions.
BITCOIN PIONEERED THE CRYPTOCURRENCY SPACE, AND FOR NOW REMAINS THE STANDARD BY WHICH OTHERS ARE MEASURED.
As a decentralized currency that is entirely digital and disconnected from any government or central bank, Bitcoin has several key characteristics:
Bitcoin utilizes a worldwide network of encrypted peer-to-peer transactions that are verifed and securely recorded in a “blockchain,” which is a digital public transaction ledger devoid of any central authority. All confrmed and verifed Bitcoin transactions are included in this blockchain.
Bitcoins are created through a process called “mining,” which uses computer processing capacity to form units of the cryptocurrency. In order to add new Bitcoins into the global network, miners must follow strict cryptographic rules specifed by the system.
Digital “wallets” are used to store Bitcoin credentials for each user and enable users to store, transfer, and spend their currency, at which point these transactions are recorded in the blockchain. Bitcoin wallets use secured “private keys,” which are used to sign and provide proof of transactions.
BITCOIN TRADING
Perhaps the most signifcant diference between trading Bitcoin and purchasing it is that when trading you can be either long or short at any given time depending on your outlook. If you buy Bitcoin outright, you obviously can only be long, and will usually just be compelled to hold through all of the volatile ups and downs in Bitcoin’s price.
Bitcoin analysts are divided as to whether the cryptocurrency will continue to shoot up in value or if it will drop sharply instead. As a Bitcoin trader, you can nimbly position yourself in either direction and take directional trading opportunities as they arise.
Relatedly, when you trade Bitcoin you can trade the price swings on a short-term basis instead of purchasing Bitcoin at a certain price and holding long-term, hoping for further price appreciation.
Margin and leverage are another way trading
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Bitcoin can be more fexible than buying it outright. Depending on the price of each Bitcoin at any given time, owning just one Bitcoin could be prohibitively expensive. Trading Bitcoin with leverage allows you to take a position with less capital but remember, increased leverage increases your risk.
Finally, trading Bitcoin actively allows the use of entry orders, stop losses, proft-limit orders, and risk management techniques that are just not possible when simply purchasing Bitcoins.
Trading Bitcoin
The original purpose of Bitcoin was to serve as a digitally-encrypted currency that could be used as payment for goods and services without being under the scrutiny of any government or central bank.
But Bitcoin has gone well beyond its original purpose to where it can now be traded as a speculative fnancial instrument in as simple and straightforward a manner as trading any traditional currency.
The creator of Bitcoin designed the cryptocurrency to be capped at a total mined quantity of 21 million Bitcoins, in perpetuity. Currently, that hard limit has not yet been reached, but around 80% of the total Bitcoin capacity has already been mined as of late 2017.
One important aspect of Bitcoin that
sets it apart from more traditional
currencies is the fact that there is a
limited supply.
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BTC/USD (Bitcoin vs US dollar)
Weekly Chart (2015-2017)
Charts by TradingView
This characteristic and perception of scarcity have helped lead to Bitcoin’s massive rise in value since inception, particularly within the past year, as traders and investors have rushed to take part in buying and selling the cryptocurrency.
While actual Bitcoins can certainly be bought and held, there are some major advantages to trading Bitcoin as a fnancial instrument rather than simply buying and owning the cryptocurrency. Some of these advantages include:
• Immediate exposure to Bitcoin price movements with the ability to trade long or short, without having to hold the underlying Bitcoins
• Easily execute both short-term and long-term trading strategies, or hedge any existing Bitcoin holdings
• Use margin and leverage to control Bitcoin positions, allowing efcient use of account equity
• Employ stop losses, proft limit orders, and other trade management techniques on Bitcoin positions that are just not possible when simply holding Bitcoins
Our services include products that are traded on margin and your capital is at risk. The products may not be suitable for everyone - please ensure you fully understand the risks involved.
Bitcoin Correlations
Knowledge and experience are key elements in successfully trading any fnancial market. Part of having a solid base of trading knowledge lies in knowing how markets generally relate with and react against each other. Intermarket analysis is the study of price correlations among diferent markets and how market prices may or may not be impacted as a result.
When trading Bitcoin, traders have discovered that its fundamental correlations with other global fnancial assets have tended to shift over time and are usually not nearly as robust as other, more established correlations.Bitcoin provides a potential opportunity to diversify trading and investment strategy.
For example, the strong inverse relationship between the US dollar and gold is both well-documented and reliable. The same generally cannot be said of the current correlation between Bitcoin and gold, or that of Bitcoin and any traditional currency like the US dollar, euro, or yen.
But perhaps it is precisely Bitcoin’s characteristic of low correlation with other markets that further boosts its appeal as a tradable asset. As most markets currently available for trading are correlated in some way or another with other markets, the emergence of a relatively uncorrelated asset like Bitcoin provides a potential opportunity to diversify trading and investment strategy.
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