Trading bitcoin and other cryptocurrencies can be pretty challenging, especially for newbies, but guess what? Today’s post will give you some tips on how you can get started with trading bitcoin profitably.
Just so you know, bitcoin trading involves speculating on movements in the cryptocurrency price. While this has hitherto involved buying the number one cryptocurrency by market cap via an exchange and hoping that the price spikes over time, many cryptocurrency traders are increasingly leveraging derivatives to speculate on both rising and falling prices so that they can make money regardless of the direction of the market.
When trading digital assets like bitcoin, you can take a position on the price of bitcoin with financial derivatives like CFDs. Trading derivatives is a brilliant way to take advantage of price movements in either direction without having to own the underlying digital asset. What this simply means is that you don’t need to take responsibility for the security of any bitcoin tokens.
Bitcoin trading: Steps you should take
Before kicking off your bitcoin trading journey, here are some important steps you should take, especially if you’re serious about making any reasonable profits.
- Learn what moves bitcoin’s price
- Pick a bitcoin trading style and strategy
- Choose how you want to get exposure to bitcoin
- Decide whether to go long or short
- Set your stops and limits
- Open and monitor your trade
- Close your position to take a profit or cut a loss
1. Learn what moves bitcoin’s price
Before you can take advantage of the many benefits that come with bitcoin trading, you’ll first need to have a grounded understanding of some of the factors that can impact bitcoin’s price. And because we want to make your bitcoin trading journey a hassle-free one, we have put together a list of things that can impact bitcoin’s price. Here, take a look at some of these factors.
Bitcoin Supply: The current bitcoin market supply is pegged at 18 million. But we expect the total bitcoin supply to fully reach 21 million by 2140. Considering the finite supply of bitcoin, it means that the price of the number one cryptocurrency by market will soar as long as the demand for it remains.
Bad press: Any breaking news which highlights concerns about bitcoin’s security, longevity and value, will most likely have a negative effect on the digital asset as some investors may consider selling off their coins.
Integration: Bitcoin’s public profile feeds on its integration into new payment systems and banking frameworks. And if this is successfully executed, the demand will increase, forcing bitcoin to appreciate in value.
Important events: Issues like security breaches, regulation changes and macroeconomic announcements have a way of affecting the price of bitcoin. Plus, any agreement between users on how to speed up the bitcoin network could potentially see bitcoin gain value.
2. Choose a bitcoin trading strategy
When it comes to bitcoin trading, there are tons of exciting strategies you can leverage to trade this digital asset profitably and they include:
- Day trading
- Trend trading
- Bitcoin hedging
- HODL (or buy and hold)
Bitcoin trading: How to day trade
Day trading is one of the popular bitcoin trading strategies out there. And for newbies, day trading simply means that you’ll open and close a position on bitcoin within one single trading day. What this means is that you won’t hold a bitcoin trading position overnight. Day trading is a brilliant way to avoid the overnight funding charges put in place by exchanges and brokers. For people looking to take advantage of bitcoin short term movements, day trading is the way to go as it allows traders to make the most of daily volatility in bitcoin’s price.
Bitcoin trading: All you need to know about trend trading
Trend trading simply entails entering a new bitcoin position based on the current market trend. For instance, if the market shows a bullish outlook, you go long and if the trend is bearish, you take a short position. It’s that simple.
That said, if you notice that the trend starts to slow or show signs of reversal, it would be smart to reconsider and close your position. Once that’s done, you can open a new position that matches the emerging trend.
Bitcoin trading: The hedging strategy
The bitcoin hedging strategy simply means mitigating your exposure to risk by opening an opposing trade to the one you already have running. If you’re worried about the market moving against you, then now is a fantastic time to take advantage of the hedging strategy. Let’s say, for instance, you have some bitcoin in your wallet and are worried about a potential drop in price; you can simply open a short position on bitcoin with CFDs. And should the market price of bitcoin fall, the gains you made from your short position should make up for some or all of the losses on the coins you have in your wallet.
Bitcoin trading: The HODL strategy
This is perhaps the easiest way anyone can trade bitcoin. Just so you know, the HODL bitcoin trading strategy involves buying the number one cryptocurrency by market cap and holding it in your wallet until it appreciates. The term hodl came from a misspelling of “HOLD” on a popular cryptocurrency forum. The term loosely translates to “hold on for dear life.”
That said, this phrase shouldn’t be taken literally. That’s because we only encourage buying and holding bitcoin if you have a positive outlook about its long-term price. If your research or trading plan shows that you should sell your positions or take profits, we always encourage making such decisions. Better still, you can set stop losses, which will close your positions automatically if your trades go against you.
3. Choose how you want to get exposure to bitcoin
There are tons of ways to get bitcoin exposure, and today, we will take you through some of them.
- Trading bitcoin derivatives
- Buying bitcoins via an exchange
- Crypto 10 indexes
Trading bitcoin derivatives
Trading bitcoin derivatives simply means that instead of owning bitcoin in your wallet, you’ll be simply speculating on its price via CFDs. To this end, you will be able to take a position on bitcoin’s price by either speculating that the price will rise, in which case you go long, or that the price would fall, in which case you take a sell position. Here are some remarkable benefits of trading bitcoin derivatives.
- Leverage and Margin: The reality is that CFDs are always traded with leverage. What this means is that you only have to deposit some funds in your trading account, known as margin, to enjoy full market exposure.
- Deep liquidity: When trading bitcoin derivatives, you’ll enjoy deep liquidity and that’s because bitcoin derivatives are traded by a lot of people. With the deep liquidity in the bitcoin derivatives market, you’re sure that your orders would be filled at your desired price, even if you deal in large sizes.
- Hedging: Shorting with derivatives is a smart and very effective way to hedge your portfolio. This also helps to protect your positions against market declines.
Buying bitcoin through an exchange
If you’re not all that hyped about trading bitcoin derivatives, then buying bitcoin through exchanges wouldn’t be a bad idea. This is an amazing option for people who would prefer the buy and hold bitcoin strategy. By buying bitcoin via an exchange, what you’re simply doing is taking direct ownership of bitcoin with an expectation that the price will rise in the future.
That said, here are some problems with this option:
- Bitcoin exchanges aren’t properly regulated. More so, most exchanges don’t have a solid structure for responding quickly to customers’ requests.
- The matching engines, along with servers that power bitcoin exchanges, are often unreliable. This can result in market suspension or reduced execution accuracy.
- When dealing with bitcoin exchanges, you have to get ready to deal with fees and restrictions on funding and withdrawal from your exchange account. More so, opening an account across exchanges can take several days before your account is verified.
Crypto 10 Index
Besides trading bitcoin derivatives and buying bitcoin directly across exchanges, you can trade Crypto 10 indexes. For starters, crypto 10 indexes gives you the opportunity to trade 10 major cryptocurrencies, including big boys like Bitcoin and Ethereum, in one single trade. This index usually speculates on these digital assets while closely tracking their underlying market price.
Decide whether to go long or short
Trading bitcoin and other financial derivatives make it possible for traders to either go long or short, depending on their outlook, especially as it concerns the current market sentiment. For newbies, going long simply means that you expect the price of bitcoin to rise. On the flip side, going short simply means that you expect the price of bitcoin to drop.
Set your stops and limits
When trading volatile assets like bitcoin, you must have a clear understanding of what stops and limits are. To bring you up to speed, stops and limits are important risk management tools in the trading space. And good enough, there are tons of these tools you can take advantage of:
- Normal stops: This risk management tool is designed to close out your current position at defined levels. That said, normal stops can be a liable slippage if the market price of a given asset changes quickly.
- Trailing stop: This risk management tool is used by traders to lock in profits. This is a great option if the market is going in your favor. For traders who want to reduce their risks, trailing stop is a great tool you should always use. That said, trailing stop is also subject to market slippage.
- Guaranteed stops: This risk management tool is designed to close out your position at a set level, regardless of any market slippage. And yes, guaranteed stops are free to set. That said, exchanges and brokers usually charge a fee if your guaranteed stop is triggered.
These risk management tools are available on almost all trading platforms, so make sure you take advantage of them.
Open and monitor your trade
To open a bitcoin trade, you’d have to buy, especially if you think that the price would rise. Also, you sell if you speculate that the price is going to drop. Once your trade is live, you’ll need to pay close attention to the market to ensure that it is moving as you predicted.
Plus, most exchanges provide traders with tons of indicators they can use to predict what bitcoin might do next. Again, indicators are great tools for monitoring current market conditions like volatility levels or market sentiments.
Close your position to take a profit or cut a loss
When trading bitcoin, you can close your position whenever you feel like taking profits. Similarly, you can cut your loss once your trades have reached a point you aren’t comfortable with. When closing your positions, your profits are usually paid directly into your trading account. On the other hand, when you’re at a loss and decide to close your position, the amount will be deducted from your current account balance.
Frequently asked questions: Learn more about bitcoin trading
Can you make money trading bitcoin?
Trading bitcoin can make you a ton of profit. However, your ability to make profits greatly depends on your understanding of market analysis, your knowledge of market sentiments as well as other underlying market sentiments.
How does bitcoin trading really work?
Trading bitcoin isn’t all that challenging to understand. Trading bitcoin simply means taking a speculative position on bitcoin’s price movements with financial instruments like CFDs, Crypto 10 index and more.
These will allow you to either take a long position, if you think the price of bitcoin will rise. On the flip side, you’ll take a short position if you speculate that the price will fall. At the end of the day, your prediction and the extent of the market movement will determine your profits or loss.
Is trading bitcoin safe?
Trading bitcoin is super risky and that’s because of the volatility in the crypto market. That said, most crypto exchanges and brokers provide traders with tons of risk management and educational tools to mitigate against risks. Some of these tools include stops and limits as well as educational resources aimed at improving users knowledge about trading in general.
When is the best time to trade bitcoin?
While you can trade bitcoin around the clock, seven days a week, some hours will see heightened volatility and liquidity. For instance, 12pm UK time usually experiences increased volatility and this doesn’t come to us a surprise, since this is the time that both the US and UK market comes into full swing.