Bitcoin trading is a new concept. Ten years ago, “cryptocurrency” was a foreign word. Today, cryptocurrencies have a market cap of over $100 billion USD.
Despite that enormous market cap, there are few good tutorials on bitcoin trading strategies. Today, we’re going to help by listing some of the introductory things new bitcoin traders need to know before they begin.
Understanding the Nature of the Bitcoin Market
The first and most important thing you need to know about bitcoin is that people aren’t really treating it as a currency right now. Sure, you can spend bitcoin at a growing number of places around the world. People have bought houses with bitcoin. Some people have contactless bitcoin debit cards they can spend anywhere in the world.
However, most investors aren’t treating bitcoin as a currency: they’re treating it as a financial commodity that might provide a return on investment.
The value of bitcoin comes from its potential uses. Bitcoin completely bypasses traditional banking institutions. It removes third parties – with all their fees and slowdowns – from the financial system. It broadcasts transactions to the network (the blockchain) in a transparent way.
Like many unknown commodities, bitcoin is subject to price volatility. Some investors see this as an opportunity, while risk-averse investors want to stay away.
Bitcoin isn’t just an unknown commodity: it will always be an unknown commodity. Bitcoin doesn’t have the fundamentals that investors typically use to analyze an asset. Most stocks or bonds can be analyzed based on some trait of the instrument. Stocks have P/E ratios and dividends, for example, while bonds have return percentages. Bitcoin has no fundamentals that can be easily measured.
Bitcoin trading occurs on exchanges. These exchanges accept your fiat currencies (like USD and EUR) in exchange for a cryptocurrency (like BTC). These exchanges maintain a liquid pool of bitcoin, allowing users to withdraw their bitcoin at any time. Investors who wish to trade on that exchange can deposit bitcoin into their personal wallet on the exchange, or make a wire transfer to the exchange’s bank account. The exchange notices this transfer, then credits your account.
At that point, you can begin trading. You can submit market or limit orders. The orders will be filled as soon as your buy/sell order can be matched to a corresponding one. Most exchanges only offer this limited structure for placing orders. However, a growing number of exchanges now allow more complex orders, including the option to go long/short on a stock and to employ leverage.
You’ll find that different exchanges cater to different markets. Today, most countries have at least one cryptocurrency exchange specializing in their own currency. There are exchanges that can accept New Zealand Dollars in exchange for bitcoin, for example. Other exchanges are known for certain pairs. Bithumb, for example, has particularly strong liquidity in the ETH/KRW (South Korean Won) pair at the moment (and it’s easily the most popular cryptocurrency exchange in Korea).
CoinMarketCap.com has a ranking of the top bitcoin exchanges by their 24 hour volume. Anything in the top 50 allows for good liquidity. However, you can also sort the list by specific currency pairs – so if you want to trade in a more obscure cryptocurrency, you can find the market with the best liquidity.
Bitcoin Trading Technology
Most bitcoin traders make their own trades manually – just like you would execute ordinary trades. However, bitcoin trading technology has improved by leaps and bounds over the past few years. Today, automated bitcoin traders use algorithms to analyze the market, then adjust their portfolios as necessary.
Typically, these companies keep their trading strategies a well-guarded secret. Some companies allow you to purchase their bitcoin trading system, then let it make trades on your behalf.
Unfortunately, bitcoin trading is kind of like the Wild West. Some companies will lure in newbie investors with promises of doubling their bitcoins in 90 days. In reality, automated bitcoin traders shouldn’t guarantee any profits.
Remember that Most Traders Lose Money and Quit Within a Year
Whether you’re day trading stocks or you’re trading cryptocurrencies, most traders will lose money and give up within a year.
However, there are a small number of traders who can earn consistent profitability – even in markets as unpredictable and volatile as cryptocurrencies.