There’s no hiding the fact that Bitcoin trading is becoming a very popular topic these days, but if you want to make money trading bitcoins, you need to understand how it actually works (and a whole lot of other things). You don’t want to just jump in blindly or you will greatly risk losing your investment.
Ok, let’s get to it…
How to Trade Bitcoin
[introduction knowledge for beginners]
The simple fact is that running a trading platform with some broker is NOT going to guarantee you any sort of return. Bitcoin isn’t really a derivative or asset, and thus you have to be EXTRA careful when/if you commit to its trading. So, it’s important to get some good tips on trading bitcoins for beginners before you get started.
There are basically two ways to trade Bitcoin – as there is with any other derivative – either through ownership (long) or with contracts (short). What you do is heavily dependent on your capital allocation, and how you wish to get involved with the market.
In other words, there are only so many ways to really effectively make money from the Bitcoin craze – and we will cover one of them in this tutorial.
In a nutshell, making money with Bitcoin comes down to 4 words – buy low, sell high.
Whilst you could argue this works for *any* profit-seeking venture, the case with the likes of Bitcoin is that it doesn’t have any revenue-generating potential of its own. This makes it quite a difficult proposition in terms of it being a long-term play… simply because its “price” is based entirely on what someone else will pay for it.
To this end, if you wish to delve into the interesting world of crypto trading (particularly with Bitcoin), you’ll need to ensure that you fully appreciate both the scope and scale of what you’re getting involved with!
Bitcoin Trading vs. Bitcoin Investing
I feel this is vital to bring up before getting too far into this post.
What we are discussing here is the trading of Bitcoins — as opposed to investing in Bitcoin. It’s very important to note that, while these are similar, they are two completely different things and should NOT be confused with each other!
Keep this in mind while reading this post and/or acting upon the information!
Investing in Bitcoin is often a long-term strategy and typically involves buying & holding with the expectation of future gains. This is usually referred to as “HODL” (hold on for dear life) if the cryptocurrency space. Therefore, BTC investors are not generally worried about price volatility on a day to day basis. They are in it for the long haul – so to speak.
In contrast, your typical Bitcoin trader is likely only staying in a trade for a relatively short amount of time – anywhere from a couple hours to a few months – generally speaking. Those who trade bitcoin are also usually very price-aware, as they strive for the best entry and exit points. Their goals are much more short-term and looking for smaller (but quicker) profits on a regular basis.
These are two very different strategies, so it is important to make sure you aren’t considering them one and the same. We are talking about bitcoin trading in this post — not investing.
Okay, now that we’ve gotten that out of the way, let’s get on with it…
The Truth About Bitcoin’s Profit Potential
The major reason most people are involved with BTC is because of the potential profit that can be earned by trading its “coins”. Stories of a new crop of “Bitcoin Millionaires” have become somewhat more resounding, especially as the “price” of the “coins” experienced substantial growth in the latter half of 2017…
The point here is that “HODL” is NOT a profit making strategy when you’re looking at trading BTC. You only make a profit when you SELL your BTC – hence the idea that you should “buy and hold” is an utterly ridiculous notion for a typical trader, although may (in certain circumstances) be of value.
I hate to say it, but if I am speaking objectively then I would say that ultimately Bitcoin is – at present – a borderline scam. It has many of the same traits as a ponzi scheme, it doesn’t have any redeemable “value” (in the sense of it holding an actual street price), and has a very narrow scope in terms of how well it can be used.
Furthermore, it’s almost ENTIRELY fueled by end-user demand. This is bad. Anyone in the financial industry should be able to attest that it’s the institutional money that determines the way in which a system may be profitable / hold value. Bitcoin has none of that, and has already been shunned by the majority of highly-valued investment banks.
So, in order to understand what the hype is about, you need to perceive exactly what Bitcoin actually does, and why it has any value at all. Why does its “coins” have prices, and what does it mean to “trade” them?
Let’s get to that…
Like most new technology, the market has completely misunderstood Bitcoin.
Rather than being entirely focused on the underlying technological value of the system, people have rushed to make it out to be some new infrastructure play that’s going to change the world. Whilst this *may* happen, it will be as a result of actually applying value to the market BEFORE trying other things.
The value of Bitcoin (right now) is solely as a transfer medium. Its ability to facilitate transactions with people in different countries, without any central provider, is the real value of the system.
Obviously, you’re transferring money – which is partly where the idea that BTC has any immediate value came from – but that doesn’t necessarily mean each coin is worth anything. The market became confused with the system calling itself a “currency” (or cryptocurrency).
The most important thing to realize is that if you’re looking at the BTC token as a means to provide yourself with a profit, its value lies in its transactability, NOT in the “value” that it stores. Without getting into technicalities, the system doesn’t store any intrinsic value; it only transfers it to others.
It’s a decentralized PAYMENT NETWORK, not an actual currency; so more a competitor to VISA / Mastercard as it is the USD – in a sense…
Bitcoin Trading Strategies
Thus, when you consider making a profit from BTC, you’re basically looking at how to make money from the purchase-and-sale of its coins to other people. As bad as it sounds, it’s something called the greater fool theory…
Greater fool theory simply states that if you buy a distressed asset at – WAY over its market value – then you’ll need to find a “greater fool” to buy it from you (to make any profit).
This is not – of course – my interpretation of Bitcoin. BTC has its own merits, BUT in a completely mercantile sense, it’s a shell game. You’re buying fictitious coins (which have NO merit in the real world) and trying to equate some sort of value to them. This is where many of the successful traders have won out.
As mentioned, there are now TWO ways to trade bitcoin – either by trading contracts on the coins or by trading the actual coins themselves (through ownership). Both are reliant on the “price” of the underlying asset increasing after you bought it…
- If you are more conservative, and actually want to hold onto some of the coins in case they drop in value (or are holding for a long play), you’ll want to buy the coins with actual money. This is done through a cryptocurrency exchange (most likely CoinBase for beginners), and means you’ll have to put down a significant amount of capital in order to purchase the coins outright.
- If you are less risk averse, you may wish to conduct derivative-based (day) trading, whereby you place orders with a broker, who will then give you a contract. This contract is what you’re really trading – allowing you to determine the best time / rate to sell at. This process is much faster, but also leaves you exposed in case of losses (since you don’t own the underlying assets, you get stung if they drop in value). Most brokers only operate with leverage (debt) too – something to be very careful of.
HOW you do this is entirely dependent on the desired outcome from the trading.
As mentioned, the broker based route to trade bitcoin is only really for more experienced traders (typically from the financial world proper) who may have spare capital to play with crypto.
Most retail traders choose to own the assets outright, as they provide a better level / rate of growth than the likes of a savings account. In either case, it’s capital management 101.
Steps To Trade…
At the core of it all, “trading” is the same regardless of whether you use the “exchange” or “broker” method. You’re placing a trade on an equity (in this case Bitcoin), and hoping that the price of the equity rises whilst you hold it. The difference lies in the method and time frame of the trade.
- Entering a trade consists of buying a POSITION on the underlying asset. This can include complete ownership (it doesn’t matter) – what’s important is that you enter the trade at a particular point.
- Exiting a trade consists of selling a POSITION on an underlying asset. This can be handled in various ways – but please understand that in order for a position to be successfully “sold”, it needs to have a buyer. This is why you cannot sell a position for [much] more than market rates.
To gain an idea as to how it works, please observe the image below…
This is the same guy who became a Bitcoin Millionaire in December 2017.
It shows his entry at around $3k, his exit at $15k… and – more importantly – a HEDGE that he placed on the price falling.
The hedge is what’s known as a short sale. This is done by taking out a buy contract with the broker for a future price on the asset. In the case of a short, the buy price needs to be LOWER than the current market value. This allows the trader to profit from the fall in spot price of the asset, whilst not losing any money in the ownership of the item.
Irrespective of this, please remember – the underlying way to profit from ANY market-based security is to buy low, sell high (or vice versa if you’re going short). This is essentially the core of all BTC transactions – the price gains being driven by a mix of consumer demand and market speculation.
To do this in a legitimate way, the following steps should give you an overview of how to do it in the two methods I mentioned above…
- Determine Your Trading Method
You need a way to place entry positions (buy a commodity). To do this, you will either need to use a broker (such as IG Markets) or a cryptocurrency exchange such as Binance. - Take a Position
Once you have a platform, you need to use it. This is done by purchasing a position with BTC – which is either done by going through your broker, or exchange. - Wait
After you’ve done this, you need to wait. The price will either increase or decrease (I don’t know your trading strategy so how long you wait for is up to you) – once it hits the price you’re aiming for, sell it. - Repeat
After you’ve sold your position (hopefully for a profit), repeat.
Conclusion
As mentioned, it’s not rocket science to read a chart and place “bets” on differentiation’s in price for bitcoin trading. The real magic comes from being able to read wider macro-economic indicators and other trends, which could indicate growth / retraction in the price of the underlying asset. Using a cryptocurrency software can also be very helpful as long as you are choosing one that is legitimate and not falling for one of the many scams out there!
Whilst Bitcoin has gained notoriety among retail traders, the simple fact is that crypto is still a “poor mans” stock market. I love it and believe in it, and I think it has a very bright future, but right now that is the reality — if I’m being honest! There’s no underlying value in the “coins”, and the various people who are still promoting everything from ICO’s to BTC itself are mainly guided by their own self-interest and ideas of grandeur.
The fact is that – like with many other opportunities – it’s the early adopters who gain most.
Bitcoin may have technical use value, but this doesn’t necessarily translate into economic potency. This means that if you’re looking at getting the most out of the likes of Bitcoin – in terms of profit – you need to ensure you’re investing into the underlying “value” of the ecosystem, and not just the “coin” itself.
Frankly, checking charts every couple minutes and placing trades based on price alone is a loser’s game. Even if you make money, it’s going to be minimal. Rather, you need to be focused on identifying the “value” of the crypto market, and fueling / supporting that as best you can. The more of that you do, the more effective each of your investments will be.
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