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Bitcoin (BTC) was the first and is the most valuable cryptocurrency in the world. As with all cryptocurrencies, it is also a highly volatile asset, the price of which can fluctuate widely.
The Financial Conduct Authority, the UK regulator, has stated repeatedly that trading in cryptocurrencies is extremely risky and that anyone doing so should be prepared to lose all of their money. The cryptocurrency market is unregulated in the UK and traders have no source of redress if something goes wrong.
This guide explains how Bitcoin trading works, which factors influence Bitcoin’s price the most, and the role of technical and fundamental analysis in forming a trading strategy.
What is Bitcoin trading?
Bitcoin trading refers to the act of buying and selling Bitcoin via a cryptocurrency exchange.
It is important for people who trade in BTC to have sufficient knowledge of how Bitcoin works so they can trade cautiously and vigilantly.
It is also critical to know the associated risks and the regulatory framework that applies.
How to start Bitcoin trading
Sign-up to a cryptocurrency exchange: Look for an exchange that has an easy user interface and handles a wide range of coins including Bitcoin.
Seed your account: Once you have signed up with a crypto exchange, you need to fund your account by paying money into it.
Pick Bitcoin to invest in: After putting money into your account, you can select the quantity of Bitcoin you wish to buy.
Start the process of trading in Bitcoin: Once you own Bitcoin, you can start to trade. You may want to enlist the help of trading bots which are available at most cryptocurrency exchanges. This automates the process based on your stated trading objectives.
Store your Bitcoins safely in a digital wallet: If you are an active Bitcoin trader, then you might need to store BTC on the exchange in order to access them. However, if you plan to hold your Bitcoin for a while, you’ll need to purchase a specific Bitcoin wallet. There are two kinds of digital wallet: ‘hot’ ones are connected to the internet, ‘cold’ ones are not – each has pros and cons, which you can read about here.
Bitcoin trading strategies
Day trading: Bitcoin day trading is a common trading strategy, which is also known as intraday trading. It involves traders entering and exiting positions within the same day. Here the trader does not have any Bitcoin market exposure overnight which avoids overnight funding charges on the position.
This strategy is ideal for those looking to make profit from Bitcoin’s short-term market movements arising from the daily volatility in Bitcoin’s price.
Pros:
- Quick profits
- Better risk management
- Not influenced by overnight market changes.
Cons:
- Very short-term outlook
- Might lose money faster
- Closing a deal within a day can be difficult.
Swing trading: In Bitcoin swing trading, the trader takes full advantage of short-term price patterns. This strategy is based on the assumption that prices never go in one direction indefinitely and therefore keep on ‘swinging’. A swing trader looks to make profits from both the up and down-market movements which occur in a short and narrow timeframe.
Pros:
- Traders have more time to learn than with day trading
- Time to make longer-term decisions
- Less risk and potential stress.
Cons:
- Traders must be well researched
- Can take time to learn.
Position trading: This kind of trading is also known as trend trading which is a long-term approach. It entails buying and holding Bitcoin for a longer period of time. This strategy does not take into account the short-term price movement and focuses on the growth in the long term.
Pros:
- Can be easier to grasp
- Can be less stressful.
Cons:
- Profits can be realised only long-term
- Keeping position for long periods can be risky.
Scalping: This strategy is like day trading but focuses on extremely short-term market movements. Scalping allows traders to make substantial small but frequent profits on very small price changes.
Pros:
- Very quick profits at a high win rate.
Cons:
- Highly risky
- Requires experience.
Understanding factors influencing Bitcoin’s price
Limited supply: The price of Bitcoin depends upon supply and demand. Bitcoin has always had a finite number of coins and its current supply is capped at 21 million, which is expected to be exhausted by 2140. A limited supply means that there is a high possibility of change in the price of bitcoin as per its rising and falling demand.
Market capitalisation: Bitcoin is known as the largest cryptocurrency in the world as it has a highest market capitalisation which means that the users perceive this currency as a sought-after investment.
Notable and key events: Any big news which is directly related to Bitcoin’s security tends to have an effect on the Bitcoin’s overall market price. For example, the ban of crypto in China led to massive sell-offs in BTC. At the same time, any big development in Bitcoin’s community can lead to a huge rally in BTC.
Smooth integration: Bitcoin is a cryptocurrency which enables smooth transactions between two parties without any involvement of regulatory or centralised authority. Therefore, it depends on its integration into a recognised payment system. If a lot of corporations or countries accept BTC as a legal payment method, then it can have a direct upwards effect on its pricing.
Bitcoin trading tips
Do your research: Unlike other financial markets, Bitcoin markets are infamously volatile, and key events can impact and move the prices of Bitcoin both heavily and quickly. If you want to be a successful Bitcoin trader, you have to stay up-to-date on Bitcoin news and any key event that could cause market movements.
Ignore the hype: Do not take your trading calls based on social media. As Bitcoin is a hot topic and misleading news on Bitcoin tends to spread quickly.
Build a balanced portfolio: Bitcoin trading is still at an early stage. There is still quite a lot of ambiguity in the crypto market. Thus, it is important to build a balanced portfolio, and not a Bitcoin-heavy one. Building a balanced portfolio includes different cryptocurrencies and a mix of other financial assets. This strategy will help you beat volatility.
Bottom line
Bitcoin trading is still quite new and largely fragmented. As Bitcoin is open to arbitrage and margin trading, it offers huge opportunities to traders who are looking for short-term profit gains. However, Bitcoin is also subject to multiple changes in regulation, taxation and the way it has to be treated. That is why it is crucial for traders to not get caught up in the hype and continue to be vigilant about the volatile nature and unpredictability of Bitcoin.
