Why Trade Bitcoins? A Must-Read for New Traders!
Trading Bitcoins have become a hit in the past few years since its introduction in the financial markets. A lot of traders have already built a stable source of income out of trading bitcoins. However, if you are serious about trading bitcoins then it is important to understand how Bitcoin works, the risks and how you can earn money trading them.
This form of trading is something that you should clearly think about because there are potential risks involved like making wrong trades and sometimes, the county’s empathetically written circulars. It is also very important to keep in mind that Bitcoin and other cryptocurrencies have shown so much volatility in the past few months.
Here are a few things that one needs to understand when entering Bitcoin trading:
What is Bitcoin Market?
Bitcoins are traded through the Bitcoin markets. Trading it works much like trading in the Forex market where you trade one currency against another. However, unlike forex currencies, which are affected by the current by a nation’s economic and financial stability, Bitcoin is not affected by such factors. This digital currency is generated through mining where miners solve of a block of BTC through mathematical computations. The Bitcoins generated are then stored for regular exchanges and for individuals looking to buy in exchange for fiat money.
Bitcoins can function in the BTC market just like coffee, gold or other kinds of commodities that it mined and sold into markets, its price affected solely by the law of supply and demand.
Where are Bitcoins traded?
For people who are not into Bitcoin mining, purchasing Bitcoin is now easier compared to how it was purchased a few years ago. Nowadays, you only need to be in a country where purchasing Bitcoins are legal and exchanges are recognized as intermediaries for currency transactions. Through these exchanges, you can instantly convert your cash into Bitcoin or vice versa. Also, you can profit from the changes in the price changes of BTC in these exchanges through arbitrage trading.
What do you need to trade Bitcoin?
There are two things that you need in order to trade Bitcoin; a Bitcoin Exchange Account and a Trusted Bitcoin Exchange. It is highly important to get a reliable Bitcoin exchange as you will process KYC documents before completing the confirmation of your account. When signing up for a Bitcoin Exchange Account, expect that you will need to pass identification documents, much like the ones that you provide in banks when opening a bank account. These measures are done in order to ensure that Bitcoin users do not use this cryptocurrency for money laundering, funding terrorism, drug trafficking, and other anti-social activities.
Having Some Forex Trading Knowledge is an Advantage.
Just like any form of investment, trading cryptocurrency has its risks and rewards. This requires one to be an attentive trading analyst. This is why it will help to have knowledge of Forex strategies and indicators. This is to make sure that you will limit your trading decisions to educated predictions alone. Knowing the latest Bitcoin and Cryptocurrency news also helps as you will have a knowledge of the possible trend of the Bitcoin price movement.
Here are a few terms in Forex that are also being used in Bitcoin trading:
Ask Price: This is the minimum price that people in a particular trading site are willing to sell their Bitcoins for.
Bid Price: It is the highest price that traders are willing to pay for Bitcoins.
Volume of Trading Site: It is the number of monetary units traded during a given trading period.
Market Depth: This is the number of Bitcoins that the people have put up for trading at a particular trading site and have not yet been purchased (the idea is no one is willing to pay for the price at the moment that it is posted).
Speculator: this is a trader who is trying to make a profit by buying Bitcoins at a low price and selling at a higher one.
Arbitration: it is trading of Bitcoins by taking advantage of the difference in prices that may exist in different bitcoin exchanges.
High Frequency Trading: it is the activity through which you try to make a profit by predicting the price movements in short periods of time.
Bubble: This happens when there is a heightened demand for Bitcoins. This causes the price to soar and fall after a while due to the instability of its demand.
Margin Trading: This is a risky form of speculation where Bitcoins are traded using borrowed money. This happens normally for traders who use leverage which allow higher profit margins but at risk of forced liquidation.
Leverage trading: This is a form of trading on the underlying product or contract for difference which enables trading more than the initial investment.
What are the risks in trading Bitcoin?
Knowledge of the potential risks is an important thing that Bitcoin traders should have. Much like other commodities being traded, the risk is high and not for those who are faint-hearted. One should know that there is a big potential of losing some, or all the invested funds before engaging in this form of trading.
One of the biggest risks in trading Bitcoin is its high volatility. The movement of Bitcoin price can be considered unconventional, unlike the forex markets. In forex markets, price movements are limited to a few pennies whereas Bitcoin price changes can range from a dollar to a thousand dollars. However, since there is a growing adaptation of Bitcoin into the financial markets, investors speculate that it will reach a state of stability and manipulation of its prices will be reduced. However, the stability of the Bitcoin price action will still mean it can fluctuate from $10 to $20 in a day.
To lessen the probability of volatilities, it is recommended for traders to get their profits at the first chance that they can. A small but consistent reward will be more appreciated than a maximum loss.
Another risk factor in trading Bitcoins is the security of your Bitcoin wallet. There are constant attacks to hack the Bitcoin exchanges hot wallets. It is recommended to limit the Bitcoins in your hot wallet and keep the rest in a cold wallet.
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You may also download our free ebook here: FREE CRYPTOCURRENCY ARBITRAGE TRADING EBOOK