Bitcoin has been a fairly steady investment over the past year and has maintained its price almost without dropping aside from a brief period during the height of the 2017 crypto market frenzy. Because of its popularity and potential to continue rising in value, many people have decided to try their luck at bitcoin trading. If you’re looking for a way to make some extra cash, you’ve probably considered trying your hand at bitcoin trading!
Trading bitcoin is not for the faint of heart as there is a lot of risk involved. In fact, many people have lost a lot of money after trading bitcoin. While buying low and selling high is a proven method for winning at stock trading, this strategy doesn’t apply to bitcoin trading. You’re going to have to learn how to balance buying and selling to make money off the move. On the other hand, you could lose a lot of money if you choose the wrong strategy. For example, if you buy bitcoin at $1000 and then sell it at $2000, you’ve lost $1000. Alternatively, if you choose to sell at the price you bought at, you’ve made a $1000 profit. So it’s important to learn how to properly evaluate a Bitcoin option before putting any money at risk.
What Is Bitcoin Trading All About?
Bitcoin trading is all about taking advantage of fluctuations in the price of Bitcoin. You’ll notice that the price of Bitcoin fluctuates a lot which makes it ideal for speculation and investment. Essentially, the price of Bitcoin will rise and fall based on a variety of factors. A few of these factors are:
- the demand for Bitcoin relative to the supply
- the number of people seeking to buy Bitcoin (demand)
- the number of people seeking to sell Bitcoin (supply)
- government policies related to Bitcoin (legal and regulatory)
- the performance of Bitcoin as an investment (risk/reward)
- media coverage of Bitcoin (previously mentioned)
- the popularity of Bitcoin among the general public (tastes and preferences)
- traditional investment vehicles used to trade Bitcoin (commodities, equities, ETFs, etc.)
When you put it all together, you get a reasonably complex picture of how the price of Bitcoin fluctuates. Depending on where you look, you’ll see that the price can go up or down. This is what makes Bitcoin such a fascinating and popular product to trade. As a general rule of thumb, the more you know, the better you’ll be able to calculate the right price for your Bitcoin option. Having a clear picture in mind of the different factors that could influence the price of Bitcoin will keep you from getting blind sided by unexpected events that come up.
Why Should You Trade Bitcoin?
If you’re looking for an investment, there are certainly better-known and more established cryptocurrencies such as Ethereum and XRP that you could invest in. These are the digital currencies that are commonly referred to as altcoins. However, if you’re looking for an alternative to traditional investments, you should consider looking into Bitcoin. Here are some of the reasons why.
- a relatively high market demand (buying power)
- a limited supply (this increases the value)
- plenty of volatility
- it’s gaining popularity as a store of value
- it’s accepted virtually everywhere (you don’t need local merchants to accept it)
- it has a history (bitcoin was first mined in 2009).
Some people may view Bitcoin as just another fad that will eventually die out. However, with its increasing popularity and constant innovativeness, it’s clear that the world is beginning to recognize the value of Bitcoin and its creators.
The Risks Involved In Bitcoin Trading
There are a number of risks involved in Bitcoin trading. Some of these risks are:
- market risk (the possibility of making a loss)
- counterparty risk (the possibility of losing money to hackers or scammers)
- risk of insolvency (the possibility that Bitcoin’s value may decrease to zero because there’s not enough money to pay everyone who’s owed money)
- regulatory risk (legal and financial risks that come with being in a country that doesn’t fully recognize cryptocurrencies yet)
- long-term risk (you could lose money if Bitcoin prices decline over time)
- short-term risk (you could lose money if the price of Bitcoin suddenly increases)
Trading in currencies, commodities, and other financial instruments comes with a lot of risks, but they’re generally contained within very specific boundaries. With Bitcoin, the risks are more generalized and can affect anyone who’s involved in Bitcoin trading. This is part of what makes Bitcoin trading so attractive and risky at the same time. While there’s a lot of risk involved in Bitcoin trading, it’s also very rewarding. Just remember, the more you know, the better you’ll be equipped to handle risks.
The Rewards Of Bitcoin Trading
One of the major draws of Bitcoin trading is the relative ease with which you can make money. The general rule of thumb is: the simpler the strategy, the more you’ll make. For instance, if you’re looking for a way to make quick money, you should consider looking into putting a long position (buy) on Bitcoin. This is the simplest and most popular strategy for making money off Bitcoin. Basically, you’re going to use limit orders to place your buys. This means that your order will be matched with the best offer available without you having to worry about the cost. You’re going to have to keep an eye on the market, however, to make sure that your order isn’t filled at a price that’s lower than you wanted.
As an alternative, you could try and short (sell) Bitcoin. Essentially, you’ll want to use limit orders to place your sells. Just remember, the slicker the strategy, the more you’ll lose. For instance, if you’re looking for quick and easy money, you might want to avoid putting all your eggs in the Bitcoin basket. Other popular and relatively simple strategies for making money off Bitcoin include:
- buy and hold (just buy Bitcoin and sit on it)
- buy on the cheap (buy low and sell high)
- scenario trading (buy when other people are buying, sell when other people are selling)
- day trading (buy and sell within the same day)
- CFDs (contracts for differences. Basically, you’ll enter into an agreement with a CFD broker to buy Bitcoin at a certain price for a certain period of time. You can then use CFDs to profit from movements in the price of Bitcoin).
Other Ways To Trade Bitcoin
While the previously mentioned strategies are all very viable ways to trade Bitcoin, it’s also possible to gain from selling options on Bitcoin. Selling options gives you the opportunity to make money no matter how much or how little the market moves. This can potentially allow you to make a lot of money if you know how to play the market accurately. You can read all about selling options in Bitcoin in our guide to alternative investment strategies:
If you’re looking for a safe and secure way to store your wealth, you could consider investing in a hardware wallet such as the Ledger Nano S. These wallets store your cryptocurrency on a highly secure element of the device itself, eliminating the need to keep your personal information (such as passwords) in the clear. Furthermore, hardware wallets make spending cryptocurrencies simple and quick since there’s no need to enter long strings of private keys to make transactions. Additionally, hardware wallets allow you to carry out cryptocurrency transactions directly on the device itself. This can be extremely handy if you want to send someone money or make a purchase using Bitcoin.
The Final Word
While it’s always great to have more options available to us, it’s also important to keep in mind the risks associated with these options. Just because a product isn’t taxed doesn’t mean it’s free from risk. When investing, you want to be sure that you understand all the risks involved before making a move. Just a few of the risks you’ll need to consider are:
- the risk of loss
- counterparty risk
- market risk
- the risk of insolvency
- long- and short-term risk
- regulatory risk
To help you make the right trading decision, we’ve compiled a list of the most important things you should know and consider before getting into the game.