The uniqueness of Bitcoin Trading
Bitcoin trading can be extremely profitable for professionals and beginners. Even though it is a new market, Bitcoin has surged in trade volume, and a big reason for this is the volatility of this cryptocurrency.
Currency trading allows for maximum yield when it is volatile – lots of ups and downs. This is precisely the reason global traders enjoy trading Bitcoin. Plenty of profitable opportunities are available when markets are volatile, and Bitcoin ranks highly with currency traders.
The media plays a big part in the volatility of Bitcoin
Each bitcoin bubble creates hype that puts Bitcoin’s name in the news. The media attention causes more to become interested, and the price rises until the hype fades. History has shown that there is a surge in bitcoin trade volume each time the price spikes and this is because new investors and speculators come in to have a share of the profit.
It is increasingly being used as the preferred payment option for merchants, money transfers, and trading purposes. More traders are turning to Bitcoin trading than ever before, and that is why this cryptocurrency is inherently valuable. It is a high demand financial trading instrument, despite no association with governments or central banks.
The algorithm which governs the production of Bitcoin limits the quantity that will be produced, and the rate at which they will be produced. There will only ever be 21 million bitcoin created at a specified rate over a period of time. It is a finite commodity – there is a fixed amount, and that ensures that greater demand will always prop up the price. In this way, it is similar to other finite commodities such as crude oil, silver, or gold.
History has shown that Bitcoin traders and speculators routinely push this digital currency to the forefront of CFD trading. If you are interested in trading Bitcoin then there are many online trading companies offering this product usually as a contract for difference or CFD.
Finding a Bitcoin Trading Platform
The Bitcoin protocol is built on a decentralized mechanism, that is, it is not owned or controlled by a single entity. Unlike stock markets, there are no official Bitcoin exchanges. Instead, there are hundreds of exchanges operating globally around the clock. Because there is no official Bitcoin exchange, there is also no official Bitcoin price. This can create arbitrage opportunities, but most of the time exchanges stay within the same general price range.
There are over a thousand marketplaces where traders can place buy or sell orders for cryptocurrencies.
However, with so many options available, it can be overly difficult to choose a suitable option for you. There is a list of factors you must consider when choosing a trading platform: Location, Security, Method of Purchase, number of supported currencies, fee structure and user experience. (See our full guide on cryptocurrency exchanges here.)
Coinbase will be used as an example for this guide. Coinbase is based in San Francisco and is one of the largest exchanges in the world. The process and basic principles of trading bitcoin remain the same across all exchanges.
Compared to other financial instruments, Bitcoin trading has a very little barrier to entry. If you already own bitcoins, you can start trading almost instantly. In many cases, verification isn’t even required in order to trade.
STEP 1: Moving Funds from Coinbase to GDAX
If you do not own any bitcoin yet, you can begin with buying from the Coinbase platform. (Read our step-by-step guide on purchasing bitcoin from Coinbase here.) Once you have access to use your currency, you’ll want to move the Bitcoin into Coinbase’s exchange interface, GDAX.
To get started, log in with your Coinbase credentials and you’ll see an interface like this (don’t be intimidated, we’ll walk through it):
Then click on “deposit”:
And then click over to the “Coinbase Account” option:
Select the amount you’d like to transfer over (in this example we’ll use 0.0095 BTC), which after submitting will then instantly show up to your available balance like this:
Now, with your available funds, you can purchase coins that are traded on GDAX.
STEP 2: Select Market to Trade
Just like trading stocks, cryptocurrencies are traded in pairs. There are two major pairs available: fiat/crypto pairing and the crypto/crypto pairing. In this guide, we will cover the process of purchasing Ether (ETH) with Bitcoin (BTC). This same process can be done with any available currency pairing:
Once you have selected the market to trade, the available balance of the cryptocurrency you are trading with will be displayed on the top, while the balance of the asset you are buying will be displayed on the bottom.
STEP 3: Place Your Buy Order
The order book (as seen in image 2.1 above) displays the current “Ask” and “Bid” price which is in red and green numbers respectively. An “ask” is the price someone is willing to sell the coin, and a “bid” is the price at which someone is willing to buy it.
The next step will be to put in a “market” order here to buy the ETH.
Note: Placing a market order has an advantage to instantly lock you in at the best available rates in the order book, but this makes you the “taker” (a trader who accepts an existing order) and therefore comes with transaction fees.
By all means, if you feel like a price is going to rocket upwards, then a market buy is an effective way to get in on the action.
However, if you’re willing to put in your own bid into the order book and wait for someone else to come along and sell their currency at your bid price, then you become the “maker” and are not charged any fees for a transaction. The same process goes for selling your currency as well.
STEP 4: Placing a Limit Order
Placing an order at a specified price is called a “limit order”. When you place a limit order you are submitting a bid into the order book, thus, you become a maker and are not charged transactional fees as stated in Step 3.
Therefore, use limit orders when possible to avoid fees and save money. Go ahead and click on the “limit” tab:
We’ll be buying ETH with BTC by putting a buy limit order in the order book. A simple tip to fill these fields in is to click the highest bid (green) number, then click your current available balance. This will automatically fill the “Amount” and “Limit Price” fields.
You can then adjust the amount manually to the exact amount you wish to purchase and then click the highest bid again to pre-fill the limit price (rather than having to type it out), as the bid numbers can change rapidly.
Step 5: Make Your First Trade
In this example, we’ll go ahead and buy 0.01 ETH.
Clicking the “Place Buy Order” adds your bid to the top in the order book, unless the market changes rapidly since the time you selected your price, which can happen:
You can cancel the order at any time, of course, which — if you are really trying to make the buy immediately— you may need to do if you see your bid drop down too far in the queue (i.e. the price goes up, making your bid less attractive, for now).
For example, I just canceled the previous order and put in another limit buy order for 0.01 ETH, and it quickly dropped down in the bid queue:
One may submit an order lower than the current price if one expects the price of the currency to fall. In a case like this, I will not receive my order for 0.01 ETH immediately, but if the currency falls as expected, your order will quickly rise to the top.
At this point, I could wait it out, or I can click cancel, and then quickly click the highest bid price again to replace the order (which I’ll do). The order book then looks like this, putting me back at the top of the bid queue:
And sure enough, a taker came along and quickly filled my order, which leaves me now with the following balance:
While your balance is visible, it might actually take a few minutes to arrive in your Coinbase wallet. A confirmation will be sent to you once your coins are received.
While cryptocurrency trading could be exciting because of its price movements, it’s very important to understand the many risks that come with trading Bitcoin.
Leaving Money in The Exchange
Over the years, several cryptocurrency exchanges have lost huge amounts of user’s funds to hackers and cybercriminals.
Perhaps one of the most famous events in Bitcoin’s history is the collapse of Mt. Gox. In Bitcoin’s early days, Gox was the largest Bitcoin exchange and the easiest way to buy bitcoins. Customers from all over the world were happy to wire money to Mt. Gox’s Japanese bank account just to get their hands on some bitcoins.
Many users forgot one of the most important features of Bitcoin—controlling your own money—and left more than 800,000 bitcoins in Gox accounts. In February 2014, Gox halted all withdrawals leaving customers confused. The company’s CEO claimed that the majority of bitcoins were lost due to a bug in the Bitcoin software. Customers are yet to receive compensation from Mt. Gox, whilst Bitcoin price keeps rising.
Gox’s catastrophic collapse highlights the risk that any trader takes by leaving money on an exchange. Using a regulated Bitcoin exchange like Coinbase can decrease your risk, however, these exchanges often limit the way you spend and use your currencies due to their compliance with financial regulators.
One should be able to spend and use their money whichever way they like, which is one important feature of Bitcoin. A trader should store the majority of their funds in a personal wallet, except they are day trading.
Apart from that, one should move their funds from the exchange wallet to a personal wallet after each trade.
Your Capital is at Risk
Remember that as with any type of trading, your capital is at risk. New traders should start trading with small amounts or trade on paper to practice. Beginners should also learn Bitcoin trading strategies and understand market signals.