Bitcoin has become quite popular in recent years. The attention the coin has generated is the reason people have learnt that there are many ways to make money through the digital currency. In reality, getting involved with Bitcoin with the intention to generate profit is nothing out of place. There are various aspects of the cryptocurrency through which people make gains.
Buying and hodling is one of the ways to earn profits with Bitcoin. This method of making profit presupposes that the price of Bitcoin will increase in the future. This is quite realistic because when Bitcoin was invented about 10 years ago, it was less than a cent in value, but today, it’s worth nearly $10,000. As at mid December 2017, it was nearly $20,000. So it is reasonable to presume that in future, the coin price will increase further. This is why people are hodling it. Hodling is the term people use to describe holding Bitcoin with the hope of profit in future when its value increases.
Another form of Bitcoin investment is trading. In trading, people are more interested in a quick gain by looking at windows of opportunities that the cryptocurrency market presents. Unlike investors who hold bitcoins long term, traders hold it to quickly buy and sell when they notice that there is opportunities make gain because the price has increased or decreased.
That is one of the peculiarities of Bitcoin – Its volatility. Prices of Bitcoin go up and down due to market demand. When more people are buying than selling, prices go up all other things being equal. However, the reverse is the case when more people are selling than those buying. In essence, when there is an oversupply of the coin, the value reduces. This can happen rapidly, many times in a day and in quick successions. This is why it takes study and mastery to understand when there will likely be price increase and when prices would fall.
In Bitcoin trading, the trader buys and sells when they know they can make gain. Assuming a trader thinks that the price of Bitcoin is going to fall, he’ll likely sell off his coins and when he thinks that the falling price has reached its lowest and will start increasing, they buy again. In doing this, an experienced trader could make a good profit again and again.
Now, why do people trade Bitcoin?
The attraction people have towards trading Bitcoin stems from its volatility, there could be wide variations in price of the coin over time. In realizing this, an experienced trader can take advantage of this and make gains.The next reason is that the digital currency is not controlled by any central body. So there is no central exchange that has monopoly over the trading. This is why bitcoin can be traded at any time, 24 hours of the day, unlike stock exchanges that have opening and closing time. Bitcoin is tradable from any part of the world, all the time.The cryptocurrency is not regulated by anybody or government. So there is no barrier to entry to trade it, neither are there stringent registration requirements before a trader can make trades.There are several techniques employed by traders in making trades such as Day Trading, Scalping and Swing Trading.
In day trading, the trader takes advantage of the minute by minute price fluctuations to buy and sell several times. These fluctuations happen several times, so to keep up with them, the trader has to keep watching the price movement on their computers most of the time to know when there is an opportunity to buy and sell. This implies that the trader spends a lot of time focused on charts, graphs and tables. At the end of the day, they close up every deal to continue another day.
In scalping, the trader moves in and out of trades by taking advantage of price movement to make many trades with the aim of gaining many small profits. This is done by buying the coin, then waiting for a small increase in value within a short time of seconds or minutes or even hours and selling again when there is a slight gain to be made. Scalpers believe that making smaller profits is safer than waiting to make substantial profits that may never come. This means that a scalper could make hundreds of trades in hours if they are very active in following the small fluctuations in the coin market. A scalper is a day trader and would close all trades at the end of the day.
In swing trading, the trader looks at the bigger picture by predicting the natural cycle or swing of Bitcoin within a specified period. They enter trade positions and hold it until the desired price and profit is attained. This could take days, weeks or months to accomplish. These are traders that fix trades and move away, not necessarily sitting in front of the computer all day.
How Do Traders Know When Price of Bitcoin Will Go Up Or Come Down?
The reality about predicting the price movement of Bitcoin is that no one can do it accurately all the time. However, to be a successful trader, a trader should be able to have a positive balance at the end of it all.
How is this accomplished?
There are certain method traders use to make informed decision on the price movement. These are fundamental and technical analyses.
In Fundamental Analysis, the trader looks at the value of Bitcoin based on the perception of people. This perception is dependent on a number of factors such as news, the history of the coin and how the price reacts with certain occurrences such as regulations and bans. The belief is that people’s perception is an important determinant of price movement.
For instance, fundamental analysis will predict when the price of Bitcoin will go down assuming the SEC decides to introduce very stringent measure such as limiting the number of exchanges operating in the country. In general, bad new such as hack of an exchange, ban by a major country such as China and such will cause the coin price to go down. Fundamental analysis takes advantage of such happenings to predict price movement.
Technical analysis makes use of statistics to predict price movement. This method operates based on the assumption that following the history of price movement, that it is possible to understand its pattern and that relying on this pattern, it is possible to predict how the price would move in the future. This method of prediction does not rely on the present happenings in the news to determine price movement but strictly looks at charts, graphs and tables to predict price movement.
Which method Works Best?
In trading, it is possible to combine both methods of analysis to arrive at a decision and that is exactly what most experienced traders do. The key to the utilization of the two systems is knowing what information to use based on what both methods tell you.
Trading Terms and their meanings
Before proceeding, we need to understand the basic terms used in Bitcoin trading.
Exchange: A bitcoin exchange is a web based site where buyers of bitcoin are automatically matched with sellers. Its automated matching and selling for users makes it convenient to use as a trading platform, enabling frequent buy and sell orders. Bear in mind that an exchange is different from companies that buy and sell bitcoins directly from users. Coinbase, Remittano and Localbitcoin are not exchanges but buy directly from people as in the case of Coinbase. Localbitcoins and Remittano are bitcoin marketplace where buyers and sellers are paired to safely sell or buy the coin.
Order Book: All the deals available for buying and selling of bitcoin is listed in the order book. The order book shows all buy and sell orders on the exchange. The buy order is called “Bids” while the sell order is called “Asks”. Bids are the prices that buyers are bidding to buy bitcoin while Asks are the prices sellers are asking for their bitcoins.
Price: Everyone is interested in the price of Bitcoin as an indicator of the behavior of the market. One thing must be clear. Bitcoin is a decentralized digital currency, so there is no universal or standard Bitcoin price. Different exchanges will trade bitcoins at slightly different prices depending on certain conditions. However, the price variations are usually not wide. In looking at price, there is a column for “high” and “low”. This shows the highest price attained and the lowest price the coin fell in the last 24 hours, in a particular exchange.
Volume: the total number of deals (buy and sell) that have been concluded in an exchange within a specific period is the volume. When the volume is high, it means that there is a reason. Whenever something remarkable happens in the coin market, it reflects in a high trading volume while low trading volume is an indication of an insignificant occurrence. Traders interpret low trading volumes sometimes as correction of a remarkable price movement.
Types of orders
Having known the terms involved in trading bitcoins, let’s see the types of orders that are placed while trading in exchanges.
Market (instant) Order: This is an order that must be filled immediately. It’s like saying that you need bitcoin now at any cost. When such an order is placed, it gets fulfilled buy the exchange using available asks to complete the order. This means that the order will be filled with different available asks and these may not be at the same price.
For instance, ordering 3 BTC using market order could have 1 BTC filled at $10,000, 1.5 BTC filled at $10,005 and 0.5 BTC filled at $10,010. This type of order may make you buy bitcoin at a price more than you anticipated. So it is better you consider and balance the need and possible profit before placing a market order.
Limit Order: This is the sort of order in which the intention is to buy bitcoin at a specified amount. A limit order in essence is saying that the buyer wants to buy at a specified amount. The consequence is that a limit order may be slower to fill because there may not be enough sellers willing to sell at the indicated price of the order.
For an example, if a limit order of 5 BTC is placed in an exchange indicating that the bitcoins were to be bought at $9000 while the exchange price was then at $9020, that order may not be filled up immediately because there may not be enough sellers willing to sell at $9000. However, some sellers may sell at that price, enabling the buyer to fill up for say 3BTC. They will have to wait until bitcoin price at the exchange falls back to $9000 before filling the balance of 2BTC.
Maker Fee: Exchanges need to have their order books filled all the time. So they encourage this by charging smaller fees to those who make orders that are not filled immediately. In other words, makers of standing order that are not filled immediately are charged lower than those whose orders are filled immediately.
To understand this, assuming you placed a limit order to buy 1 BTC at $8000 when the current bitcoin price at the exchange was $8700, such an order may not be filled immediately. The exchange classifies you an order maker. Your order will be listed in the order book because it hasn’t been filled. The fees you’ll pay later will be smaller because you are seen as a bringer of business by the exchange.
Also, if a seller wanted to buy bitcoin and placed limit ask order to sell 1 BTC at $9,200 while the current exchange price was $8,500, there won’t be people willing to buy at that higher price, so the person that placed the order is a maker of business to the exchange and pays smaller fees.
Taker Fee: Taker fees are higher because the exchanges consider trades who make them to be taking businesses from the exchange following this scenario. Takers are traders whose orders are filled immediately because they were within the limits of the current market price.
Assuming a trader places a limit order to buy 1 BTC at $10,000 while the exchange price is $9,998, the order is filled immediately and the trader pays taker fee since they take businesses from the exchange.
Price Graphs and How To Interpret Them
Japanese Candle Sticks are bar charts that show the opening, closing, high and low prices of bitcoin within a specified period. The candle will either be green in color if the market closed with price higher than it opened or the color would be red if it closed with lower price than it opened. The chart is referred to as OHLC (Open, High, Low, Close) by some traders.
Bull and Bear Markets
These are metaphoric expressions that show if the prices are going up (bull) or coming down (bear). This is mainly a representation of how these animals fight or attack.
Resistance and Support
Bitcoin has a pattern of price movement. There are prices that are difficult for the coin to go higher than in a bullish market. These are usually round numbers accompanied by a lot of sell orders making it difficult for the price to go higher. For instance, before 2017, people felt $1000 was too much money to pay for Bitcoin. That amount created a resistance level that the currency couldn’t bridge for a long time, but when it did, it went up all the way to $10,000, by mid December, the $20,000 resistance level was too difficult for the coin to make and cross.
A support level is the value that the coin price cannot fall below. Support level is accompanied by may buy order because traders know that at that point, the next direction of the price will be upward. The desire to make profit drives the many buy orders at support levels. These levels exist because inexperienced traders hold these figures as significant and massively buy or sell at such points.
There are still a lot more to learn in trading successfully, however, since this is a beginner’s guide. The above overview will help a new trader start.
A final warning, in trading bitcoin, you must realize a few things:
Do not start trading with an amount you cannot afford to lose. Losses are commonplace in trading.
Control your emotions. Greed of trying to make all the profits at the same time. Fear that you are about losing your bitcoins are emotions that would make you not assess situations well and make appropriate judgments.
You must create a plan and work with it. How do you want to trade? How much? When? How?
Learn from your mistakes but don’t give up.
Never leave your bitcoins in exchanges. They are for trading, not storage. Secure your coins because they can be stolen.
I suggest you learn more before you start practicing. There are many resources where you can learn where to trade such as www.thepatternsite.com, www.bfdata.com, www.theobstacleistheway.com.