Bitcoin (Bitcoin) is notoriously volatile, and this gives it tremendous potential for investment and trading. Every now and then when the hype puts Bitcoin’s name in the news, it grows in value, and then, when the wave of excitement fades out, the price goes down — but never that much.
That’s why Bitcoin trading can be extremely profitable for both professionals and beginners. Bitcoin is global and easy to send anywhere, the spreads are huge, margin trading is widely available, so getting started is probably way easier than you think.
Of course, due to high volatility, Bitcoin trading is a very risky venture, so one must proceed with the highest caution possible. However once you’re sure you want to try, you probably won’t face many obstacles. Unlike most other financial instruments, barriers to entry into Bitcoin trading are really low, and if you already own the cryptocurrency, you can probably start trading right away. Sometimes you don’t even need verification to start trading bitcoins!
Most likely you will use a trading platform provided by some online trading company, which usually offers the product in form of a contract for difference, or CFD. This allows you to trade bitcoins without actually transferring the cryptocurrency to the counterparty.
Here are some brokers offering CFD for bitcoin: AMarkets, Instaforex, Alpari.
Why should I trade bitcoins?
Probably the most important thing in trading is motivation. Therefore, before we show you how to trade bitcoins, it is important to understand why it is so exciting.
Bitcoin is global. In a sense, Bitcoin is a currency much like any other: it can be saved, spent, invested, and even stolen. But it has nothing to do with fiat money—and that means its price isn’t directly related to the economy or policies of any single country. Throughout its history, Bitcoin’s price has reacted to a wide range of events. For instance, when China tried to ban the cryptocurrency Bitcoin has dropped in value more than 50 percent just over 36 hours. Conversely, when capital controls were introduced in Cyprus in 2013, it brought attention to Bitcoin and caused the price to rise rapidly.
Bitcoin trades 24/7. Unlike stock markets, there are no official Bitcoin exchanges with certain working hours, holidays and weekends. Instead, trading is going non-stop on hundreds of exchanges around the world. This can create certain opportunities for arbitrage, but, of course, most of the time the exchanges stay within the same general price range.
Bitcoin is highly volatile. Bitcoin is known for its rapid and sometimes unexpected price movements. As we have already said, such volatility creates excellent opportunities for traders looking for quick benefits—but also causes great risks.
Finding an exchange
The choice is huge, so a new user should be especially cautious. Consider the following factors when deciding on an exchange:
- Regulation & Trust. Is the exchange trustworthy? Is it legal in the country where it’s located? What if the founders run away with their customers’ funds?
- Location. If you plan to place deposits in fiat currency you should find an exchange that accepts payments from your country.
- Fees. What percent of each trade is charged?
- Liquidity. This is especially important if you plan to trade large amounts of Bitcoin.
Based on the factors above, we can recommend the following exchanges:
- OKCoin. The exchange is based in China but trades in USD.
- Bitfinex. World’s largest Bitcoin exchange in USD trading volume, with about 60,000 BTC traded per day. As of August 2017, it is almost 262 million dollars a day. Customers can trade without verification if they don’t plan to use fiat money as a deposit method.
- Bitstamp. The first licensed and regulated cryptocurrency exchange in Europe. The license was issued by the Ministry of Finance of Luxembourg. Bitstamp was founded in 2011 and is currently one of the world’s oldest Bitcoin exchanges.
- Kraken. Founded in 2011, Kraken is the largest Bitcoin exchange in in terms of euro volume at about 6,000 BTC per day, and is also trading Canadian dollars, US dollars, British pounds and Japanese yen.
Trading Bitcoin in China
It makes sense to say a few words about trading bitcoins in China. According to data.bitcoinity.org, a website collecting and processing ata on all global bitcoin transaction, a very large percent of the global price trading volume comes from China. It’s important to understand that the Chinese exchanges actually lead the market.
The main reason why China China dominates Bitcoin trading is because the regulators there take a more loyal approach to this kind of activity compared to other countries. Often, exchanges in China can offer leverage and marginal trading options that exchanges in other countries can’t. More importantly, Chinese exchanges charge no fees that allows unlimited trading volume.
How to trade Bitcoin
We will use Kraken as an example, but the process and basic principles remain the same for all exchanges..
Once you have created an account and confirmed it via email, you must verify your personal information. Different Bitcoin exchanges may require varying levels of verification as required by local AML laws. Kraken has three verification levels:
After verifying your account you should see something similar to the screenshot below. Select your deposit method from the panel on the left
Kraken offers following deposit methods:
- EUR SEPA Deposit (Free) - EEA countries only
- EUR Bank Wire Deposit (€5) - EEA countries only
- USD Bank Wire Deposit (Free until 3/1/2016, then $5 USD) - US only
- USD SEPA and SWIFT Deposit (0.19%, $20 minimum)
- GBP SEPA and SWIFT Deposit (0.19%, £10 minimum)
- JPY Bank deposit (Free, ¥5,000 deposit minimum) - Japan only
- CAD Interac Deposit (Free until 3/1/2016, then 1%, $10 CAD fee minimum, $5,000 CAD deposit maximum)
- CAD EFT Deposit (Free until 3/1/2016, then 1%, $10 CAD fee minimum, $50 CAD fee maximum, $10,000 CAD deposit maximum).
Deposits made via bank transfer may take up to three days to be approved. Bitcoin deposits require six confirmations, which takes about an hour.
Now navigate to the "Trade" tab. Using the switch at the top of the page you can select different trading pairs. In this example, XBT/USD is used. We want to buy bitcoins. Ok, let’s make an order. Go to the "New Order" tab.
Suppose we’ve deposited $370 to our account through bank transfer, and now are placing an order to buy 0.5 bitcoin (XBT) at a price of $370 per bitcoin.
We check the information bar at the top of the page and see that the last trade price is $383.17.
A simple question: why do we make an order to buy XBT at a price of $370, not $383.17? Well, that really makes sense if we expect the price of Bitcoin to fall. But that also means we will have to wait, as the order won’t be executed immediately. Placing an order at a specified price is called a limit order.
But before placing an order we need to check the orderbook for our trading pair. In the orderbook we can see that the highest ask price is $383.16 per bitcoin, while the lowest bid price is $384.07 per bitcoin.
A switch on the order panel also also allows us to opt for a “market” order:
A buy market order is an order for XBT at the price of the lowest available sell order. According to the orderbook, a market order for 0.5 XBT would purchase 0.5 XBT at $384.07 per coin. If selling bitcoins, a market order would sell bitcoins for the highest available buy price, in our case, $383.16.
Before heading to bitcoin trading it’s worth asking yourself if you really want to in the first place. Bitcoin price changes dramatically each trading day, rising and falling double-digit in an instant. This means that if you miss the right time to place a transaction order you may lose way more cash than you would have trading traditional currency pairs. That’s why 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.
In addition, any trader, regardless of experience, can become a victim of hackers or lose money due to a software error (remember the collapse of Mt. Gox.) For this reason, it is better not to leave your money on the exchange and to transfer funds to your personal bitcoin wallet at the first opportunity. Using a regulated Bitcoin exchange like Kraken can decrease your risk, but not eliminate it completely.