Trading Bitcoin – Good Preparation is the most Important Foundation

We assume at this point that you are familiar with the basics of Bitcoin (BTC) and the most important characteristics of the leading cryptocurrency. Why else would you be asking yourself how to trade Bitcoin correctly and profit from the price developments? But always remember that trading is risky and can lead to capital losses.

Are you still missing some important facts about the crypto market? Then you should definitely take a look at some other important expert guides on aspects such as Bitcoin mining for the acceptance of the coin or buying Bitcoin (or selling). Because with this information, readers have the general tools to enter the crypto market.

Bitcoin Trading also Needs to be Learned

Many rumors still surround Bitcoin trading – warnings are often formulated regarding the supposed risks and, above all, the high volatility of the BTC price. And there is of course a risk of loss, which applies equally to all other asset classes and assets. The fact that many governments or institutions such as the responsible central banks in many countries have still not created uniform regulatory requirements deters some potential investors. Convinced fans who trade Bitcoin correctly and know what to look out for point to the positive characteristics of the world’s first cryptocurrency.

Trading Bitcoin: Small Investors Can also be Successful

Over time, the Bitcoin, which was created in 2009, received the nickname “digital gold”. This designation can be explained primarily by the natural limitation of the currency. As with gold, resources are not unlimited. The inventor of the system, Satoshi Nakamoto, set the maximum available coin amount at around 21,000,000 units. Of this total, a good 18.5 million had already been mined by the end of September 2020, which is also known as mining. Blocks in the so-called blockchain are created in sizes of 50 units each. The smallest unit of Bitcoin is Satoshi, 100,000,000 Satoshi are one complete Bitcoin. In order to invest in Bitcoins, small amounts can also be purchased without requiring large budgets at the beginning.

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The Cryptocurrency Market Works Differently than the Fiat Market

In order to be able to trade Bitcoin correctly, interested parties need to know a few things, and in the first step they need access to the crypto market at all. So to the environment in which Bitcoin and its alternatives from Ark to Zcash are traded. Trading takes place via so-called exchanges or trading venues. The procedure is basically identical to the procedure on classic stock exchanges for trading in stocks and other assets such as commodities or options. Transactions therefore take place between different market participants, with prices largely based on supply and demand as usual. The exchange providers are also often involved in trading.

Typical influences such as central bank interest rate decisions have a rather indirect effect on the price development. However, the Corona pandemic at the latest showed that the crypto market is by no means completely independent. It is essential to understand this in order to be able to trade Bitcoin correctly.

Advantages and Disadvantages of Increasing State Intervention

Increasing regulations will also most likely influence the way we can trade Bitcoin and other digital currencies in the future. On the one hand, trading is guaranteed to be safer if state institutions issue licenses and trading providers are regularly subjected to controls. As always, this coin has two sides. Many crypto users from the very beginning fear far-reaching restrictions as a result of official rules and laws. However: The extent to which the crypto sector can really be controlled in the end remains to be seen. Especially with so-called privacy coins such as Monero – so much for the record – the possibilities of influence for politics are limited, at least in active trading and when paying.

Fiat and Crypto Currencies Can be Exchanged Reciprocally

But back to the actual topic, the question of how to trade Bitcoin correctly in order to speculate. It is important to realize that this is a purely digital currency system. However, the gradually blurring boundaries between the real and digital world ensure that Bitcoin is gaining more and more acceptance. Especially in the tourism and gastronomy sectors, the currency can be used more and more often as a digital means of payment. There is no link to fiat money such as the US dollar in the Bitcoin blockchain. The big but: Anyone who trades with Bitcoin can buy the currency on – sometimes already regulated – exchanges and pay with currencies such as US dollars, euros and others or exchange their crypto holdings back into fiat money or use Bitcoin to purchase other cryptocurrencies.

Bitcoin trading is often compared not only with the gold market. Global trade in coffee, tea and other raw materials is also sometimes used as a comparison. There is no question that the parallel is that these are markets in which supply and demand define prices.

Where Can and should I Trade Bitcoin?

The mining mentioned above (“mining”) is one way to use the world’s most important cryptocurrency by market capitalization. However, this path is not the best approach for everyone due to the associated technical requirements. Anyone who has been dealing with the theory of Bitcoin trading for a long time knows that the selection of portals on which you can dedicate yourself to trading is constantly growing. Although many exchanges and trading platforms are based in Asia, there are now also a number of large service providers in Europe that are open to customers from German-speaking countries. More variety in the area of trading providers means more competition. This in turn is a clear advantage for investors. Transparency in the conditions is essential. This includes the following criteria:

• clear presentation of the tradable digital currencies
• comprehensible statements on the usable fiat currencies
• reliable information on trading fees as well as purchase & sale prices → how is the price determined?
• Details on the possible payment methods and associated fees

Many exchanges also offer their customers the storage of their cryptocurrencies. Often, unfortunately, successful attacks by hackers and embezzlement are now rather rare in the crypto world. Nevertheless, such news naturally puts a strain on insecure new customers in particular. Many experts recommend an external wallet – paper, cold and hardware wallets in particular are popular. The more secure, the better. Because where large amounts of money are handled, criminals are automatically found. Exchange operators today invest a lot of money in security standards, information on state licensing and regulations is an indication of trustworthiness. It is important here that every investor does everything for their own security. In plain language, this means that access data to exchange accounts and wallets should never be made accessible to third parties.

Trading Bitcoin Correctly: Proceed with Multiple Exchange Accounts?

Sooner or later, newcomers will come across the term arbitrage trading. This refers to the targeted speculation on or with price differences. Depending on how exchanges structure their prices and how clear the margins between purchase and sale prices are, accounts with different exchanges can actually pay off very well. Of course, the first step is to create an account at all. To do this, use a reputable and objective broker/exchange comparison; the aspects mentioned above in the list are crucial. Too much personal data is usually not required to open an account. However, the gradual regulation of the crypto sector ensures that new customers on platforms must meet requirements in the sense of know-your-costumer (KYC) provisions and anti-money laundering (AML) regulations. In addition to a valid email address and information about the place of residence, new customers must increasingly provide proof of identity. This is usually done digitally, for example with photos of a valid passport or identity card.

Basically, every consumer who wants to trade Bitcoin correctly knows this practice from a normal bank account. Reputable service providers can be recognized by their open information policy. You should find sufficient information about the providers themselves in the legal notice of the platforms. After an initial deposit in the desired currency and proof of identity, the first transaction can usually be carried out quickly.

Traders Need to Understand how Prices are Created on Trading Venues

The transparent explanation of the price structure and fees – for example for withdrawals and transfers to external wallets – is evident in the arbitrage trading mentioned. It is about selling Bitcoins purchased on exchange A on another platform at a better price for the provider. Or of course the other way around. If everything goes wrong, high trading fees will eat up possible profits again. This can happen especially when using arbitrage. So the greater the differences between different trading venues, the more opportunities on the earnings side if you trade Bitcoin and use the appropriate places for buying and selling.

Analysis Technologies also Play a Major Role in Bitcoin

In order to speculate with Bitcoin, it is generally helpful if investors have access to high-quality and reliable analysis instruments. Various “tools” are already available on many trading portals. Especially at the beginning, they do not necessarily have to be additional tools that are subject to a fee. Here, the trading goals determine how important professional accessories are. Anyone who uses analysis technologies should above all ensure that prices are constantly updated. In many places you will find the reference to “real-time prices”, as price changes in real time. This is generally useful and recommended in a market as volatile – i.e. susceptible to short-term fluctuations in prices – as the crypto sector. Analytical skills and a sense for price actions are later the indispensable basis for being able to trade Bitcoin correctly. Regular reading of industry news is also advisable.

Some of the most Important Technical Terms for Trading Bitcoins Correctly

Last but not least, a certain vocabulary should be known so that no misunderstandings arise that could ultimately have serious economic consequences. That is why our experts have finally compiled a glossary that contains some of the most important terms that everyone who wants to trade Bitcoin correctly should know.

Our glossary as a basis for being able to trade Bitcoin correctly:

The “Ask” Price:

This term refers to the price at which exchange operators (if they are actively involved in trading) or users of a platform are willing to sell their Bitcoin holdings

The “Bid” Price:

This is about the price that interested parties want to pay at most in order to receive a certain amount of Bitcoin (or Satoshi units) via a trading venue

The Arbitration:

This activity, which we have already mentioned, is about trying to profit from the fact that traders identify price differences at different locations for buying and selling when trading Bitcoin. In this way, they can buy cheaply from one provider and sell elsewhere at a better price.

The Trading Volume (also “Volume of Trading Site”):

The name basically says it all. The trading volume refers to the amount of a certain monetary unit sold via the trading platform within a time window XY. Here, of course, the Bitcoin (BTC).

The Market Depth:

The so-called market depth is also and especially important in order to be able to compare different platforms with each other in terms of activity. The market depth defines the amount of Bitcoins that participants in a trading environment offer for sale, for which there are no buyers/buyers to date. The lack of interest can have two reasons: There are either simply not enough active interested parties or they are not willing to pay the price called.

Speculators:

Speculators are those market participants who specifically invest in the leading cryptocurrency in order to buy cheaply and sell more expensively. Here again, there are differences with regard to the periods within which traders/speculators proceed. The number of investors who trade Bitcoin correctly and make it a fixed component of their long-term portfolio has recently increased significantly – one reason for this trend is inflation concerns on the traditional financial market. Speculators are explicitly looking for the price differences mentioned on the market in order to exploit them when trading. See arbitrage.

High-frequency Trading:

This term refers to the possibilities of profiting from acute price changes through correct Bitcoin trading in very short time windows. But remember that trading is risky and can lead to capital losses. Therefore, comprehensive – especially analytical – know-how is required in order to formulate accurate price forecasts.

The Price Bubble:

Especially at the beginning of the Bitcoin boom, there were repeated phases in which demand was temporarily particularly high for certain reasons. Not every industry news was correct and turned out to be a rumor. As a result, prices fell significantly later because there was no realistic reason for the enormous demand. Such scenarios also exist on the normal stock market. A Bitcoin price bubble presented itself, for example, in the period between December 2013 and 2014. Bubbles of more or less large proportions will always exist.

Margin Trading or Margin Trading:

This type of trading is characterized by a particularly high risk when speculating. Traders use capital that is not their own. Although interesting opportunities often beckon when positions are successful. Due to a lack of coverage, however, it can lead to the premature closure (“forced liquidation”) of trading positions. In addition, – despite the prospect of very good profit margins – equally high losses can arise.

Leverage Trading:

As with margin trading, this trading approach can result in substantial profits, but also losses. Even if traders are firmly convinced that they can trade Bitcoin correctly – the market does not always do what you expect it to do. “Leverage” ultimately means that traders trade with a so-called leverage. There is a parallel here to trading with contracts for difference (CFDs). A maximum leverage of up to 1: 30 is sometimes possible. This means that investors can invest 100 times their own capital.

The Investment Risk:

No matter how confident investors feel in their decisions. There is a residual risk even for investors who have been trading Bitcoin successfully and correctly for years. You have to be able to withstand this risk. Therefore, beginners in particular should only invest money that they can and want to afford to lose. Once again, experience is the be-all and end-all in order to keep this investment risk as low as possible. If you compare the sometimes very dramatic price fluctuations of Bitcoin in the past with the mostly rather small movements on fiat markets, the investor danger becomes very clear. However, the BTC’s susceptibility to massive slumps and manipulations from the early phase is decreasing. Among other things, due to the increasing number of market participants and the increasing acceptance in the “normal” economy. However, even smaller fluctuations are and remain problematic, especially for traders with a small budget.

Wallet Security:

Recently, for example, hacker attacks have been a problem. Criminals continue to try to attack the hot wallets of many Bitcoin exchanges and steal holdings. There have been repeated incidents of this kind, from which well-known and established names in the industry have not been spared. The Japanese exchange Mt.Gox, for example, had to confess to its customers years ago the loss of Bitcoins in the order of 450 million US dollars. For this reason, experts advise traders to keep the majority of their reserves in an offline cold wallet and to store only a small amount of crypto capital in the wallets directly associated with exchanges. Unlike banks, deposit insurance and other protective mechanisms to secure customer funds are not always the best at crypto exchanges.

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