Bitcoin Trading Basics

Before an investor trades Bitcoin (BTC), they should be sure to review the basics. By doing so, they can increase their chances of meeting their investment objectives, whether they want to generate robust returns or simply use Bitcoin to diversify their portfolio.

Why Trade Bitcoin?

Since the 2009 launch of BTC, crypto trading has made a quantum leap in popularity. Consistent volatility, liquidity and a vast number of offerings have attracted active traders from every corner of the globe. However, before diving head first into trading Bitcoin and the cryptocurrency market, one is well-advised to be aware of the benefits and drawbacks.

For starters, investors may want to first consider why they would want to trade Bitcoin. After all, many market observers have stated that the digital currencies come with substantial risk. For example, European Union regulators warned in early 2018 that cryptocurrencies are "highly risky."[1]

Legendary investor Warren Buffett has repeatedly warned investors about digital currencies, telling CNBC in 2018 that "in terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending."[2] Given the stance of Buffett and the EU, it stands to reason that cryptocurrency investing involves significant risk exposure.

Notable Gains

While some have warned about Bitcoin's risky nature, the digital currency has experienced some very impressive gains. In 2017, for example, Bitcoin's price rose from less than US$1,000 to more than US$20,000.[3] During the post-COVID year of 2021, BTC rose to epic levels, posting an all-time high of US$69,000. Unfortunately for BTC bulls, the first half of 2022 proved to be a challenge. The high risk nature of BTC once again reared its head, as prices plunged to a Q2 low beneath US$18,000.[27]

Pricing Moves Differently

Bitcoin's price has also frequently moved out of sync with the price of other digital assets, making it a prime financial instrument for diversification strategies.[4] Because the digital currency's price movements do not follow those of other asset classes, incorporating it into a portfolio can help maintain greater stability.

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Volatility And Opportunities

So, why trade Bitcoin? Experienced traders look to BTC for high volatility and opportunities 24 hours a day, seven days a week, 52 weeks per year. No matter if one wants to buy Bitcoin for long-term investiture or sell a BTC derivatives product, there is myriad possibilities. As long as prudent risk management techniques are applied, Bitcoin can be successfully targeted by a wide range of investment or trading strategies.

Investing vs. Trading

Once an individual has evaluated whether Bitcoin is right for them, they can begin looking into whether it makes more sense to invest in the digital currency or trade it. While these two may sound the same, they are different.

Long-term vs. Short-term

When differentiating the two, the easiest way to think of it is that investing is a long-term activity, and trading is a more short-term activity. For example, many people invest for retirement, accumulating wealth over time so that they can build up a viable nest egg. Alternatively, they may save up for their children's college education.

Trading can be far more short-term, however, as a person could purchase a security with the intention of selling it later the same day. High-frequency trading, a more extreme example, involves buying and selling assets within fractions of a second.[5] For active traders, the frequently buying and selling crypto is a viable way of securing steady cash flows. These actions are frequently executed according to day trading, scalping, or swing trading strategies.

Do Your Own Research

This one may sound like a given, but it is particularly important for traders considering a highly volatile asset like Bitcoin. The digital currency is a very new asset relative to many other securities. Acting on "hot tips" or subscribing to signals providers may work in the short-run, but its far better to do your own research over the long-term.

While stocks and bonds have been around for some time, the first bitcoins were produced in 2009.[6] At the time of this writing (March 2018), the digital currency has been around for less than a decade, making it rather new compared to more established assets.

Watch For Scams

There are plenty of cryptocurrency scams out there, too. Many initial coin offerings (ICOs) have been taking place in the digital currency space, and these sales of newly created digital tokens have provoked warnings from prominent market experts such as ether co-founder Vitalik Buterin.[7]

Government Regulation

Further, the regulatory environment surrounding digital currencies is very immature, meaning that varying government agencies and other entities have provided disparate guidance. The Commodity Futures Trading Commission (CFTC) in the U.S., for example, declared in 2015 that Bitcoin was a commodity like gold or oil.[8] As a result, the CFTC has the authority to regulate the digital currency.

The U.S. Securities and Exchange Commission has also provided guidance on digital currencies, indicating in 2017 that the digital tokens sold through ICOs could in some cases be securities.[9] In the instances where these tokens are securities, they are subject to U.S. federal securities law.

However, the developments involving the CFTC and SEC only speak to U.S. regulations. When examined through a global lens, digital currency regulation can become even more confusing.

Cryptocurrencies were a major topic of discussion at the 2018 G20 event in Argentina, where representatives of major economies reportedly worked toward a consensus that Bitcoin—and other digital tokens—are in fact assets.[10]

"Whether you call it crypto assets, crypto tokens—definitely not cryptocurrencies—let that be clear a message as far as I'm concerned," stated Klaas Knot, who heads De Nederlandsche Bank, the central bank of the Netherlands.[10] "I don't think any of these cryptos satisfy the three roles money plays in an economy."

Given these considerations, it is even more important for would-be Bitcoin traders to conduct their due diligence before getting involved with the digital currency.

Get Familiar With The Terminology

There are many places that investors could start when researching Bitcoin. They may benefit from scouring industry terminology, learning terms like HODL (hold on for dear life), FUD (fear, uncertainty and doubt) and shill (a person who promotes coins they own in order to turn a profit).

In addition to determining whether Bitcoin is right for them, investors should evaluate how the digital currency fits in with their financial objectives and any existing portfolio they have. Bitcoin traders may also want to familiarise themselves with the broader cryptocurrency ecosystem by learning about the prominent personalities and their unique voices.

Fundamental Analysis

One of the best things about market research is that it can take on a variety of shapes and sizes. For standard traders, as well as cryptocurrency traders, it's important to understand both market fundamentals and technicals. Let's take a look at fundamental analysis first.
Fundamental analysis is the study of an asset class's underpinnings. The cryptocurrency market has a unique collection of fundamentals. Below are a few that have the potential to drive BTC prices, as well as the prices of altcoins, significantly directional:

Supply & Demand

As with shares, commodities, or forex trading, crypto is subject to the laws of supply and demand. Generally, reduced supplies or increased demand promote high prices; conversely, excess supply and lagging demand can prompt price drops. For BTC, the maximum supply of 21 million is thought to provide an inherent scarcity. This isn't the case for other coins that have extremely large circulating supplies, such as Dogecoin (DOGE) or Shiba Inu (SHIB).

Blockchain Technology

The evolutions and functionalities of blockchain technology can have a dramatic impact on coin values. As an example, the halving of BTC block mining rewards has negatively impacted the creation of new Bitcoins. Some analysts believe this is a bullish market driver in that it restricts the supply of BTC. Blockchain issues can be a big deal for many types of cryptocurrency, from Etheruem (ETH) to Terra (USDT). When trading BTC, it's imperative to stay abreast of structural changes such as hard forks or alterations to network algorithms.

Mainstream Adoption

Since inception, the adoption of BTC by the financial mainstream has been a key element of its pricing. Essentially, as Bitcoin has gained traction in the conventional financial world, prices have risen. From a macro perspective, the launch of BTC ETFs and Bitcoin debit cards are two items that suggest the coin is making financial inroads. Nonetheless, optimism over mainstream adoption can be fleeting with gains rapidly giving way to bearish price changes.

Technical Analysis

Technical analysis is the study of an asset's past and present price action. It is used to identify tendencies in market price and craft informed financial decisions.

The backbone of technical analysis is the application of tools and indicators to current and past pricing data sets. By doing so, traders can define the BTC and cryptocurrency prices most likely to act as support or resistance levels, or as periodic peaks or troughs.

The volatility and price action of BTC and crypto make it especially attractive to technical traders. Even though it can be challenging to find accurate tick or trading volume data, many indicators function well on active cryptos. Legions of technical trend, reversal and breakout traders focus on the crypto market due to the well-defined price action.

Select An Exchange

Finding the right exchange is a crucial step for a new Bitcoin trader. In fact, for any book titled "Cryptocurrency Trading For Beginners," selecting a trading venue is an ideal first chapter. Finding a safe, reputable exchange with which to do business is a must. And, in the online environment, there are a vast collection of alternatives. A few household names in the segment are Etoro, Gemini, Kraken and Binance.

Security Issues

Before depositing capital for trade on a crypto exchange, it's important to understand the history of security issues. Over the years, many digital currency exchanges and crypto trading platforms have been hacked, including Bitfinex, which has at times been described as the world's largest Bitcoin exchange.[20]

Bitfinex suffered a hack during the summer of 2016, during which it lost roughly US$70 million worth of Bitcoin.[21] The exchange survived the experience, spreading the losses it suffered across all accounts and compensating account holders with newly created digital tokens, which it in turn bought back.[22]

While Bitfinex managed to pull through a hack unscathed, Tokyo-based exchange Mt. Gox was also compromised by nefarious parties, which resulted in the loss of US$460 million.[23] Mt. Gox went into bankruptcy, and a trustee named Nobuaki Kobayashi started selling digital currencies on behalf of creditors in March 2018.[24]

Conduct Due Diligence

Investors can benefit substantially from conducting their due diligence on any exchanges before using them. There is a short list of digital currency exchanges that have not been hacked at the time of this writing. For instance, Coinbase has never been hacked.[25] However, its customers have been hacked after falling victim to elaborate schemes that target personal bank account information.

Basic Security Techniques

In addition to picking out the right exchanges, investors can reduce their chances of getting hacked by learning more about security techniques.

Two-Factor Authentication

One of the most basic techniques is two-factor authentication, which requires users to take more than one step to confirm their identity. Not all forms of two-factor authentication are created equal, though.[26] Using Google Authenticator instead of SMS, for example, can make a big difference.

If investors want to use Google Authenticator for two-factor authentication, they should be sure to turn off their SMS two-factor authentication, according to Dan Romero, vice president and general manager of Coinbase.[26] By doing so, text messages will not be used to confirm transactions or manage platform logins. This ensures that if a phone is lost or compromised, sensitive information won't fall into the hands of nefarious trading bots or cyber criminals.

Protect Accounts

Another way investors can prevent their money from getting hacked is contacting their cellular service provider and taking every effort to protect their account, said Sean Everett, Coinbase's VP of product management.[26] Traders can request that their mobile service provider refrain from porting any phone numbers, which adds another layer of protection.

Safeguard Payment Methods

One basic security measure that can be particularly effective is to safeguard any information related to payment methods. To buy and sell crypto on an exchange, one must either link a bank account, credit card or fund operations via wire transfers.

This can be a risky endeavour as many people store sensitive information in online banking or credit applications. That's why it's especially important to secure related email accounts, use a secure VPS and make sure that all computing devices are firewalled and virus-free.


Before ever placing a trade, it's important that cryptocurrency and BTC participants are aware of the risks. Historically, crypto assets have been exceptionally volatile. Also, there have been many incidents of hacking and security breaches that resulted in billions of U.S. dollar (USD) denominated losses. At the very least, robust security and risk management is advised for individuals interested in entering the crypto markets.

Would-be Bitcoin traders should keep in mind that while they can potentially generate substantial gains through digital currency, there are many different factors they should consider before making trades. Failure to conduct thorough due diligence could mean losing all of one's money.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.



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