An Introduction to Bitcoin Trading: The Ultimate Guide [2020]

As the volatility in the cryptocurrency market in 2020 begins to go back up with what looks to be formation of the 3rd major ball run throughout the life of Bitcoin, as has happened before, a new wave of traders entering the market for the first time means that many are seeking to quickly learn about exactly what Bitcoin trading is, and how to do it the best way possible.

Although at its core Bitcoin trading is a simple set of activities that can quickly be understood and used, as novice traders begin to dig a bit deeper into the wide range of opportunities for generating profit within the cryptocurrency market it begins to become clear that there is more to the story than simply buying low and selling high.

In 2020 perhaps more than in any other point in the life of Bitcoin, there are new opportunities, platforms, and tools popping up all the time in the cryptocurrency industry, with it being important for Bitcoin traders to research the best way that they can for generating profit.

It’s with these considerations in mind that we are taking a look into what Bitcoin is, before moving on to what exactly Bitcoin trading consists of, looking at where the best Bitcoin trading platforms are in 2020, breaking down the best Bitcoin trading strategies, and finishing up with a look at the future of Bitcoin trading.

What is Bitcoin?

Who Created Bitcoin?

In 2008 a mysterious research paper known as the Bitcoin Whitepaper was quietly dispersed amongst clubs such as cryptography groups, financial anarchist groups, and various strains of niche computer science groups online at the time.

The author of the paper, an anonymous group or individual known as Satoshi Nakamoto, outlined the concept for a form of digital money that would not be controlled by a single central authority, but instead would have decentralization built into the core of how it operated.

The creation of Bitcoin and cryptocurrency can be seen within the context of the period of time that Nakamoto was designing this new form of money, in particular the fact that 2008 was still in the midst of the global financial crisis that was rocking the world, and at its core was caused by the mainstream financial system.

Perhaps as a direct result of what was happening in the world’s economy at the time, Nakamoto looked to a new alternative way for people to be able to create and share value without the need for a central bank or other authority in order to manage the system, and to designate which parties receive value and were able to transact value.

Who Uses Bitcoin and Why?

Bitcoin has grown from being something that was hardly used by much of the world, and those that were using Bitcoin were mainly using it for illicit reasons, to today branching into many areas of mainstream financial trading, and being a widely accepted payment medium throughout the Internet.

While there are still many that are using Bitcoin for nefarious means, the representation of the total number of Bitcoin transactions that occurred in relation to this is substantially smaller today than it was many years ago.

Today a much wider spectrum of the population of the world are using Bitcoin for reasons as diverse as trading with the goal of generating a profit, as a way of storing value in life savings for a long time, sending funds internationally with low fees and short transaction times, and a wide range of other reasons and uses.

Some of the more interesting and applicable reasons for using Bitcoin stories revolve around its ability to provide pseudo-anonymity, although instead of this being used for the commission of criminal activity it is being used in order to protect freedoms in countries and regions where authoritative governments control the flow of money to dissident groups and others.

Why Does Bitcoin Have Value?

Bitcoin has value for a number of reasons and it is not a simple question to answer, as there is not a single reason that Bitcoin holds value.

Instead for different users and organizations there is a combination of different reasons with varying degrees of importance that persuade users to begin using Bitcoin and to continue using it.

Perhaps the most common reason for people to use Bitcoin instead of fiat currency is because of Bitcoin’s significantly lower transaction fees in comparison to the use of banks and payment processes such as Paypal, as well as the typically low transaction times in order to send the funds.

While sending a payment via PayPal can incur fairly substantial fees, as is the same with the international transfers of some banks, a good example of the cost efficiency of using Bitcoin to make a transfer of value is a few weeks ago when they a large exchange made a payment of hundreds of millions of dollars in Bitcoin costing them roughly $0.63 in fees.

Regarding the speed of transactions from using cryptocurrency, although the typical transaction time for making Bitcoin payment can be up to about half an hour, with many cryptocurrencies, such as Ethereum, the typical transaction time can be seconds, and this is in comparison to international bank transfers which can often take 3 days or more.

As well as the practical uses of Bitcoin, there are other reasons for it to hold value, with one of the most widely focused on reasons being the perception that Bitcoin will increase in price continually over time as a result of the mechanism built into it that is deflationary known as the “Bitcoin halving”.

What is Bitcoin Trading?

Bitcoin Trading 101

Bitcoin trading is the process of creating long and short positions in the Bitcoin markets with the aim of generating a net profit across all trades that are made within a period, and while mitigating risk as much as possible.

While Bitcoin trading originally started out as a fairly rudimentary process that was conducted on very basic exchanges, today the collective group of activity that is known as Bitcoin trading has ballooned to include a wide range of exotic and potentially highly profitable strategies and techniques for engaging with cryptocurrency markets.

Some of the more common ways that traders engage with cryptocurrency markets are Bitcoin mean reversion, Bitcoin momentum trading, and Bitcoin algorithmic trading.

Bitcoin mean reversion is the concept that if there is a large spike or drop in the price of Bitcoin, that at some point it is likely that the price of Bitcoin will return back towards the mean rate that it was at prior to the large movement, and that profit can be generated by taking the contrarian position at the right point in time.

Bitcoin momentum trading is the principle that when the price of Bitcoin moves in a given direction either upwards or downwards, that it is likely that the momentum of the trend will carry through and the price of Bitcoin will continue in that direction for a longer period of time, with profit being generated by backing the direction that the trend is already moving in.

Bitcoin algorithmic trading is the process of using software-based Bitcoin trading bot that can trade autonomously based on a set of algorithmic rules and mathematics and engage with the cryptocurrency market in a way that creates multiple trades over a period of time, and generate profit over that period.

Bitcoin Investing 101

Bitcoin investing is similar to Bitcoin trading in that the aim of Bitcoin investing is to create positions over a given period of time with the aim being to generate net profit over that period as a result of those positions.

Where Bitcoin investing differs from Bitcoin trading is that unlike Bitcoin trading which typically sees the time duration of a position lasting up to a maximum of a few weeks and down to a minimum of microseconds, the typical duration that a Bitcoin investor will create a position for is at a minimum of about one month anywhere up to multiple years.

Where Bitcoin traders typically pay attention to technical factors such as the movement of the price of an asset, a range of different technical indicators that can be developed from this, as well as the volume of trades that are occurring over a given period, Bitcoin investors focus more on the fundamentals of the cryptocurrency market as a whole, and Bitcoin specifically.

These considerations include things like the overall strength of the cryptocurrency market, the point in the 4-yearly halving cycle that we are at at a given time, public sentiment for Bitcoin and cryptocurrencies in general, and any kind of macro development such as the banning or regulation of cryptocurrency in any given country.

Trading vs Investing — Pros and Cons

There are distinct advantages and disadvantages to choosing whether or not to invest in Bitcoin or whether to trade Bitcoin, with the implications of this choice being far-reaching and ultimately perhaps determining the profitability of all activities taken in the cryptocurrency market.

There is no way to say that either trading or investing in Bitcoin is more profitable than the other, and profitability depends on a number of factors that include the amount of investment capital to begin with, the strategy selection within the context of either trading or investing, and the success of the execution of which other strategies are selected.

Really the major distinction between Bitcoin trading and Bitcoin investing with regards to advantage and disadvantage is the pressure that is present with much Bitcoin trading, that is largely vacant when investing in cryptocurrency.

Manual Bitcoin traders often spend large periods of any given day watching the charts and reacting to the inevitable peaks and troughs that come for the day, with this being labor-intensive both physically and mentally, and having the potential to generate a substantial amount of stress if done long enough.

Contrary to this, Bitcoin investors typically seek to understand the market in a more long-term sense and then to develop positions which can be placed and left with basic monitoring for months or even years.

From this point of view, Bitcoin investors really have a substantial advantage over traders in that the pressure placed upon them is much lower and it is much less stressful to invest in Bitcoin typically than it is to trade Bitcoin.

Where are the Best Bitcoin Trading Platforms Online in 2020?

PrimeXBT

PrimeXBT provides industry-leading leverage of up to 100X on all cryptocurrencies that include BTC, ETH, XRP, LTC, and EOS, and up to 1000X on or traditional assets that include stock indices, forex pairs, commodities, and metals.

After launching originally as a cryptocurrency-only platform, PrimeXBT today bridges the worlds of cryptoasset trading and traditional asset trading, and provides an easy access point to transition funds between the 2 markets, as well as a convenient platform to be able to manage a wide range of different asset classes.

PrimeXBT is extremely competitive with the rest of the market when it comes to its fee schedule, with the platform providing the lowest fees of any major cryptocurrency trading platform of just 0.05% across-the-board.

PrimeXBT has recently dropped the minimum position size required in order to create positions on the platform by up to 90%, working to ensure the smaller retail traders can access the same opportunities that large institutional investors also have at their disposal.

The security in PrimeXBT is also unparalleled with bank-grade security features such as Mandatory Bitcoin address whitelisting feature and Full risk check after every order placement and execution active on the site, with this preventing the platform from ever being hacked or breached.

Binance

Binance is one of the most prominent cryptocurrency trading platforms and is a cryptocurrency-only platform that provides trading of cryptoassets against other cryptoassets.

The platform has built its exposure rapidly through savvy marketing and the use of its native cryptocurrency, the Binance coin, which allows users to be able to reduce the trading fees by up to 25% by holding a designated amount of BNB within an account.

Binance has an easy-to-use and attractive user interface, and provides a powerful solution for traders looking to engage with the global cryptocurrency market, being that Binance provides one of the widest range of crypto listings of any platform online.

Security on the platform has been called into question with Binance being hacked to the tune of $40 million in early 2019, and as well as this, the platform charges one of the highest fee schedules of any major cryptocurrency trading platform, even including the 25% reduction in fees, with traders at Binance paying up to 10 times more than traders from PrimeXBT, for example.

Saying this however, Binance is a leading cryptocurrency trading platform and provides better services than many other platforms in the industry.

What are the Best Bitcoin Trading strategies?

Bitcoin Swing Trading

Bitcoin swing trading is a methodology for generating a profit with the new cryptocurrency market that is based on traditional asset swing trading where instruments such as stocks and forex pairs have been traded in this way for many years.

The basic principle of Bitcoin swing trading is to trade medium size positions that may last for days or weeks with the goal to be to capture a significant portion of the profit available during a major trend over this period.

While other strategies may target much longer periods such as “HODLing”, or buying and holding, or much shorter. such as scalping, swing trading is the process of trying to trade long and short positions which take advantage of the natural fluctuations in the price of Bitcoin.

Swing trading is one of the more common ways that people trade Bitcoin, and if done correctly can be substantially more profitable than a number of other strategies, based upon the high returns that are available over any typical period of multidays.

Bitcoin Algo Trading

Bitcoin algorithmic trading is the process of developing software-based cryptocurrency trading bots that can autonomously create positions in the Bitcoin market and make decisions based upon a predetermined set of algorithmic rules.

While there are many ways that traders can make money by manual trading, almost all of them can be enhanced with the use of a bot based upon the removal of emotion from the decision-making process, as well as the ability to create a large number of trades over a comparable period of time.

There are also a number of trades that for all intents and purposes cannot be executed without the use of trading bots, being the complexity and volume of trades that need to be executed over a relatively short period of time, and these strategies include things such as market making and triangular arbitrage.

Buying and Holding (“HODLing”)

Another strategy that is perhaps more of an investment strategy than a trading strategy is HODLing, which is crypto-speak for buying and holding an asset in the cryptocurrency market for a prolonged period of time before selling.

This concept is quite popular because over the lifespan of cryptocurrency, holding Bitcoin or other cryptoassets for a long enough period of time has always generated a profit, and often a substantial profit.

While this can be a possible strategy and the stress and risk involved with trading is completely removed, HODLing is not the optimal way of generating profit over any given period of time, being that there are a number of strategies that could be implemented which maximize the profit over that same period of time in comparison to this strategy.

However it is common for investors to combine the principle of HODLing with a concept known as “dollar cost averaging”, which is essentially buying a portion of a cryptoasset over a period of time instead of spending the entire investment at the beginning of the period, with the goal of lowering the average price of investment as the price inevitably moves down, or continually creating profitable positions as the price moves up.

In Conclusion: An Introduction to Bitcoin Trading

Bitcoin trading has been growing in popularity and the number of users doing it for 10 years, with there being exponential growth in the number of Bitcoin traders over the past 3 or 4 years, as well as the total volume with Bitcoin being traded every day.

This is largely in response to the huge amount of exposure that the cryptocurrency market received during 2017 bull run, and with another bull run looking to be forming currently and potentially lasting over the next year and a half to two years, a lot of traders are speculating that once again the size of the market could balloon.

When engaging in Bitcoin trading there are a range of different strategies that can be used, however one of the most important considerations for any Bitcoin trader is selecting the most optimal platform for the generation of profit and reduction of risk that is available.

For both new and experienced traders who are seeking a better platform to trade Bitcoin on, check out PrimeXBT and Binance, as they represent the top-tier of Bitcoin trading platforms online today.


An Introduction to Bitcoin Trading: The Ultimate Guide [2020] was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.