Bitcoin trading has deservedly earned a reputation over the past 10 years for being one of the most profitable ways of earning money online, if not the most profitable for many people.
The unprecedented pace that the use of Bitcoin and cryptocurrency in general has grown in the last decade is in no small part as a result of the stories of Bitcoin traders and investors generating thousands, or even tens of thousands, of dollars every month.
However, while the profitability of Bitcoin trading is undeniable, the risk that is also involved with buying and selling the world’s number one cryptocurrency is also something that causes a large amount of concern for many traders, and in particular traders that are relatively new to the cryptocurrency market.
It’s because of this, and because of the impact that making mistakes when trading Bitcoin can have on the finances of traders, that there is such a large concern regarding the risks that are present in the cryptocurrency market, how to identify these risks, and how to mitigate them.
And while many traders have gradually spent years learning through first-hand experience about the range of risks that are present in the cryptocurrency market, often at the cost of significant financial losses in the process, many other Bitcoin traders seek out shortcuts and information in order to understand the risks that are present, without needing to lose money in order to learn about them.
And it’s because of this that we have created this guide, which breaks down the biggest risks for Bitcoin traders to avoid in 2020, starting with taking a look at what Bitcoin is and how it works, before moving onto looking at the mechanics of Bitcoin trading, Bitcoin investing, and some of the best Bitcoin trading platforms and strategies, and then finishing off with a list of the biggest risks for Bitcoin traders to avoid in 2020.
What is Bitcoin and Why is it a Big Deal?
What is Bitcoin?
Bitcoin is a financial wonder-tech that was created in 2008 by the elusive individual or group known as Satoshi Nakamoto, which is more than likely a pseudonym, and unlike many attempts at trading digital currencies previously to Nakamoto’s attempt, Bitcoin has not only survived, but thrived since then.
Bitcoin is a digital currency, it can also be considered as a kind of digital gold, and really it is the amalgamation of what a currency is, what a resource that can be used as a store of value is, and a new form of computational and algorithmic technology that is infused with cryptography.
People have been using Bitcoin for the last decade in order to do a number of things, with these focusing around either storing their wealth, investing, making payments to any place in the world without the need of a bank or payment processor, or speculating in the cryptocurrency market.
In all these situations, Bitcoin has presented solutions and opportunities that were not previously available, and often these solutions have provided significant value to users, and this has been clearly reflected in the astronomical growth in the value of Bitcoin’s price in the past 10 years.
When Bitcoin was first created by Nakamoto it was literally valueless, and even for many months after the launch of the Bitcoin blockchain, users were trading tens of thousands of Bitcoins for almost nothing.
However one factor has dictated the price that people have been prepared to pay for a single Bitcoin throughout the past 10 years, and that has been Bitcoin’s connection to the concept of network effects.
Basically, the more people that use Bitcoin and invest their money into it the greater the total value of the entire Bitcoin network is, and therefore the greater the value of a single Bitcoin is as well.
How Does Bitcoin Work?
Nakamoto created the concept of cryptocurrency, and named the first cryptocurrency to be released, Bitcoin, but as well as these two new concepts there was a third, and perhaps even more impactful, invention released by Nakamoto in 2008.
This was of course the new technology that Nakamoto created known as blockchain, which would be used as the ledger system which allowed the entire Bitcoin network to decide and understand who owns how much Bitcoin at any point in time, and for this to be achieved in a truly decentralized manner.
Up until the creation of Bitcoin, currencies such as the USD and EUR have all been controlled by central banks, who have decided how much would be created, how would be distributed, and the factors that would influence its price such as interest rates and monetary policy.
However, Nakamoto envisioned an economic system based around a new currency that would be completely decentralized in the ways it operated, as well as being fully digital.
Blockchain is a system of many mechanisms that work together in order to autonomously decide who will be given new Bitcoin, and other cryptocurrencies, and will manage every economic aspect of the Bitcoin network in order to ensure that everybody agrees on who owns one at any point in time.
Why is Bitcoin a Big Deal?
Bitcoin is a big deal for a number of reasons, as is cryptocurrency in general for similar reasons, but with many caveats.
To Start with the concept of cryptocurrency in general, cryptocurrencies are the first time that a digital currency has been able to be created which has been robust enough to be able to defend itself against not only the governments and central banks of the world, but also malicious actors of all shapes and sizes.
With other digital currencies that were launched as early as the 1990s and anywhere up until the launch of Bitcoin, they all failed for specific reasons, with one reason being more prevalent than the rest.
Most digital currencies created prior to Bitcoin were shut down by governments and regulators because they were centralized, and once a government discovered the location of the server that was running the digital currency, all that was needed was to unplug the server or to seize the equipment in order to kill the currency.
Bitcoin is a big deal because it was the first time that a digital currency had been created which cannot be shut down and did not have one location that it was running from.
As well as this Bitcoin is a big deal because, if for nothing else, it’s price has seen a growth of 27,000,000% or more in the last 10 years, rapidly outpacing every other financial asset and asset class over that period of time, and not just outpacing them, but out pacing them significantly.
Bitcoin Trading 101
What is Bitcoin Trading?
Bitcoin trading is the most popular way that Bitcoin uses are generating income online with the world’s number one cryptocurrency today, and although there are many strains and strategies of Bitcoin trading, the underlying principle of what it is it is very simple.
Bitcoin trading is the process of designing strategies that involve the purchase and sale of Bitcoin, through the creation of long and short positions on Bitcoin, with the intent of generating profit over the period of the trades that are executed.
Traders may be single individuals who have never had anything to do with cryptocurrency, or traditional asset market trading such as stocks and forex, but decided to just buy and sell a few hundred dollars worth of Bitcoin to see if they could make some profit.
Conversely, traders can be large, technically-proficient hedge funds and other institutional investment organizations that are running hundreds of cryptocurrency trading bots 24/7, and are buying and selling millions of dollars worth of Bitcoin and other cryptocurrencies within any given 24 hour period.
Bitcoin trading has the potential to change peoples lives with the amount of money it can provide them as income, and it also has had the propensity to lead to large losses for traders that believed it would be easy, didn’t research the market and Bitcoin itself enough, and launched into trading without being prepared and understanding the risks.
Bitcoin Trading vs. Bitcoin Investing
Bitcoin trading and Bitcoin investing are two sets of activities which are both very similar and highly connected, but which both are distinct and suit different types of people, as well as different types of investment structures.
While Bitcoin trading is the process of creating multiple trades regularly in order to generate profit in the Bitcoin market, Bitcoin investing is more closely aligned with the concept of identifying longer-term opportunities to be able to profit in the market.
For example, a Bitcoin trader may create thousands of trades in a single day, with some traders even creating hundreds of trades per minute, whilst a Bitcoin investor may create a single trade over a five-year period.
Also as well, Bitcoin traders are typically more concerned with using technical analysis in order to understand the patterns that are found in the Bitcoin market in order to be able to monopolize upon them, where Bitcoin investors are significantly more concerned with the macro considerations related to fundamental analysis, being the overall health of the Bitcoin market as well as the cryptocurrency market in general.
Best Bitcoin Trading Platforms
PrimeXBT is the world’s leading multi-asset margin trading platform and has grown exponentially over the past two years to go from launching with a wait list of 150,000 traders, to today being one of the largest cryptocurrency trading platforms online and managing up $2 billion worth of global trade every day.
PrimeXBT is primarily a Bitcoin-based platform which runs on accounts that hold Bitcoin, however there are a wide range of ways to fund an account using PrimeXBT using the platform’s Changelly integration that include a wide range of different cryptocurrencies and payments using credit cards and debit cards.
PrimeXBT is a margin trading-centered platform which provides world-class advanced margin trading services with leverage of up to 100X being provided on all cryptocurrencies listed on the platform that include BTC, ETH, XRP, LTC, and EOS, and a wide range of traditional assets such as stocks indices, commodities, and forex pairs, which have up to 500X leverage available on those.
PrimeXBT has integrated bank-grade security into its systems and as a result has never been hacked or breached by hackers throughout its life, with a range of advanced security features implemented on the site including mandatory Bitcoin address whitelisting and cold storage of digital assets with multisignature technology.
PrimeXBT is also renowned for having the lowest fee schedules of any major cryptocurrency trading platform on the market in 2020, with a flat rate of 0.05% being applied to all trades on PrimeXBT, irrespective of the size of the trade or the asset which is being traded.
PrimeXBT’s user interface is also intuitive, easy to use, and attractive, and this has allowed a range of traders and investors from beginners up to experts to be able to quickly and easily learn how to use the platform, and then to execute professional level strategies in the cryptocurrency and traditional asset markets.
Binance is another major cryptocurrency trading platform that has launched in the last few years and has grown rapidly during that period of time.
Unlike PrimeXBT which lists a wide range of traditional assets, Binance is a cryptocurrency-only trading platform, and even more than that, Binance does not provide trading in fiat currency such as USD or Euro, but only crypto against crypto.
As a result of this, traders that do not already have cryptocurrency in their account have found it more difficult to use Binance, and this has been somewhat prohibitive for beginner traders especially.
However Binance does list a very wide range of cryptocurrencies, and does have a large number of trading pairs for each cryptoassets as well, providing a range of opportunities for cryptocurrency traders.
While Binace was hacked in early 2019 for around $40 million of its users funds, since then the platform has implemented new security measures which hopefully have mitigated much of the risk from hackers.
Best Bitcoin Trading Strategies
Margin trading is the process of borrowing funds from a cryptocurrency broker in order to create trades that would typically not be possible without those funds, and that unlike ways to generate significantly higher levels of profitability in the cryptocurrency market.
The two main ways of margin trading are leverage and shorting, and while there are similarities between the both of them, there are distinct differences in what they provide in the way of value, and how they are executed.
Leveraging is the process of borrowing funds from a broker in order to create trades that are significantly larger than what would typically be available with the capital that is available to the trader.
Shorting is the process of borrowing funds from the broker in order to be able to create trades to generate profit once the price of the asset drops, instead of the normal way of making money from trades which is generating profit when the price of the asset increases.
Swing trading is a highly popular trading strategy that is more commonly found in the traditional markets, however which is becoming more popular in the cryptocurrency market also in 2020.
The basic idea of swing trading is for a trader to move with the natural upward and downward fluctuations in price that typically happen over the short to medium term.
Trades commonly last for a period of one to a few days, with the aim of swing trading being to try to predict the point where the asset will become overbought and then create short positions, then to wait until the asset becomes oversold within a period of a few days and then to revert that position to being a long position.
Algorithmic trading is also known as bot trading, and as the name dictates indicates, algorithmic trading is creating software-based bots that use algorithms in order to decide when to buy and sell autonomously, and that run 24/7 without the control of the trader.
Algorithmic trading has the potential to deliver significant profits being that there is no need to be present at a computer in order for profit to be generated, and once a successful strategy is able to be discovered and implemented by the trader, then the profit that they generate is autonomous after that.
Algorithmic traders can program a range of different strategies into their bots such as arbitrage, market making, high frequency trading, and other variations of strategies such as swing trading.
What are the Biggest Risks of Bitcoin Trading to Avoid in 2020?
Trading without Risk Mitigation
One of the biggest mistakes which cryptocurrency traders can make when they are starting out is to underestimate the importance of trading with risk mitigation in place.
Risk mitigation is an umbrella term for a range of different mechanisms which ensure that no matter what happens in the cryptocurrency market, an investor’s funds will not be lost at a rate higher than they’ve deemed to be acceptable.
Perhaps the most famous form of risk mitigation and the one that is most commonly used is the use of stop losses, which are in order type that will cancel an open position if the price of the asset moves too far in a direction that is opposite to the profitable direction of the position.
As an example of how a stop loss works, I may create a long position on Bitcoin at $9000, but then will also create a stop loss at $8900 where if the price of Bitcoin drops by more than $100 I will have my position closed, limiting my losses to only that small percentage instead of absorbing large losses if there was a significant crash.
Not Using Margin Trading
Although many new people associate margin trading with risk in the cryptocurrency market, the reality of what margin trading is is actually the polar opposite of that.
Margin trading is commonly used by professional traders as it is easily the most efficient way to use capital in the market, and in fact can be used in many ways for risk mitigation in the cryptocurrency market.
One such way that margin trading can be used for mitigating risk is with the ability to hedge through the use of shorting and long positions at the same time.
Hedging is the process of creating diametrically-opposed trades which simultaneously have both a loss and a gain for any move in price, however by balancing the size of each position and adjusting it according to predetermined calculations, the risk collectively involved in both trades is reduced as much as possible, whilst the potential for generating profit is left open as much as possible.
Using Risky Platforms
There is a significant difference between the best cryptocurrency trading platforms on the market and the worst cryptocurrency trading platforms on the market.
Maybe the most distinct difference between them is the risk involved in using a high-quality platform compared to using a very low-quality platform.
While many low-quality platforms are simply poorly made and through neglect instead of malice, traders can lose a lot of money by using them, there are also a fairly wide number of cryptocurrency trading platforms on the market which are outright scams and will steal money from traders when they make the deposits.
For this reason it is incredibly important to use platforms that not only look good, but also that have a widely known track record for being safe to use and for protecting the funds of users.
One of the best ways of doing this is by looking at platforms that have never been hacked yet have been around for a number of years and that have a high volume of trade at the platform.
Not Diversifying Crypto Investments
Diversification is a concept which is more commonly considered within the traditional markets of stocks and forex, however that is equally as important, if not more important in the cryptocurrency market.
The basic idea of diversification is that instead of putting an entire investment into a single asset or asset class, by splitting the investment and putting it into a number of different assets or asset classes, a negative movement in the price of any single investment will have a much less impact than it would if the entire investment was put into that asset.
As an example of diversification, if I have $10,000 to invest in cryptocurrency I could either spend $10,000 on a single altcoin, or I could split the $10,000 into lots of 1000 and invest into 10 different altcoins which each come from different sectors.
In the first scenario, if the asset that I put the entire $10,000 into has some kind of project-related issues and the price of that asset drops significantly, I will lose a lot of money, whereas if only $1000 of my $10,000 is put into that asset and the same situation occurs then I will only lose 1/10 of what I would’ve lost in the first situation.
Not Looking for Other Ways to Generate Revenue
While the main way the people generate money in relation to cryptocurrency is by far trading and investing, there are also a range of other ways of generating revenue which are important to consider and made in fact be able to generate a higher amount of lower risk.
An example of this is cryptocurrency mining, which has been another of the major ways that people of generating revenue in the cryptocurrency market for many years, and also some other methods such as cryptocurrency referral programs, cryptocurrency bounties and air drops, and cryptocurrency giveaways and faucets.
Each of these methods have their own pros and cons, with some of these methods requiring no investment at all and no specific technical expertise or knowledge, making the barrier to entry very low and easily accessible for anybody.
Often with enough time dedicated to one of these resources, users can generate a relatively significant amount of income without needing to risk their funds in the market, however in most cases trading and investing will deliver significantly higher returns for those that are involved.
In Summary: The Biggest Risks of Bitcoin Trading to Avoid
While it is common knowledge that there are significant rewards to trading Bitcoin and other cryptocurrencies, it is important for people to remember that risk mitigation is also a critical part of the equation.
However while there are a number of risks that need to be understood and mitigated against when trading Bitcoin, the good news is that for each risk there are ways to prevent them from eating into the profits that can be generated in the cryptocurrency market.
While there are techniques such as hedging, the use of stop losses, and diversification which need to be studied and implemented, and can often take some time to effectively understand, there are simple things that can be done that have a huge impact such as selecting trading platforms that are not risky in order to trade at.
We provided the details of two cryptocurrency trading platforms which are widely renowned for being safe and for protecting the funds of users at those platforms, and for any traders that are seeking to learn more about safe platforms in cryptocurrency in the street look no further than the platforms mentioned above.
The Biggest Risks of Bitcoin Trading to Avoid: The Ultimate Beginner’s Guide  was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.