The revolution in the financial market began with the development of Bitcoin. Many who recognized this potential early and invested in the cryptocurrency are millionaires today. Therefore, it is understandable that the interest in Bitcoin trading does not stop. But how does trading with bitcoin actually work? Is it still worthwhile at all and what risks can exist?
General information about the largest cryptocurrency
Satoshi Nakamoto introduced the idea of a digital and decentralized currency to the world in a written paper at the end of 2008. A short time later, in early 2009, Bitcoin, the world’s first cryptocurrency, was finally born. Bitcoin, and cryptocurrencies in general, stand out for several points that make them superior to traditional fiat currencies such as the euro or the dollar. These include:
- Decentralized: cryptocurrencies are not controlled by any third party entity, such as a government, central banks or financial institutions
- Fraud-proof: cryptographic signatures and blockchain technology make double entries and manipulation of any virtually impossible.
- Partially Anonymous: Transactions made in Bitcoin are “partially” anonymous and cannot be attributed to a specific person. However, all transactions made in a Bitcoin address can, of course, be traced.
- Inflation-proof: Bitcoins cannot be produced in arbitrary numbers, as, for example, central banks can, so the cryptocurrency is also not threatened by inflation or even complete devaluation
What makes bitcoin trading so interesting?
Due to the properties just mentioned, the Bitcoin has many advantages and is becoming increasingly popular worldwide. If you look at the price development of the Bitcoin, it shows that the cryptocurrency has increased significantly in the last year. After the cryptocurrency was repeatedly declared a failure in the past, it now records a value of about US$10,000. In the meantime, it was also already over US$ 20,000. In comparison, the price in 2013 was still around US$100. This results in a price increase by a factor of 100 to 200 in just under 4 years. Experts believe that the value can even be much higher in the long term. How does Bitcoin Trading work?
Anyone who has now decided to invest in Bitcoin generally has two options:
The direct way would be to buy Bitcoins and hold them until a certain price increase has been reached and then sell them. However, those who decide to take this step must first overcome a few hurdles.
Bitcoins cannot be obtained from your own bank like other currencies. To do this, you must first set up a wallet, i.e. a digital wallet. You can then buy the Bitcoins on exchange markets or crypto marketplaces on the Internet and send them to your own wallet. A well-known wallet provider is Coinbase. It is also possible to purchase Bitcoins directly via the platform. Alternatively, you can also store your Bitcoins in hardware wallets, such as the Ledger Wallet.
Bitcoins are not available from your own bank like other currencies.
Alternatively, Bitcoins can of course be mined. However, this method is not as profitable today as it was in the early days. The difficulty is regularly increased and this ensures ever higher energy costs and high computing power that must be provided. For individuals, mining is therefore not recommended to get Bitcoins, because the costs are usually much higher than the equivalent value.
But fortunately, for Bitcoin trading you do not necessarily have to be in possession of the cryptocurrency. Alternatively, there is the possibility of Bitcoin trading via CFDs. CFD stands for contract for difference or contracts for difference. Here, investors speculate only on the rise or fall of the Bitcoin price.
In principle, trading is similar to other securities. Underlying values can be specified, at which the CFDs are to be bought or sold. If the Bitcoin rises in value by 10%, then the value of the purchased CFDs also increases by the same percentage value. With the use of leverage, risk-averse traders can even multiply their profit margin. If the trader had a Bitcoin CFD with a leverage of 20, then his price gain would even be 200% if the Bitcoin increases by 10% as in the example above. However, a price development in the opposite direction is equally possible and would then even lead to a complete loss.
Choosing the right broker
Currently, there are still comparatively few online brokers that offer Bitcoin trading. Nevertheless, in order to find a good and reputable trading platform, you should consider some important criteria.
- Security and respectability. This is probably the most important point when choosing a broker. A good broker is ideally subject to a financial supervisory authority or is otherwise regulated and supervised by higher authority. In addition, it should be checked in advance how the clients’ money is kept. There should definitely be a separation between the company’s business account and the clients’ funds. Otherwise, customer funds could also be lost if the provider becomes insolvent
- Returns versus risk management. High returns are desirable, of course, but when choosing a broker, you should also make sure that measures are taken to minimize risk as well. A good balance between returns and security is therefore appropriate in order not to lose everything in the end.
- Customer friendliness and support. A reputable online broker should be easily accessible for its customers in order to be able to help quickly with possible problems and questions. This is not only important for inexperienced traders. In the best case, the company offers, in addition to telephone availability, communication via live chat.
- Is there a demo account? Not all online brokers offer this feature and it may be unnecessary for experienced traders. But for beginners, a demo account is a particular plus, as it gives them the opportunity to familiarize themselves with the material without risking losses
Important basic rules and precautions
As mentioned before, Bitcoin trading can be a great opportunity but at the same time a big risk. Therefore, it is especially important to heed some basic rules and take precautions to keep the risk as low as possible.
Bitcoin trading is speculative. Bitcoin is still comparatively young and the idea is far from being fully developed. Therefore, there are hardly any reliable empirical values about the price development. If you look at the price development, an increase can be observed on average, but this is rather erratic and fluctuates strongly. The volatility is further fueled especially by inexperienced traders, as they react very quickly to price fluctuations and may sell too early. This then leads to a downward spiral and a vicious circle is created.
Always stay up to date. To be able to trade bitcoin successfully, investors should regularly keep up with news about bitcoin and the crypto scene in general. A headline can quickly lead to a price change, as described above. If you miss this news, you could miss a good opportunity
Initially work with small amounts. To protect against larger losses and to get a feel for trading, only smaller amounts should be invested at first. These are in the case of a bad speculation rather to get over.
Protection through limits and stop values. Many brokers offer their investors the possibility to protect themselves from total loss with a stop value. Here, a certain value can be set in advance, at which the investor wants to sell his CFDs, so that the entire capital invested is not lost.
Conclusion about Bitcoin Trading
Bitcoin trading can still be a profitable investment. The examples from the past show how high the profits can be. But this time is probably over, because since the beginning/middle of 2017 really everyone invests in this area and the gold rush mood is over. Also, it remains very speculative and the risk should not be forgotten before all the euphoria about the possible return opportunities. In this regard, for investors who have little knowledge of Bitcoin or the blockchain, or people who are only interested in trading the cryptocurrency, trading CFDs is the simplest solution. Personal note: Since the market is influenced by external forces, it is no longer possible to make reasonable predictions. Until mid-2017, you just needed to wait and the price of most cryptocurrencies rose automatically. Those days are over. Investing in blockchain technology is more rewarding.