When planning to invest, there are two approaches you can take: a passive approach or an active approach.
The passive approach to investing is the so-called “buy and hold” strategy. In the world of bitcoin, that means buying bitcoin and holding onto it as a long-term investment to benefit from its price appreciation over time.
The active approach to investing, on the other hand, refers to trading in and out of the digital currency to profit by capturing short and medium-term price movements. It is this approach that we outline in this guide.
Here, you will discover different trading strategies, the best platforms to use for trading bitcoin, how to generate a profit using bitcoin derivatives, how to make money day trading, and why you should consider using a bitcoin broker for larger trades.
Bitcoin Trading Strategies
Using fundamental analysis, traders take a moderate approach to trading bitcoin by buying when the “fundamentals look right.” For example, when there are reports of a surge in demand for the digital currency in a particular country, or when large bitcoin markets such as Japan or China introduce bitcoin-friendly regulation, this could be a clear buy signal when focusing on fundamentals. Alternatively, every time that block halving occurs and bitcoin’s supply growth decreases, that could be another fundamental driver for the price of bitcoin. (See our guide to Bitcoin Fundamental Analysis here.)
Event-driven trading refers to buying and selling off the back of market-moving news and events in the bitcoin economy. For example, if a major exchange gets hacked, as was the case with Bitfinex in August 2016, that could be the right time to sell, since the price of bitcoin often drops after large-scale hacks. This is because hackers will have to sell their bitcoin in order to cash in on their “winnings,” which drives prices down.
Conversely, if a country that has previously had a negative stance towards bitcoin is changing its view and is contemplating accepting bitcoin as a legal payment method, that could be a clear event-driven buy signal for bitcoin.
Technical analysis can also be used as a successful bitcoin trading strategy. A technical analysis-driven strategy makes use of charting tools and technical indicators, such as the Moving Average Convergence Divergence (MACD), the RSI (Relative Strength Index) or Bollinger Bands®. These and other indicators can be combined to give buy or sell signals that traders can use to make their trading decisions. (See our guide to Bitcoin Technical Analysis here.)
Once you have mastered one or several of the above-mentioned strategies, you can start developing your own bitcoin trading strategies that suit your trading style.
Bitcoin Trading Platforms
When you are taking an active approach to trading bitcoin, it is important to use the right bitcoin trading platforms that provide all the services you need and that have adequate security measures in place to keep your bitcoin holdings safe while on the exchange.
The most reputable and secure U.S.-based bitcoin trading platforms include Kraken, GDAX, and Gemini. All these bitcoin exchanges provide users with a wide range of charting tools, live pricing, and insight into the order books to facilitate bitcoin trading for the individual investors. (See our Best of Bitcoin feature for our list of top exchanges.)
Bitcoin Margin Trading
A very popular way to trade bitcoin when you have smaller amounts of capital available is using margin. Bitcoin margin trading, also known as trading using leverage, refers to borrowing funds to purchase bitcoin.
This allows you to buy up to 100 times the amount of bitcoin that you invest. In other words, if you make $100 buy trade on bitcoin using a 100x leverage, you will have a position of $10,000 worth of bitcoin. In that case, if the price of bitcoin moves up by 2 percent, you will generate a return of $200, which is double the amount of money you put down for the trade.
If the price of bitcoin drops, however, you can also lose more than you invested, provided you have enough money in your margin account to cover the paper losses. If not, then most brokerages will close your trade out before you lose more than your $100 initial margin.
If you want to trade bitcoin on margin you have to choose between bitcoin futures and bitcoin CFDs (contract for difference). Several online brokerages such as eToro and Plus500 offer CFDs on bitcoin. Alternatively, you can trade bitcoin futures on dedicated bitcoin derivatives exchanges such as BitMEX.
Bitcoin Options Trading
There are also bitcoin derivatives trading platforms that allow you to trade options on bitcoin. Options are financial derivatives that give the holder the right (but not the obligation) to purchase an asset at an agreed-upon price, within a certain time horizon, on a pre-defined exercise date. In other words, using options, you can bet on a price increase using leverage, but your downside risk is limited to the price of the option. Although they may seem more complicated to trade than bitcoin futures or CFDs, they are a great way to manage your risk while betting on bitcoin price movements using leverage.
While options are a great tool for speculating on the price of bitcoin, they can also be used to hedge your bitcoin holding. If you own bitcoin and you want to hedge your holding against a sharp price drop, you could purchase a bitcoin put option with a strike price of, say, $100 below the current prevailing price. In case the price of bitcoin crashes and drops more than $100, you will make a loss on your bitcoin holdings but make a profit on your put option to offset the losses. If on the other hand, the price of bitcoin does not drop, your put option simply expires worthless and you lose only the price of the option, which will be comparatively small compared to your gains.
Bitcoin Day Trading
If you love the excitement of seeing the price of bitcoin inch up and down on a chart, and enjoy following intra-day market-moving news, then day trading bitcoin might be the right option for you. Day trading refers to buying and selling the same asset throughout the day, and generally involves leverage.
Day trading involves the use of technical analysis as well as following market news. The aim of a day trader is to make a daily profit before you close out all your positions at the end of the day.
If you are looking to place large institutional-sized bitcoin trades, you should consider using a bitcoin broker, as individual bitcoin exchanges often do not have enough liquidity to accommodate large trades without moving the price against you.
Two leading institutional brokers that focus on large ticket sizes include New York-based Genesis Trading, which is a subsidiary of the Digital Currency Group, and London-based Bitstocks. Aside from being able to process large bitcoin trades for you, bitcoin brokers can also advise you on market timing and provide you with market information.
Virtual Currency Trading
On cryptocurrency exchanges, bitcoin is also used as the base currency for other virtual currencies. So, for example, you could buy litecoin (LTC) or Ethereum’s ether (ETH) for bitcoin, if you want exposure to other altcoins for your digital assets portfolio.
Trading so-called “altcoins” (alternative digital currencies to bitcoin) carries more risk than trading purely the price of bitcoin against the US dollar, as these are less mature digital assets and therefore have a higher volatility. However, with the right trading strategy in place, the high volatility found in altcoins can be very profitable for traders.
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