How to Trade Bitcoin

Trading bitcoin can be a great way to earn money and has several benefits over traditional markets. You can start trading with any amount of money, with minimal red tape and the markets aren’t dominated by high frequency algorithms. 

If you’re new to bitcoin trading then here’s a step by step process to help you get started. 

How to Buy Bitcoin

First thing you’ll need to do is purchase some bitcoin so that you can start trading. Owning bitcoin will give you the flexibility of trading on multiple exchanges because it’s easier to send than fiat. 

There are a variety of ways to get bitcoin depending on your needs. One way is to send money to an exchange and buy them off the spot market. It can take a few days for your bank transfer to clear but you’ll get the best price at market value. Alternatively, you can meet up with someone locally and pay cash but this usually comes with a 5-10% premium. 

For anyone living outside of the U.S., I find that Quadrigacx has the best options for purchasing bitcoin. If you’re living in the U.S. then the easiest way to buy bitcoin is through Coinbase. 

IMPORTANT: Always make sure to use a strong unique password and activate 2-Factor Authentication on all your online bitcoin accounts. 

How to Use a Bitcoin Exchange 

There are several types of bitcoin exchanges that you can use such as spot, margin, futures and altcoins. 

Spot: Simple buying and selling of bitcoin or altcoins. 

Margin: Using leverage by borrowing bitcoin or fiat to increase your position size. 

Futures: Using leverage to increase your position size, yet rather than borrowing coins you’re creating contracts that have an expiry date. 

New traders should practice with small amounts using the spot markets to minimize the risk. Leverage should be used sparingly for quality trades. 

Here’s a basic tutorial on using a bitcoin exchange:

Different Ways to Trade Bitcoin

There are a variety of different ways to trade bitcoin and you’ll want to find one that’s suits your personality. Some styles of trading tend to work best in specific market conditions. 

Day Trading Bitcoin 

Day trading consists of closing your position at the end of each trading day. Unlike the regular stock market, bitcoin trading never sleeps so day trading isn’t as common. 

In order to day trade bitcoin effectively, you need the right type of market conditions. I find the best conditions for quick trades is during price dumps because the markets move quick and can be volatile. 

Swing Trading Bitcoin 

Swing trading consists of holding your position for longer than a day. This approach can work really well when the markets are trending. During strong trends bitcoin can gain or lose hundreds of dollars over the course of a few weeks. 

One general trading rule for swing trading is to ride the trend until signs of a reversal. It’s possible to make money regardless of the trend being bullish or bearish. 

Scalping

Scalping consists of taking frequent smaller trades at a 1:1 risk to reward ratio. Many small successful trades can add up into larger gains. That said, taking a big loss can wipe out several winners so it requires tight risk management. This style of trading tends to work best with algorithms. 

Automated Trading

It’s possible to build an automated trading bot and potentially generate passive income. A trading algorithm can use a variety of different strategies depending on the market condition. Generally it’s  best to program your own strategy as oppose to purchasing one online. Always test your strategies with small amounts because bots can glitch out from time to time. 

Market Making

Market making is a trading strategy that entails adding liquidity to an exchange by stacking both sides of the order book. Good bitcoin exchanges will give discounts or even pay traders to market make.

Exchanges that lack liquidity have too much slippage, which is unfavourable for traders. Slippage is when an order can’t be filled at the best market price, due to a lack of orders on the book. For this reason, market makers provide a valuable service to the exchanges and other traders.

Arbitrage 

Arbitrage consists of making profit from price discrepancies across multiple exchanges. There’s no one exchange that determines the price of bitcoin so its possible to buy low on one exchange and sell for higher on another.

Arbitrage tends to work best during periods of high volatility. It’s much faster to send bitcoin and altcoins between exchanges than it is to send fiat. It’s also possible to arbitrage by watching the dominant exchange that’s the market mover. 

Trading Altcoins

There are hundreds of other cryptocurrencies to trade, which opens up more market opportunities. Bitcoin is usually used as the reserve currency of crypto to measure altcoin values and lock in profit. 

Altcoins tend to have larger price swings, due to a lower marketcap and less liquidity. At the time of writing this, Poloniex is the dominant altcoin exchange that has the most liquidity. 

Tools for Trading Cryptocurrencies

Combining fundamental and technical analysis can increase the effectiveness of your trades. There are a variety of different resources that traders can use to have an edge in the markets.

Fundamental Analysis

Consists of researching the specifications of coins and following news events. Some things to consider when researching an altcoin:

  • Supply: total amount, distribution and rate of inflation
  • Market capitalization: supply x price
  • Development: innovation vs cloned projects
  • Community: active participants based on social media stats
  • Reputation and skill level of the developers
  • Business adoption
  • Any major news events

Most cryptocurrencies have an announcement page on bitcointalk.org. Here’s a list of coin market data. 

Technical Analysis 

Technical analysis consists of measuring price history on a chart to determine probable outcomes. When a large group of traders follow similar rules they can sometimes create a self-fulfilling prophecy. 

Coinigy is one of the best cryptocurrency charting platforms because they have many advanced features and cover all the markets. 

TA Basics

Risk Management

Trading comes with risk and results are never guaranteed. It’s not possible to be 100% accurate with all your trades so it’s important to manage risk. Sometimes traders need to take a couple of strikes in order to hit a home run. 

Managing risk doesn’t mean being afraid of losing money. The fear of loss can actually work against you and sabotage good trades. When trading it’s important to have a plan and set profit targets ahead of time. Before you pull the trigger on a trade you also want to assess how much you’re willing to lose if the market moves against you. These two elements combined are called risk to reward. Some traders use stop orders as a safety net to get out of a bad trade. 

There’s also security risks associated with owning bitcoin and altcoins. You want to make sure that your private keys are secure, otherwise hackers can steal your money. As a trader you’ll also want to have a plan for reducing counterparty risk when leaving money on an exchange. 

Conclusion 

This is just a basic tutorial to help you get started because there’s a lot more to learn about trading and cryptocurrencies. If you would like to study a variety of strategies and join a community of professional traders, then feel free to join our crypto trading school. 

Rocky

Crypto trader and investor. My preferred style is swing trading and longer term accumulation plays. I help coach traders and share my trades over at skillincubator.com
Facebooktwittergoogle_plusredditpinterestlinkedinmail