A Beginner’s Guide to Trading Bitcoin for Profit
Bitcoin offers us all the opportunity to ‘be your own bank’. But that isn’t just limited to storing your own digital money balance in an app or on your computer rather than on a bank’s computer systems. It can also extend to helping to provide financial services to your peers, such as currency exchange services, or becoming a currency trader – both of these things are more accessible to regular folks who will find a much more level playing field compared to the traditional markets, which give unfair advantage to traders from the big banks.
Perhaps the simplest way to get involved in trading Bitcoin for profit is as an exchanger. All you need to do is to join a peer-to-peer exchange marketplace like Bitsquare or LocalBitcoins. You can then provide a service in your local area, buying and selling coins. To make a profit you just need to add a spread – for example offering to buy for 2% below market price and sell for 2% above. If you can offer convenient ways for people to deal with you – perhaps even including in-person deals – and if you are always ready to make a deal without delays, then your customers will be happy to pay this percentage which is called you ‘spread’. Be aware, however, that you will probably need to make a few deals by replying to other people’s ads before and paying the spread yourself to gain reputation before you gain enough reputation to have your own ads show up near the top of search results and buyers trusting you enough to take up your offers.
Being an exchanger doesn’t really require a lot of financial analysis, and that’s why it’s the easiest way to start. Being a ‘trader’ requires more knowledge and skill. A trader will often use online exchanges, and will aim to buy or sell depending on whether they think the price will rise or fall. They may still be providing a service, by filling up the orderbooks with offers that can be taken up by people wanting to buy and sell for more practical purposes. But their main focus is not on providing a service to customers, building up relationships and offering great customer service – their focus is on simply making or taking offers, as a kind of bet on whether the market will go up or down.
There can be a fairly smooth transition between being an exchanger and a trader, and if you want to become a trader offering peer-to-peer exchange services can be a good way to start, which is why I decided to include it in this introductory section. As long as the market is not rising or falling too quickly it is possible for an exchanger to make money regardless of whether the price is going up or down. But at the same time, if the market is rising then it makes sense to buy more than you sell, by either offering a better buy and not so good sell price, or buy just buying and taking all your sell offers down altogether. So an exchanger can increase their profits by becoming a trader, whilst offering exchange services gives would be traders a lower risk way to experiment and test their skills.
Even on a more centralized exchange, where you do not deal directly with the other person, you can, to a small extent, increase your profits by offering exchanger services – by making rather than taking offers. By placing offers onto the orderbooks rather than accepting offers which are already there you can potentially get a better price. Because you are also providing a service – you are being the ‘market maker’ who allows the exchange website to act as an exchanger without having huge amounts of their own capital by adding your own liquidity, many exchanges will also offer you incentives to be a maker rather than a taker. This can come in the form of reduced trading fees, zero trading fees, or even bonus and rewards. Being a ‘market maker’ or ‘exchanger’ as well as simply betting on the market going up or down is your first lesson in trading bitcoin for profit, the rest of this article will deal with how to make a profit from correctly predicting the future direction of the market.
Common Bitcoin Trading Strategies
If you want to be successful then you need to have a clear and well-defined strategy. You need to know exactly what you want when you open a trade – how much profit you want before to build up before taking it, how much loss you can stand before admitting defeat and so on. You need to know what timescale you are looking at and what kind of changes would make you rethink. To help you develop your strategy you might want to look at a site like KoCurrency which helps bitcoin investors gain access to various insights including “smart crowd” powered bitcoin price predictions.
There are a few broad categories of trading strategy which may give you some idea where to start:
Using Prediction Markets
Prediction markets, such as KoCurrency, allow users to follow cryptocurrency price predictions based on the prediction history of the “smartest” members of the crowd. Every prediction is charged with an incredible amount of information. Platforms like KoCurrency allow users to copy the trading patterns of the smartest members of the crowd. This is a great way for new investors to learn from the most successful crypto investors.
Riding the Trend
Most financial markets will have long-term price trends, in which the general direction of motion will be in one direction for months or years at a time. The price will zig and zag up and down all the time, of course, but a clear trend will remain.
Some longer term traders will simply look for this long-term trend and trade in that direction. You do not even have to spot the point at which a trend turns and a new one begins in the opposite direction, as long as you don’t need to cash out any time soon. If an average trend takes 1 year to complete, then it really doesn’t matter if it takes you 5 months to be confident that it’s a new trend – you will still be right enough of the time to come out in profit (this is a gross over-simplification, of course, but is simply meant to illustrate my point).
Trading the News
The price will often go up or down according to what is happening in the news. For example, a big exchange getting hacked or a government announcing draconian legislation may make the price go down, whilst exciting new start-ups getting funded, established businesses integrating bitcoin or friendly regulations being announced may all make the price rise.
Trading the news directly is very difficult to do as your main strategy – because its difficult to always hear the news first and react instantly. Most of the time, the market will already have moved before you get there – although if you are an obsessive news junky who is always logged into an exchange website or app then you may be able to get their first often enough for it to be worthwhile.
Another method is to capitalize on corrections. Often the market will over-react to big news stories as people get caught up in the moment or jump on the bandwagon without really thinking things through properly. Because of this a 20% fall, for example, will often be followed immediately by a 5-10% rise as the market corrects this over-reaction. This provides an additional way to trade the news and make a profit.
Bitcoin Technical Analysis
Technical analysis is the use of mathematical formulae and chart patterns to predict the future direction of price movement. Unlike fundamental analysis, technical analysis is based purely on past price data (and perhaps volume data). It therefore says nothing about whether the price is too high or too low objectively. Rather, technical analysts believe that there are certain repeating patterns and trends which will appear in any market.
Many of these are postulated to be based on human psychology – the idea that people just tend to act in a certain way to various price movement. Some analysts also suggest that changes in the real underlying value are priced in by market participants themselves, and therefore studying the actions of these market participants gives you all the knowledge you need.