What is Bitcoin and How to Trade It – The Complete Guide
Bitcoin has become an extremely popular financial instrument in the past few years, but not many are familiar with the basic concepts of this cryptocurrency. The purpose of this article is to provide all the necessary information about bitcoin to those who are interested in investing and trading bitcoins or other cryptocurrencies…
In this article, we will cover the following issues:
✅what such Bitcoin?
✅how mine Bitcoin?
✅how to invest and trade Bitcoins?
✅how to use technical analysis at trade Bitcoin?
What is Bitcoin?
Let's start with the most important question – what is Bitcoin? Bitcoin is a digital currency more commonly known as a cryptocurrency due to the fact that it uses cryptography to secure transactions in its infrastructure. This infrastructure is an online database or so-called blockchain technology (Blockchain).
Bitcoin can be used as an alternative payment method with lower fees and faster rates. But perhaps the biggest advantage of bitcoin payments is the extremely high level of security.
How does Bitcoin work?
Bitcoin offers the ability to make fast, secure, and cheap consumer-to-consumer payments without the need for a bank or other centralized system to intervene.
Fundamental value bitcoin is largely tied to its manufacturing process and energy and equipment costs, while the rest of its value is driven by its limited supply and growing demand.
Transactions in the bitcoin system occur directly between users' digital wallets and are verified using Blockchain technology. Transactions are digitally signed with a unique “private key” that confirms that the orders come from the owner of the digital portfolio.
What is Blockchain technology?
Each blockchain technology is a decentralized public ledger of all transactions that have ever occurred. A series of transactions form a database block called a “block”. Each block contains information about the previous block, and each transaction also stores information about the previous transaction.
Bitcoin Blockchain technology has introduced a revolutionary infrastructure for storing financial data that is accessible to everyone, completely transparent, and developed using open source code that does not belong to any organization or person.
Instead, Blockchain support is done using the collective power of millions of computers around the world to validate transactions and add them to the blockchain.
Co-verified transactions cannot be modified or deleted, so Bitcoin payments are final and non-contested.
What abbreviation is used for Bitcoin?
The abbreviation for the largest cryptocurrency Bitcoin is simply BTC. For the formation of this abbreviation, the same principle applies to other currencies USD (US dollar) and EUR (Euro), and they can form currency pairs with traditional currencies or cryptocurrencies.
For example, the Bitcoin / US dollar ratio is denoted as BTC / USD, and contracts for difference for this pair are designated as BTC / USD CFD.
How to mine Bitcoin?
When a new blockchain is created, it is awarded 12.5 bitcoins, which happens every 10 minutes. This is a reward for the so-called bitcoin mining process. Award for the use of electrical and computer energy to maintain the network of units. There are many people and specialist companies involved in mining all over the world.
The system automatically generates new bitcoins, independently adjusting the speed of the process, so there is no danger of bypassing the rules and speeding up the process of creating new bitcoins with large investments in mining equipment and high consumption of electricity.
The block building fees will be split in 2020, and this will be so every 4 years until the amount of bitcoins generated reaches 21 million, which is the final number that can be mined.
This means that Bitcoin has at least one fundamental reason to support its growth in value – the limited supply of bitcoins.
As soon as the largest cryptocurrency gained immense popularity around the world, the pace began to slow down. The reason is more and more people started to mine it.
On average, this is about 144 blocks per day, which at 12.5 bitcoins per block is 1,800 bitcoins per day. Since many miners are adding new hash power, over the past few years, blocks have often been opened at 9.5-minute intervals rather than 10. This creates new bitcoins faster, so over 1800 new bitcoins are actually created on most days.
Who Invented Bitcoin?
Bitcoin is believed to have been created by Satoshi Nakamoto, who presented his invention on October 31, 2008, in a document titled “Bitcoin: A System for Electronic User Caching for the User.” What's more interesting is that its name is probably a pseudonym used by an unknown person or people who originally developed Bitcoin.
In 2016, Australian entrepreneur Craig Wright called himself “Mr. Bitcoin”, which was widely accepted by members of the bitcoin community, but some continue to question Wright's legitimacy.
When was Bitcoin created?
The financial history of Bitcoin dates back to 2010, although it was created in 2009. On May 22, 2010, someone buys a pizza with Bitcoin. If you've never heard of this incredible story, don't worry, you're hardly the only one …
The pizza was not the most important part of the deal. Even more interesting, it was worth 10,000 bitcoins, which was the first public transaction of a virtual currency associated with a real-world item. This day is known as Bitcoin Pizza Day.
Things have changed significantly since then. The use of bitcoins and the value of this currency have increased significantly. Today 10,000 bitcoins will cost over $ 80,000, which will definitely bring a lot more pizza than in 2010.
Where can you shop using bitcoins?
Using bitcoins for payments, now you can buy a lot more goods and services, and not just pizza! There are also many places where virtual currency is used as a means of payment.
According to bitbitcoins.com, over 100,000 merchants worldwide accept payments using bitcoins. Many of these are online e-commerce sites, but a growing number of live stores now accept BTC as well. The list of organizations accepting payments with Bitcoin continues to grow.
✔️General subjects home everyday life;
✔️Videogames;
✔️Gift cards;
✔️Travels;
✔️Food industry;
✔️Cars cars;
✔️Tip and charity;
✔️the Internet and offline the shops…
Most Bitcoin processors also provide a QR code that represents the Bitcoin address and payment amount.
QR codes are very convenient; they make it easy to pay through the Bitcoin Wallet app on your smartphone. Just scan the QR code and it will pre-fill in the recipient's Bitcoin address and the requested payment amount. After sending the transaction, the payment will be completed.
Below is a list of some of the major companies that accept Bitcoin payments:
✔️Microsoft
✔️Expedia
✔️KFC
✔️Metro
✔️AT&T
✔️Gyft
If the popularity of Bitcoin continues to be high, the likelihood that more and more companies will start using it will increase.
Bitcoins – Are Bitcoin Transactions Tracked?
Bitcoin is a completely transparent currency. All Bitcoin transactions are public, tracked, and permanently stored on the Bitcoin network. Bitcoin addresses are the only information used to locate and send currency.
These addresses are created individually for each configurable virtual wallet. Given the fact that consumers usually have to identify themselves in order to receive purchased goods and services, Bitcoin cannot remain completely anonymous. The Bitcoin network is built on a user-to-user basis.
Is Bitcoin Legal?
Bitcoin's legal status varies from country to country, but the number of countries that recognize Bitcoin as a currency has increased over the past few years.
Bitcoin, as a payment system, is independent of all central banks, unlike traditional currencies such as the US dollar or the Euro. Bitcoin also lacks centralized control or a single administrator, making it a decentralized digital currency.
This is something that worries some government officials and they are blacklisting Bitcoin.
Bitcoin is spreading around the world as a valid payment method through which you can buy goods and services, further increasing its demand.
Bitcoin regulation varies from country to country. Currently, only Japan has recognized Bitcoin as money, while other countries still do not have specific legalization. On the other hand, there are countries that have recognized Bitcoin as illegal. Here are some of them (datacryptonews.com)
✔️Afghanistan
✔️Pakistan
✔️Algeria
✔️Bolivia
✔️Bangladesh
✔️North Macedonia
✔️Saudi Arabia
✔️Vanuatu
✔️Vietnam
On the other hand, there are countries that have imposed restrictions on payments with bitcoins and other cryptocurrencies. Thus, they cannot be used for trade or payments. Here they are:
✔️China
✔️India
✔️Ecuador
✔️Indonesia
✔️Morocco
✔️Zambia
✔️Nepal
✔️Egypt
✔️American Samoa
✔️Qatar
At the same time, the most friendly countries for bitcoins and other cryptocurrencies are:
✔️Japan
✔️Gibraltar
✔️Malta
✔️Ukraine
✔️Switzerland
✔️Netherlands
✔️Lithuania
✔️Estonia
✔️Great Britain
✔️Germany
✔️Bermuda islands
✔️Slovenia
✔️Singapore
✔️Georgia
✔️Belarus
✔️Hong Kong
It can be expected that with the growing interest in cryptocurrencies and the interest of regulators in this type of trade and payments, it will increase.
Is it safe to use Bitcoin in trading?
A wide range of regulators are trying to fight cryptocurrencies and mainly bitcoins. It turns out that there is no full agreement on what Bitcoin is and its attendant elements: currencies, commodities, securities, or something completely new. For this reason, you may come across them under the terms crypto assets, digital symbols, coins, or simply “crypto”.
In 2008, the creators of Bitcoin and Company stated that more than 21 million bitcoins would never be created. This means that they can be compared to some extent with scarce goods such as gold whose value is determined only by how much people are willing to pay for it.
Cryptocurrencies have gained significant popularity in places where hyperinflation lowers purchasing power (such as Zimbabwe) or where sanctions are applied (such as Venezuela and North Korea).
There are also arguments that cryptocurrencies have some of the characteristics of shares as an ownership stake in a common effort and an expectation of profit from the work done by the company. Much of the attention has shifted to new projects offered through initial coin offerings, the so-called ICOs.
Although they take various forms, ICOs allow companies to raise capital by selling coins instead of shares. In some cases, the founders claim that coin buyers pay upfront to use the service the company creates.
In many places around the world, various financial regulators have launched large-scale investigations into whether ICO organizations are violating the rules by offering securities. A senior SEC official then stated that neither Bitcoin nor Ethereum falls into this category.
Another problem with initial coin offerings is that in many cases, ICO investors have been tricked by fraudulent crypto projects.
Forex bitcoin trading
Bitcoin, like other cryptocurrencies, is an extremely volatile asset most of the time, and daily price fluctuations in the range of 10% are not uncommon. Of course, as investors know and traders, large profits are the result of higher risks. However, it is extremely unwise to invest in trading and in bitcoins that you cannot afford to lose.
Bitcoin CFD trading
The downtrend (the falling price of Bitcoin) and movement in the range prevent physical owners from taking advantage of fluctuations in the price of Bitcoin, as well as other cryptocurrencies. Moreover, buying in a downtrend or consolidation is not the best choice in most cases.
Therefore, anyone who wants to actively participate in the market and make a profit should turn to other financial derivatives such as contracts for difference.
Trading bitcoin, while the price is falling, can be mainstream as it gives traders the opportunity to enter the market and make a profit when the long-term trend of an asset is down. At the same time, those who own bitcoin or other cryptocurrencies lose money and don't have many options.
It is of course useful for investors to remember that the direction of the trend can change and nothing lasts forever. However, since the long-term uptrend in Bitcoin's price seems to be a long way off, CFDs seem to be the best way to trade cryptocurrencies.
In addition, CFDs allow those with an investment in Bitcoin to hedge against the falling price of Bitcoin. This can be done by opening a short position on the Bitcoin CFD.
Trading Bitcoin CFDs is probably not much different from trading any other currency pair, commodities, or high volatility that are in trend.
An interesting fact about trades is their diversity, and thorough research into price movements, traders should be able to generate profits that make them financially independent and stable.
Practicing Bitcoin CFDs traders should know the following:
❗Follow trend
❗Apply correct control capital and risks
❗The main trade session: London, New-York, and Tokyo…
Selling trades following a decline in the price of Bitcoin against the US dollar (BTC / USD) may be major. This will allow traders and investors to join a larger part of the market and follow the dynamics.
Proper money management is the holy grail of trading in the financial markets, and bitcoins and cryptocurrencies are no exception. If proper risk management is applied in a strong trend environment, it can theoretically generate huge returns on the investment made in bitcoin.
Live trading
Traders should definitely focus on the main trading sessions as the major providers offer the highest liquidity and volatility on BTC / USD.
Trading bitcoin through CFDs has its advantages over buying physical cryptocurrency. Bitcoin is not backed by physical assets, and there is no government or company behind it that makes valuation difficult except through technical analysis.
Bitcoin Trading – Leverage
Most traders are looking for volatility in the trading instrument they trade. In the case of cryptocurrencies, there is volatility. Even for some more conservative traders, this may be overkill. Therefore, before you start trading such volatile instruments, make sure that they are right for you.
Keep in mind that market fluctuations of 10% and even 20% in virtual currency prices during the day are not atypical.
Using leverage provides capital that you can use to trade other instruments (currencies, stocks, indices, commodities, and so on.). Thus, you can diversify your portfolio of financial instruments, thereby reducing the risk to your capital.
At the same time, if you choose to trade with leverage, you can double your positions when trading bitcoins or other cryptocurrencies and try to get the maximum profit if you can correctly understand the price direction.
Bitcoin Trading – Long and Short Positions
As mentioned earlier, when trading bitcoin using CFDs, you can benefit from price movement in both directions. If you think the current Bitcoin price will go up, then you can go long and make money while Bitcoin goes up.
On the other hand, if you think the current Bitcoin price is high and going down, you can go short and win when the price goes down. In this situation, you will lose if the price goes up.
Taking short positions can also help those who have already purchased or mined bitcoins. By opening a short position for Bitcoin CFDs, they will be able to ensure their positions against a drop in the Bitcoin price.
Bitcoin Trading – Technical Analysis
First, what is technical analysis? It is the application of analytical methods to determine the future direction of an asset's trading based mainly on its historical behavior. Technical analysis methods are many and varied, allowing traders to choose the best ones for them based on trading style, trading goals, and risk aversion.
In fact, technical analysis is one of the few types of analysis that you can apply to Bitcoin. And this is partly due to the fact that fundamental analysis is practically not applicable to trading and investing in bitcoin.
The first reason (which is one of the main problems and keeps large institutional investors from channeling bitcoin funds) is the fact that the currency has no “intrinsic value”. Many market participants believe that this is fair, so in this regard, Bitcoin is very similar to gold.
Secondly, Bitcoin and its Blockchain are a decentralized payment system and, in this sense, a currency. Such structures do not have sufficient regulation and decision options to influence supply and demand, on the basis of which fundamental analysis, similar to traditional currencies, should be carried out.
For comparison, the dollar, euro, and other currencies are influenced by monetary policy and decisions of their regulating institutions – in the person of the Fed and the ECB. And predicting these decisions and policies is an integral part of fundamental analysis.
Having defined this, we can take a look at technical analysis in bitcoin trading and some of the possible uses for it.
Bitcoin Trading – Determining the Trend
“The trend is your friend” – this rule is fundamental in technical analysis. That is why, before you start trading bitcoin, it is important to know the direction of the trend of this cryptocurrency.
Another rule of technical analysis is that when you graphically analyze an asset, you always switch from a longer trend to a shorter trend.
There is a very simple way to identify the trend using moving averages. Namely – one long-term and one short-term. When the short-term moving average is higher than the long-term one, the trend is assumed to be up.
Analysts use different moving averages in his analysis. However, the most common are 200-period and 50-period, simple (which gives equal weight to all-time periods) and exponential (which gives more weight to recent periods) moving average.
Bitcoin Trading – Support and Resistance Levels
Support and resistance levels are another extremely important and useful technical analysis technique. They are used to determine entry or exit levels and can be very helpful when trading bitcoin through CFDs.
In simple terms, support and resistance levels are the previous bottoms and peaks that the price tends to push off from. Support is the level at which the price of a currency pair usually slows down. And vice versa – resistance is the level at which it is possible to stop the growth of a currency pair.
These levels operate because of the tendency of investors to judge whether a financial instrument is “expensive” or “inexpensive” compared to previous highs and lows. To a large extent, these technical levels work precisely because everyone expects them to work.
What happens when an asset approaches its previous low? Buyers get active and start buying actively. This is in an environment where sellers are reluctant to sell, waiting for evidence that the price will continue to decline, that is, in anticipation of a breakout in the support level.
And vice versa – when an asset approaches its maximum, sellers become active, and buyers take a wait and see attitude. This brings it closer to the indicated resistance level.
Moving averages, especially long-term ones, are a good tool for determining the trend, but not very good for determining the best time to enter a position. Again, support and resistance lines come to the rescue.
Bitcoin Trading – Candlesticks
It is impossible to start talking about technical analysis and not mention charts. There are many of them and of different types – line charts, bar charts, candlestick charts, and so on.
Cause of attractionJapanese candles is a visualization of a chart that provides insight into market behavior and key turning points. This feature of the indicator makes it the preferred tool for technical analysts.
You can use Japanese candlesticks in any market and at any time as long as you have an open price, a close price, a minimum, and a minimum.
Bitcoin Trading – Technical Indicators
Finally, it is impossible to conduct technical analysis without applying at least one technical indicator… Although there are dozens of indicators available to investors, it is up to each trader to determine for himself which indicator best suits his trading style.
In addition, it should be borne in mind that experts recommend not to overflow charts with indicators and not to rely on more than two or three indicators when making a decision (considering that some indicators may conflict with each other). Now let's take a look at some of the main technical indicators that traders and investors prefer.
Bitcoin Trading – MACD Indicator
It is one of the most popular indicators for trading and investing in the financial markets and is fully applicable to Bitcoin trading. It measures the momentum of the price movement, but can also help determine the direction of the trend.
You can customize the three indicator parameters (26, 12, and 9) as you wish. As with averages, it is recommended that you experiment to achieve the optimal indicator timeframes that most closely match your trading strategy.
It offers several types of trader alerts:
✅Passing higher / below zero level
✅Crossing sliding average
✅Divergence indicator movement prices
Calculating the difference between a faster and slower EMA is the basis of the indicator's work. This happens whenMACD indicator does not confirm price movement.
For example, price sets a new high in an uptrend until the indicator reaches a new high. This indicates that the upward movement may be weakened.
At the same time, when the price creates a new low in a downtrend and the indicator does not confirm this, it is a signal that there is no inertia in the downtrend, which can lead to an increase in the price.
Bitcoin Trading – Bollinger Bands Indicator
Every list of the best indicators for trading Bitcoin should include a time-tested volatility channel indicator, such as Bollinger Bands…
The volatility channel is another method for determining the trend. It uses the idea that if the price moves away from its moving average by more than a certain level, it can start a new trend.
The Bollinger Bands indicator was invented by financial analyst John Bollinger over 30 years ago. It continues to be one of the best indicators available for traders and investors.
The indicator uses two parameters:
- Number of moving average periods
- The number of standard deviations you want to associate with the mean
The most common values are 2 or 2.5 standard deviations. In statistics, the standard deviation measures what the deviation is from the means in one statistical chain. In finance, the standard deviation is used to measure volatility.
Bollinger Bands show market volatility. The channel widens with increasing volatility and narrows with decreasing volatility. A system following a long-term trend can use two standard deviations and a 350 moving average.
You would go long if the close of the previous day was above the top of the channel, and short if the close of the previous day was below the bottom of the channel. The starting point of the occupied positions will be in the event that the close of the previous day returns and again crosses with the average value.
Bitcoin Trading – Pivot Points
One of the most popular indicators for identifying potential support and resistance levels are pivot points. Pivot trading points are based on standard technical information about price levels, such as high, low, and close, and use this to create possible support and resistance levels.
You should close your long positions when the market reaches resistance levels, or close your short positions when the market falls to support levels.
In addition, you can use support and resistance levels as indicators of when to open positions. You need to open a sell trade when the market reaches resistance, and a buy trade when it falls to the support level.
Investing in Bitcoin – How to Invest in Bitcoin
It is no coincidence that many investors and experts compare bitcoin to gold. The reason is the lack of intrinsic value and the movement is completely predetermined by the supply and demand of the asset. Neither Bitcoin nor Gold offers interest or dividends…
When you invest in a particular asset, you are actually doing it on a fundamental basis, based on the prospects for the asset's appreciation, based on sound logic and financial ratios. In other words, based on fundamental analysis.
However, how can you fundamentally analyze an asset that has no intrinsic value? The answer is no way.
This is why one of the most popular investors of our time, Warren Buffett, a stock supporter, dislikes gold and cryptocurrencies!
However, the situation with cryptocurrencies is more complicated. First, they are not linked to any other financial asset. In comparison, gold correlates with the movement of the dollar and often stock market sentiment…
These are some of the reasons why many analysts recommend short-term trading in the cryptocurrency market and by no means long-term. In other words, it may be better to practice short-term bitcoin trading than planning long-term investments in bitcoins and other cryptocurrencies.
However, tech analysts love cryptocurrencies. Because technical analysis is one of the few types of analysis that you can apply to bitcoins and other digital currencies.
