Unless you have been living under a rock for the past two years, it is very likely that you have heard about Bitcoin and Cryptocurrencies before. Even though Bitcoin was created and released in 2009, it was not until late 2016 when the cryptocurrency market took off and became mainstream. The “High” on caffeine rally of 2017 was responsible for the hype around the sector and the mania of individuals fighting in order to buy coins.
Since the all-time high of Bitcoin ($19,891 x Coin) in December of 2017, the market has been on a considerably long bear market that has lasted almost 18 months. As a result of the selloff, BTC lost almost -82.3% of its value in this period of time. While this may look like a bloodbath, it is certainly not the first time that Bitcoin Traders and Investors have had to deal with this type of drawdown and volatility, as this same scenario was seen between 2014 and 2015 for a total drawdown of -82.19%.
After bottoming at a low of under $3,200 in late December, the cryptocurrency market started a new rally that is now delivering almost 168% return YTD ($85,00 x Coin), making it the best performing asset class in the market.
Following the price action seen in the markets in 2019 so far, it is almost certain that the number of interested traders and investors will continue to rise. Before digging into Bitcoin trading, it is very important to be aware of the risks that such a volatile asset brings to your portfolio. Even though Bitcoin has proven to be a real, money-making machine, it has also destroyed many portfolios and billions of market capitalization in its downturns.
Keep in mind that cryptocurrency is a technology that hasn’t been adopted globally, which makes it incredibly speculative. If you are still interested, it is recommended to only invest money that you can afford to lose. On the other side of the coin, if you are a trader, always remember that cryptocurrencies are extremely volatile, holding on a loser position can take years to breakeven without any promise or certainty that it will do so. Keep a tight leash on your positions, it is better to bail out on a position if the technical conditions are not on your side. You can always get back into your trade if the market conditions change, and possibly with a better entry.
How to Trade Bitcoin
In this article, we will cover the basics of Bitcoin and Cryptocurrency Trading. Keep in mind that this is a very dense topic and that in order to successfully mater trading you will need thousands of hours. It is a common mistake for new traders to believe that they will be able to become rich quickly, this is usually boosted by unrealistic expectations. Take your time to properly learn how to trade, focus on building solid bases. Trading is a very exciting career and also a well-remunerated one if you follow the right steps.
Before even thinking about trading any type of asset or security you will need a Trading Account with a Brokerage House. The opening process is pretty straightforward and in most cases, it should only take a couple of days after submitting the request to gain access. The trading market is overcrowded with brokers offering different types of accounts and their own approach on how to trade, keep in mind that in most cases the services are going to be pretty much the same, what truly changes are the platform and their pricing.
If you are planning on trading Bitcoin and any other cryptocurrency, we recommend opening your account with a mature and reliable broker like eToro or Robinhood. With all the intrinsic volatility of the market, it is keen to have a reliable broker that will not disappoint when it comes to execution. Being late on a trade can cost a lot of money, and the same goes for closing a position.
Path to Opening an Account
1. Enter your contact information:
The first thing you will have to do is to visit the website of your broker (Robinhood in this case) and start the application process. In the first instance, you will be requested to complete your contact information as presented below.
2. Complete your basic information:
You will continue to disclose information like your address and your zip code. Please note that this is an important point since not all States in the US allow bitcoin trading. It is important for you to review if you are eligible or not.
3. Verify your Identity:
A brokerage account is simply a bank account that offers trading capabilities. In order to open one, you will be requested personal information in order to verify your identity and also to secure your ownership of the account, the funds and any type of securities in it.
Please note that if you are not a permanent resident of the US or a Citizen, you won’t be able to open an account with Robinhood directly on their webpage but if you call them directly you might be eligible if you have a valid US Visa (a tourist visa will work).
4. Fund your account
For the next step, you will have to transfer funds from your checkings or savings bank account into the broker. These are the funds that will be used in order to buy and sell the bitcoin and will allow you to trade. Please note that Robinhood offers access to other asset classes besides cryptocurrency, the account created will also allow you to trade stocks and ETFs as well.
Please note that the same account used for the deposits will be the default account for any withdrawals made in the future.
5. Submit your Application for Review:
After reading and agreeing to all their terms and conditions you will submit the application for review. keep in mind that for regulatory purposes the broker will perform a KYC review in order to ensure that all the information is accurate. The reviewing process is relatively fast and you should get a response to your application in less than 24 hours (depending on the volume of requests it can take up to 48 hours in extreme cases).
6. Download the mobile app:
Robinhood has the peculiarity that they do not offer access to a desktop platform and instead they rely solely on their mobile app. Their app is available for both Android and iOS, the installation won’t be any different than a typical app download. Once your application has been confirmed and approved you will be able to log in with the given email and password and you will be able to start trading right away!
Keep in mind that the logic behind making money in the markets is based on the analysis and not the execution. Even though platforms differ from broker to broker, the logic behind placing a trade is the same for most of them. Please be aware that there aren’t only two combinations of trades one can actually initiate. Both of them are composed by an opening position and then the opposite to close the trade:
- Long Position: In a long position you are directly buying the asset with the belief of selling it later at a higher price.
- Short Position: In a short position you will borrow the assets from your broker in order to sell them at the current market price, the idea behind this trade is to buy back the assets later in the future at a lower price.
Keep in mind that in order to close a Long Position you will have to sell the assets and on the other hand, you will have to buy back the assets to close a Short Position.
In order to initiate your first trade, you will have to select the asset you are interested in trading, in this case, you would select bitcoin from the Cryptocurrency sector of the Broker.
This should populate a new window with the information about the trade, here you will be able to select the action and also the size of the position. It is also important to understand that you can add and specify any additional order like for example an order to take profit after a certain level is met or more important, an order to cut your losses and close the trade.
Please note that it is very common to see individuals committing the mistake of buying when they wanted to sell and vice-versa. Whenever you are about to open or close a trade it is crucial for you to be extremely focused and to take all the due precautions like reviewing it twice before executing the order. You would be surprised by the number of millions that retail traders lose every day due to this amateur error.
Another point to take into consideration is the sizing of your positions. It is fairly common to see individual trading sizes that are simply too big for their portfolio and their account value. Beginners luck is actually one of the worst professors when it comes to trading, every day I see new traders becoming irresponsibly comfortable with their oversized positions. It is not until something goes south and they lose all their profits and part of their portfolio that they realize the huge mistake and the overexposure of risk that they were taking.
Trading is a long marathon, it takes years to master disregarding the asset class you are focusing. Take your time to understand about technical and fundamental analysis, with time it will become part of you and it will be all easier! Always aim for a career built to last, trading is a marathon and not a sprint.
When it comes to the financial markets no one can be 100% certain of what is going to happen next with the price of an asset or a security. Many individuals spent thousands trying to find the best indicator thinking that it could help them boost their careers, in reality, there is no crystal ball available to anyone.
The idea behind trading is to be able to identify patterns, signals and other indicators that will make the probabilities of one thing happening over another. If you can become good at reading the markets and to manage probabilities and possibilities, then it is pretty possible that you can even become a millionaire out of it. Keep in mind that this is easy to say than to do it, the financial markets are cold places where things can turn in milliseconds.
When it comes to trading you are competing against some of the best and more intelligent individuals in the world. Don’t forget that at any transaction in the market someone is selling and someone is buying, and both of them believe they are correct.
The two principal approaches to analyze the markets and make assumptions based on price action are Technical and Fundamental Analysis. These two are the major branches of market analysis and they are utilized and implemented by almost every trader and institutional player in the world.
If you were able to go back in time to visit a trading desk back in the early ’80s, you would be amazed by the way most traders used to look at technical analysts…. they were the real alchemists, Market Wizards to be precise.
Technical analysis is the study employed to assess investment and trading opportunities based on statistical information and charting techniques. The foundation of technical analysis is based on analyzing patterns of price action to evaluate the strength or weakness of a security.
In today’s world technical analysis has become the most prevalent approach of trading and investing. Keep in mind that most of the studies and technical indicators found in traditional brokers were once private models and most of them are obsolete or have a very light edge.
Technical Analysis and Charting are great tools for short term trading, intraday or even scalping as it allows for great signals to enter the market.
Fundamental analysis is the science of studying anything that can affect the value of a security, from macroeconomic factors like the economy and the industry, to financial conditions directly from the underlying asset.
The end state of fundamental analysis is to provide a quantitative model that can be interpreted by the trader or the investor in order to compare the asset current price relative to its value. This analysis type will usually result in an asset being consider undervalued or overvalued.
Fundamental analysis has been guiding investors for centuries and will probably continue to do so for many more to come. One of the most representative names of Fundamental Analysis is Warren Buffett.
Please be aware that even though fundamental analysis does not perform well for active trading, but instead it is one of the best weapons for anyone interested in long term investing in an asset. No surprise that Berkshire Hathaway owns more than $650 billion in assets utilizing this approach.
With Quants taking control over a considerably large portion of the financial markets worldwide more and more individuals are starting to implement a more hybrid or dynamic approach for their analysis. Instead of solely relying on technical or fundamental analysis, both approaches are being consolidated under one mathematical approach.
Even though certain experts simply consider hybrid trading as a technical model on steroids, it is worth mentioning that the edge that a proper hybrid approach to the markets can offer is higher than any other analysis model.
One of the key benefits of utilizing a hybrid model is that it will allow you a more nimble approach to the markets, this because signals are more dynamic. Keep in mind that this specific approach is difficult to apply as it requires a higher technical level of statistic and econometrics.
When a new trader starts their career in the financial markets, it is highly probable that its first approach will be to learn about day trading. This model consists of opening and closing positions within one calendar day, allowing individuals to benefit from small movements in price. In order to make this approach worth the risk, it is common to see individuals utilizing high levels of leverage in order to capitalize even more from these small/medium movements in price.
In order to successfully become a day trader, it is very important to have a clear understanding of both technical and fundamental analysis, this will ensure that the trader will be able to act fast on their execution, but also on its overall analysis.
Please be aware that different asset classes will require a different approach to trading. For example, day trading has been very popular in the Forex market due to its cheap execution. On the other hand, day trading stocks can results in very expensive fees if you are not using the right broker.
Even though day trading has become very popular in the market, traders should be aware that it is more complicated than they imagine. In order to survive, you will need strong risk management that will allow you to balance between winning and losing traders.
As a trader myself, I consider scalping to be the most difficult strategy from this list. Scalping consists of profiting from minor prices changes in an assets price. The strategy requires a trader to execute dozens if not hundreds of trades on a single day.
The idea behind scalping is to compound small gains into a large profit within the day. Please be aware that this is not a strategy that should be used by beginner traders as it requires a totally different technical knowledge.
If you think that risk management was strick in day trading, then you can imagine how tough it has to be for scalpers to manage its risk. Any wrong trade can easily erase hundreds of winning positions. In order to become a successful scalper, it is key to have nerves of steel, not many individuals can deal with the feeling of losing so repeatedly without being emotionally affected.
Scalping requires a conviction, knowledge, and Speed!
Swingtrading follows a more macro approach to the markets on which a trader will remain on a position until the trend shifts direction (days-weeks). This is usually considered a more active approach to investing as the positions can remain open for months at a time. The benefit from a swing trading model is that you won’t be executing trades every day, this provides an advantage for individuals with little or no time to oversee the markets every day.
In most cases, once a position is placed and so is the stop loss and take profit order, a trader can easily stand up from the computer and forget about the position by knowing the risk associated with it. The stop-loss will prevent losses to exceed an x amount in case the trade goes south, and the take profit order will close the trade for the target profit.
Many individuals that do not feel comfortable will active trading usually prefer this approach. Please note that from an emotional perspective swing trading allow its users to reduce the pressure of actively trading, which translate in more confident traders.
Best Exchanges to Trade Bitcoin in 2019:
eToro – Social Trading meets Crypto!
With the rise of Social Networks, the founders of eToro saw an opportunity to create their own interface in order to connect traders under the same platform. The result was the first social trading network which later transformed into a fully operational and dedicated brokerage house.
The firm has become a world power when it comes to connecting traders, offering services like copy trading and also ideas sharing as part of their business model. A social platform will only be as good as their users, in the case of eToro the firm is full of professional and experienced traders offering their knowledge as part of the copy trading and portfolio managing initiatives. If you are new to trading you should consider using eToro as it will allow you to interact with more experienced individuals, and you will even be able to copy their trades (this will allow you profit while learning from them).
It is important to mention that just like the company was ahead of the game in terms of social trading, they were also ahead when it comes to bitcoin adoption. Bitcoin trading was initially offered in the platform in early 2014, almost two years before all the hype and before the market took off.
eToros commitment to the cryptocurrency movement is so big that the firm offers more than 12 different options for trading and investing. It is important to mention that just like with Robinhood, you will be getting all the benefits from their reliable and mature platform.
- Minimum Deposit :$200
- Best Feature : Social Trading Platform
- Recommended for: New traders and investors interested in following a more technical and active trading strategy.
Robinhood – Commission Free Cryptocurrency Trading
From a business model perspective, no other broker in the US or even the world can say they have been more disruptive to the financial markets than Robinhood. The company became instantly famous after announcing a completely new approach to trading wherein essence trading would be free of any type of fees and commissions. While in the past other names have offered a similar approach with other assets like forex or CFDs, this was completely unheard in the stock and later the crypto market.
It is worth noticing that the firm was founded in the middle of the financial crisis as a response to the financial situation of the country and also of the markets perse.
Since 2018 the company started offering access to the major cryptocurrencies in the world, allowing their users to buy and sell these virtual currencies. Robinhood has always followed a very minimalistic model for their platforms and this one is no exception.
Please note that the cryptocurrency business of Robinhood is offered under a subsidiary and not the parent company, for this reason, it is not regulated by FINRA.
- Minimum Deposit :$200
- Best Feature : Trading is free of commission and fees.
- Recommended for : Swing Traders and Long Term Investors.
Investing vs Trading in Bitcoin
This has been one of the key debates in the financial markets for many decades, Investing vs trading. In reality, both options offer their own perks and benefits, it is important to keep in mind that success in one over the other will depend on the individual executing the investments or the trading.
It is common to see individuals that are less attached to their portfolio and to their positions, this allows them to be better at trading than investing. On the other side of the coin, we will find people that can not deal with the pressure of actively trading in the markets, and that are not as used losing money within trades (this can easily overwhelm anyone).
When it comes to bitcoin narrative is the same, the best option will be based on your personality, your goals, and also your time! Trading allows individuals to benefit from a more active approach, where they will be able to profit from all the ups and downs in the market. Investing, on the other hand, will allow individuals to profit from capital gains on the broad picture.
If you had bitcoin investing in 2017, you would have seen your money go from $2,000 a coin to over $19,000 in one single year, no surprise why so many investors became millionaires during this period of time. If you would have been actively trading during this same period of time, it is very unlikely that you would have been able to catch the entire rally, mostly because you would have taken profits way to early in the process.
Another example would have been active trading during the bear market of 2018, where you would have been able to benefit from both long and short positions, while the investor would have had to deal with a drawdown of more than-80%.
The best advice I can give is to analyze what works best for you and to go that way.
Pros and Cons of Bitcoin Trading
Just like with any other type of trading there are going to exists certain problematics with the asset class, for examp
- Diversification and Hedge: In the past, the Gold market used to be the only asset that would offer protection when cash was not an option (geopolitical or economical reasons), but Bitcoin has created its own spot as a go-to safe haven for funds and asset managers due to its little correlation. Being the number one performing asset in the market proves why so many portfolios are now investing a portion of their funds in Bitcoin, the asset is so volatile that even with a considerably small investment the possible returns could easily beat all benchmarks.
- Global Adoption in Progress: One of the key factors that prove that adoption is taking a stronger pace is seeing states in the US allowing their residents to pay their taxes in Bitcoin.
- Momentum (like no other asset): Not many assets deliver the linear momentum that Bitcoin and the major cryptocurrencies provide. Whenever a real breakout or breakdown occurs in this market, it is pretty possible that its direction will prevail for a considerable period of time. If you analyze the price action of 2017 you will be surprised by the number of days where bitcoin was moving between $600 and $1,000 a day.
- Trending Blindly: If you know the concept of being a “spring chicken“, then you can imagine what many Bitcoin traders went through during the 18 months of a bear market. Many individuals that enjoyed the beautiful upside from $2,000 to almost $20,000 in 2017, ended up losing their profit and even their capital as a result of not having a solid understanding of trading. Following a trend blindly without technical analysis or fundamentals backing your hypothesis is a perfect formula to lose money in the markets.
- Price Volatility: Cryptocurrencies are by far the most volatile assets in the market right now. If you analyze how they have performed since their inception, most of them have been close to the verge of disappearing before making comebacks straight out of Hollywood. While volatility can be of great advantage if you are position on the right side of the market, it can also have disastrous results if, on the other hand, the trade was wrong. It is key to drop any money making mindset and to focus on capital preservation, this will ensure that your career will last and that you will have money available to trade when opportunities arrive.
- Speculation: Even though other markets like commodities are full of active speculators, their bets are usually based either on a technical or a fundamental thesis. When it comes to Bitcoin the overall market is driven by support and demand, but it has proven to be incredibly erratic due to it’s sensitiveness to news and because of the commitment of traders being incredibly low at some points. Even though the basics of technical analysis has proven to work in order to successfully trade Bitcoin, it is key to keep in mind that BTC is an asset that does not follow conventional rules of market trading and that traditional principles can be wrong more than they are right.
- Bubble Danger: Seeing an asset doubling in price in a matter of weeks is enough for any financial analyst to start talking about a bubble. This type of price actions is typically associated with unsustainable results that commonly end up with a burst. The most common narrative around cryptocurrencies is a fight between their early adopters and supporters against everyone calling them a faux or a bubble in the market. Keep in mind that even after 10 years of its existence, it is still a pretty new technology and that at this point any objection or support is purely speculative.
- The commitment of traders and Market sentiment are not fixed: Most individuals and especially those new to trading fail to understand that while it may seem like the sky is the limit of an asset to rise, sentiment can tank incredibly fast. It is said that on bull markets assets take the stairs to go up in value, but when it comes to downturns they simply take out the nearest window and free fall.
Many economists see the entire crypto market as a “Greater fool” game, where the hype and the idea of becoming rich will continue to attract more individuals to the Market. While offer and demand will kike the prices to the point where the bubble burst again.
Technology Behind Bitcoin (Blockchain)
The rush of new investors and traders in 2017 was so strong that many individuals who invested didn’t even know what they were buying into, and it was not until later that they understood the basic concepts of Blockchain and Cryptocurrency as a whole.
Blockchain is the key technology behind all cryptocurrencies, including Bitcoin. Even though understanding it deeply can be complicated due to all the technicality behind it, the principal concepts can be simplified:
The Blockchain acts as a chain of records that are linked and secured using cryptography tools, the information of these records (blocks) is resistant to changes and it can not be modified. The whole chain of blocks turns into a ledger where new records are created and linked which each transaction, providing a track of any movement inside the ledger.
The best analogy to explain how blockchain work is by comparing Microsoft Word and Google Drive.
Sharing a micrsosoft word file would require for you to send an email with the attached file, and for the recipient to open it, review it, modify it and then send it back. The result of this was a dependence between two or more individuals where actual transparency and eficiency was not available at all.
On the other hand, a google drive would allow multiple individuals to join a modify the file electronically. With this approach, the most updated version of the file will always be available online and it would not require multiple versions or emails in order to complete it. This approach follows the basics of how a decentralized platform works and how ownership would be divided between all its users, allowing for total transparency and anonimaty at the same time.
This is a simple example, but it proves how blockchain can be adopted for other purposes besides cryptocurrencies.
As adoption of cryptocurrencies continues to grow, the demand for trading and investing will follow closely. Keep in mind that even after the difficult period of time seen by this sector over the last 18 months, it would not be the first time that we see this market roaring after been heavily punished.
If you are a new trader the best advice I can give you is to be patient, becoming a trader is not an easy task and it is definitely not fast. It will take you months before you successfully cover the basic principles of trading, and especially the foundation for technical and fundamental analysis. Take your time to build solid bases, this will ensure a brighter future as a trader and a smoother learning curve.
Try to focus on learning all the details about one specific asset class and one strategy, avoid moving from market to market and also from strategy to strategy. Consistency is one of the keys that will make you a better trader, and it is also one of the requirements to become profitable.
***Note: Don’t forget that even with the recent price action seen in the past few weeks, bitcoin will not be out of the bear market until it surpasses $11,000 per coin. There is still a lot of ground to cover before we can talk about a new bull market in place.
Bitcoin follows a decentralized model that is based on the blockchain technology. There is no organization or government behind the control of bitcoin as the ledger is managed by all the bitcoin owners in an open a transparent page.
Just like in most asset classes, the footprint of the traders buying and selling securities leave behind patterns that could be analyzed and interpreted as indicators of thing happening over another one. There are many different types of technical analysis, from statistical models to volume analysis. Technical analysis definitely has an edge, the real deal is to find the type of approach that is working the best at that moment.
It is probably the most volatile asset class in the world To put it into perspective bitcoin is up almost 170% YTD. The only other asset that is as volatile would be the future contracts of natural gas, commonly known as the widow maker of the commodity market. Please remember that even though this volatility opens space for possible profits if positioned appropriately, it can also translate into incredibly painful loses if the trade goes south and you don’t manage it accordingly.
Many brokers like the ones mentioned above offer access to trade bitcoin as simple as if it was another forex pair, this allows executing to be lightning fast and also cost-efficient. Besides utilizing a broker you could access the bitcoin market by acquiring the bitcoin directly from one of the exchanges. This will allow you to buy and sell but it will also be more difficult, more expensive and also less direct.
If you are planning on actively trading you should aim for a broker instead of an exchange. If you are only planning on buying and holding the currency, then an exchange could result in a better option since you will be able to utilize the bitcoins you bought as a payment mechanism.
Part of the beauty of blockchain technology is that there is a record of every single transaction ever done with bitcoin. The anonymity comes from not knowing who the other transactions are from. In the grid, you will only see wallet numbers and the number of bitcoins exchanged.
Bitcoin and all the other Cryptocurrencies are still speculative assets, this makes them incredibly risky to own. Should you invest in bitcoin? The answer is yes, but you need to additionally consider the right sizing for your investment. This is an asset that is so risky that you don’t want to overexpose your money and your portfolio.
Should you trade Bitcoin? It is an erratic asset and it is very difficult to predict its movements, there are other assets that are considerably easier to trade than bitcoin. If you are still interested the best advice I can give you is to keep a tight leash on your trades, if you are right on the trend direction chances are you will be holding a grand slam, on the other hand, you can easily destroy a portfolio faster than you can build another one.
Volatility in the cryptocurrency market offers its traders a very peculiar opportunity to take advantage of an asset that even when in a range bound can easily move more than $500 in a day. This allows traders to profit from the long ups and downs, but it is important to keep in mind that these movements can be very erratic and difficult to time.
In order to determine how much money you can make by trading bitcoin, it is important to understand the size of your account and also your risk appetite. Trading bitcoin will automatically label you as a high-risk speculator, with this profile in mind and without overexposing yourself to the markets a professional trader can easily get a 30% monthly return on their balance.
Don’t forget that as a beginner trader you should always aim for capital conservation and not to make money fast. You should be in the game aiming for the long run and you should not put your future in jeopardy just to make some quick bucks$$$.
Just you make you want to go back in time and Invest in Bitcoin, a $1,000 investment in July 2010 would be worth more than $ 2.5 billion!! During this period of time, you could have gotten 125,000 coins for your money.