What Is Bitcoin Trading?

Key Takeaways:

• Bitcoin trading involves buying and selling Bitcoin based on its price fluctuations in order to potentially profit from rises and falls in its value. Common trading strategies include day trading, swing trading, and position trading.
  
• Technical analysis tools like candlestick charts, moving averages, and oscillators can help traders identify potential price trends.
  
• Understanding what could impact Bitcoin’s price, such as supply and demand, can inform trading decisions. Risk management is important in mitigating potential trading losses.

Check out Crypto.com’s new BTC to USD Converter.

Short Introduction to Bitcoin

Bitcoin trading has become increasingly popular in recent years. But what exactly is it and how does it work? This article explains the basics of Bitcoin trading, including how to get started, different trading strategies, and risks to be aware of.

To start, it’s important to understand Bitcoin itself, which is a decentralised digital currency, meaning it is not issued or backed by any central authority like a government. Bitcoin transactions are added to the blockchain, Bitcoin’s public transaction ledger, via mining, a process that involves solving complex computational puzzles. There is a fixed supply of bitcoins (BTC) to be created, limited to 21 million total.

Learn more about Bitcoin in What Is Bitcoin? A Complete Guide for Crypto Beginners.

Bitcoin’s Popularity

Key factors that have led to Bitcoin becoming a sought-after asset for some include its finite supply and potential to grow mainstream adoption. Bitcoin’s value rose from just a fraction of a penny at inception to over US$60,000 per coin at its peak in late 2021. However, its value has also seen significant volatility, with sharp price swings both up and down in a short period. While volatility carries risks, it also makes Bitcoin attractive for certain traders looking to profit from its price movements.

Read about what could make Bitcoin a store of value in Bitcoin as a Store of Value: A Comparison to Gold and Other Assets.

How to Trade Bitcoin

Bitcoin trading simply refers to the act of buying and selling on its price fluctuations and is done through cryptocurrency exchanges and trading platforms. Bitcoin’s volatility allows certain traders to potentially profit from both rises and falls in the Bitcoin price. Some common Bitcoin trading strategies include day trading, swing trading, and position trading. 

To begin trading Bitcoin, traders need to first choose a cryptocurrency exchange or trading platform, such as the Crypto.com App, and set up an account.

Learn how to sign up for and use the Crypto.com App in our Quick Guide to Using the Crypto.com App.

Once the account is funded, users can purchase Bitcoin using fiat currencies like US dollars or other cryptocurrencies. Most trading platforms allow trading via different orders, such as market orders to buy/sell instantly or limit orders to trade at specified prices.

It might also be prudent to consider setting up a secure personal cold wallet to store Bitcoin for long-term holding. Some traders keep only small positions on trading platforms for active trading.

Read more about crypto storage in What Is a Crypto Hardware Wallet and How Does It Work?

Strategies and Tools for Trading Bitcoin

Successful Bitcoin trading requires understanding factors that could impact Bitcoin’s price, as well as different trading strategies and tools. Below are popular strategies traders employ when buying and selling Bitcoin.

• Day Trading — Focuses on short-term price fluctuations throughout the day hoping to capture small profits on numerous trades. Typically requires very close market monitoring.
  
• Swing Trading — Involves holding positions for a few days to weeks to profit from medium-term trends.
  
• Position Trading — Taking stances based on anticipated long-term directional moves. Positions may be held for months to years.
  
• Leverage Trading — Using margin (i.e., borrowed funds) to control larger Bitcoin exposures with just a fraction of the capital. Increases risk and potential reward.
  
• Shorting — Also known as ‘short selling’, where a trader borrows the asset and immediately sells it with the aim of profiting from an expected decline in its price. Shorting can also be done via derivatives like futures.

Read more about margin in Crypto Spot Trading vs Margin Trading: What Is the Difference?

Like in other markets (e.g., stocks), technical analysis is a type of trading tool that may be useful for analysing Bitcoin’s past price performance to potentially predict future trends. Some popular technical analysis trading indicators include:

• Candlestick Charts — These are bars on a price chart that show the daily open, high, low, and close price. They can be used by traders seeking to identify trends.
  
• Moving Averages — Averages of prices over a specified period of time that can help identify trends by smoothing out price volatility.
  
• Oscillators — Examples include Relative Strength Indicator (RSI) and Bollinger Bands, which aim to identify overbought/oversold levels.
  
• Chart Patterns — Visual formations on a price chart — such as head and shoulders, triangles, and cups — used to predict potential price breakouts and directional trends.

Read more about technical analysis in these articles:

Top 10 Bullish Crypto Trading Indicators

10 Bearish Crypto Trading Indicators to Know

How to Read Crypto Charts — A Beginner’s Guide

How to Read Candlesticks on a Crypto Chart: A Beginner’s Guide

Many traders also use trading bots. These are tools that automatically make trades based on predefined trading indicators and parameters. They are available on some exchanges and trading platforms, and help traders avoid having to constantly monitor the market.

Read about grid trading, a type of strategy utilised by trading bots, in Grid Trading: What It Is and Tips for Getting Started.

Factors Impacting Bitcoin Price

There are many factors that could potentially influence Bitcoin’s price, including those related to supply and demand, fundamentals, macro, and sentiment. Because crypto is a nascent industry, regulatory developments can also have a significant impact on prices.

• Supply and Demand — Theoretically, the more demand for Bitcoin relative to supply, the higher the price, and vice versa. Bitcoin’s halving events (which reduce new supply) are seen by some observers as favourable for the price.
  
• Fundamentals — The Bitcoin network’s health and growth is seen in metrics like the increase in addresses, node count, developers’ activities, the number of decentralised apps (dapps) existing or in development, scalability, security, and the amount of potential real-world use cases.
  
• Macro — Macro factors are those that affect the broader real-world economy. Because crypto does not exist in a vacuum, these factors also affect the price. Interest rate hikes by central banks are a good example.
  
• Sentiment — Refers to factors that affect people’s desire to buy or sell Bitcoin mainly based on their emotions. One particularly prevalent example in crypto is news and social media hype.

Read more about these factors in What Influences the Price of Crypto?

Bitcoin Derivatives Trading

Derivatives are a type of trading instrument that allows traders to gain exposure to the price movement of Bitcoin without actually owning it. Futures and options are two common types of derivatives, and perpetual futures are a special type of futures contract unique to crypto markets. Derivatives typically involve margin (i.e., borrowing of funds), and therefore can potentially magnify gains, as well as losses.

Read about UpDown Options in What Are UpDown Options?

Risks of Bitcoin Trading

As with any financial contribution, there are risks involved with Bitcoin trading, as well. Traders are exposed to potential losses if their analysis proves incorrect or the market moves against their position. Proper risk management using methods like stop-losses is crucial.

Read more about risk management in Stop-Loss and Take-Profit Levels in Crypto Trading.

Conclusion

Bitcoin trading is one way to engage with the wider emerging cryptocurrency asset class. By learning different trading strategies and tools, and practicing prudent risk management, the Bitcoin trading experience can be rewarding.

Read more about how to properly perform research in Crypto 101: How to DYOR.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.