A Beginner’s Guide to Bitcoin Trading

A Beginner’s Guide to Bitcoin Trading

Bitcoin trading can be a rewarding venture if done correctly. It’s not about simply buying when the price is low and selling when the price is high. Rather, it’s a strategic endeavor that involves forecasting price fluctuations by examining the industry as a whole and studying price charts in detail.

There are two primary methods used to analyze Bitcoin’s price: fundamental analysis and technical analysis. Mastering these techniques requires significant time, financial investment, and effort. However, with dedication, one can gradually become proficient at it.

Here are the steps you need to follow to start trading Bitcoin:

• Register for an account on a Bitcoin exchange.

• Complete the identity verification process (also known as Know Your Customer or KYC).

• Deposit funds into your account.

  Initiate your first trade on the exchange, which could be either buying or short-selling.

1. Understanding Bitcoin Trading vs. Investing

Before we delve into the subject, it's crucial to distinguish between Bitcoin trading and investing.

When individuals invest in Bitcoin, it typically implies that they are purchasing Bitcoin for the long haul. They believe that despite the market's volatility, the price will eventually rise. Bitcoin investors often have faith in the technology, ideology, or the team of developers behind the cryptocurrency. They tend to "HODL" (a term born out of a typo for "hold" in a 2013 BitcoinTalk forum post) the currency for the long run.

On the other hand, Bitcoin traders buy and sell Bitcoin in the short term, capitalizing on price fluctuations to make profits. Unlike investors, traders often view Bitcoin as a tool for profit-making, sometimes without delving into the technology or ideology behind the product they're trading.

However, it's important to note that people can trade Bitcoin and still care about it. Many individuals invest and trade simultaneously. The sudden surge in Bitcoin's popularity (and several altcoins) can be attributed to a few factors.

Firstly, Bitcoin's volatility means that significant profits can be made if the market is correctly anticipated. Secondly, unlike traditional markets like stocks and commodities, which have specific opening and closing times, Bitcoin trading is open 24/7. This means you can buy and sell at your convenience.

Lastly, Bitcoin's somewhat unregulated landscape makes it relatively easy to start trading, often without the need for lengthy identity verification processes. This accessibility has contributed to its popularity among traders. However, it's essential to approach it with knowledge and caution to navigate the market successfully.

2. Diverse Trading Strategies

While the ultimate goal for all traders is profit, the methods they employ to achieve this can vary significantly. Here are some popular trading strategies:

Scalping - Recently gaining popularity, scalping is a day-trading strategy that aims to make significant profits from minor price changes. It’s often compared to “picking up pennies in front of a steamroller.” Scalping focuses on extremely short-term trading and is based on the notion that making small profits repeatedly minimizes risks and provides advantages for traders. Scalpers can execute dozens—or even hundreds—of trades in a single day.

Day Trading - Day trading involves executing multiple trades within a single day to capitalize on short-term price movements. Day traders often spend considerable time in front of computer screens and typically close all their positions by the end of each day.

Swing Trading - Swing trading is a strategy that seeks to leverage the natural “swing” of price cycles. Swing traders aim to identify the onset of a specific price movement, enter the trade, and hold on until the movement subsides to take the profit. Swing traders strive to see the bigger picture without the need for constant screen monitoring. For instance, swing traders can open a trading position and maintain it open for weeks or even months until they achieve their desired outcome.

Remember, each trading strategy requires a different skill set and understanding of the market. Choose the one that best aligns with your trading goals, risk tolerance, and time commitment.

3. Analytical Methods: Fundamental vs. Technical

Predicting Bitcoin’s price movement is a complex task. No one can definitively predict what will happen to Bitcoin’s price. However, some traders have identified certain patterns, methods, and rules that allow them to make a profit over time. The key idea is that, despite potential losses along the way, you should aim to have a positive balance at the end of the day.

When analyzing Bitcoin (or any other tradable asset), traders typically follow two main methodologies: fundamental analysis and technical analysis.

Fundamental Analysis

Fundamental analysis involves predicting the price by looking at the bigger picture. In the context of Bitcoin, this means evaluating the cryptocurrency’s industry, news about the currency, technical developments (like the lightning network), global regulations, and any other news or issues that could affect Bitcoin’s success.

This methodology assesses Bitcoin’s value as a technology, independent of its current price, while considering relevant external factors to predict future price movements. For instance, if China were to suddenly ban Bitcoin, this analysis would predict a probable price drop.

Technical Analysis

Technical analysis is a method that predicts prices by analyzing market statistics and charts, such as past price movements and trading volumes. It aims to identify patterns and trends in the price, and based on these, infer future price movements.

The fundamental assumption behind technical analysis is this: irrespective of current global events, price movements are self-explanatory and narrate a story that can help predict future movements.

Which Methodology is Superior?

As mentioned earlier, accurately predicting the future is impossible. From a fundamental perspective, a promising technological innovation might not meet expectations. Similarly, from a technical perspective, the price chart may not behave as it did in the past.

The reality is that there are no guarantees in any form of trading. However, employing a balanced mix of both methodologies—fundamental and technical analysis—may likely yield the most favorable results. Remember, successful trading involves a strategic blend of knowledge, patience, and intuition.

4. The Stock-to-Flow Model

The Stock-to-Flow (S2F) model is a pricing model that predicts Bitcoin’s price based on the relative rate of new supply—that is, the amount of new Bitcoin being created compared to the existing supply of Bitcoin.

This model, originally applied to precious metals like gold and silver, is based on scarcity. The term “stock” refers to the existing supply of the asset, while “flow” refers to the new supply entering the market. The fundamental question that the stock-to-flow model answers is: Given the current rate of supply, how long would it take to replace all units of the asset already in the market?

For Bitcoin, this question is relatively straightforward to answer. Thanks to the hard-coded rate of supply in the Bitcoin protocol, we can estimate the stock-to-flow ratio at any point in the future with reasonable certainty.

Stock-to-Flow in Practice

At the time of writing, the circulating supply of Bitcoin is around 19.5 million coins. With the current rate of new supply—around 900 BTC per day—it would take over 59 years to replace all of these 19.5 million bitcoins already in the market. This illustrates the scarcity of Bitcoin.

However, we know that Bitcoin is even scarcer than this calculation implies; Bitcoin has a maximum supply of 21 million coins. By combining this knowledge of supply with historical Bitcoin pricing data, we can create a formula that predicts the future price of Bitcoin based on the stock-to-flow ratio. This is how the stock-to-flow pricing model was developed.

The model was formalized and published by “PlanB,” a prominent crypto analyst who is reportedly a highly experienced former Dutch institutional trader.

Does the Model Work?

At first glance, the S2F model appears quite accurate, with the Bitcoin market price seeming to follow the model’s estimations closely. However, upon closer inspection, the actual price has deviated significantly from the model at times during its boom-and-bust cycles.

Overall, it could be argued that the model serves as a good baseline for a “fair” Bitcoin price and could be best used as a guide. For instance, if the actual price is much higher than the predicted price, it may be a good “sell” indicator. Conversely, if the actual price is well below the model price, it may be a good “buy” indicator. Remember, while models can provide guidance, they cannot guarantee future outcomes. Always trade responsibly.

5. Dollar-Cost Averaging (DCA) Model

Dollar-Cost Averaging (DCA) is an investment strategy that involves allocating a fixed amount of resources to a particular asset at regular intervals, regardless of its price. This strategy is commonly used in the cryptocurrency space, including Bitcoin trading.

The DCA method aims to mitigate the impact of market volatility and potentially lower the average cost per share². By allocating a fixed amount regularly, you acquire more units of an asset when prices are low and fewer units when prices are high. This approach aims to potentially lower the average cost per unit over time.

For instance, if you decide to allocate $100 to a particular cryptocurrency every month, you will do so regardless of the asset's price. If the price is high, your fixed allocation will acquire fewer units, and if the price is low, the same allocation will acquire more units.

One of the main benefits of DCA is that it eliminates the need to time the market. Timing the market can be challenging, even for experienced individuals. By allocating a fixed amount regularly, you remove the emotional aspect of resource allocation and adhere to a disciplined resource allocation plan.

However, it's important to note that like any resource allocation strategy, DCA doesn't guarantee profit or protect against loss. It's a strategy that can benefit both beginners and long-term investors. For beginners, it's a simple and disciplined approach to resource allocation that doesn't require extensive market knowledge. For long-term investors, it's a way that aims to mitigate the impact of market volatility and potentially lower the average cost per unit of an asset.

Conclusion

We’ve traversed a vast landscape of Bitcoin trading in this guide. However, a word of caution: a majority of individuals who embark on Bitcoin trading cease after a short period, primarily due to lack of profitability.

Here’s my perspective: if you aspire to be successful in trading, you must be prepared to invest a significant amount of time and resources to acquire the necessary skills, much like any other venture. If your motivation to enter trading is merely to make a quick profit, it might be more prudent to steer clear of trading altogether.

There’s no such thing as quick, easy money—every opportunity comes with its own set of risks and downsides. However, if you’re dedicated to learning how to become a professional Bitcoin trader, consider exploring the resources mentioned in the section below. These resources will equip you with the best possible tools and facilitate your ongoing education.

Remember, the journey to becoming a successful trader is a marathon, not a sprint. Patience, persistence, and continuous learning are the keys to success in this field. Happy trading!