A Beginner’s Guide to Trading Bitcoin for Profit

Exchangers and Traders

invest-in-tennis-ballsBitcoin 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).

Fundamental analysis

Fundamental analysis may be more familiar to stock market investors, but can also be used as a bitcoin trading strategy. All it means is that you look at the fundamental data which affects the price – number of wallets, number of active wallets, number of transactions per day, volume traded on exchanges, volume reported by retailers who accept BTC, and so on. You then use this data to estimate what you think Bitcoin should be worth right now. You can then decide whether you think it is currently undervalued or overvalued (and how confident you are in that assessment) and then buy or sell accordingly.

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.

Swing Trading

All of the methods described above are long or medium term strategies. They will probably take many months or years to generate a good return for you, and you can easily end up taking losses or making minimal profits for many months on end. A faster paced way to either make or loss yourself a lot of bitcoin is day trading – buying and selling on the basis of short-term price movements, over the course of minutes, hours or days rather than months or years.

The most common strategy for day trading is ‘swing trading’. This method uses a range of technical indicators (see the section below on technical analysis) to look for the turning points in short-term trends. You can then profit from the daily swings up and down in the price of btc, regardless of whether the long-term direction is up or down.

This often involves looking for ‘support’ and ‘resistance’ levels. A support level is one where a downward price level is expected to meet resistance as buyers come into the market to pick up a perceived bargain, whilst a resistance level is one where an upward price move is expected to meet resistance of sellers taking a profit.

Bitcoin Technical Analysis

whaleTechnical 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.

You can learn more about TA in this Beginner’s Guide to Technical Analysis for Bitcoin

Bitcoin Trading Signals

If learning technical analysis is too much for you, then you can always get someone else to do it for you. Signal providers use technical analysis to provide you with alerts when they think you should either buy or sell. You will normally have to pay for a subscription to a service like this. There is one nice looking signal provider I have found (but haven’t tested so this is no recommendation):

  1. Sunshine Profits

Bitcoin Derivatives and Trading Platforms

Trading Bitcoin on Margin

Margin trading is a way to increase the amount you stand to make as profit or loss from any movement in the market. You do this by borrowing money to make your trade and using the currency or asset you buy as collateral. For example:

You have $100 to buy bitcoin. Instead of just buying with that amount, you borrow $900 and buy $1000 worth of bitcoin. This is 1:10 leverage. Now, if the price goes up by just 1% you gain 10%, but if it falls by just 5% you lose 50%.

When you are trading on margin there will also be an automated system which will sell if the market moves too far against you, because they want to limit you loses to less than the initial capital you provided. So in the example above, if the price drops by 9% then you will already have lost 90% of your money. If that was to continue then you would lose all of your own money and start losing your creditors money which was lent to you for the trade. To stop this, you will hit a ‘margin call’, which means that your trade will be automatically closed for you.

Two popular exchanges which offer margin trading via peer-to-peer lending are:

  1. Bitfinex
  2. BitYes

Another way to margin trade either bitcoin or litecoin is to use ‘electronically traded funds’ or ETFs such as those provided by Plus500. These are funds whose price tracks that of bitcoin, but no actually coins are held by the fund. Generally this is only available for day traders as all of your trades will be closed at the end of the day, but it can mean lower fees than using an exchange and you get instant access to 1:10 leverage, whereas the leverage available on the exchanges listed above depends on what other users are offering at the time.

How To Trade Bitcoin Futures

Futures are a contract which gives their buyer the right to make a purchase at a particular price, at a particular date in the future. They can be used by people who own a lot of btc as a ‘hedge’ so that they don’t lose as much if the price goes down, and they can also be used by speculators as a way to make a profit by correctly predicting the whether the value of btc at a given date will be higher or lower than it is today.

You can trade bitcoin futures on the OrderBook.Net website.

BTC Options Trading

Coinut provides a trading platform for binary and vanilla options and the ability for users to select their own strike price.

Algorithmic Trading: Using a Bitcoin Trading Bot

If you are serious about day trading then, eventually, you will probably want to get involved in algorithmic trading. This is when you program a ‘bot’ (short for robot, but actually a computer software program) with a few simply rules about when to buy and sell and then just let it loose with your money. Most exchange websites have an API which bots can use to place orders on your behalf and fetch data from their orderbooks.

If you want to create your own bots then you will probably need to learn how to use software like Matlab, specialist software for performing mathematical operations, as well as enough programming to make use of the APIs provided by the exchanges you want to trade on.

To get yourself started, however, I would recommend using a service like CryptoTrader. They have some ready-made bots, some of which you can use for free and others which you can purchase. Most bots from CryptoTrader will work on all the big exchanges and will come with data about their historical performance and the strategy they adopt so that you can pick one which is right for you and has a good chance of making you a profit. They also have tools that you can use to make it a little bit easier on yourself if you do decide t get started with programming your own bots.