Bitcoin Trading Guide

This post covers the basics of Bitcoin trading. It will help you get familiar with basic terms, understand different ways to “read” the market and its trends, make a trading plan, and learn how to execute that plan on Bitcoin exchanges or via a Bitcoin ETF.

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Bitcoin Trading Summary

Successful Bitcoin trading involves buying low and selling high. Unlike investing, which involves holding Bitcoin for the long run, trading involves trying to predict price movements by studying the industry as a whole and price graphs in particular.

People use two main methods to analyze Bitcoin’s price – fundamental analysis and technical analysis. Successful trading requires a lot of time, money, and effort before you can actually get good at it.

In order to trade Bitcoin, you’ll need to do the following:

1. Open an account on a Bitcoin exchange (e.g. CEX.IO, eToro, Bitstamp)
2. Verify your identity
3. Deposit money into your account
4. Open your first position on the exchange (i.e., buy or short-sell)
   

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That’s Bitcoin trading in a nutshell. If you want a really detailed explanation, keep on reading.

1. Bitcoin Trading vs. Investing
2. Trading Methods
3. Analysis Methods – Fundamental vs. Technical
4. The ‘Stock-to-Flow’ Model
5. Bitcoin Trading Terms
6. Reading Price Charts
7. Common Trading Mistakes
8. Frequently Asked Questions
9. Conclusion

1. Bitcoin Trading vs. Investing

The first thing we want to do before we dive deep into the subject is to understand what Bitcoin trading is and how it is different from investing in Bitcoin.

When people invest in Bitcoin, it usually means that they are buying Bitcoin for the long term. In other words, they believe that the price will ultimately rise, regardless of the ups and downs that may occur along the way. Usually, people invest in Bitcoin because they believe in the technology, ideology, or developers behind the currency.

Bitcoin investors tend to HODL the currency for the long run (HODL is a popular term in the Bitcoin community that was actually born out of a typo of the word “hold”—in an old 2013 post in the BitcoinTalk forum).

Bitcoin traders, on the other hand, buy and sell Bitcoin in the short term whenever they think a profit can be made. Unlike investors, traders view Bitcoin as an instrument for making profits. Sometimes, they don’t even bother to study the technology or the ideology behind the product they’re trading.

Having said that, people can trade Bitcoin and still care about it, and many people out there invest and trade at the same time. As for the sudden rise in popularity of Bitcoin (and several altcoins) trading – there are a few reasons for that.

Firstly, Bitcoin is very volatile. In other words, you can make a nice profit if you manage to anticipate the market correctly. Secondly, unlike traditional markets, Bitcoin trading is open 24/7. Most traditional markets, such as stocks and commodities, have an opening and closing time. With Bitcoin, you can buy and sell whenever you please.

Finally, Bitcoin’s somewhat unregulated landscape makes it relatively easy to start trading—without the need for long identity verification processes.

2. Trading Methods

While all traders want the same thing – profit – they practice different methods to generate it. Let’s review some examples of popular trading types:

Day trading

This method involves conducting multiple trades throughout the day and trying to profit from short-term price movements. Day traders spend a lot of time staring at computer screens and usually close all their positions by the end of each day.

Scalping

This day-trading strategy is becoming popular lately. Scalping attempts to make substantial profits on small price changes and is often likened to “picking up pennies in front of a steamroller.”

Scalping focuses on extremely short-term trading and is based on the idea that making small profits repeatedly limits risks and creates advantages for traders. Scalpers can make dozens—or even hundreds—of trades in one day.

Swing trading

This type of trade tries to take advantage of the natural “swing” of the price cycles. Swing traders try to spot the beginning of a specific price movement and enter the trade then. They hold on until the movement dies out and take the profit.

Swing traders try to see the big picture without constantly monitoring their computer screens. For example, swing traders can open a trading position and hold it open for weeks or even months until they reach their desired result.

3. Analysis Methods: Fundamental vs. Technical

Can I predict Bitcoin’s price movement?

The short answer is that no one can really predict what will happen to the price of Bitcoin. However, some traders have identified certain patterns, methods, and rules that allow them to make a profit in the long run. No one exclusively makes profitable trades, but here’s the idea: at the end of the day, you should see a positive balance, even though you may have suffered some losses along the way.

When analyzing Bitcoin (or anything else they want to trade, for that matter), people follow two main methodologies: fundamental analysis and technical analysis.

Fundamental analysis

Fundamental analysis is used to predict the price by looking at the bigger picture. In Bitcoin, for example, fundamental analysis evaluates Bitcoin’s industry, news about the currency, technical developments of Bitcoin (such as the lightning network), regulations around the world, and any other news or issues that can affect the success of Bitcoin.

This methodology looks at Bitcoin’s value as a technology (regardless of the current price) whilst considering relevant outside forces in order to determine what will happen to the price. For example, if China suddenly decides to ban Bitcoin, this analysis will predict a probable price drop.

Technical analysis

Technical analysis tries to predict prices by studying charts and market statistics, such as past price movements and trading volumes. It tries to identify patterns and trends in the price and, based on these, deduce what will happen to the price in the future.

The core assumption behind technical analysis is this: Regardless of what’s currently happening in the world, price movements speak for themselves and tell some sort of a story that helps you predict what will happen next.

So, which methodology is better?

Well, as I said in the previous section, no one can accurately predict the future. From a fundamental perspective, a promising technological achievement might end up as a flop. From a technical perspective, the graph just doesn’t behave as it did in the past.

The simple truth is that there are no guarantees for any sort of trading. However, a healthy mix of both methodologies will probably yield the best results.

4. Stock-to-Flow Model

What is Stock-to-Flow?

The stock-to-flow model is a pricing model that predicts the price of Bitcoin based on the relative rate of new supply – that is, how much new Bitcoin is being created compared to how much Bitcoin already exists.

The model is based on scarcity and was originally applied to precious metals such as gold and silver. The word “stock” refers to the already-existing supply of the asset, while “flow” refers to the new supply entering the market.

The underlying…