A Beginner’s Guide to Trading Bitcoin

Bitcoin has taken the world by storm in recent weeks as the digital currency continues to make new all-time highs in price. Internet security expert John Mcafee recently said he believed the price could reach $5000 in three years. With the potential in rising prices, many are left wondering exactly how they can try to grab a piece of the pie.

Before getting involved in Bitcoin, it is imperative to understand exactly what Bitcoin is. You need to know that they are units of digital currency, and the Bitcoin network is not an exchange-traded product like a stock or commodity. There are a few steps involved in order to purchase bitcoins, including obtaining a Bitcoin wallet for your bitcoins to be deposited in.

Once you have researched different providers and obtained a wallet, you can begin buying and selling bitcoins.

These units of digital currency can be purchased for regular use, as an investment or as a speculative play. If you are looking to actively trade Bitcoin, there are numerous ways you could proceed depending on risk tolerance, objectives and more.

The market for Bitcoin appears to be growing by the day, and price volatility is becoming the norm. Such a environment can make for quick and significant potential gains, and can also make for quick and significant potential losses.

One simple way to go about trading Bitcoin given recent price action is to employ a trend following strategy. The price of the cryptocurrency has seen some sharp rises followed by some sharp declines, but the longer-term trend appears to be pointing higher. A simple strategy would be to wait to buy until prices see a decent pullback from the highs, or pullback to a trend line.

Another way to play a volatile market that is trending higher would be to buy on a fresh high in price, looking for that bullish momentum to continue. Whatever strategy you decide to go with, whether it is chart-based or otherwise, the key to trading any asset is in risk management.

This is where trading Bitcoin can become very challenging. The lack of a central exchange makes placing a stop loss order impossible. Sure, you can sell your bitcoins if the currency declines to a specific level, but there is nothing to say that its value couldn’t see declines far beyond your chosen risk parameters. In fact, it is also possible that the currency could become worthless if the network became compromised or merchants abandoned it.

Scaling into or out of positions may also be useful. For example, if you purchased five bitcoins at $4000 each, you could look to sell two at $5000 and two at $7000. On the other hand, you can also look to scale into a buy by purchasing bitcoins and then dollar-cost averaging if the price drops.

If you are looking to trade Bitcoin, understand three things before putting your capital at risk:

  1. Trading in Bitcoin is highly speculative and could result in a total loss.
  2. Bitcoin could have theoretically unlimited upside potential.
  3. There is no leverage when purchasing bitcoins. Just as with the purchase of an option, the amount of money at risk is therefore limited to the amount of money paid for the bitcoins.

If you are going to try to trade Bitcoin, be ready for a wild ride and make sure you are using risk capital.

About the Contributor Jeremy Blossom

Jeremy Blossom has been building ideas to grow businesses for more than 15 years. For over a decade Jeremy was active in the financial industry and his understanding of the financial sector is vast and deep. Under his leadership, he delivers result-focused strategies and executions that are designed to do one thing: make clients more profitable.

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