Do you want to trade in Bitcoins and other cryptocurrencies? Read our study that guides you through this world of investments.
Cryptocurrencies are enjoying media and political attention in recent months and this has prompted an increasing number of investors to take an interest in this asset.
However, due to the peculiarities of both digital currencies and the system on which they are based, namely the blockchain, it is necessary to adopt different strategies from those traditionally used for commodities or traditional currencies. In short, it is necessary to consider the movement of shares from another point of view, and above all one that corresponds to trading with a high-risk profile.
- Trading in Bitcoins: differences from traditional currencies
- Brokers for trading in Bitcoins
- Investing in price changes
- Leverage effect: how to multiply earnings
- Trading with the OBV indicator
- Cross strategies: Bitcoin, Ethereum and OBV Indicators
- Why trade in Bitcoin. Advantages
Cryptocurrencies are characterised by a high level of volatility. This means that even abrupt and sudden price fluctuations, can be considered physiological: it is not impossible for a tokento lose 10% in a day and to recover it fully on the following one.
To complicate matters further, there is the huge panorama of cryptocurrencies: currently, there are more than 800, and new ICOs are being launched on the market (read what ICOs are)every day. There is also a very large number of investment strategies, but to avoid confusion we believe it is necessary to start with the best tactics for trading with Bitcoins.
Bitcoins (which we will also call BTC) are effectively the founder of cryptocurrencies. They’re the most famous, the most exchanged and even the most discussed. Making light on the mother of all virtual coins and using it as an example helps clarify others, so why not apply the same methods adopted on other tokens and diversify our own investment portfolio.
Trading in Bitcoins: differences from traditional currencies
From a certain point of view, Bitcoins are no different from other traditional currencies. Both coins do not have an intrinsic value: in the first case we are dealing with bits and in the second case paper and hardly precious metals. Cryptocurrencies and currencies, on their own, are worth nothing. This is so different from oil, diamonds, gold, basically any raw materials, which instead have an intrinsic value in themselves.
The differences concern the framework within which the two systems operate, and there are no small divergences. The legal tender coins are issued by central banks; transactions and financial operations are therefore controlled by institutes that act as intermediaries. The more banks that print currency, the more inflation increases, with the consequence that the value of money decreases.
Bitcoins and cryptocurrencies are generally exempt from inflation. Not only are they free from a supervisory authority (they are defined in fact decentralised), but they are also issued in limited numbers. For example, approximately 21 million BTCs have been created: there is no current provision for an increase in this supply, and therefore these tokens are less prone to inflation.
Brokers for trading in Bitcoins
Given the above, we must add that trading with Bitcoins is no different than traditional methods that use CFD (contracts for difference) for pairs of legal tender, such as EUR/USD.
Where to start?
First of all, as always when it comes to trading, it is crucial to choose a safe and reliable broker. This choice is vast, but to avoid scam sites, which are not so uncommon in the rough sea of the internet, we recommend choosing platforms such as eToro, Copyfund, Trade.com, Plus500, IQ Option and BDSwisse.
There are countless advantages to these brokers. Many give the opportunity to open a free demo account so that you can try your hand at trading before investing any real money. Moreover, if you decide to start investing, the minimum deposit required by these platforms is generally modest, ranging from $50 to $100.
Another positive point is social trading, i.e. being able to follow more experienced traders and to copy their strategies. For those who are just starting out, this is an important function, because it allows you to learn from “senior” investors, thereby minimising your risks.
Lastly, monthly bonuses, financial levers, zero trade taxes make these brokers the best platforms to trade on and make money with Bitcoins in a simple and secure way.
Investing in price changes
This is the first and easiest trading strategy using Contracts For Difference. In this case, you can earn when the price both rises and falls; in the event of a BTC collapse, if you have opted for a falling market, you will gain substantial profits.
CFDs are derivatives that let you earn on the price fluctuations of an underlying asset. In our specific case on the exchange rate between the BTCs and the main currencies, usually US dollars.
How to trade on a bull market
Trading on a bull market means investing in price increases of Bitcoins. Let’s look at a practical example.
Supposing that the price of BTC is $10,000, and we decide to invest in a bull market (or, as we say in technical jargon, to go for a long-term investment).
If the price rises to $12,000, we can decide to sell the CFD contract on previously purchased Bitcoins and collect the $2,000 difference.
Investing in a bull market is possible both with CFD contracts (with which you cannot “physically” buy Bitcoin) or on the exchanges, which allow you to buy BTC and other cryptocurrencies.
How to trade on a bear market
To trade in a bear market means implementing a short-term strategy, which consists of selling short to earn from a decrease in share prices. But let’s take a simple example to fully understand how it works.
Imagine we are selling 1 BTC when its price is $10,000. If the price goes down to $8,000, we can recover 1 BTC at this price. Our profit would, therefore, be $2,000.
It is a faster method to earn than on bull market bets: prices fall faster than they go up, but we must be very careful in assessing and constantly monitoring the market trends, not just for Bitcoins but all cryptocurrencies.
As previously mentioned, whether adopting a long or a short strategy, the essential thing is to observe the trend. A simple tool that can help newbies is the candlestick chart.
When a cryptocurrency is bought by many traders its price rises, in accordance with the “rule”, so that the increase in demand follows an increase in the price.
Looking at how much the Bitcoins are bought or sold, we can easily decide whether to position ourselves long or short selling.
Leverage effect: how to multiply earnings
Financial leverage is a tool made available by most online brokers in CFD trading.
The provider asks you to pay only a part of the total outlay (margin or deposit requirement), and they will take care of settling the sum. The profits you gain in the event that the market is going in your favour is based on the entire position. In short, the sum you earn is very high compared to what you initially invested.
The deposit margin is variable, but by averaging brokers, we can give an example of leverage at x10. If you invest $100 then you have a market exposure of $1,000; this means a tenfold increase, but in the event of a loss, you would risk even more than your initial investment capital.
The main advantage of leverage is that you can keep more liquidity in your trading portfolios. As mentioned, what you tie in is a percentage of your capital. The second advantage is the exposure to the market benchmark, which is proportionally much higher than the deposit margin. The combination of these two aspects makes it possible to make better use of your money and diversify your investments more easily, an essential factor for maximising profits and curbing losses.
However, this is an instrument with surprising potential that should only be used by experienced traders, since the risks are quite substantial.
Trading with the OBV indicator
This strategy is certainly among the best ways to earn money with Bitcoins, reducing the dangers to the absolute minimum possible. At a first glance it may seem complex, but in reality, it is based on a simple technique of comparison. Before going into this method of trading step-by-step, let’s take a look at what an OBV indicator is.
The On Balance Volume (OBV) is one of the most classic indicators of technical analysis and has been in use since the 1960s. It measures the pressure of purchase and sales volumes with a simple calculation: in practice, volume is added on bull days, and it is subtracted on bear ones. The OBV, therefore, includes the total volumes, and its performance is particularly important because it moves before the actual price increases or decreases. Bear in mind that you do not need to focus on absolute numerical values: a good tradingstrategy instead observes the line, which is nothing other than the metaphorical path that Bitcoin operations are experiencing.
In practice, we need to compare the OBV with the price of Bitcoin, and at this point, we will have three possible scenarios. If we notice a convergence, i.e. prices and OBV are equal, this indicates a strengthening of the current trend, regardless of whether it is a bull or a bear market. If, on the other hand, the OBV shows a discrepancy with respect to the price, we are faced with a divergence. In particular, if the OBV is decreasing but prices are rising, we are in a phase of congestion that signals a weakening of the trend. On the contrary, if OBV grows but prices are falling, it is likely that a trend inversion is imminent.
Therefore, it is a predictive tool based on concrete data. Its reliability derives from the fact that the charts refer to volumes, i.e. financial instruments whose numbers are incontrovertible. In other words, there is nothing to interpret if, for example, of every 100 Bitcoins purchased only 5 are sold. The OBV indicator draws its strength from solid data, that we can find in the financial and speculative world.
Cross strategies: Bitcoin, Ethereum and OBV Indicators
Although the OBV is an incredibly predictive tool, we must underline that no technical indicator can be considered safe in all cases. To limit risks and have a more realistic view of how the Bitcoin trend will go, we can also add OBV on ETH to the study of OBV Indicators on BTC.
Ethereum is the second largest cryptocurrency by market capitalisation, and one of the most appreciated by investors, above all for its feature of supporting the smart contracts. For this reason, it is useful to compare the movements of both digital currencies, always overlapping the price chart with that of the OBV Indicator.
This strategy stems from the assumption that the entire cryptocurrency market shouldmove in the same direction. Of course, there are always exceptions. If Bitcoin collapses traders throw themselves headlong on Ethereum strengthening it, or vice versa, but most of the time all cryptocurrencies adapt themselves to the day’strends. With the method we are going to illustrate, it is thus possible to trade simultaneously with Bitcoins and another token, in our case Ethereum as a “direct competitor” and which is now a solid currency.
An example of a cross strategy
Let’s imagine an example to better understand how to put our cross strategy into practice.
Assuming that Ethereum has exceeded one resistance point, while Bitcoin struggles to follow. We are facing a smart money divergence, i.e. a divergence of a smart price. One of the two cryptocurrencies is effectively lying: if Bitcoin is late it means that soon it will follow the sister currency or it is anticipating a reversal of the trend.
At this point, to untangle the riddle, we superimpose our OBV Indicators on the price charts of the two coins. Given what we said on OBV we can now predict both cryptocurrencies’ trends and make short or longtrading positionings, based on expectations.
If the OBV gives us a green light on Bitcoins, this means that the BTC will reach the ETHs, and therefore the trend is increasing. We can now place a purchase order at the expected resistance level, from the perspective of a breakout. Let us always remember to place a protective stop loss below the breaking point: if the resistance below the trigger should break breakout, this would prove that it is a fake breakout, and there is no real purchase.
Why trade in Bitcoin. Advantages
- it gives the possibility of earning even if prices are down (short investing);
- the purchase of CFD contracts does not “physically” provide for buying cryptocurrency, therefore you do not havethe problem of having to choose a secure portfolio to deposit them;
- the leverage effect can multiply gains (but also losses, for which we must invest carefully and with risk controls);
- everyone can trade by investing an initial sum of $100 with some of the trusted Italian brokers.