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Bitcoin Trading: How to Trade Bitcoin

Bitcoin Trading: How to Trade Bitcoin

 

 

 

 

Bitcoin is a digital currency, otherwise known as a cryptocurrency. Bitcoin can be bought, sold, or traded either on cryptocurrency exchange platforms, or it can be traded through a broker which offers the trade in cryptocurrencies.

 

 

 

A Quick Overview of Bitcoin Trading:

 

These exchanges, or trades, are internet-based and make use of cryptographic functions through which financial transactions are executed. Blockchain technology is prevalent in cryptocurrencies providing them with decentralized and transparent characteristics in addition to cryptocurrencies being immutable.

 

 

 

Overview

Cryptocurrencies and their related transactions and issuance cannot be controlled by any central authority and it provides cryptocurrencies with immunity as far as government control, manipulation, and interference is concerned.

 

Cryptocurrencies can be exchanged or traded directly between two parties by utilizing private and public keys. This means that the transaction costs involved are substantially lower in addition to processing fees. Traders also avoid fees that are traditionally charged by financial institutions.

 

Traders are, however, also cautioned against the security threats which are involved when trading cryptocurrencies as hackers are always looking for new ways to access the funds of traders. Also, as with any type of trading, there are trading risks involved as well.

 

Furthermore, traders are also advised to only make use of regulated brokers when trading cryptocurrency in addition to ensuring that cryptocurrency exchanges are legitimate and offer adequate security protocols.

 

Although the trading of cryptocurrency is, for the greater part, unregulated where cryptocurrency exchange platforms are concerned, there are exchanges that offer extensive security measures to ensure that the funds and information of traders remain safe.

 

Due to various advances in technology, cryptocurrency, and especially Bitcoin, trading has become more popular and even a global phenomenon to which most people have had exposure, even if it is simply hearing about it on the news.

 

There has been intensive research conducted by a variety of financial establishments, such as major banks, accounting firms, software companies, and even various governments, into the technology used by cryptocurrencies to further the applications of blockchain projects.

 

Bitcoin and smaller units thereof

Bitcoin can be split into smaller units consisting of millibitcoin or mBTC which is one-thousandth of one Bitcoin, expressed as 0.001 BTC. It can also be split further into microbitcoin or µBTC which is one-millionth of a Bitcoin, expressed as 0.000001 BTC.

The smallest subunit of Bitcoin is called Satoshi which is one-hundred-millionth of Bitcoin. This ensures that instant transactions are executed whether the Bitcoin owner makes a payment or receives funds.

 

Why is Bitcoin coded?

Bitcoin is coded for the simple reason that there is no inflation involved and Bitcoin in itself is self-sustaining. It also means that virtual spaces cannot be flooded with Bitcoin and through coding, Bitcoin allows for purchases on Bitcoin exchanges.

 

The History of Bitcoin

Bitcoin was first mentioned during the registration of the bitcoin.org domain in 2018. During the same year, there was a link to a paper circulated that was authored by Satoshi Nakamoto. The name of the paper was “Bitcoin: A Peer-to-Peer Electronic Cash System”, and it was posted on a cryptography mailing list.

 

The paper contained methods of using peer-to-peer networks for the generation of systems to execute electronic transactions without focussing substantially on reliance on trust.

 

Officially launched in 2009, Bitcoin first reared its head through the mining of what is referred to as the “Genesis Block”, which was mined by Nakamoto and is also known as block number 0. The reward that it held amounted to 50 Bitcoins.

 

The very same day that the software launched, one of its first supporters, adopters, and contributors to Bitcoin, Hal Finney, downloaded the software and became the first receiver of a Bitcoin transaction. He received 10 Bitcoins, and this marked the world’s first Bitcoin transaction.

 

After mining an estimated 1 million Bitcoin, it was handed over to the developer Gavin Andresen who became the lead developer of the Bitcoin Foundation. This foundation was the closest thing that Bitcoin ever had to an official public face for the community.

 

The value of the first Bitcoin transactions was initially negotiated by individuals who formed part of the official Bitcoin forum.

 

Bitcoin’s Growth

  • During 2011, cryptocurrencies had only begun to emerge. These cryptocurrencies were based on the open-source code of Bitcoin through WikiLeaks in addition to several other organizations that began accepting Bitcoin payments.
  • In 2012, Bitcoin was featured in the television series The Good Wife, and by September, the Bitcoin Foundation had been launched. Following this, BitPay reported that more than 1,000 merchants had begun accepting Bitcoin.
  • By 2013, around $1 million worth of Bitcoin had been sold by Coinbase followed by the acceptance of Bitcoin donations by The Internet Archive. Followed by this was a variety of developments in Bitcoin and other cryptocurrencies during the same year.
  • 2014 saw more acceptance in Bitcoin as a payment method with more companies opening up to the possibilities of crypto payments.
  • In 2016, Bitcoin’s network exceeded 1 exahash per second and during the same year, by March, virtual currencies such as Bitcoin had seen acceptance by the Cabinet of Japan. At this point, cryptocurrencies were considered to possess the same function as real money.
  • During 2017, numerous businesses had started accepting Bitcoin and there was a substantial increase in BitPay’s transaction rates. There was substantial legitimacy in Bitcoin among lawmakers and legacy financial companies. There was also a substantial increase in trading volumes experienced.
  • In 2019, there were approximately 5,457 Bitcoin ATMs that were in operation around the world, with the most based in the United States, Canada, UK, and Spain.

 

Digital Wallets – Introduction

To trade Bitcoin, and other cryptocurrencies, traders must have a digital wallet. A digital wallet is a software program that serves as much purpose as an actual wallet does, the storing of digital currencies.

Cryptocurrencies cannot be stored anywhere using any type of software as they involve a private key, or a secret number, designed for every individual who has a balance in a Bitcoin wallet. It is imperative to note that the private key corresponds with, and to, the Bitcoin address of the wallet.

These wallets facilitate both the sending and the receiving of Bitcoin. They also provide ownership of the Bitcoin balance to the user who possesses this private key or secret number.

One of many advantages that digital wallets have, is that they are not conformed to only one platform. They are available to desktop computers, laptops, mobile devices, web browsers, and various hardware.

There is a great variety of digital wallets which support an array of cryptocurrencies and traders must ensure that the one they use corresponds with the cryptocurrency that they wish to trade, exchange, buy, or sell.

As previously mentioned, digital wallets are software programs that store relevant information such as the user’s private keys to their Bitcoin address, it is, therefore, important to explore the different types of digital wallets that are available for use.

 

Different Bitcoin Wallets

 

Desktop Wallets

These types of Bitcoin wallets are created with the purpose that they can be downloaded and used on both personal computers and laptops. The wallets can be accessed regardless of an internet connection and they are available for the following:

  • Ubuntu
  • macOS, and
  • Microsoft Windows

 

Mobile Wallets

Mobile wallets are developed for use by mobile devices such as tablets, phones, iPads, iPhones, and numerous others. They provide a substantial amount of portability, convenience, and ease of access wherever users may go.

 

Numerous mobile wallets have a QR feature, allowing the user to scan the merchant’s code to make payments straight from their account.

 

Two of the best Bitcoin wallets which are currently being used are Blockchain and Mycelium. Both these wallets can be accessed from Google Play for Android devices and the App Store for iOS users.

 

Traders who make use of Blackberry can download a corresponding and compatible Bitcoin app.

 

Cold Wallets and Hot Wallets

The reference made to wallets being either cold or hot may be confusing for beginners, but when understood, makes a substantial amount of sense.

 

A cold wallet is a wallet that is offline or not connected to the internet. It is considered the safest wallet as it is much harder for hackers to infiltrate the software without internet access.

 

A hot wallet is one that requires internet access to operate. This makes these types of wallets extremely susceptible to online threats in addition to being the prime target for hackers.

 

Online Web Wallets

Online Web Wallets, as the name suggests, is an online web-based wallet that requires an internet connection for the user to access their funds. These are often third-party providers of wallets.

 

Such wallets are also provided by exchanges or companies such as Circle and Coinbase.

 

Physical Wallets

These types of wallets are also referred to as paper wallets. When considering that Bitcoin is not only limited to being a digital currency but physical wallets can also be generated by Blockchain.info as well as Bitaddress.org.

 

These are printed out on paper and can be kept in a deposit box, or any other storage for safekeeping.

 

Hardware Wallets

Hardware wallets have become increasingly popular when considering the various security threats that are involved with online wallets, software programs, internet access, and various other factors.

 

These wallets are small devices that store the user’s Bitcoin. Funds can easily be accessed by the user to make payments, send Bitcoin as well as the receiving thereof.

 

Trezor is one such device that is becoming an increasingly popular portably physical crypt.

 

Bitcoin Clients

These wallets are also known as the original wallets which were utilized by the founders of Bitcoin. Some computers have these wallets installed which are being sold. They provide online trading clients with access to all the transactions which were executed through the Bitcoin blockchain.

 

Tips and advice on keeping your Bitcoin wallet safe

A Bitcoin wallet, and any other cryptocurrency or digital wallet, for that matter, should be kept safe the same way that a person would keep their physical wallet safe.

 

Bitcoin, and the transferring thereof, is extremely convenient and it has given a lot of Bitcoin owners and users a false sense of security that they will not fall prey to hacking attempts.

 

When used correctly, Bitcoin wallets can provide users with a high level of security depending on the security measures that they take. It remains the responsibility of the Bitcoin owner to ensure that they keep their funds safe despite the measures that brokers and exchanges employ to ensure security.

 

There are a few tips that traders can use to keep their Bitcoin wallet safe, including, but not limited to:

  • Take caution when dealing with online services which are designed to store digital currency. Exchanges and hot wallets are particular targets for hackers. Traders need to select their service carefully and do thorough research.
  • Make use of as many security features as possible including, but not limited to two-factor authentication, locks, pins, biometric security, and numerous others. This deters hackers from gaining easy access to accounts and wallets.
  • Make use of small amounts where everyday uses are concerned. This entails keeping limited funds on a computer that is connected to the internet along with any other hot wallets on mobile devices, cloud-based servers, and other programs. Keep large sums of funds in an offline, cold wallet.
  • Ensure that software is updated and back necessary information and data up to prevent loss as a result of computer failures and human error. Back-ups ensure that should the hardware fail, or is stolen, that users can gain access to their funds again.
  • Backing up includes private keys and online backups must be encrypted to avoid ease of access. Backups should also be done over several locations, not merely one.
  • Wallet encryption is crucial, and it must be done so that unauthorized withdrawals or fund transfers cannot be done by anyone but the owner.
  • Make use of strong passwords that cannot easily be guessed or configured by software designed to configure passwords.
  • Make use of offline transaction signing in addition to hardware wallets for added security.
  • Enable multi-signature features where possible as it requires transactions to be approved through a variety of independent approvals. This makes it harder for hackers to quickly transfer funds and may deter them as they seek easy-to-access avenues.

 

Bitcoin Trading

 

Why is Bitcoin valuable?

The value of Bitcoin can be attributed to a variety of factors. It was the first decentralized digital currency that was created and launched, which is one of the main reasons why it is so valuable, in addition to the fact that it cannot be controlled by any person, organization, or authority.

 

Bitcoin can be exchanged in a variety of ways and Bitcoin owners cannot be told what they should do with their Bitcoin or how they need to spend, invest, save, or trade it.

 

There is no dictatorship involved in Bitcoin and oppression and hyperinflation cannot be factored into Bitcoin. It is also a haven for people who live under such extreme circumstances.

 

Bitcoin is also limited with a supply of 21 million in total, and this number will never change. There is also transparent knowledge of how many Bitcoins are released into circulation along with the rate at which they are released.

 

There is also knowledge of when the very last Bitcoin is set to be created and released into circulation. This type of transparency exists only in cryptocurrency and it is another major reason why Bitcoin is so valuable.

 

Bitcoin also holds a substantial amount of leverage over paper money, or fiat currencies, as paper money is controlled by central banks, which leaves a lot of room for problems such as governmental control over monetary systems through various policies and processes.

 

Monetary systems are strictly controlled and manipulated not only in the supply of money but also by the fact that the value of money is backed by the word of governments. This, amidst several other controversial issues, is also considered when weighing the value of Bitcoin.

 

There is a unique design attributed to Bitcoin and it is poised to have a significant impact on the lives of people, even if they live in unstable economies where monetary systems are greatly manipulated by their governments.

 

Fiat currency will not simply fall away, even when considering that cryptocurrency is more widely accepted now than even just a few years ago. Monetary systems still serve substantial importance, and it has been used through the ages and remains stable grounds for both exchange and trade.

 

Fiat currency is heavily affected and impacted by inflation whereas Bitcoin is not. This, amidst numerous other differences, show that Bitcoin, although not a leading currency, is becoming a strong contender between the two in paving the way towards a more digitized monetary system.

 

Why do people trade Bitcoin?

The simplest of answers is that Bitcoin, as with numerous other financial instruments, can be traded as a way to make a profit. There is a substantial amount of stigma which surrounds Bitcoin and how profits can be generated from the exchange or trade in it.

 

This is due to the common belief that profit can only be made by trading major currencies. However, this has changed substantially in recent years and numerous traders have started embracing cross pairs in forex trading.

 

There are a lot of successful traders who advocate that, to make a profit, the focus should not only be placed on the major pairs or a single currency pair but that traders should instead diversify their portfolios.

 

Also, more traders have started embracing the cross pairs and exotics due to the high level of volatility associated with them. When utilizing the right strategy, which harnesses the volatility in the market, there is a lot of profit that can be made.

 

However, volatility is not the only reason why traders should consider trading Bitcoin. Other reasons include:

  • Market movements are easier to understand seeing that the focus is not solely on major trends. Bitcoin trading also offers an easy way to make substantial profits once traders have learned more about trading, they have practiced trading, and they understand the market better.
  • Bitcoin is substantially less susceptible to high-impact news and traders do not have to spend a lot of time conducting fundamental analysis.
  • The leverage associated with Bitcoin and other cryptocurrencies is substantially lower, which lowers the risks of losses that can be incurred.
  • There is a global market for cryptocurrency trading and seeing that it is decentralized, it is free from governmental and central bank control.
  • Cryptocurrencies can be traded 24/7 unlike traditional markets such as forex, which have a weekend gap. There is also no official exchange but rather a variety of exchanges around the globe.
  • There is substantial volatility in the market which offers a variety of opportunities for profits.

 

There are but some reasons why traders should consider trading Bitcoin. Regardless of the ease with which the cryptocurrency market can be accessed, and Bitcoin can be traded, traders must understand that some fundamental knowledge, skill, and experience are needed to start trading.

 

How are new Bitcoins created and generated?

Before delving into how Bitcoins are created, it is important to understand that the Bitcoin network is secured by miners who mine Bitcoins and process all transactions executed in Bitcoin.

 

Without these miners, the network would become vulnerable to attack and it would subsequently become worthless. For the services, efforts, security, and processing services that the miners provide and perform, they are provided with Bitcoins as a reward in addition to payments from fees derived from transactions.

 

Every time that the proof of work algorithm of Bitcoin is solved by a miner, a block is mined and the miner, or the mining pool, responsible for the successful mining, is rewarded with a block reward.

 

The block reward consists of a set number of Bitcoins which is predetermined by the network. The Bitcoins contained in the block reward are new Bitcoins that are created or released into circulation.

 

The block reward initially consisted of 50 Bitcoins, or BTC, per block. The block halves with every 210,000 blocks mined. This means that every block until 210,000 will have rewarded 50 BTC but thereafter, from 210,001, for instance, the reward would halve.

 

There is a certain level of difficulty involved when mining Bitcoin and this ensures that Bitcoin blocks are only found on an average of 10 minutes. When considering the halving after every 210,000 blocks, it means that halving occurs roughly every four years.

 

There are therefore new Bitcoins generated and released into circulation every 10 minutes. With the block halving set for every 210,000 blocks, the rewards will become so small that no more Bitcoins would be created.

 

How is Bitcoin traded or exchanged?

There are a variety of ways in which Bitcoins can be obtained due to their increasing popularity. This includes the following:

  • Brokers – numerous brokers provide traders with the opportunity to trade Bitcoin and other cryptocurrencies. Brokers offer traders access to the cryptocurrency market at competitive rates and fees. Also, traders have more client fund security when using regulated brokers.
  • Bitcoin Exchanges – Bitcoin can be bought, sold, and exchange through cryptocurrency trading platforms such as Coinbase, Coinmama, Kraken, Binance, and numerous others.
  • Peer-to-peer – exchanges such as LocalBitcoins allow for the buying and selling of Bitcoin directly between participants with extraordinarily little intervention.
  • Bitcoin ATMs – these are becoming particularly popular and can be found all over the world in major cities. There are Bitcoin ATMs in the United States, Europe, Asia, South Africa, and other locations.

 

Bitcoin and Cryptocurrency trading through a Broker

Traders who would like to trade Bitcoin through a broker must first choose one which suits their unique trading needs and objectives. This involves the process of evaluating the broker’s offering and testing their platform through the use of a demo account.

 

It is imperative to consider several factors when evaluating a broker such as regulation, range of assets, type of accounts and their features, fees and commissions, deposit and withdrawal methods, and more.

 

When choosing a broker, it is important to select one which has regulation and authorization through reputable regulatory entities as this ensures client fund security. These brokers are also required to follow strict rules, regulations, and processes.

 

When looking at a broker to facilitate the trade-in Bitcoin especially, traders must consider some of the following factors:

  • Cryptocurrency pairs offered
  • The variety of coins that are offered and supported
  • Accessible and reliable payment methods including conventional methods and digital or online payments
  • The quality and usability of the trading platform along with the features and functions on it
  • The level and the quality of customer support in addition to promptness, depth of information provided, and more.

 

Bitcoin and Cryptocurrency trading through an exchange

When considering that there is no singular or official exchange provided through which Bitcoin can be traded, exchanged, bought, or sold, there is a variety of exchanges that cater for the exchange of Bitcoin.

When evaluating exchanges, traders and investors need to consider the following crucial factors:

  • The liquidity, as well as the market depth of the exchange, must be adequate. This ensures that orders are filled and there are fewer chances of quick dips which may occur and lead to substantial losses.
  • Trading fees are charged by the exchange. These fees need to be low enough so that traders can exit their trades despite small movements while making some profits.
  • Location of the exchange in addition to whether the exchange permits deposits in fiat currency. This is important as it allows traders to deposit funds in their local currency and it also makes for easy withdrawals.
  • Regulation and trust – exchanges are predominantly unregulated. This does not mean that they cannot be trusted. Traders need to thoroughly evaluate the history of the exchange and view reviews from trusted sites.

 

In which ways is Bitcoin better than conventional payment methods?

One important characteristic of Bitcoin is that it can be used as a method of payment. It is therefore important to evaluate how Bitcoin weighs up against other payment methods.

Bitcoin is becoming increasingly popular and when compared to other payment methods, Bitcoin has the following benefits and advantages:

  • Transactions between Bitcoin wallets are not linked to individual bank accounts which makes it harder for identity theft, among others, to occur.
  • Bitcoin can be used by anyone and the account verification involved is not as strict as that of brokers.
  • There is no central authority that directs or dictates how Bitcoin can be used or spent.
  • The Bitcoin account can neither be seized nor can it be closed; the user is the only one who has control over it.
  • The privacy of users is greatly enhanced when using Bitcoin.
  • Bitcoin transfers can be done instantly unlike bank transfers which may take up to several days.
  • Bitcoin does not have international boundaries. It can be sent and received anywhere in the world.
  • There are no substantial fees involved as is the case when using bank transfers.
  • Access is unlimited and users have full control over their funds from anywhere in the world.
  • There are very few limitations involved with the maximum or minimum transaction.
  • Purchases are anonymous and the user’s name is not tied to the transactions.
  • Merchants also have peace of mind as transactions cannot be reversed once they have been processed, which cancels out the worry regarding chargebacks on credit cards.

 

FAQ’s

 

What is Bitcoin?

Bitcoin is a digital currency and the first of its kind created.

 

Who created Bitcoin?

The official specification and proof of the concept were published by Satoshi Nakamoto in 2009, although Wei Dai first described the concept of cryptocurrency in 1998 on a cypherpunks mailing list.

 

Who controls the Bitcoin Network?

There is no single entity that controls the Bitcoin Network.

 

Is Bitcoin legal?

In most jurisdictions, there are no legislations that prohibit Bitcoin, but there are some jurisdictions that restrict foreign currencies severely, or they are banned within these jurisdictions.

 

Can Bitcoin be regulated?

Bitcoin in itself cannot be regulated due to its decentralized nature.

However, numerous brokers who offer a trade-in cryptocurrency have regulation and authorization along with some exchanges who may be regulated or at the very least licensed or registered with entities.

 

Can I make money with Bitcoin?

Bitcoin is not a way to make a substantial amount of money in a short amount of time. It does allow for some profits but there are still risks involved which may lead to substantial losses.

 

Is Bitcoin safe to use and trade?

Yes, but it is imperative to consider that the extent to which it is safe will depend on various factors, and despite the security features employed, there is a constant risk associated with cybersecurity threats where online activities are concerned.

 

What happens if I lose my Bitcoins?

When Bitcoins are lost, they remain on the blockchain, but they remain dormant forever as there is no way for the private key or keys to be found to allow for the coins to be spent again.

 

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

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