How Does Bitcoin Trading Work? A Quick Look At The Fundamentals

2018 is already being labelled the year when the “plumber and the hairdresser” started buying and selling the digital currency bitcoin.

There has certainly been an incredible uplift in the number of people learning about bitcoin – searches for the phrase “buy bitcoin with credit card”, for example, were reported by Google to have “skyrocketed” towards the end of December, when the digital currency was on its magnificent bull run.

The price of the cryptocurrency hit $10,000 in December, for the first time in its 8 years of existence, and went on to climb to above $16,000, in a little under a week.

It has also been reported that more than 1 million people have signed up for early access to crypto trading platform Robin Hood, which is promising to slash trading fees – a source of frustration among seasoned bitcoin speculators.

And perhaps most importantly, interest from major financial services firms, who had previously turned up their noses at the thought of investing in bitcoin, has started to materialise, with rumours abounding that some of the world’s biggest banks and hedge funds are “pouring money” into bitcoin.

The trouble with bitcoin, as most people know by now, is that it can be a highly volatile currency. Driven on by newsflow and intense media scrutiny, the price has climbed to highs that most analysts had not thought possible, prompting cries that it could go from a 5 to a 6 or even 7 figure valuation in as short a time as it went from 3 to 4, before dropping to unexpected lows.

There is an argument that says that buying bitcoin now is a sensible strategy. The price is comparatively low, but the end of the hype cycle still seems to be some distance away, which would suggest another price surge might be coming.

How can one be prepared for such an eventuality? There are several options.

Bitcoin exchanges are springing up everywhere, as existing ones struggle to cope with demand for new accounts. It is very straightforward to pick one (there is a plethora of articles online that rate exchanges and offer advice and guidance) and equally straightforward to open an account.

It is not hard to purchase bitcoin – remember, you will most likely be purchasing fractions of one coin, given the current valuations, unless you are an institutional or high net worth investor prepared to speculate with 5 figure sums. Neither is it hard to sell. The exchanges make it simple to view your account, the current price of bitcoin, and to make a buy or sell order in just a few clicks.

Transactions are completed instantaneously, then routed through settlement and clearing houses usually based in Europe or Asia. You will be informed firstly of the sell or buy order, and then, usually not more than 72 hours later, receive a message from the clearing house informing you that the sale has been processed.

After that, it is just a question of how long it takes to send the money to your bank. This takes the longest amount of time, and could be anything up to 5 days.

In terms of strategy, the old adage; “buy the dips, sell the highs”, is still about as sophisticated a guide as there is to speculating on bitcoin. Of course, nobody, or perhaps just a very few select people, knows exactly when these highs and lows will occur.

January 2018 has taught us that the price of bitcoin does not necessarily just keep going up and up. So the other option is to try trade the volatility of bitcoin, i.e. take advantage of its constant price fluctuations. This can be a risky business if you do not know what you are doing, and the losses can be heavy. If that does not put you off, however, a site such as IG could be a good option.

Research is an invaluable way of second guessing the market too, just as long as you don’t believe you read. A good tip. If you read an article recommending one strategy, perform a google search for the exact opposite eventuality, so you can see both sides of the argument.

Always have a graph to hand, showing daily, weekly, and yearly price moves, don’t overdo the thinking (your brain will hurt!), and test theories with small best before wading in with your life savings.

Oh, and if you are using a credit card – think twice about it?

This content is sourced and brought to you by The Money Cloud – comparing the best rates for sending money overseas offered by hand-picked, regulated brokers and money transfer agencies.

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