The rise of Bitcoin and cryptocurrencies to a more mainstream audience has lead many to ask themselves what is Bitcoin trading. This article will explain Bitcoin trading, how to turn in a profit from cryptocurrency trading and will further detail one of the most popular ways of trading cryptocurrency nowadays, the perpetual contract.
Q: What is Bitcoin Trading?
A: Bitcoin trading refers to the trading of a cryptocurrency, like Bitcoin, in order to make a profit from price speculation or a dividend of sort. The main ways to trade Bitcoin so far are:
Hodling: While not trading per say, it has been a staple of the cryptocurrency community for years and still retains many adepts despite increased recent setbacks, massive losses, and lack of prospective profits from bear markets. Hodling consists of the buying and keeping of coins for a later resell at a higher price. This strategy only relies on the hope that the market will rise sometimes despite contrary market movements. Many crypto-millionaires success stories started with hodling; thus, maintaining the dream.
Coin-to-fiat: Coin-to-fiat remains to this day one of the most used ways to enter cryptocurrencies. Fiat currencies refer to national currencies such as USD or Pounds. This consists of the buying of a cryptocurrency, like Bitcoin, against a fiat currency, like Dollars, or the opposite. This is done in the hopes of a rise in the price of the asset you are buying, or to protect yourself from a drop in the price of the asset you are selling.
Mining cryptocurrency: This is another way to get into cryptocurrency. It works by joining a blockchain as a node and receive mining rewards and transaction fees for every block completed. Do note that many popular blockchains have mining farms making up for most of the hash power and would thus be hard to get into.
Coin-to-coin: Coin-to-coin consists of the exchange of a cryptocurrency against another cryptocurrency, and much like coin-to-fiat consists of price speculations to profit from a rise of the asset being bought or to protect yourself against the drop in the price of the asset sold. A typical example of this is buying BTC against ETH.
Arbitrage: Arbitrage consists of taking advantage of the price differences between several assets on the same platform of the same assets across several platforms. A typical example of this is buying BTC in exchange A and sell BTC in exchange B to profit from the price difference.
Staking: Staking consists of the buying and holding of coins in exchange for, much like dividends, a stake of the profits. While not consistent day-by-day it does provide somewhat consistent returns annually. Not all coins provide staking and the returns are generally in the form of a cryptocurrency and not a fiat.
Perpetual contract: Futures and perpetual contracts allow traders to speculate against the future price of cryptocurrency like Bitcoin. It works by fixing a pre-determined price at which to buy or sell the coin in the future. This allows traders to profit from both bull and bear markets according to the chosen position.
Q: How to: Trading Cryptocurrency for a Profit?
A: Trading cryptocurrency for a profit is becoming more and more difficult than just hodling with a myriad of opportunities some with high risk/reward while others offer more low risk/reward perspectives.
Some low-risk methods involve staking, arbitrage, and mining as those can be controlled fairly well and propose relatively constant returns while still being subject to price fluctuations. Hodling, while not pair say a trading strategy, would also be part of the low-risk/low reward right now as many traders see their assets devaluate, but the volatility of the market has previously, and still could, make this a high-reward scenario for some coins.
Two trading strategies with higher risk/reward ratios would be coin-to-fiat and coin-to-coin trading as both speculate on the price of several assets and trade in highly volatile assets, caution is advised.
The last and increasingly popular way of trading cryptocurrency for a profit is to use the previously mentioned perpetual contracts.
A: Perpetual contracts, like futures, are a type of derivative product allowing leverage and profits to be made from both Bull and bear markets. They work by allowing traders to buy or sell a coin at a pre-determined price in the future. Short positions sell the asset in the present and buy it back in the future; thus, profiting from a drop in the price. Inversely, long position buy the asset in the present and sell it back in the future; thus, profiting from a rise in the price.
For example, with Bitcoin at $3,800, trader A enters a long position and trader B enters a short position. Trader A then agrees to buy now and sell the coin at a later date, while trader B Sells now and buys back the coin later. A few days later, the market is bearish and Bitcoin’s price fell to $3,400. Trader A is losing $400 as he will sell his Bitcoin for less than he bought it for, while trader B would profit as he would buy back his Bitcoin for less than he sold it for.
A BTCUSD perpetual contract then allows traders to profit from both bear and bull markets through future price speculations and depending on the positions they open.
Over the last few years, and with hodling becoming increasingly uneconomical, this type of contracts has attracted more and more attention. This trend is not likely to change as, in traditional finance, derivative products have a market size 17x larger than normal equities, but derivatives in cryptocurrencies do not have even half of the market size traditional cryptocurrency trading has.
Q: How to get a Bitcoin Wallet?
A: Bitcoin wallets come in two variants; hot wallets and cold wallets. Hot wallets are online software with ease of payment, speed, and convenience as their advantages but may be subject to attacks and hacks. Hot wallets can easily be found online from a simple Google search, some examples are Coinbase, Electrum, Exodus, and Jaxx.
Cold wallets, on the other hand, are hardware and must be physically connected to the internet to work. They are much more tedious and inconvenient to use than hot wallets but benefit from unrivaled security measures to keep crypto assets truly safe. These wallets should be bought and carried, some examples are Trezor, Ledger Nano S, and Keepkey.
This concludes today’s article about what is Bitcoin trading, we hope enjoyed the read and learned a lot about how to do cryptocurrency trading for a profit and perpetual contracts. Stay tuned for more great content.