Bitcoin Trading And Investment: A Beginner's Guide

Bitcoin is a cryptocurrency, a new kind of payment network and money. It was created by a person or group, going by the username Satoshi Nakamoto, who posted a white paper on a discussion board. Bitcoin operates without a financial system or government authorities and can be used as an alternative to fiat currencies or as an investment. It uses a blockchain to secure transaction information out of the reach of centralized third parties who traditionally facilitate and regulate transactions.

Bitcoin trading involves buying and selling the cryptocurrency on an exchange. It can also be traded by speculating on its price movements using derivatives like CFDs. Bitcoin forex trading combines the risks inherent in both types of trading.

Bitcoin's value comes from its store of value and payment system and its finite supply. Its popularity has inspired the development of many other cryptocurrencies.

Bitcoin's volatility and risk

Bitcoins Volatility and Risk

Bitcoin is a financial tool that carries risks, like any other payment method or currency. However, the risks are slightly different from traditional currencies and payments. One of the main risks is its volatile price. Bitcoin's price movements are greatly exaggerated and sometimes prone to movements of thousands of dollars.

Bitcoin's volatility is driven by speculation. The hype witnessed in December 2017 was fuelled by frenzied FOMO. When people heard they could make a lot of money on Bitcoin, it turned into a speculative asset. It ceased to be viable as a form of currency and became heavily subject to FUD.

Bitcoin's anonymous creator, Satoshi Nakamoto, released it to the public in 2009. It has since become the most well-known and largest cryptocurrency globally, inspiring the development of many others. However, it is still relatively young and needs time to mature.

Understanding Volatility and Uncertainty

Uncertainty is the degree of likelihood that an investment may change in value. Volatility is the degree to which an investment may change in value. Research from Northwestern and Yale found that investors protect their investments against volatility, not uncertainty.

How to Minimise Risk

To invest around uncertainty, it is important to understand the difference between the risk of change and the change of risk.

First, distinguish uncertainty from volatility. Uncertainty, or implied volatility, is when investors measure an asset's likelihood to change. Volatility, or realised volatility, is when investors expect an asset to change in value by a certain percentage.

Then, disregard uncertainty and evaluate volatility. Focus on the potential magnitude of any change.

Finally, price volatility into your investments. Take a measure of volatility and quantify it. Put a number to how much you think Bitcoin will change.

Other Risks

There are many other risks involved with investing in and using Bitcoins, including fraud, theft, regulatory risk, security risk, insurance risk, and market risk.

Bitcoin and the underlying blockchain technology reduce some of the risks presented by traditional payment methods. There are no chargebacks, and fraud is difficult due to transparency. Transaction fees are also very low compared to credit cards, wire transfers, or remittance services.

However, it is a new breed of technology, and there is always the risk that even the best solutions and implementations may not be viable if nobody adopts them.

How to trade bitcoin

Trading Bitcoin can be a complex process, and it's important to understand the risks involved. Here is a step-by-step guide on how to trade Bitcoin:

Step 1: Understanding the Basics

Before venturing into Bitcoin trading, it is crucial to have a comprehensive understanding of the assets, technologies, and risks involved. Bitcoin is a highly volatile digital asset, and its value can fluctuate significantly. Make sure you also familiarise yourself with blockchain technology, which serves as the foundation for Bitcoin and many other cryptocurrencies.

Step 2: Choose a Trading Platform or Exchange

Select a reputable and secure crypto exchange or trading platform that offers Bitcoin trading. Examples include Coinbase, Binance, eToro, and Kraken. Compare the fees, security measures, and range of cryptocurrencies offered by each platform before making a decision.

Step 3: Open an Account and Fund It

Sign up for an account on your chosen platform, providing the necessary personal information, such as your name, date of birth, and email address. You may also need to provide identification and proof of address to pass the Know Your Customer (KYC) verification process.

Once your account is set up, you will need to deposit funds. You can typically connect your bank account and transfer money via bank deposit, debit card, or wire transfer. Wire transfers usually incur the lowest fees.

Step 4: Choose a Trading Strategy

There are two main types of trading strategies: active and passive. Active trading strategies, such as day trading and swing trading, require constant monitoring and management. On the other hand, passive investment strategies, like HODL and index investing, allow for a more hands-off approach. Choose a strategy that aligns with your risk tolerance, knowledge, and trading goals.

Step 5: Start Trading Bitcoin

Now, you can begin trading Bitcoin. You can trade Bitcoin against fiat currencies like the US dollar or other cryptocurrencies like Ethereum. Remember that trading carries risks, and you could lose money if the market moves against your position. Always do your research and consider seeking advice from a financial advisor before placing trades.

Step 6: Store Your Bitcoin Securely

If you plan to hold your Bitcoin for the long term, consider using a Bitcoin wallet to store your coins safely. There are two main types of crypto wallets: hot wallets and cold wallets. Hot wallets are online or software-based and require an internet connection. Cold wallets, on the other hand, are physical devices, such as hardware wallets, that store your crypto offline.

Bitcoin's advantages and disadvantages

Bitcoin is a cryptocurrency that uses blockchain technology to support transactions between users on a decentralised network. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto.

Advantages:

• Accessibility and liquidity: Bitcoin is an accessible and versatile currency that can be used to purchase goods and services from a growing list of places that accept it.
• Independence from a central authority: Bitcoin is not regulated by a single government or central bank, meaning governments can't control it like they can with centralised fiat currency.
• Protection from payment fraud: Bitcoin transactions are secure and irreversible, protecting merchants from losses caused by fraud or fraudulent chargebacks.
• Lower fraud risks and transparency: Bitcoin transactions do not require users to disclose any confidential financial information. At the same time, the user's true identity is hidden, and all their data is kept confidential and stored using blockchain technology.
• Fast and inexpensive: It only takes a few minutes to send any amount of money anywhere in the world, and the cost is either negligible or non-existent.
• Decentralised issuance: Bitcoin cannot be regulated or valued by any government or central bank, and it cannot be created or distributed by any authority. There is no third-party interference, and no one has the authority to freeze, charge, or demand coins.

Disadvantages:

• High volatility: Bitcoin prices are extremely volatile, rising and falling rapidly. This makes it too dangerous for genuine investors, and therefore, many investors do not invest in Bitcoins.
• Unregulated: One of the biggest drawbacks of investing in Bitcoin is the lack of regulatory oversight. Cryptocurrency laws and taxes differ from country to country and are often ambiguous or contentious, which can lead to fraud and scams.
• Risk of loss: If a hard drive crashes or a virus corrupts records, Bitcoins can be lost forever with no way to recover them unless a backup phrase code has been created.
• New economy and consumer protection: The Bitcoin framework may have bugs that have yet to be discovered. If a bug is found after widespread Bitcoin adoption, it could result in enormous wealth for the exploiter at the expense of the Bitcoin economy.
• Not accepted everywhere: Even though more major companies are beginning to accept Bitcoin, it is still not widely accepted, limiting where you can spend your money.
• Environmental concerns: Bitcoin's mining process requires a significant amount of energy, leading to concerns about its environmental impact.

Bitcoin wallets

Hot wallets are connected to the internet and are often free to use. They are typically apps on devices such as computers, phones, or tablets. They are convenient when making transactions face-to-face as they are designed to use QR codes to make quick and seamless transactions. However, they are susceptible to malware, spyware, and viruses, and the loss or damage of the device can potentially lead to the loss of funds.

Cold wallets, on the other hand, are not connected to the internet and are, therefore, a more secure way to store large amounts of Bitcoin. Examples include hardware wallets (such as a USB drive) and paper wallets (printed public and private keys kept in a safe place). Cold wallets are more difficult to use while mobile and are not designed for scanning QR codes. If the device is lost without a proper backup, the funds may be unrecoverable.

When choosing a Bitcoin wallet, it is important to consider factors such as security, ease of use, and compatibility with different operating systems and cryptocurrencies. Some popular hot wallet options include Trust Wallet, Coinbase Wallet, and MetaMask, while Ledger and Trezor are well-known cold wallet options.

Bitcoin mining

Miners use hardware and software to generate a cryptographic number that is equal to or less than a number set by the Bitcoin network's difficulty algorithm. The first miner to find the solution to the problem receives bitcoins as a reward, and the process begins again. This reward is an incentive that motivates miners to assist in the primary purpose of mining: to earn the right to record transactions on the blockchain for the network to verify and confirm.

The Bitcoin mining process also confirms transactions on the cryptocurrency's network. As an incentive to participate in the process, bitcoin is rewarded to those that win the competition.

The Bitcoin network is made up of thousands of devices that mine 24 hours per day. Because the mining reward goes to the first to solve the problem, they are all competing. This competition led miners to create pools to gain an advantage over other miners because they needed more computational power to increase their chances of winning.

The Bitcoin network mining rate fluctuates but averaged a little over 578 exa-hashes per second on July 3, 2024. That's 578 followed by 18 zeros. If it takes roughly 10 minutes for a block to be mined, that's about 3.4 x 1023 hashes to open a new block.

The mining process is what you hear called proof-of-work (PoW). PoW is also sometimes called a consensus mechanism, but proof-of-work is only part of consensus. Consensus is achieved after the miner adds the block to the blockchain, and the rest of the network validates it using the hashes (reaching consensus). This doesn't require much energy or computational power because each mining node also does this while mining the latest block. As new blocks are added, the network confirms them.

Frequently asked questions