Here’s a two-part series on why you should be looking at trading bitcoin CFDs.
This post sets out some basics of bitcoin.
Next post I’ll do a deep dive into why bitcoin has potentially a really bullish future.
And why you need to be trading it.
I don’t like to discuss specific market dynamics or fundamentals on this blog.
Occasionally I’ll do so on babypips.
But bitcoin’s different – it’s still new on the scene, and few of us know much about it.
I wrote my first post on bitcoin here and was quite sceptical of BTC for a long time.
However, bitcoin price action works great with the systems on this site.
And with such a bullish backdrop, its a no-brainer bitcoin needs to be on your radar in future.
Apologies to US readers
The crux of these two bitcoin articles is trading bitcoin CFDs, not bitcoin,
Unfortunately, you guys (thanks to US futures and options industry lobbyists) are not allowed to do that.
Shame, I find contracts for difference the most convenient of trading instruments.
For US traders, there are crypto ETFs out there – I believe.
Alternatively, you could go the futures or options route.
But I apologise if you don’t get as much out of these articles as say European, or Australian readers.
Or, indeed readers from any jurisdiction allowing CFD trading.
The basics of bitcoin
Satoshi Nakamoto started bitcoin in 2009.
No one knows the real identity of this person or entity because it’s a pseudonym. The US government perhaps?
Whoever it is though, they left the crypto scene in 2011 and haven’t been heard of since.
Bitcoin is a decentralised digital currency.
It wasn’t the first digital currency in existence but was the first to solve the major headache of double-spend.
The term that is used to describe when the same single digital coin is spent multiple times.
Bitcoin solved this problem by recording every transaction in something called a block.
This includes the owner’s current balance of coins, and when and to whom it has been paid.
These blocks are linked in a chain between all users who’ve ever transacted against each other. Acting as a digital version of an accounting ledger.
And all this happens outside the banking system. Free from middle-men, swift codes, high street banks or having to wait for clearing.
It is, in essence, the ultimate peer-to-peer payment system.
Why the excitement?
One of the issues with our monetary system is, each day our currency is slowly debased.
Central banks love to expand the money supply.
Politicians love to burden future generations with debt, promising voters things now, so they can keep their own jobs.
Because of this, there’s no shortage of individuals suspicious of both banking and government.
Libertarians, certain hard money (gold) advocates, tech-savvy investors, and brave millennials have become the early adopters and investors of this new technology.
But bitcoin is not only outside the banking system.
It also has limited supply. Something that can’t be said for fiat currency.
Even gold is slowly being debased.
Every year, approximately 2% of gold is added to existing supply.
Not so with bitcoin.
There will only ever be 21 million bitcoins in circulation. With the last remaining coin coming online in 2140.
Bitcoin is also a medium of exchange. It can be used to make payments for goods and services.
And can cross borders in a digital instant – something gold cannot do.
The bitcoin network
Bitcoin is maintained by the bitcoin protocol or simply an open network of users.
Anyone can download the software needed to connect to other bitcoin users.
With the software, you can send bitcoins.
All the other participant’s computers play their part in verifying all the other transactions.
Meaning it’s (apparently) impossible for fraudulent transactions to take place.
A new coin comes online through bitcoin mining.
Mining takes a lot of computer power and energy.
One of the potential problems with bitcoin going forward could come from the climate change movement.
A computer or bank of computers used to mine coins is referred to as a rig.
And every ten minutes, reminiscent of a lottery, one miner is rewarded with a bitcoin.
Every four years the number of them mined is reduced, and so by 2140 or thereabouts supply will end.
Purchase and storage of cryptocurrency involve the use of a wallet.
There are three types of wallets.
A hardware wallet – a physical device, stored offline. And safe from online hacking.
A software wallet – ran on a computer or mobile.
These are connected to the internet, making them vulnerable to hacking – but also necessary for transactions.
A paper wallet – contains a bitcoin address and private key details, including a QR code.
With paper wallets, you can store your bitcoin, but they cannot be used for spending – you need a software wallet for that.
For the less tech-savvy like myself, the very idea of all this wallet stuff is both complex and off-putting.
Buying bitcoin on a crypto exchange
The most common way to purchase bitcoin is via an exchange.
Registering for a crypto exchange is similar to any registering for any forex trading platform, with all the same personal information requirements.
Once set up you can buy or sell crypto easily.
And on the larger exchanges can trade many different crypto pairings. But without doubt, BTC/USD is the most liquid pair.
One great thing about trading BTC on an exchange is you can see the order book.
Some traders, particularly day traders can use the order book with great effect.
CFD or forex traders on the other hand have no order book to see. We trading against a market maker and not other traders.
Market-maker models come in for criticism with some traders. But personally, I’ve never encountered anything worth complaining of.
However on a crypto exchange there are a number of things to be wary of.
Why I haven’t bought bitcoin on an exchange
I’m bullish on crypto.
But so far haven’t bought any coins outright.
That could change. Particularly if mass adoption as a payment system takes place in the future.
But there are other reasons I’ve not bought crypto.
Bitcoin costs a nice chunk of change.
I don’t think outright purchases are ever a prudent way for me to use my funds, when leverage is an option with CFDs.
There are other reasons.
Firstly exchanges are open to hacking and theft.
Bitstamp, Mt Gox, Bitfinex, Nicehash, Coincheck NEM, Zaif and Binance are all exchanges that have collectively lost hundreds of millions because of it.
Hacking is a major fear for crypto enthusiasts.
Secondly, the idea of losing your private key is a total nightmare.
Lose or forget this special code, and yes that’s right, your bitcoin investment has been lost for good.
Trading bitcoin CFDs
None of the problems associated with crypto exchanges are a concern for CFD traders.
Bitcoin CFDs are liquid in comparison to the real crypto market.
Trades are executed in a split second – not always the case with crypto itself.
There’s also little chance of your money being hacked or stolen (beyond the normal concerns of finding a reputable broker).
Forex and CFD brokers are highly regulated compared to the wild west of the crypto world.
For regulators safety of funds for retail traders is paramount.
There’s also no chance ever of you losing your private key code.
You could lose your log in or your password – but that’s hardly the stuff of nightmares.
With a CFD account you can also trade a whole range of assets – forex, stock indexes, commodities, government bonds, and now crypto.
No matter how bullish you are on bitcoin, it will not always be performing well.
Trader or purist?
A crypto purist (just like the stock purist) will tell you it’s better to buy the asset rather than trade a derivative there of.
To these folks, you’re committing a mortal sin.
Let them have their moan. While you go about your trading operations in a quiet manner.
The more profitable you are, particularly with derivatives, the more ire you’ll draw from the traditionalists.
You’ll be considered an evil speculator, or worse yet, a degenerate gambler.
Meanwhile the holding for the long-term crowd, or the HODL crowd will consider themselves somehow more respectable.
Get use to it. Learn to thrive of it.
Bitcoin’s a market you cannot ignore
In terms of price action trading, bitcoin is a dream.
Crypto markets are known for tight consolidations followed by large range expansion.
This is what all traders thrive on, and bitcoin has it in spades.
To top this off, there are many reasons to be ultra-bullish on the price of crypto going forward.
Next post, I’ll discuss some of those reasons. It really isn’t a market you can ignore any longer.