The Internet currency Bitcoin has long been in real life: Bitcoins can be bought and sold on special exchanges. Various online merchants, shops, pubs and restaurants accept Bitcoins as a means of payment. The fact that the digital currency is neither controlled by governments nor by banks is what makes it so appealing to many: Everyone (with enough financial resources) can generate Bitcoins through the technical process of mining.
However, there are also some significant risks associated with Bitcoin: amounts can be irrevocably lost through data loss or break-ins in online exchanges. Even extreme exchange rate fluctuations have already led to high losses. The prospect of quick money from the Internet is tempting, but Bitcoin newcomers can quickly go astray and go down expensive roads.
Bitcoin trading is becoming increasingly interesting for investors and promises significant profits. Therefore, more and more interested parties are asking themselves the question: How can Bitcoins be traded? There is a relatively broad spectrum of possibilities and means, which will be presented here in an overview to make it easier for beginners.
How can Bitcoins be traded, and what should you know in Advance?
In order to make informed decisions when trading Bitcoins, it is essential to gather basic information about the principle of cryptocurrencies in general, the function of the block chain and Bitcoins in particular. For beginners, the topic is admittedly quite complex at first and therefore carries the risk of making losses.
So what is Bitcoin and the Technology behind it?
Bitcoin is the first digital currency ever and the pioneer of the so-called block chain technology – Bitcoin has been around for ten years. The concern of the founder(s) behind the pseudonym Satoshi Nakamoto was to create a decentralized, user-oriented currency that would be both practical to use and safe from manipulation.
During the first years of its existence, the Bitcoin bobbed in the shallow waters of international finance, hardly noticed and often dismissed as a pilot project for nerds. Since 2016, however, interest in the crypto currency and its numerous imitators or even offshoots such as Bitcoin Cash has been growing.
How does Bitcoin work anyway?
The Bitcoin or BTC is on the one hand the unit of the means of payment, but on the other hand also the computer network that manages it. Behind the cryptocurrencies is the network of the Blockchain – all users of the Bitcoin who manage it via the associated software are part of it. Each transaction with Bitcoin is added to the transaction list of the block chain to keep it up to date.
New “blocks” are continuously added and their contents are distributed to all computers in the network. Anyone who makes their computer available for these administrative processes in the block chain generates new Bitcoins through the computing power expended. This is called mining. The Bitcoins “dug” in this way benefit the prospector.
What makes Bitcoin Trading interesting for Investors?
The zero interest rate strategy of the European central banks ensures that classic savings simply no longer pay off. This makes more and more investors look for alternative investment models that are not tied to the banking industry.
Cryptocurrencies, especially Bitcoin, were created from the outset with the intention of offering investors just such alternatives. Bitcoin’s high-flying in 2017 shows how high the interest is now. Even if the Bitcoin exchange rate has fallen again in the meantime, the digital currency will remain in business due to its long-term availability and decentralized security. After the spin-off of the – faster and cheaper – Bitcoin Cash, there is a growing tendency to make Bitcoin attractive as “digital gold” for investors.
This is due to the limited amount of Bitcoin from the outset and the cumbersome nature of the Bitcoin Blockchain. With limited block sizes of 1 MB, the proponents of the classic Bitcoin defend the concept of a virtual financial design that is not necessarily intended to function quickly and easily like cash, but is characterized by security against manipulation and peer-to-peer functionality.
Anyone who gives Bitcoin preference over other crypto-currencies for ideological reasons, among others, will now ask themselves how Bitcoin can be traded.
How to trade Bitcoins
Bitcoin can be traded in two ways. Investors can buy and physically own the digital currency themselves, and then sell it as the price rises. This is similar to the way forex trading works. Alternatively, one can speculate on the price development without actually owning Bitcoin. The latter is possible via financial derivatives, such as contracts for difference, also known as CFDs.
Trade Bitcoins directly
Those who want to buy and sell the cryptocurrency directly need the Bitcoin client, i.e. the software for receiving or transferring the digital currency. The handling is very easy, especially for users who are already familiar with electronic banking. After installation, users are immediately taken to the main window of the software and are guided through the setup step by step.
The Bitcoin client also creates an electronic purse, a so-called wallet, when used for the first time. The Wallet is not initially password-protected. If you decide to encrypt using a password (which is advisable), it is advisable to choose a strong, long password, write it down and keep it safe.
If you want to use the Bitcoin client to trade with BTC, you should know that the software copies all the block chain information on the local computer. This can take a lot of time during the initial installation – it is a data volume of about 65 GB, which is constantly updated and supplemented!
On the other hand, it should also be noted that the so-called “local” wallet, i.e. the digital wallet on your own computer, is much safer than the digital wallet at a provider – these are always the target of hacker attacks. If you decide to use a virtual wallet, you should place the greatest possible emphasis on strong passwords and 2-step verification to protect your Bitcoin capital.
Trading Bitcoin on a Crypto Exchange (Spot Trading)
Another way to trade with Bitcoin is on one of the online exchanges suitable for this purpose. Registration for such a stock exchange is usually a multi-stage process, comparable to registration for online banking. The first step is to provide your email address and mobile phone number. After validation by a code, you are there and have set up an account which can now be topped up by depositing currency.
This gives you all the means to purchase and trade Bitcoin. The amount of daily purchases is however tied to the verification level. Only users who have verified themselves to the highest level, including a VideoIdent procedure, can use all the functions of the crypto exchanges for trading large sums of money and also use their credit cards.
The advantage of digital exchanges is that registered users can enter their preferences for intended transactions, such as minimum or maximum prices. The exchange takes care of the rest. If a suitable offer is available, the transaction is carried out without the user having to look up each time.
Trading BTC on Marketplaces
In so-called marketplaces, things are basically similar. Here too, supply and demand are compared. Unlike on a stock exchange, however, investors must enter the desired parameters themselves. The marketplace then provides a list of possible bids or requests, which can also be viewed in detail.
Here, buyers and sellers have the opportunity to contact each other directly and, if necessary, agree on details of the transaction. However, you have to search for suitable partners yourself, unlike on the exchanges, matching is not automatic.
Marketplaces usually require the specification of a bank account through which the transactions carried out are covered. The location of the house bank for both buyer and seller has a significant influence on how quickly a transaction can be completed – ideally if both banks are located in the same country.
Trading Bitcoin indirectly with Derivatives
As already mentioned in the beginning, you can participate in the price development of the BTC without actually owning Bitcoin. This is possible via contracts for difference.
Bitcoin Price Transactions as CFD
If you don’t have any Bitcoin cash at all, but still want to participate in the performance, you can opt for CFDs. CFDs or contracts for difference profit from the price difference between the time of entry and exit, the so-called spread. If the price of Bitcoin Cash increases, the CFD also increases. Trading is done through a CFD broker.
Investors only need a comparatively small amount of equity capital, because the use of CFD trading can be multiplied by so-called leverage. Depending on the offers of the respective broker, but also on the liquidity of the investor, the leverage in Bitcoin margin trading can be a factor of up to 20 and possible profits can increase accordingly.
However, CFDs derivatives are so-called high-risk products. Comprehensive advance information and a clear awareness of the risks are a prerequisite for entering into this type of margining transaction.
Investors wondering where to trade Bitcoins can also be referred to so-called binary options. These financial products are actually based on only two parameters: The occurrence or non-occurrence of factor X. The advantage of trading Bitcoin via Binary Options is that an investor only risks his investment, but nothing beyond that.
This distinguishes this form of Bitcoin price trading from trading in Contracts for Difference and makes this investment interesting even for newcomers to the field of crypto-currencies. Binary options offer a good opportunity to enter into indirect trading with Bitcoin without too much risk.
Trade Bitcoin Forecasts (Futures)
These products, also called Futures, are bets on the future price trend, both rising and falling. If another trader accepts the bet, the deal is closed. The subsequent price development of Bitcoin determines the expected profit. Good profits can be made with forecasts, but also here with the risk of losses. The special thing about forecasts – there must always be a trader who accepts the forecast, i.e. the bet. Forecasts with relatively low risks are not particularly attractive for the creator and therefore often do not find a buyer.
Trade Bitcoin offline
Just like other digital currencies, Bitcoin can be traded offline. There are platforms that bring buyers and sellers together, often in close proximity. In real-time meetings arranged in this way, Bitcoin changes hands in exchange for cash. However, these are strictly private transactions that are not subject to supervision or any kind of control and are entered into at your own risk.
Conclusion on Trading with Bitcoin
As now described, there are various ways to trade Bitcoin – on the one hand by directly owning the digital currency, on the other hand by speculating on the development of the price. The profits differ significantly. Especially high-risk products such as contracts for differences can yield high profits, but should be handled with appropriate caution.
Especially the so-called leverage, i.e. the multiplication of the original investment value in CFDs can lead to investors multiplying their losses in the event of a loss. For this reason, detailed information and all necessary caution are always recommended when trading Bitcoin. Especially beginners should at best start trading Bitcoin with small amounts and diversified investments.
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