It seems as if the last few months have received so much news with regards to Bitcoin and crypto currencies in general. Traders have been scrambling to get a piece of the action in this relatively obscure new currency.
Indeed, the recent record highs that Bitcoin (BTC) has reached have added to that feeling. BTC has soared since February, surpassing the price of Gold and even breaching the $2,000 level.
Yet, many people would be asking how to trade Bitcoin? What are the best BTC trading strategies? We will go over all of this below and look at trading this crypto currency from a fundamental as well as a technical standpoint.
As we have discussed previously, Bitcoin was one of the first Crypto currencies to come to the market. Given that it is a crypto currency, its fundamentals are heavily impacted by supply and demand.
Unlike traditional currencies, the fundamentals that drive Bitcoin are quite different. It is not the currency of a country and hence is not directly impacted by interest rates, inflation economic growth etc.
The trader will need to understand the exact dynamics that are driving the supply and the demand of the currency. These are sometimes hard to understand but should no doubt be monitored to take full advantage.
Bitcoin is a crypto currency and is not issued by any central bank authority such as traditional FIAT currency. Bitcoin is “mined” by computers.
What this means is that these computers solve complicated cryptographic mathematical functions and are rewarded Bitcoin for it. The functions that they are solving is authenticating the payments on the Bitcoin blockchain.
When Bitcoin was originally developed, the code was designed such that solving these functions became increasingly complicated and required more computing power.
This was done in order to limit the amount of Bitcoin that was entering circulation and hence curtail any of the effects of inflation.
However, given that the amount of Bitcoin transactions has increased substantially over the past few years, the complications involved in solving these hash functions has too. The end result of this is that transactions are taking quite a long time to clear the Blockchain.
This can be viewed in the below image. As you can see, the average confirmation time of these “blocks” has spiked in the past month. This means that transactions are increasing considerably and hence slows down supply.
Blockchain confirmation time is therefore one of the more important measures to watch when the Bitcoin trader is deciding on whether to trade bitcoin.
Bitcoin traders should then keep their ears open for any news that may impact on the speed with which transactions can be authenticated and hence Bitcoin mined.
On the other side of the equation, Bitcoin demand is similar to demand for an asset such as commodities. There is investment demand and transactional demand.
On the transactional side, more and more consumers and merchants have decided that making and receiving payments in Bitcoin is a cost effective alternative to other online payment types. Transactions fees are virtually non existent and transactions are anonymous.
This means that demand for the use of Bitcoin is increasing substantially (as evidenced by above image). Moreover, Bitcoin is also the de facto currency of the Dark Web. Despite your views of it, the need for an anonymous payment is evident.
However, the bulk of the demand for Bitcoin is for holding as an investment. Given the design and authenticity of Bitcoin, many investors view the currency as a great store of value and a dollar hedge. Hence, whenever the dollar is facing instability, Bitcoin increases in price.
Bitcoin is seen as the modern day equivalent of gold. An asset that will hold its value and one which has a limited supply. Similar to the way investors buy gold in case of market turbulence, geo political risk drives the price of bitcoin up.
Bitcoin is also an important investment for citizens of countries that have exchange controls. This is because given that they are anonymous, it is a great way for an investor to buy a currency without their central bank interfering.
Nowhere is this more prevalent than in China. Trading volume demand in China is about 90% of total volume of Bitcoin exchanged daily. Whenever there is news about rumblings at the Peoples Bank of China, Bitcoin moves quickly.
Hence, for the trader that wants to use fundamental demand analysis for analysing Bitcoin, they will need to monitor any news that is emanating from China. They should set up Google alerts or mobile notifications to keep them abreast of all of the latest changes.
Bitcoin Technical Trading
Technical analysis is the study of previous price movements and forming an opinion on where the price will go based on those movements. It is based on the assumption that trends repeat themselves and markets move in cycles.
Bitcoin is an asset that is also greatly driven by technical indicators and key psychological trading. Many traders who currently trade Bitcoin, trade other assets and hence are well versed in all the key levels.
Like with traditional forex, Bitcoin traders will examine charts and try to identify particular patterns or key levels where possible trends are forming or reversing.
In the below, we will go over some of the key technical trading charts that the Bitcoin trader can use to make profits while day trading the crypto currency.
Moving Average Indicators
A moving average indicator is a great way for a technical Bitcoin trader to get an idea of the general direction of the asset. This could either be a Simple Moving Average (SMA) or an Exponential Moving Average (EMA).
The reason that Bitcoin traders will monitor the moving averages is in order to establish whether the asset is currently above or below a chosen trend line. This allows the trader to spot potential breakout points or reversals.
The Bitcoin trader will also combine trend trading with complex candlestick analysis in order to get an idea of whether the trend is reversing or confirming.
Although the subject of trend analysis is quite a complicated one, there are a few rules of thumb that one can adhere to when doing Bitcoin moving average analysis.
Traders will usually monitor more than one moving average indicator. They will usually look at a shorter trend line and a longer trend line. In this example let us assume a 50 day moving average and a 200 day moving average.
The trader will look for what is called a “moving average crossover”. This is essentially when the shorter moving average indicator crosses over the longer indicator.
In the below price chart of BTCUSD, we can see the point at which the moving average crossed over and the best opportunity there was to enter a long position and benefit from the rally.
Sometimes, trend lines can also be helpful in identifying support and resistance levels. When the price of Bitcoin breaks through a trend line that was previously a resistance level the trader can consider that a bullish sign. The same can be said for a bearish sign when it breaks through a support level.
Relative Strength Index (RSI)
The Relative Strength Index (RSI) is an important indicator of momentum. It takes account of the magnitude of previous gains and losses to get an indication of whether an asset has been oversold or overbought
This is also an important indicator for the Bitcoin trader. This is because Bitcoin tends to be an asset that can be overbought in moments of market euphoria (and oversold in certain panics).
The trader need not understand how the RSI is calculated but should have an idea of the levels that are generally observed to be oversold and overbought.
When the RSI indicator is above 80, then this is generally understood to be an overbought level and could mean that the market is in a stage of unwarranted hysteria.
Likewise, when the RSI indicator falls below 20, this is considered an oversold level and could mean the market is being unnecessarily bearish.
Bitcoin traders will usually use the RSI indicator combined with others such as the Moving average indicator. This is because trend line support / resistance coincides with RSI indicators.
Bollinger Bands are also used for trend analysis but incorporate volatility into their calculation. This means that they are an important indicator of deviation from a particular trend.
We have covered Bollinger Band strategies in great detail previously. Similar to the way one would use trend lines to establish resistance and support levels, Bollinger Bands are also used.
Bollinger bands are also most effectively used when they are combined with candlestick analysis. Traders will usually monitor the signals that they are getting from the individual candles around the upper and lower Bollinger band limits.
In the below image we have BTCUSD charted with the (2, 20) Bollinger bands. We are observing a unique trend called the “Bollinger band squeeze”. What this essentially means is that the price trades in-between the upper and band for a period time as it builds up pressure. It then has to “release” this pressure.
In the above case, BTCUSD was trading between the range and then when it finally broke through the squeeze it fell quite substantially. This could have been a good chance for the trader to make profit on the downside by shorting Bitcoin.
Choose a Bitcoin Broker
Once you have formulated a strategy to trade Bitcoin and want to get your feet wet, you will need to set up an account at a trusted broker. It would also be ideal if the broker platform incorporated other crypto currencies so you could combine your trading.
The FXAxe reviewers have put together an extensive list of brokers who offer Bitcoin to their clients. They are either offered as a CFD product or as a Binary Option instrument.
Before you invest any money with the broker, open a demo account and practice with some free funds before you commit. This would also allow you to refine your strategy and find out how to trade Bitcoin.