Bitcoin Trading For Dummies
Bitcoin Trading for Dummies
This post is essentially Bitcoin trading for dummies. We will explore the uncharted waters experienced by new traders in the cryptomarket. The challenges they face and the losses they make, a potential trade which could make it big but ends up exiting the market.
Multiple financial products are accessible on the market; like a guitar, each string is tuned differently to give a different note. In this case, each financial instrument offers different results. Cryptocurrency is one such financial instrument. And it is different from the traditional stock market.
The Bitcoin fever has affected everyone in the last few years, especially the last two years. With the loss of livelihood as the world entered lockdown due to the pandemic running rampant, earning easy money was so tempting that many fell victim to Bitcoin scams. Those few who opened an account with a genuine Bitcoin exchange lost due to a lack of knowledge and awareness, leaving a bad taste behind for new traders.
To begin Bitcoin trading for dummies, we should first understand some basic concepts.
Though there are some gray areas where trading in the stock market is the same as trading in the cryptocurrency market, it is essentially a different market with different factors responsible for the price movement.
Bitcoin trading means buying low and selling high. Rather than holding Bitcoin for the long-term, the traders generally trade by predicting the next price movement by studying the industry with price graphs and booking profits.
There are two popular methods for traders when analyzing Bitcoin price prediction- Fundamental Analysis and Technical Analysis. However, to be successful is not an overnight thing but instead requires a lot of time studying and analyzing, money, and effort to understand and grasp how the price movement works before you start converting your potential losses into profits.
Before you dive into Bitcoin trading, a few things should be kept in mind.
- Open an account with a reputable Bitcoin exchange.
- Verify your identity.
- Deposit money in your account.
- Open a position on your first trade (Long-position = buy, and Short-position = sell).
That’s how you carry out Bitcoin trading. However, if you want to treat yourself, learn more about Bitcoin, and continue reading this detailed explanation of Bitcoin trading for dummies.
- Bitcoin Trading vs. Investing
- Trading Methods
- Common Trading Mistakes
- Things to remember before investing in cryptocurrency
- Decentralized Information Sharing Over the Internet
- Hashing Algorithm
- Digital Signature
- Cryptocurrency Miners: A New Breed of Agent
- Bitcoin Volatility Increase Risks on High Leverage
Bitcoin Trading vs. Investing:
It would help if you remembered the differences between Bitcoin trading and investing in Bitcoin.
Investment in Bitcoin usually means that the investor is holding on to Bitcoin for long-term. Many crypto community members believe in the technology, ideology, and the team behind the currency. Another factor that appeals to Bitcoin investment is the rate at which the price of Bitcoin has appreciated in recent years. They know that with the inherent volatility of Bitcoin, the price will rapidly change, but in the long run, the price will keep on appreciating.
Bitcoin traders make profits by being aware of the latest crypto trend. Due to rapid price fluctuation, these trades make huge profits in a short time. But unfortunately, many, if not most, traders trade without really understanding the dynamics of the price change in crypto.
Bitcoin has encouraged the emergence of several cryptocurrencies that use other technologies but are essentially based on blockchain technology.
Two glaring opportunities attract many, the first being the price volatility, and the second, the crypto market is open 24X7X365. Thus a trader trades at any time of the day.
Even though all traders are interested in profit, their approach and methodology differ from trader to trader. Here are some popular trading methods employed by the traders.
- Day Trades:these traders continuously make multiple trades throughout the day. They constantly monitor the price movement making a profit by searching for the window of opportunity. They continue to trade till the end of each day.
- Scalping:This day-trading strategy is becoming more popular amongst the trading communities. The traders make multiple but small price change trades. Thus even though the difference is less, they still make a lot of profit. These small trades make a huge profit.
Since the price difference is less, incurring colossal loss is mitigated.
- Swing Traders:the traders take advantage of the price cycle “natural swing.” They observe the market and wait for the precise moment when the price cycle swings, and then they enter only to exit on the next swing in the price cycle.
Traders make a profit by studying and anticipating the next price swing. Until the market swings into a more favorable position, these traders hold on to their position for weeks or months.
Analysis Methods – Fundamental Analysis vs. Technical Analysis
Two methods are popular with crypto traders: Fundamental Analysis and Technical Analysis.
prices are predicted based on the factors that would affect the crypto market. This analysis involves an evaluation of Bitcoin based on the Bitcoin industry, news regarding cryptocurrencies, technical development of Bitcoin like lightning network, global regulation, and any other news that might cause volatility in the price of Bitcoin. Regardless of the current price, the evolution of the technology or upgrading of any latest cyber security feature is deemed positive news, and the market swings accordingly. However, the crackdown on cryptos in China caused Bitcoin to fall.
price prediction is based on studying market statistics, like historical price movement and trade volume. The traders try to identify a pattern to anticipate the next price change.
There are three types of charts that are popular with Bitcoin traders.
It’s the most popular chart amongst Bitcoin traders. This chart represents the cryptomarket-like volume, and the high-and-low price indicators are represented in summary.
Each candle has a body and wicks at both ends. The volume depicts the candle’s body, while the wicks represent the highs and lows of Bitcoin. They represent opening, lowest, highest, and closing. It is also referred to as the OHLC graph or Open, High, Low, Close.
The candle is further colored green or red depending upon the market scenario. If the candle is green, the opening price is lower than the closing price. And if the candle is red, then the opening price is higher than the closing price.
For a given period, the bar charts denote the opening and closing prices and the highs and lows of Bitcoin. The highest trade price is represented by a high bar, while the lowest trade price is denoted by low bars.
The entire trading price of Bitcoin is represented by the whole bar; the horizontal marks on the left indicate the opening price, and on the right side, the closing price.
A bar chart represents the price range identifying the contraction and the expansion.
A line chart is easiest to understand as the line represents the price movement of Bitcoin. These lines are represented on a graph showing the opening price and the closing price of Bitcoin.
Common Trading Mistakes:
It is important for Bitcoin trading for dummies to remember that mistakes in a risky business like Bitcoin trading cost money. But remembering to avoid those mistakes is equally important.
You risk more than your risk appetite:
One of the biggest mistakes to avoid is investing more than you can afford to lose. In the initial stages, invest less. Thus, if you happen to make a loss, it won’t hit you so much. Also, once you gain confidence while trading, even then, only invest what you can afford to lose. Chances of you making bad decisions that can prove costly will magnify if you start investing more than what you are comfortable with.
Trading without a plan:
Another common mistake people make while trading is not having an action plan. In other words, they are clueless while entering and exiting a specific trade. It is important to have a clear financial goal and make good use of stop-loss options to minimize losses if they occur.
Avoid leaving money on the exchange:
common mistake most make is leaving their money on an exchange when they are not currently trading. In the event the exchange gets hacked, goes offline, or even goes out of business, the chances of you losing money increases. Make sure to move your money for safekeeping into your Bitcoin wallet or bank account when you are trading for the short term.
Falling for Fear and Greed:
Two basic emotions that make many traders make stupid mistakes while trading. Fear can present itself in the form of rapidly closing a trade after reading a news piece, hearing a rumor from a friend, or seeing the market price drop unexpectedly (the market might be correcting itself, but you read it wrong) Another emotion that plays mind tricks is greed. The fear of missing the bandwagon by missing a golden opportunity makes people take rash actions and pay heavily for their mistakes. This is common when people say that “you mustn’t miss this as it’s the next big thing,” or when there is a “sharp increase in market price.” Remember, our emotions play a huge part during trading, and if unchecked, they can compel us to make silly mistakes that can cost us a lot.
Repeating the same mistakes:
It is immaterial if you make a profit or a loss. The critical takeaway is learning from it. So when you make a profit, take some time off, analyze what went right, and try to replicate it. Should you make a loss, it is equally important to analyze what went wrong and make sure you don’t repeat those mistakes again.
Things to remember before investing in cryptocurrency
Before investing in any cryptocurrency, you should take time off and understand how a cryptocurrency works. Although the basic technology remains the same, some cryptocurrencies that may not share the same market cap as Bitcoin are still promising and may appreciate in the future. Thus it is crucial for you as an investor to look beyond Bitcoin, Ethereum, and Ripple.
It is also important to understand and explore blockchain technology which is the base for decentralized finance and working in the cryptocurrency world.
Some aspects of blockchain technology might be challenging for you if you do not have a computer science or coding background. However, many understandable and straightforward books and articles have been written to benefit a larger audience who are not affiliated with computer science or coding.
It would help you a lot if you were to join the cryptocurrency community online to get the latest news regarding cryptocurrency. There are many advantages to joining such communities that are very active since any changes or developments are first to be addressed in these communities.
When you are interested in cryptocurrency, take time to find the “white paper” of the project. Every cryptocurrency has one. If there is no white paper available for that crypto, then the chances of it being a scam are real.
The white paper should be read carefully as it describes the developers’ intention of the work, including the time frame, a general overview, and any innovative technology being incorporated. Any white paper that avoids data and specific details are generally negative. If the white paper is missing information or is misleading, there may be serious problems with the project.
Before investing in any new cryptocurrency in the market, many flock around and invest heavily; the chances of improving your investments lie in doing your research and following the company. Cryptocurrencies generally follow a pattern before making it big, and Bitcoin is usually at its forefront.
Remember that cryptocurrency is very volatile, and more people have lost their money due to poor research against those overnight cryptocurrency millionaires. Therefore, conducting thorough research before the investment is the key to success.
Decentralized Information Sharing Over the Internet:
Rather than relying on a central authority to exchange information over the internet, a decentralized exchange for information sharing is possible, like a peer-to-peer or P2P network.
The information shared on a P2P network is similar to sharing information among your friends and family. The information will reach every network member when shared with one member of the network. The only difference is that there will be no alteration of this information while using a digital network.
You must be aware that BitTorrent, a P2P file-sharing application, is very popular. You must have also heard about Skype, another popular P2P application, and other P2P chat systems.
The digital identities are based on cryptographic hashing work. In other words, readable data is encrypted, which can only be deciphered by someone having the right credentials.
However, there are a few requirements for a good hashing algorithm:
- The output length of the hashing algorithm must be 256 bytes.
- A significant difference is the output produced when even a small change in the data is put in.
- Same outputs are produced with the same inputs
- There must be no way to calculate the input value by reversing the output value.
- Calculation of HASH value should be fast and less compute-intensive.
Considering the simple statistics, there are a limited number of possible HASH values as the HASH length is limited. However, the hashing algorithm should be impossible to replicate, thus making it unique.
You add your signature to a texted document when signing a paper. A digital signature is similar; instead, you add your personal details to the document while you are signing. The hashing algorithm sticks to ‘a slightest change in the input data produce a significant difference in the output’ rule. As a result, the HASH value generated for the document with the additional signature will differ significantly from the HASH value generated for the original document.
Thus a digitally signed document combines the original document and your data added to the document.
This is how your virtual identity is made, which consists of the data you add to the document before creating the HASH value.
Next, your signature is unique as it identifies you, and thus it is important that nobody can copy it. The best way to ensure your signature remains safe and secure is to keep it to yourself and allow someone else with different methods to validate the signed document. And this is easy as we have the technology and the algorithms at our disposal. For this, public-key cryptography is used. It is also called asymmetric cryptography.
Thus, two keys are a private key that identifies you and a public key that validates you. Thus these two keys must be created by you. Furthermore, there should be some mathematical correlation on which both the keys depend. Since the algorithm assures that no two keys are the same, each private key and public key are different. Thus, the information you keep to yourself is the private key, and the information you share is called the public key.
No same HASH value can exist if the input value for the signing algorithm is based on your private key (your identity) and the original document is created. This is only possible if you keep your key safe; no two HASH values created would be the same.
Others can validate the original document, i.e. the HASH value you created, and provide input as your public key for the signature verifying algorithm to verify if these values match.
How to send Bitcoin or cryptocurrency?
You can start sending information to your peers if you have executed P2P communication, the procedure of resting digital identities-both public and private keys, and provide ways for users to use their private keys to sign documents.
Since the entire operation runs on a decentralized system, it requests information regarding how much money you have and verifies to check if you have lied. Thus when a transaction is being carried out, it follows these steps.
- Suppose you own 20 Bitcoins
- You are sending 5 Bitcoins to pay off a car dealer (you need that specific car dealer’s public key)
- You burned 0.15 Bitcoin as a transaction fee.
- And finally, you are left with 15.85 Bitcoins.
Once the transaction is completed, your digital signature using a private key is required to sign off the transaction and transmit the data regarding the transaction to your peer network. Everybody can see that someone (your virtual identity) has completed a transaction by sending money to someone else (the car dealer).
The transaction will be completed if the entire network agrees that you did start with 20 Bitcoins, and after the transaction with the car dealer, you are left with 15.85 Bitcoins.
Cryptocurrency Miners: A New Breed of Agent
Crypto miners, unlike other real miners, do not mine in the dirt. Instead, they use computers to mine cryptocurrencies. As a result, Crypto mining is computationally-intensive work. It might have been a lucrative option a few years back, but now the mere prospect of getting rewarded for mining cryptos has attracted a lot of attention amongst the masses, and thus the competition has increased.
The main purpose of miners is to confirm the validity of every transaction as requested by the users. There are two things a miner does to validate the transaction.
Since each transaction is out in the open as it is copied and made available to peers in the network, the miner will look into your transaction and verify that you did hold a certain number of crypto coins before the transaction. Now the number of crypto coins has changed after the transaction (whether you have brought or sold the number of crypto holding changes). After confirming the account balance, miners generate a specific HASH value. However, this HASH value must be in a specific format, like containing a certain number of zeros.
This HASH value is calculated by two inputs, namely data containing transaction records and proof-of-work by the miner.
It is a difficult task for the miners, while miners as a single change in the input of data can cause a significant change in the output of the HASH value. They need to produce a Hash beginning with zeros by finding a specific value for the proof-of-work. Suppose a minimum of 20 zeros are required to validate each transaction. Thus, the miner must calculate nearly 2^20 different HASH values to find the right proof-of-work.
Once miners find the proper value for proof-of-work, they are entitled to a transaction fee that is added as a part of the validation. Blockchain is a specific format where every transaction is passed on to the peers in the network and gets stored
So the question arises since the hardware is getting faster and more efficient, does it make mining easier. The answer is that the difficulty level remains the same. More and more miners started mining with CPUs and systematically upgraded to FPGAs, and now some are designing their ASIC chips. Even though the efficiency has increased, the HSAH rate increases proportionally, thus maintaining an equilibrium between the number of coins mined against ever-evolving technology. The hashing power is directly proportional to the mining difficulty. The difficulty lies in the readjustment of the hash rate if a miner decides to discontinue mining if it is not profitable. Other factors like the energy required to compute these algorithms are enormous and require adequate cooling systems. There are crypto farms where individual miners come together to mine cryptos. Once they have successfully mined a coin, the reward is distributed equally.
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Frequently Asked Questions
You can carry out your trade by following these steps:
- Search for the best Bitcoin exchange online as per your needs.
- Shortlist and settle for one exchange.
- Open up an account in that exchange.
- Validate the identity of the account you have opened.
- Deposit some money into your account.
- Consider which position you wish to enter (buy or short sell).
- And now you can start trading.
There are two more methods than day trading, swing trading and scalping. Go through each method and select one that might appeal to your trading style. Most traders will advocate day trading as the most efficient way to trade. However, roughly 90% of the people quit day trading within the first three months. In the end, select one of the trading methods and trade accordingly. If you are consistent and learn from your mistakes, the odds of your success greatly improve.
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