The problem for people who have been trading Bitcoin seems to be deciding what to do with all their profit. With jumps of 700%+ over the past 12 months, it certainly would seem like a lucrative proposition… but is it real?
If you’re really interested in getting involved with Bitcoin, you’ll need to learn how to trade it. It’s a somewhat difficult proposition because you’re not actually trading an asset (as you would a stock certificate etc), but nonetheless people are still doing it, and making a profit by doing so.
This article is going to explain the basics of trading Bitcoin. Please be assured this is NOT an endorsement of the commodity, nor a recommendation to buy it. I am merely explaining the market and how to get involved IF YOU SO WISH. All financial & legal stipulations apply – I am simply providing information for educational purposes only…
What Is Trading?
Commodity trading has existed FOREVER (even the Romans bought and sold wheat). Today, there are MANY ways to “trade” commodities, from purchasing barrels of crude oil to investing into “futures” certificates.
Regardless of when you traded commodities, the practice has been the same at all times…
An “investor” will purchase an amount of commodities from a merchant. It may be cotton or wool for example. This then gives the trader the opportunity to go and SELL that commodity in another location.
This used to be done manually (roving salesmen / caravans)… since the 1800’s, commodities exchanges have grown in all major economies to provide a central market through which you could trade your goods. These markets – especially with the dawn of the digital age – have given rise to retail investors who purchase small quantities of certain commodities from a central “pool”.
This determines a more stable price, allowing for a much wider economy to form. This is what we have today (prices for milk are generally consistent throughout the whole of the UK for example).
The place where “traders” fit in is to take “positions” with certain commodities in the anticipation that their prices will increase inexorably. This not only allows the trader to make a profit, but also ensure they’re able to do the same thing again to create even more wealth.
The entire premise works on the back of Supply/Demand, whereby a trader will purchase stock in order to provide for increased demand. If demand for a product/item increases sufficiently, and he’s able to get a higher price for the commodity from more people, he’s made a profit. This is the core of trading.
It must be stated that trading is NOT the same as “investing”. Investing is generally about providing capital for the building of assets. The anticipation is then that these assets will be able to yield a commodity which can be traded at a profit… the “investors” then taking a cut of these yearly profits (in the form of a dividend if the asset is a business).
A good example to make is that “investors” will buy a farm and pay for a herd of cattle & farmer. They may make 5000 litres of milk per year (for example). To these investors, the price of milk is not very important. The most important thing is being able to produce enough to keep profits high. The point where “traders” come in is to buy that milk at a relatively low price and sell it to the end consumer at a higher price. The trader is essentially a merchant or middleman.
Whilst this might seem complicated, it’s actually very simple.
What Is Bitcoin?
What might be complicated is Bitcoin.
Bitcoin is a new type of “currency” known as a Cryptocurrency. This is built on a technology called “Blockchain” which basically splits data into “blocks” and “chains”.
The sole premise of blockchain technology is that you are able to take a file and constantly have access to the latest version – through storing the files on 100’s of different servers, rather than just one. The idea of a decentralized database is basically at the core of it all.
Now, the point here is that all the “coins” which have been produced are basically there to provide a particular type of encryption to the “blockchain” technology. Blockchain stores data in a decentralized way – cryptocurrency encrypts that data so that only certain people can access / use it.
The idea behind Bitcoin was to encrypt parts of the “blockchain” so that it could be used for financial transactions. The idea of a decentralized, constantly updating, transparent, public ledger of financial transactions gave birth to the idea of a “digital” or “cashless” society (which is not feasible despite what many of these “coin” promoters say).
The premise of Bitcoin was to give people the opportunity to spend money outside the realm of banks/governments. This is especially important in developing economies, where the likes of corruption, sanctions, war and other issues could cause problems to arise with a local currency. Much akin to gold, putting value into a universally accepted form of value gives many people security, especially when there isn’t any within their local environment.
Whilst Bitcoin is real and seems to work relatively well, the majority of people who became involved with it did so because of its astronomical price jumps. These have been predominantly driven by speculation and should not be used as an indicator of value.
How Is Bitcoin Traded?
To “trade” Bitcoin is exactly the same as “trading” other commodities – you buy a certain number of “bitcoins” from other people, hold them and then try and sell them for a higher price.
Also like other commodities, you can do this by either going to sellers directly or going through an exchange. In the case of Bitcoin (other other Cryptocurrency), you will be best advised going to one of the plethora of Crypto currency “exchanges” which have sprung up over the past few years.
These exchanges basically allow you to buy coins from sellers in an eBay-like environment (where you place bids and purchase coins that others are selling). This is also possible with many of the trading platforms designed for the likes of Forex and Stock trading (I know IQ Option has a Bitcoin contingent now).
The way a coin is traded is to have the coin stored by the exchange in their own wallet. From here, the key to the coin is deposited in the exchange’s secure account. Once a trade has been successfully completed, the buyer has the capacity to access the coin, which you’re either able to resell or use. Since most people don’t want to use the coins, the majority just sell it back on the exchange in the hope of profit.
Should You Trade Bitcoin?
This is a question ONLY you have the answer to.
I am not a financial adviser so – by law – I cannot give you an recommendations on what you should do with your money. What I can say however is whether it’s generally a good idea to put money into certain things… and for Bitcoin, it’s not looking bright.
Bitcoin is predominantly getting its pricing from the massive secondary market that’s grown around the idea that you can make “quick and easy” money by “trading” it. This has all the hallmarks of a speculative bubble, and the lack of 1) returns 2) value proposition should send any mature investor running a mile.
The main issue with Bitcoin today is that none of its value is predicated on actual results – it’s all hearsay and inflated promises. There is no way to calculate intrinsic value because there is very little to measure. As such, no serious investor will touch it with a bargepole.
That’s not to say you should stay clear, but in my opinion it has peaked and will be headed for a crash. There will likely be some piece of news which sets the price into a nosedive – typically that it’s been regulated in the US or similar.
Personally, I would stay clear of the coins themselves and look at companies operating in the “blockchain” space. There is plenty of opportunity for a company to create a new type of file system, which allows files to continually remain up to date (through the “blockchain”), or for various data collection agencies to have their inventory maintained through the use of blockchain technology.
If you are looking to get involved with the Cryptocurrency space specifically, I’d look at the various exchanges which have sprung up. There will be one which becomes the equivalent of the ATM, all running on top of the Blockchain network (and accepting all types of digitally encrypted coin). That’s where the money will be moving forward.