In this article we’ll explore the world of Bitcoin and how you can trade it through a broker like any other financial instrument.
What is Bitcoin?
Bitcoin was created in 2009 by a software developer using the alias Satoshi Nakamoto. The idea was to produce a decentralized currency, transferable electronically with minimal transaction fees. It is not tied to any country, central bank or external authority. Bitcoins are stored in a digital wallet, which can exist in the cloud or in a personal computer.
Bitcoins are created through a process called mining, where new Bitcoins are found by powerful computers solving complex algorithms. There are a finite number of Bitcoins: 21 million. Currently there are over 16 million Bitcoins in circulation.
Bitcoin vs. Fiat Money
Fiat money is currency that a government has declared to be legal tender and is not tied to a physical commodity such as gold. Bitcoin has the advantage over fiat money that it can be sent directly from one user to another without any banks or credit cards as an intermediary. Unlike fiat money, Bitcoin cannot be printed by central banks, so in this way its value cannot be diluted by an external authority.
Bitcoin’s Rise in Value
BTCUSD Daily Chart
Just this year Bitcoin has increased in value from under $1,000 to over $8,000. The chart can be described as parabolic (an uptrend during which the angle of ascent steepens as the move matures).
If you had bought $1,000 of Bitcoin in 2010, your investment would now be worth over $50 million.
Trading Bitcoin in a brokerage account allows you to speculate on its price movements whether you think the price is going up or down. This is done using a Bitcoin CFD (Contract for Difference). A CFD is a financial derivative product that allows traders to invest in an asset class without actually owning the underlying asset. CFD’s also enable you to trade using margin.
Bitcoin is most often quoted against the US dollar, with the ticker symbol BTCUSD. If you buy BTCUSD you are simultaneously buying Bitcoin and selling the US dollar (analagous to EURUSD in the forex market). The tick value is $10 per lot in BTCUSD.
Bitcoin and News
Bitcoin’s price can be driven dramatically by news stories, as we have seen in the past couple of months.
Bitcoin sold off sharply in September on news of China’s move to ban ICO’s (Initial Coin Offerings). It came roaring back to new highs in late October after CME Group announced plans to launch Bitcoin Futures.
Bitcoin Trading Strategies
Moving Average strategies work well in trending markets such as Bitcoin in 2017. A classic moving average strategy is to use the 5 and 10 period EMA’s and look for crossovers as entries (5 crossing 10 upwards for buy, crossing downwards for sell). You could use 200 period SMA as a filter, when price above only take buy signals, when price below only sell.
On Balance Volume (OBV) is another popular indicator for trading Bitcoin. OBV measures positive and negative volume flow. This indicator is based on idea that volume preceds price. Look for divergences between OBV and price for possible price reversals or use OBV to confirm trends when it trades in line with price.
Correlation trading with Bitcoin and Ethereum. Bitcoin can serve as a leading indicator when trading Etherium or vice-versa. This basic strategy can be used both on short term and long term time frames.