1. Introduction

There are many resources available to see an introduction to Bitcoin, but the significance of Bitcoin is often a point that many of them have convinced. The importance of Bitcoin can be determined by its various features, but one of the important features is that it is secure, time and cost-efficient, and also provides convenience in mobile payment. It is also global and has no central financial institution, providing access to everyone. A step-by-step explanation for the importance of Bitcoin comes from its benefits in modern society, and it can be seen in detail from various comprehensive readings.

The first Bitcoin specification and proof of concept was published in a cryptography mailing list by a member under the pseudonym of Satoshi Nakamoto, who later published the Bitcoin software in 2009. Satoshi’s anonymity has raised unjustified concerns, many of which are linked to a misunderstanding of the nature of open-source or the relative to other leaders who work on bugs.

As per the history of Bitcoin, it came into existence in 2008, following the global financial crisis. The crisis had a major impact on people’s faith in financial institutions. It can be due to the actions done by the government to save troubled banks.

1.1 What is Bitcoin?

Bitcoin is a digital currency. But, what does this really mean? Simply put, it is money that is entirely different from the sort of money we are all used to. Bitcoin can be used to purchase things electronically, in this sense, it is no different to pounds, dollars or euros which are also traded digitally. However, bitcoin is decentralized. No single institution controls the bitcoin network. This makes a lot of people wary as it means that large banks and so on cannot control the money. With them being in control of the money, more often than not they believe they are in a position to manipulate the currency to keep a steady inflation rate. This can actually reduce the real value of money, this is known as an inflation tax. With bitcoin, there is a set inflation rate that tends to lean towards deflationary, this is enabled as there is a capped supply of 21 million coins in total. With a publicly known rate of increase/decrease, this means that it is not possible to print out more money for personal gain. This is especially advantageous to the public due to the fact we currently live in an age where debt is an issue. Anyone who has bitcoin is in complete ownership of it; it is not possible to obtain debt with such a currency. This is because it is not possible to spend any money that is not yours, without the ability to borrow, this would be an impossibility. Bitcoin is something the users have total control over. The fact there is no third party involved means that it is cheaper to use. It certainly is not free to the public to send money worldwide, there are a great number of fees that vary dependent on how much money is to be sent and how quickly the money is required at the receiving end. With bitcoin being peer-to-peer, it is much less complex and fees are incomparable to any service available at this day and age. Lastly, bitcoin is the first viable form of digital cash. There are actually very few limitations when using bitcoins, the only real ones being the lack of retailer support in comparison to standard money and the fact that due to the currency being relatively new, the public are not all fully aware on how to go about setting up and using bitcoin. As time goes on, the latter limitation will resolve itself.

1.2 History of Bitcoin

Bitcoin is a digital currency which was first proposed in a paper published in 2008 by an unidentified individual or group of individuals using the name Satoshi Nakamoto. It was later released as open-source software in 2009. Although Bitcoin was the first decentralized currency, it wasn’t the first attempt at creating digital currency. In the 1990s, several companies made a for digital currency, however, these attempts failed. After 2000, there were more attempts all of which failed. Then in 2008, Nakamoto combined many years of research in cryptography to create a new digital currency which would be decentralized. This was the first successful implementation of digital currency. After Al-Qaeda’s 11 September attacks, there was a suspicion that many accounts were being used for funding the terrorists. This led to money laundering and financing of terrorism being used as a reason to remove the existing financial systems. Bitcoin has been described as a complete break from the previous system of finance due to its ability to act as an alternative to the traditional banking and financial systems. However, most people are drawn to its use and transfer taking place on the internet. This is important to the internet community as IT companies have not been able to establish a uniform way of payment for some time. Bitcoin is said to be the best example of a completely global currency.

1.3 Importance of Bitcoin in the Financial Market

And this is where the importance of Bitcoin in the financial market is totally transparent. We currently live in a globalized world with a free market system. This means that there are massive opportunities across the board from currency to stocks, goods to commodities, and everything in between. Trading is at the heart of it all, buying low and selling high in a variety of different markets to turn a profit. But it is currency trading that is possibly the most fast-paced of them all. It provides the highest risk to reward for traders and can be done 24 hours a day, 5 days a week. Anyone familiar with forex trading can see where I am going with this. “What is the importance of Bitcoin in the financial market?” you may ask. Well, take the forex trader, the gold and oil trader, and pit them all in their respective markets with Bitcoin as the median to exchange between currencies. They are no longer separated traders dealing in separate entities with hundreds of different transactions. Now they will be dealing with one another, either buying or selling Bitcoin to change to a different currency. Step out of the forex market and head over to traders of other currencies and goods. They too may be finding themselves trading and moving Bitcoin to change as it provides greater opportunity in the desired market that they are dealing in. This is providing increased liquidity across a number of different markets as traders are now using Bitcoin to make a greater number of transactions overseas, as Bitcoin provides ease in which it can be transferred to another person’s wallet anywhere in the world. This is making global transactions more fluid with faster exchange and minimal fees. Finally, as a higher number of transactions occur in the world today, so are a higher number of people looking to turn a profit. And being quite the profitable asset, there are many who are now looking to trade Bitcoin itself in hopes of turning a stronger fiat currency into more due to the massive volatility.

Bitcoin has been a revolutionary breakthrough in currency. Like any other currency, Bitcoin is used as a means of exchange for goods and services. However, unlike any other currency, Bitcoin is an electronic currency. Aside from being purely digital, it was created cryptographically, which means that it is a coded form of currency. It is also decentralized and not governed by any single organization. Bitcoin is based globally and does not rely on any one country’s economy for value. Over the years, Bitcoin has proven that it’s here to stay and it’s anyone’s guess where the value of it will go in the future. With this being said, Bitcoin has proven itself to be highly volatile, which would be a downfall for some. But for others, where there is volatility, there is massive opportunity.

2. Getting Started with Bitcoin Trading

Bitcoin has made quite a splash in the world of financial trading in recent years. It has proven to be unpredictable yet profitable for those with the skill to trade it. If you are interested in trading Bitcoin, the first step is to acquire some and you will need a place to store it. Just like if you are trading physical commodities you will need a place to store your goods. To store your Bitcoin, and make it easier to trade, it would be best to get a Bitcoin wallet. There are various places you can go to find a wallet such as a wallet software program for your PC, an online wallet or a wallet that is stored on your smartphone. With all types of software, there is the risk of malware or failing of your hard drive where the data is stored. With online wallets, you not only have to be careful of malware but you also need to prevent your wallet from being hacked into. Smartphone wallets may be the safest due to the ability to encrypt the data and even store a backup on a piece of paper. Once you have a place to store your Bitcoin, you will need to keep up to date with the BTC/USD exchange rates. This can be done using data that can be found from the internet. There are a number of tools available that can be used to predict the general direction of the market. Any trader needs to have a defensive strategy: limiting the risk by making the probability of incurring losses acceptable. As the BTC/USD market can be highly volatile at times, this is arguably the most important. An exit and entry rule will be implemented to help reduce the risk of buying into a losing position. This rule stipulates that one should quit a trade if the price is too far away from the original prediction, and the money lost could be better and more safely utilized in a different trade. This is to avoid the sunk cost fallacy of an investor having lost money and pouring in more in an attempt to recover losses.

2.1 Setting up a Bitcoin Wallet

One of the first steps in getting started with Bitcoin trading is to obtain the virtual currency. As it is a decentralized currency, purchasing it can be complicated. A Bitcoin is essentially a piece of code signed by its owner, which is stored in an electronic wallet app. To obtain Bitcoins, one will be required to have a Bitcoin address to receive them. The address can be obtained from the recipient and a Bitcoin wallet can be generated by the recipient using a Bitcoin client when installing the program. The Bitcoin client generates a public key which has to be copied and given to the person sending the Bitcoins. The address to give is essentially an encrypted form of the public key. Once the Bitcoins are sent, it may take a few hours for the transaction to be verified on the Bitcoin network and for the Bitcoins to appear in the wallet. Sending Bitcoins is irreversible so it is recommended that you double check the address provided before sending it to the recipient. Always store Bitcoins in a secure wallet and always ensure you have a backup in case of hardware failure.

2.2 Choosing a Bitcoin Exchange

Step one before choosing an exchange will be to determine your own trading strategy. Do you want to make a bank wire transfer to the exchange and trade using limit orders, or do you want to use your PayPal account and buy Bitcoin right away at the market price? If you want to start a trading account using a bank wire at an exchange that requires identification, this could take a week or longer due to difficulties with identification verification and bank wire transfer. If you are looking to buy Bitcoins right away at the market price simply with a credit card, this may be the simplest method. Each exchange offers different payment methods and terms for those payment methods. Also, each exchange may have different fees for each method, so it’s good to get that confirmed. Make sure to do some research on what exchange would be best suited for which short or long-term strategy mentioned in your first trading assignment.

There are many Bitcoin exchanges for you to choose from. Some are based in the country where you live, others are based in different countries. Most exchanges also provide a FAQ page online where they answer questions asked by customers. If the answers are not there, you can always contact them via email. The more you learn about Bitcoin and exchanges, the better you will be at making intelligent choices at the right exchange.

2.3 Understanding Bitcoin Market Trends

Knowing the current market trends is an important aspect for making profits in stock market trading. Same principles apply to Bitcoin trading. The current understanding and display of the market trends while a person is trading can be a decisive factor between profit and loss. There are many tools available that track and predict Bitcoin market trends. They range from various types of spread information to various systems that are automated. The category a trader wishes to fit into will vary. If the trader is comfortable with programming and using a program to create his own system and backtest it using the market data he can get from an exchange. This can be a very cost-effective method as defining your own system that is capable of tracking the trends can save funds in the long run, as the system will gain a depth of understanding of the market, saving the need to adjust the system at other costly information sources and tracking hours. Other traders can use professional system traders who will have a well-established track record in the trade and likely have information systems already in place. Finally, trend information can be purchased in multiple formats from companies like Rent or Buy trading trends at the consumer’s own choice. The depth of the information can be highly varied and beginner traders are recommended to avoid high-cost information and systems until they are more knowledgeable with the possible benefit. Using the trend information cost should be evaluated on its potential profit versus the cost of the information and funds of similar alternatives with lesser risk.

2.4 Managing Risks in Bitcoin Trading

Allocation of your capital is something that you must consider when engaging in Bitcoin trading. Often, traders will risk a large portion of their capital on one or two trades. It is often the case that these happen to be the same trades that are low probability and high risk. This can be very damaging to your financial health. When dealing with Bitcoin trades, you must be diligent in analyzing the risk versus reward of each trade. A good way to do this is by using the Kelly System. This is a high-risk aggressive strategy. It is done by maximizing the percent chance of a trade being successful multiplied by the outcome of the trade. For example, you come across a trade with a 60% chance of it being good and the outcome being double what you risk (2:1). The Kelly formula would be f = (0.6(2) – 0.4) / 2. f = 0.8 – 0.4 / 2. f = 0.4. Meaning you would invest 40% of your capital if that is the only trade you are looking to make. A safer strategy is to use half of the calculated value; however, this system can still be too risky for some and it is not recommended to use this in the long run for low probability trades. Ideally, you want to look to be risking less than 5% of your capital on any given trade. This will help to preserve your capital and keep you in the game for the long run.

3. Strategies for Successful Bitcoin Trading

Scalping The final bitcoin trading strategy to be covered is scalping. Not often used, but it is starting to be seen more regularly in bitcoin trading. Scalping is a trading strategy that attempts to make numerous profits on small price changes. Scalpers will aim to make small profits on a large number of trades. Although it is time-consuming and mentally exhausting, the strategy can be effective and is actually quite low risk. It is said that the best time to do scalping on bitcoin is when it is trading in a range.

Long-term investing The last trading strategy to be covered is perhaps the easiest to do, but the hardest to do it correctly: HODLing. HODLing is a term that originated from a post on the bitcointalk forum several years ago where a user misspelled hold and the crypto-community ran with it ever since. Long-term investing can also involve buying and holding bitcoin over the long term, and holding can be for a couple of months to several years. This form of trading can be very rewarding, albeit a slower process than the other types of trading discussed.

Swing trading Swing trading is a longer-term trading strategy that can be used in bitcoin trading as in any other market. The basis for swing trading is often trying to capture a large chunk of a price movement either up or down. The trade is exited once the price movement is deemed to have finished, in the hope that most of the profit potential has been captured. This can also contain taking a short or long position at the start, but that is often based on hoping to capture a large portion movement that is about to take place.

Day trading Day trading is a trading strategy in which an investor watches the market, opens and closes a position the same day. The reason for this is primarily to avoid overnight fees and poor price gaps. The one factor that makes day trading seem attractive is the potential for a large amount of profit. It has been said that a volatile market is the day trader’s friend. This is because when prices are changing, day traders can make a profit. However, it is also a risky strategy and is not recommended for novice investors.

3.1 Day Trading Bitcoin

In comparison to other trading strategies, day trading will be much shorter term and therefore much more risky. The prospect of making losses is significantly higher, but with that, the potential profits can be much larger. A long-term strategy of holding can be effective in cases where the bear market is due to turn around to an upward trend. A combination of holding long and short-term day trading should yield a higher profit than just holding through the bumpy ride.

Though most of a month’s day trading will end in losses, the prospect of this method providing a big profit over the long term is absolutely viable. With a stable approach and quick reactions to the news, you can also make some great money. It is also an excellent strategy to exploit the bear market if you got into the crypto scene too late, by buying alternative coins to increase your holdings of bitcoin.

If you want to make the most of a single day’s value fluctuations, then day trading bitcoin is a good option. However, understand that this technique can be fairly difficult and isn’t very well suited to newcomers. For the most part, day trading will consist of a collection of small, fast trades. These might be based on chart analysis or just the breaking news. The idea is to exit the market from your trades before the unpredictable bad movement to the opposite direction. In theory, this sounds straightforward. However, the applied strategies may be complex, and the information sources on which to base your trades could be overwhelming.

3.2 Swing Trading Bitcoin

Swing trading tries to take advantage of the natural “swing” of the price cycles. Swing traders try to identify the beginning of a specific price movement and enter the trade then. They hold on until the movement dies out and take the profit. The fundamental advantage of swing trading is that it offers the possibility for fantastic returns. It is because the movement a swing trader aims to exploit can last anywhere from a few days to a few weeks. With this in mind, swing traders who make the right pick can see their very high returns. In the case of Bitcoin, this has proved to be highly successful. With the price going through many cycles both high and low, there has been lots of opportunity for the savvy investor to take advantage of these moves. One thing is clear though – on specific dates Bitcoin’s price on average has always increased. This means that with swing trading, there is an opportunity to capitalize extremely high returns. The downside to this is that it’s high risk when compared to long-term investment, as if a swing trader misses the beginning of a cycle and enters a trade towards the end, significant losses can be had. This has been illustrated recently with the Mt Gox collapse. Swing trading is best for those with a small amount of available resources and it’s widely considered the best option for trading for people with full-time jobs, as it doesn’t require you to be watching the markets all the time. Considering that it’s very rewarding, there is time to take advantage of a second income since it doesn’t require watching the markets constantly and it’s relatively high success rate with Bitcoin, it’s logical to assume it will become even a more popular method for trading.

3.3 Long-Term Investing in Bitcoin

A common investment strategy is the idea of buying Bitcoin now and holding onto it for a long period of time. This can be referred to as “hodling” within the cryptocurrency community. The reason for this is that over the long term, Bitcoin is still in its early stages and has a lot of potential for price appreciation. Long-term investors are confident that Bitcoin adoption will drive global economic change, and Bitcoin’s limited supply will create value in the future. While holding Bitcoin over the long term has many risks and potential for price depreciation, many investors still subscribe to this investment methodology. This has created a notable supply shortage in the past where a substantial price increase eventually ended in a bubble and crash. In this scenario, Bitcoin has the potential to mimic the scarcity dynamics of precious metals and become the global reserve currency. Long-term investing has its upsides. The tax code benefits from long-term capital gains can be advantageous. For an investment held longer than one year, gains are taxed at a lower rate than short-term capital gains or income. This is a complicated area, so consulting with a CPA or tax attorney is recommended. Long-term investors are also taking the risk that their investment could go to zero. Although Bitcoin has a huge potential for profit and has proven to be a disruptive technology, investors should consider the possibility that it has all been an experiment which could fail. Behavioral analysis is something I use before, during, and after making a trade. With the growing number of social media platforms and Reddit forums where users can share ideas, studying crowd behavior has become a lot easier. Identifying the top of a bull market or the bottom of a bear market can be exceptionally difficult, so blending this type of knowledge with technical and fundamental analysis is my most successful strategy. Bear markets are frustrating times for long-term investors, and preying on the emotions of the weak-handed, or “raw meat” as we say it, is a great source of liquidity for those who are patient and know how to read the markets.

3.4 Scalping Bitcoin

Scalping is a short term strategy that takes advantage of small market movements. It derives its name from traders who aim to “scalp a profit” through numerous rapid trades. Scalping attempts to capitalize on minor changes in the market and can be a very profitable strategy if it is performed correctly. Since the method entails a large amount of small trades, it is often associated with high transaction costs, though the high volume in trades often creates more opportunities to build profit. Bitcoin has potential for great liquidity and volatility throughout the given trading day. This will lead to a lot of potentially profitable trading moves when employing the scalping strategy. It is ideal to focus on movement in price trends which occur in short time frames. These are often more predictable and have a higher probability of success. High frequency trading using algorithms is often employed when scalping, but this is not a strategy that would be viable for the average retail trader due to high costs of development and maintenance. Ultimately, the key to successful scalping is in making informed and accurate decisions on market movement. This is achieved by assessing market trends and using sound analysis in combination with effective risk management.

4. Advanced Topics in Bitcoin Trading

Does the erratic up and down of the Bitcoin value lead us to any system behind the mad fluctuations? A major form of analysis, whether it provides the right or wrong information, forms upon technical analysis. This is the study of market action mainly through the use of charts for the purpose of forecasting future price trends. I found many different traders have different views and may provide different interpretations of the same data. The main price information comes from the trade of Bitcoin, where all selling offers and buying offers set the price of Bitcoin. This is a different process from foreign exchange (forex) and stocks, where all price data comes from confirmed sales. With the simple access to Mt.Gox trading data, this is a convenient way of conducting analysis. Bitcoin provides a simple and clean market with no companies or reporting agencies which could sway the price with false information. Technical traders can use various tools to try and identify trends. One simple method is drawing linear trendlines on the price data to identify the direction of the market. The next step is to try and identify areas of supply and demand to see where the price could reverse to using support and resistance. Price trends of short, medium, and long term can be identified through the use of moving averages that may also indicate changes in trend and act as support or resistance. For the purpose of identifying trend change and the strength of trend, several methods and a combination of methods can be used. An example being the use of MACD, a simple customizable tool that subtracts a long moving average from a short moving average. The histogram produced portrays the divergence between the two moving averages. Technical analysis is a wide subject with many methods and tools. It is very probable that a trader with a different form of analysis might find different results from another.

4.1 Technical Analysis for Bitcoin Trading

4.1.1 Basic Assumptions of TA and its Applicability to Bitcoin The basic assumption of TA is that all factors which might influence the price of a financial instrument are quickly discounted in the price movement. Because Bitcoin is a relatively new and thinly traded market compared to established markets (gold, silver, forex, etc.), this is only partially true. This can often be seen in the volatility of the Bitcoin to major fiat currencies. Although the price is in a state of perpetual fluctuation, short to medium-term movements all tend to form pronounced trends. The basic principles of TA tell us that these trends can be categorized as: Primary (long-term price movement), Secondary (reaction against the primary trend, usually implying a change in trend direction), and Minor (short-term movement part of the secondary trend). By identifying the trend and the type of trend, a trader can make an informed decision whether to buy (uptrend), sell, or short (downtrend) BTC. TA is also used to identify reversal points in the market trend. By using various methods to determine overbought or oversold positions, TA can be used as a complementary method to successful Fibonacci retracement levels and change the likelihood of a profitable trade.

Technical analysis (TA) has been one of the most prevalent and traditional methods used by traders to determine the future direction of BTC and other financial instruments. Its simple assumption that ‘history tends to repeat itself’ makes it a valuable tool for speculation in the cryptocurrency market. Here we will cover the basic theory behind TA, discussing the various methods involved and its applicability to Bitcoin trading.

Table of Contents 4 Advanced Topics in Bitcoin Trading 4.1 Technical Analysis for Bitcoin Trading

4.2 Fundamental Analysis for Bitcoin Trading

Market sentiment can be gauged from social media and forum posts. This may be information that you would rather not take, however it is common in the stock market for companies to pay people to post positive messages about them in online forums. From this you can establish the overall ‘mood’ of the market. Using the search tools on many social media platforms, you can search for what people are saying about Bitcoin. YouTube is a budding social media platform with many informational resources about Bitcoin and market sentiment. This method of fundamental analysis has proven successful in helping to predict the future movement of stocks.

Fundamental analysis of Bitcoin is unorthodox, as traditional analysis techniques do not apply. This is because the asset is still relatively new and does not yet have a well-established track record to make use of. A change in market sentiment, which continues to be volatile and unpredictable, can see the value of Bitcoin change dramatically.

4.3 Leveraging Trading Tools and Indicators

For experienced traders, those tools can be extremely powerful in reading the market, understanding trends and potential price movements. For those traders who are just starting to understand the Bitcoin markets, you can use the same tools to make technical analysis easier and more accurate. Indicators are a series of data points that can provide an overall view of how the market is moving. Indicators can show whether the market is trending, whether it is volatile, the strength of the movement and several other factors. Here are some of the more useful indicators to improve your technical analysis. Moving averages are probably the most common and useful form of technical indicator. The moving average is a line that takes the average price of a currency over a set period of time. Some moving averages include the SMA (simple moving average) which is the average price of a currency over a defined set of time. An SMA with a short time frame will react much quicker to price changes than an SMA with a long look back period. For example: 100, 50, 200, 10. There are four different moving averages here. The 10 SMA will react the quickest to price changes. If the price had been going down over the 100, 200 SMA, we can tell the market is in a downtrend. If the price balances above the 50 SMA, it is likely to move back up and test the 100, 200 SMA. Prices which move above the 100, 200 SMA into this it is likely to move back up and test the 100, 200 SMA. Prices which move above the 100, 200 SMA into this it is likely to move back up and test the 100, 200 SMA. Prices which move above the 100, 200 SMA into this signifies a long term reversal. Using moving averages in this way can make trend recognition very accurate. Volume is a very important indicator in confirming price movement. Normally in a strong market an uptrend will be accompanied by an increase in price and a downtrend will be accompanied by a decrease in price. If the price is going against the direction of the trend it will usually lead to a price reversal. Made tradable on the internet in 1996, Bollinger bands were developed by John Bollinger. This tool consists of a simple moving average and two standard deviations. The high profitability which means there is likely to be pressure to continue the trend. The width of the bands will change dependant on the volatility of the market. High volatility results in wider bands and lower volatility results in the bands narrowing. A very common strategy using Bollinger bands is the Squeeze. This occurs when volatility is at a relative low and the bands are narrowing. A simple moving average crossover will provide an entry point but the best risk to reward ratio can be found if the price breaks through the bands at which point there is likely to be a strong price movement.

4.4 Tax Implications of Bitcoin Trading

This is the most complex aspect of trading Bitcoin futures, but it’s absolutely essential to grasp its implications. Failing to do so can lead to some massive tax problems. The U.S. Commodity Futures Trading Commission has issued a guide which is designed to educate the public about how bitcoin and digital currencies are viewed under federal law. For the purposes of this guide, we will refer to bitcoin futures and options as “bitcoin derivatives”. The notice makes a clear distinction between simple buying and selling of bitcoins and use of bitcoin derivatives. Essentially, any transaction using bitcoin derivatives is speculative in nature and will, if profitable, be subject to capital gains tax. This is no different from buying and selling an equivalent amount of the underlying asset, and the assumption that it is can lead to some big tax implications for businesses, particularly foreign exchange (forex) trading firms/businesses. The first thing to note is that bitcoin derivatives are treated as certain types of high-risk financial instruments subject to the chance of default. ‘Swaps’ and ‘foreign exchange forwards’ fall under the definition of ‘Notional Principal Contracts’ (NPC) and are considered to be the same as futures for tax purposes. 26 U.S. Code § 446 defines a future as “property which the taxpayer contracts to acquire in the future”. It goes on to say that all futures must be marked to market and any contracts which are not settled on the same day must be recorded as a realized gain or loss, the difference between the value of the contract at the end of the day and the value of the contract at the beginning of the day. This means that anyone trading bitcoin derivatives must keep detailed records of the value of them on a daily basis and record any profits and losses in accordance with Internal Revenue Code: Standard Deduction and Filing Information. This is similar to a bruising process forex trading and it is possible that switching at some point from trading forex to bitcoin derivatives could bring about a similar change in tax write-up and actually do in more knowledge of the permeate between the two.