Bitcoin Trading: Where to Start?
Bitcoin divides opinion. Some think it’s the most revolutionary development in global finance ever, whilst others are all too eager to demonize it as “fraud” or Ponzi Scheme. Whatever your opinion of the world’s first truly decentralized money, one thing is certain: the price is incredibly volatile.
It’s not uncommon for Bitcoin to see 20% moves in just 24 hours. In fact, the largest swing ever in the price of Bitcoin was in 2013. It dropped from $233 to $67 in a single night. For investors, a crash of 71% such as the one experienced that April will have been heart-wrenching to endure. However, not all would have lost money during the drop. If you were somehow able to time the market and sell right at the top and buy back in around the $70 mark, you’d be sitting pretty. Buying low and selling high like this is known as trading, and the regular volatility in cryptocurrency markets is music to an experienced trader’s ears. However, timing the Bitcoin market in such a way is much easier said than done.
Understand What You’re Letting Yourself in For
Trading isn’t for the feint of heart. In a market as volatile as Bitcoin, it’s high risk and high reward game. Only the best players manage to survive. In traditional markets, it’s estimated that between 92 and 96 percent of traders lose money.
Bitcoin trading is even tougher than trading in traditional markets. Being largely unregulated and entirely global, crypto market never sleeps. This means, as a trader, you must have a strategy regarding your own rest times. Do you set alarms for if the price crosses a certain threshold or do you sell before you sleep and re-enter when you wake up? Do you wait until you’re confident in a trend and hope that you sleep for long enough to not see a reversal? Needless to say, those trying to trade professionally do not get much sleep.
Such colossal swings in the price combined with the 24-hour market make day trading for a living incredibly stressful. Then you can add in the fact that even the greatest traders don’t make profits on every trade. Good traders need to learn to not get emotional about their losses. Just like a professional poker player needs to be comfortable with losing large sums of money to awful players, so does the trader when they don’t quite read the charts correctly or a sudden news event changes them in some unforeseen way. For this reason, it’s important not to trade with your whole stack.
The poker analogy continues here. A winning professional gambler will only take a small percentage of their entire bankroll to the table with them. Even playing a solid strategy and making all the right moves isn’t enough to guarantee victory in the short term. Going all in with a pair of Aces versus an unsuited seven and a two will spell disaster 12.71% of the time. If the luck is against you and you used your entire bankroll on the hand, it’s game over until you can get funds from elsewhere. This is the same as day trading Bitcoin. If you’re serious about trading for a living, set parameters for your roll and stick to them. Some traders decide to only risk 10% of their entire stack on a single move, for example.
Study Technical Analysis Before You Dive In
If we haven’t put off the idea of trading just yet, it’s important to study before you get started. Technical analysis of charts and trends will be the indicators to guide you when deciding whether to buy or sell your Bitcoin (or any other cryptocurrency). There are various signs that you will need to get familiar with to become a successful trader. Moving averages, relative strength indexes, and Bollinger Bands are just some of the common ones that can help traders decide on their next move. The best way to get started is with hard study. Jumping right in and trying to time the market will wreck a new trader. If it doesn’t, you got lucky. You won’t get lucky every time. Take a course, read the advice of successful traders, and study the market without risking your own money. Make calls to buy and sell without actually buying or selling. See if you were right and repeat it until you’re making good calls more often than not.
Understand That You Will be Taxed!
Just because it feels like the Wild West out there doesn’t mean it’s entirely lawless. For one thing, you will be taxed.
In fact, some 13,000 Coinbase users have recently been warned that their data will be sent to the Internal Revenue Service. All users who had completed transactions of more than $20,000 between 2013 and 2015 with the company will have their records reported. This was ordered by a San Francisco court on February 23, 2018. It’s likely that other exchanges will soon be forced to submit their own records too. However, reporting taxes for a trader who can potentially make hundreds of trades a day thanks to the lack of regulation might be easier said than done.
Cryptocurrency trading is a tough way to make a living. The long hours, the stress of losing huge sums of money, the fact that you’ll have to beat the rate of tax, and that it’s so difficult to actually predict which way a market will turn all make it brutally hard to survive on. These facts only amplify the level of risk you’re taking on. Therefore, ensure that you have enough funds to live on if the worst should happen.