Where & How to Trade Bitcoin (BTC) in 2023

There are many different ways to benefit from the Bitcoin revolution, but before engaging in any of these, it is important to understand how they operate. There is a difference between a standard investment in Bitcoin and trading the cryptocurrency, so it's vital to establish this before going any further.

Bitcoin is a digital currency, and as such standard investments in the cryptocurrency can see investors holding the coin over a period of time, in a manner akin to traditional currency markets. By contrast, trading will see investors enter a position on Bitcoin, usually over a relatively short period of time.

Typically, trading is a considerably more powerful activity to benefit from the price discovery of Bitcoin, owing to the timescales involved. It allows much greater agility for investors and enables the peaks and troughs of the market to be predicted and benefited from. Traditional investment can be seen as long-term debt on the fundamental viability of Bitcoin as a platform.

It should also be noted that when trading Bitcoin, investors don't receive any actual coins. The usual way to trade this cryptocurrency is to utilise crypto derivatives, such as CFDs, futures, and options. 

CFDs (contract for difference) see the difference between the open and closing trade prices settled in cash. Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. And options are financial instruments that are based on the value of underlying securities, such as stocks. Options contracts offer the buyer the opportunity to buy or sell a particular asset.

Trading strategies for Bitcoin are dependent on the type of derivative entered into, the market behaviour at the time, and any risk profile involved, as well as other factors. There is no one-size-fits-all approach with Bitcoin, or indeed any other commodity or equity. That's great for investors as they can still profit without buying Bitcoin directly.

Bitcoin Volitility

The main difference in trading bitcoin compared to other, more traditional, asset classes is how volatile the market is. The spreads you will find on a Bitcoin CFD is massive compared to currency pairs like GBP/USD.

Bitcoin Analysis: The Key to Success!

Once you have decided to invest in Bitcoin, there are a variety of ways to go about this. Various analyses are available, including the aforementioned technical analysis, and its counterpart, fundamental analysis. Technical analysis utilises patterns on charts in order to predict the way that the market will react. It differs from fundamental analysis, which is focused on the ‘true value’ of an asset, based on breaking news, regulation, technical development, and other relevant issues and information.

Traders investing in Bitcoin for the first time should also consider other factors such as the overall economic picture, whether or not the cryptocurrency is in a bull market or bear market currently, and the general market sentiment at the time. It can be difficult to balance all of these various factors, but doing so accurately is one of the key skills in successful trading.

There are a variety of trading methodologies and approaches available when dealing with cryptocurrency, and in this section, we will examine several of these.

Swing trading

Swing trading sees traders attempt to capture short-term gains in any stock, equity, commodity, or financial instrument. The timescale associated with swing trading tends to last for a few days, although it can stretch over several weeks in some situations.

Swing traders take advantage of technical analysis in order to identify trading opportunities and analyse price trends and patterns in order to draw informed conclusions. Typically, swing traders hold a position, whether long or short, over more than one trading session, but usually not for longer than a couple of months. Overall, swing trading is intended to capture a significant tranche of a more generalised price movement in a particular asset.

Day trading

Day trading involves a trader making several purchases or sales on a daily basis. The practice is described as day trading, as in principle all positions related to the strategy should be closed prior to the market closing. The intention behind this is to avoid unmanageable risks and negative price gaps. 

Day trading is more speculative than other approaches and is significantly less based on market fundamentals. It also usually utilises specialised software in order to complete trades.

Technical Analysis

Technical analysis is an approach to Bitcoin trading that involves examining and predicting price movements by using historical price charts and market statistics. It is based on the assertion that traders capable of identifying the previous market patterns can form accurate predictions of future price trajectories.

Scalping

Finally, another popular approach to crypto trading is scalping. This involves placing a large number of trades in an extremely short period of time, in order to capitalise upon small movements in the market. Scalping is often viewed as a lower risk trading strategy, as spreading capital over a large number of small trades diversifies any capital risk.

Sign Up on an Online Broker or Derivatives Exchange

When trading Bitcoin, there is always the option of utilising an online broker or using a derivatives exchange. Brokers act as intermediaries, offering contracts that allow trades based on the underlying value of an asset, whereas a derivatives exchange is a platform that traders can use in order to conduct any trading activity directly.

Aside from its fundamental difference, there are practical differences involved with these two methods of trading as well. Depending on where you live in the world, online brokers (CFD) may have certain restrictions when it comes to leverage effect on crypto-related products (like in Europe with the ESMA restrictions on leverage permitted on crypto CFDs). In cases such as this, derivative platforms, being largely unregulated, might offer more leverage than online brokers.

This fact may appear to position derivative platforms ahead of brokerages in terms of appeal, but the benefit of regulatory oversight cannot be overstated, as these legal frameworks are ultimately put in place to protect both retail and institutional investors.  

Deposit Funds

Depositing funds via a cryptocurrency exchange is relatively straightforward, as most of these systems have been designed with inexperienced traders in mind. 

The first part of this process is registering with the trading platform, which typically involves filling in a form with personal details and then verifying your identity. Some Bitcoin exchanges and brokerages will not require this verification process, but in the current climate, most of the credible ones will certainly require you to confirm your identity.

Once you have completed this initial registration, you'll then be asked to add a payment method. Most brokerages and exchanges support all of the mainstream deposit methods that you would usually expect, such as debit cards, credit cards, PayPal, Skrill, etc.

This will then enable you to deposit funds on the site that you have chosen, but it is also advisable to set up a cryptocurrency wallet in order to store any Bitcoin tokens. Cold wallet storage is generally considered to be more secure.

Open Your First Bitcoin Trade

Implementing your first trade in Bitcoin is naturally a major step, so understanding the process fully before embarking on this journey is essential.

The first important principle with cryptocurrency trading is to decide whether or not you're going to hold actual coins. This distinction was explained earlier in the article, but for those that do intend to hold bitcoins, it is vital to acquire a crypto wallet.

While the cryptocurrency space has become increasingly safe and regulated, and the chances of theft or fraud are no greater than with any other financial instrument, it is still advisable to store Bitcoin independently. Exchanges do offer storage, and this can often be secure, but it is still preferable to own your own digital wallet, and rely on this for Bitcoin storage.

It's also important to decide upon your Bitcoin trading strategy before beginning. Make a trading plan based on your entry and exit strategies, and what you hope to achieve from your overall trading activity. Research the market diligently, and keep yourself abreast of any news regarding security and macroeconomic issues. Finally, if you're executing trades yourself, it is important to monitor the crypto market on a regular basis.

Short / Long Position

If you are intending to trade Bitcoin, there are several options available to you. The first of these is spread betting, which enables you to trade on the price movements of Bitcoin, without incurring any tax liability. As with any form of spread betting, this involves opening a position on whether you believe the cryptocurrency will gain or decrease in value.

When you believe that Bitcoin will decline in value, you take a short position on the cryptocurrency. And if you think that Bitcoin will increase in value, you will enter into a long position. This could be held for a considerable period of time and can be seen as long term bet in many ways.

CFD Contracts

Another option is to trade via CFD, which is a derivative product based on financial leverage. These contracts do require you to pay capital gains tax on your digital assets, but are available on a global basis. CFDs can also be used as a hedging tool, enabling you to offset losses incurred with a physical trade in the underlying market. This can be particularly useful in volatile financial circumstances.

While CFDs are popular with experienced traders and can lead to massive profits, there are also downsides to these financial instruments. CFDs incur rigid margin requirements, and also open traders up to the risk of significant losses.

Order Book

Another concept that you should be familiar with before trading in Bitcoin is the order book. This refers to an electronic list of buy and sell orders for any security or financial instrument. The order book will list the number of shares being bid on and offered at every price point, and the document also identifies market participants. Order books are used by almost every cryptocurrency exchange, as well as other markets and assets.

Order Types

There are also a variety of order types available, which enable you to provide specific information to brokers about your trading ethos. Limit and stop orders tell your brokers that you don't favour the market price, and instead, wish for trades to be executed when the price moves in a certain direction.

Leverage

Another important concept in Bitcoin trading is that of leverage. This technique is commonly used by professional and institutional investors, enabling them to trade large amounts of money while only requiring a small percentage of this figure. Trading using leverage is effectively trading via credit, by depositing a small amount of cash, and then borrowing in order to trade via this credit. This can lead to massive profits, but it also results in a greater risk of liabilities.

Risk Management

It is therefore important for any Bitcoin traders to engage in appropriate risk management. This helps protect your account from losses and ensures that you’re entering into the process in a rational way. Risks always occur in any form of trading, but when these are managed effectively, traders increase the odds that they will make a profit in the market.

Risk management is not one of the more glamorous aspects of trading, and thus it can be overlooked at times. However, all successful investors would consider this to be a prerequisite to success. Indeed, even the most prolific traders can experience major problems with just one or two bad decisions if a proper risk management strategy has not been implemented.

Due diligence and the restriction of emotion from entering into the trading process are always important in trading, and the best traders view risk management as an essential pillar in this process.