Bitcoin trading explained: How to trade BTC

Bitcoin trading is becoming increasingly popular as cryptocurrencies gain wider adoption and acceptance as an investment asset class. 

With so many strategies – from short-term speculation to long-term hodling – where and how can investors begin their journeys with the cryptocurrency? 

In this guide, we take a look at how to start trading bitcoin (BTC), evaluating key risks and opportunities the coin may offer.

What is bitcoin trading?

Bitcoin trading is the process of buying and selling BTC with the aim to profit from the coin’s price movements, which also involves risk of losses. Traders aim to gain returns by buying bitcoin when the price is low and selling when it is high. 

Short selling is a form of trading bitcoin for profit whereby traders can profit as the price of the coin falls, but lose money if the coin’s price rises. Traders can speculate on a potential upside or downside by conducting a technical analysis, studying on-chain data, observing the macroeconomic environment and examining signals that could potentially indicate the current market sentiment.

Market players have a wide choice of financial products available for trading BTC, from derivatives such as futures and contracts for difference (CFDs) to spot trading on various centralised and decentralised crypto exchanges (DEX).

Before you start trading BTC you should note that the cryptocurrency markets can be extremely volatile, resulting in a high degree of risk. The chances of turning a profit when you trade bitcoin go hand in hand with the risk of losses.

History of bitcoin

Bitcoin was created in 2008, when a person or a group of people under the pseudonym Satoshi Nakamoto released a technical paper called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. The whitepaper detailed features and philosophy of a peer-to-peer payment system that would allow online transactions “without going through a financial institution”.

“We have proposed a system for electronic transactions without relying on trust,” said Satoshi Nakamoto in the white paper.

When did bitcoin start trading? The first economic transaction involving bitcoin took place in 2010 when someone in Florida paid 10,000 BTC for two Papa John’s pizzas worth $25. At the time, one BTC coin was priced at $0.0025 – unimaginable numbers compared to what Bitcoin is trading at right now.

Bitcoin relies on a shared public ledger or blockchain where all confirmed transactions are stored. The network uses the proof-of-work (PoW) consensus mechanism whereby miners compete to solve complex cryptographic puzzles to validate transactions that are updated to the public ledger. In return, miners are rewarded with bitcoin for verifying blocks of transactions.

The Bitcoin blockchain has undergone permanent changes called ‘hard forks’. Most notably, a separate blockchain called Bitcoin Cash (BCH) was created in August 2017, when Bitcoin developers split into opposing factions due to their differing ideologies on the future roadmap of the cryptocurrency. 

In 2021, the crypto faithful saw the approval of the first bitcoin-linked exchange-traded fund (ETF). The Proshares Bitcoin Futures ETF offers investors a convenient and liquid way to gain direct exposure to the bellwether cryptocurrency.

Since then, bitcoin traders have also seen the launch of a short bitcoin ETF designed to give holders a way to profit from the crypto bear market. However, if the bitcoin price rises, traders with a short bitcoin ETF exposure would lose money. 

The US Securities and Exchange Commission (SEC) is yet to approve a spot bitcoin ETF despite its popularity.

Factors to consider when trading bitcoin

Below are some factors to keep in mind before pursuing BTC trading. 

• Market volatility

The cryptocurrency market is not as mature as equities and is known for high volatility, which increases risk. For example, between November 2021 and June 2022, bitcoin fell from an all-time high of about $69,000 to a low of near $17,500 – a drop of nearly 75% in just seven months.

• Leveraged exposure

The cryptocurrency market is also known to be highly-leveraged. The ease of debt available from various decentralised finance (DeFi) applications and access to leveraged products like futures and CFDs has made it easy for traders to gain large exposure while only requiring to tie up a small amount of capital. The high leverage in cryptocurrency markets is one of the factors leading to its high volatility. Note that leverage magnifies both profits and losses. 

• Bitcoin trading hours

Bitcoin and other cryptocurrencies are available for trading 24/7. This is one of the key differences between equity and cryptocurrency markets, as the former typically remain closed during nights, weekends and bank holidays.

• Liquidity

Another key difference between equity and cryptocurrency markets is liquidity, which measures how easy it is to convert an asset into cash without affecting market price. Equity markets are highly-efficient and liquid compared to cryptocurrencies. While the liquidity of top cryptocurrencies like bitcoin and ether have improved over the years, less-known cryptocurrencies may suffer liquidity issues. 

What moves BTC prices?

There are several factors that have significant influence on bitcoin price movements. These are essential to be aware of when learning how to trade bitcoin.

Supply and demand

You may hear bitcoin enthusiasts talking about ‘hard cap’ and ‘halving’. Bitcoin’s hard cap refers to its limited supply. The maximum amount of bitcoin is capped at 21 million. No bitcoin will be mined after the total supply reaches its hard cap limit.

Halving is an event that occurs roughly every four years when the amount of bitcoin rewards to miners are cut in half, reducing the rate of bitcoin emission. In essence, halving events cut bitcoin’s inflation rate every four years.

Bitcoin’s hard cap and halving mechanism are key to the coin’s supply dynamics. As with other markets, when an asset has a limited supply, its price goes up when demand increases. Bitcoin demand is primarily driven by global adoption from individuals and institutions. 

Today, bitcoin is seen as a speculative alternative investment. If bitcoin fulfils its goal to be the global legal tender its demand will naturally rise.

Media

The media plays an important role in how the public views bitcoin. For many, the concept of cryptocurrency is new and they may not fully understand the notion of decentralisation.

Media reports can sway public perception of bitcoin and cryptocurrencies, shifting investor sentiment. Fears of a cryptocurrency bubble have been circulating ever since bitcoin prices skyrocketed.

In 2021, bitcoin was touted to be an inflation hedge and expected to remain uncorrelated to equity markets. This theory was tested in 2022 as bitcoin and altcoins have maintained a high correlation with equity markets. 

Adoption

Adoption of bitcoin is a leading upside driver for the cryptocurrency price. As using bitcoin as a payment method removes the need for centralised intermediaries, global financial institutions have naturally opposed its adoption. 

On the other hand, crypto natives have argued that the Bitcoin network is slow and lacks the scalability to support transactions on a global scale. However, as of 4 July 2022, two nations – El Salvador and Central African Republic – have adopted bitcoin as legal tender. 

Bitcoin supporters believe the adoption of the coin can help countries fight economic disasters like hyperinflation. Moreover, scaling solutions like the Lightning Network are working on improving transaction time and growing scalability. 

Community

Cryptocurrency communities play an important role in spreading awareness about decentralised digital assets.

The community of Bitcoin traders and investors is arguably the strongest and the most vocal among various crypto factions. A group of bitcoin supporters called ‘Bitcoin Maximalists’ believe BTC is the only digital asset that will be needed in the future.

Some famous Bitcoin supporters include Twitter founder Jack Dorsey, MicroStrategy CEO Michael Saylor and Shark Tank investor Kevin O’Leary.

Regulation

Government regulations will have a significant impact on the viability of cryptocurrency networks like Bitcoin. Authorities have criticised cryptocurrencies for facilitating terror financing, money laundering and dark web transactions.

In 2021, China banned cryptocurrencies by prohibiting its financial institutions from engaging in crypto-related transactions and outlawing crypto minings and transactions. China’s crypto ban saw BTC lose as much as 55% of its value between April 2021 and June 2021.

More recently, on 7 June 2022, US senators unveiled a bill that could hand over cryptocurrency oversight to the Commodity Futures Trading Commission (CFTC).

Several countries have begun developing central bank digital currency (CBDC) to counter the growing popularity of cryptocurrencies and stablecoins.

Bitcoin price historical chart

According to the bitcoin price history data from CoinMarketCap, the coin was trading near the $100 mark in early 2013. Looking  at the bitcoin price history chart of 10 years we can see that in just four years the coin has grown tenfold, hitting the $1,000 mark by early 2017. 

The cryptocurrency saw its first major bull market in 2017, as market exuberance pushed the coin to a then record high of near $20,000 in December. However, the bitcoin price graph shows it sank to $3,128 by the end of 2018, taking nearly three years to return to its 2017 peak. 

_{Past performance is not a reliable indicator of future results.}

The crypto rose to nearly $30,000 in December 2020 and hit a new high of $64,899 in April 2022, bolstered by increased institutional investor adoption and ultra-low interest rates.

Bitcoin briefly fell to $28,880 in June 2021, an effect of China’s ban on bitcoin mining. However, some investors took the opportunity to buy the dip and by early November BTC surged to another record high of $69,000, boosted by favourable market sentiment after the approval of the first bitcoin-related ETF in October 2021.

Since then, as of 5 July 2022, BTC has been on a downtrend. Souring macroeconomic conditions brought on by the high inflation and start of a rate hike cycle by the US Federal Reserve (Fed) has played a significant role in the crypto bear market of 2022.

Different ways to trade or invest in bitcoin

How do you trade bitcoin? There are multiple approaches traders and investors may apply to bitcoin trading, from buying the underlying coin on various bitcoin trading platforms such as centralised or decentralised exchanges (DEX) to buying bitcoin-linked ETFs or trading derivatives. 

The best way to trade bitcoin would depend on your personal circumstances such as risk tolerance, investing or trading strategy, portfolio size and goals.

Bitcoin CFDs 

Bitcoin CFD trading is a popular way to speculate on the price movements of the cryptocurrency without owning the underlying asset. 

CFDs are contracts - typically between a broker and a trader - where both parties agree to pay the difference in the asset value between the opening and closing price of a trade, whichever direction a trade goes. 

When trading CFDs, traders can use leverage to take large positions. It should be noted that leverage can magnify the size of gains as well as losses. 

Capital.com offers traders BTC CFDs to speculate on future price movements with a 2:1 leverage for retail clients, which means a BTC position worth $1000 will require traders to hold a margin of $500 in their account.  However, if the market goes against a trader’s position on bitcoin, they would need to add extra funds to their account to cover for potential losses and keep their positions open. 

Traders can also trade the Crypto Index (CRY) which is an index composed of five popular cryptocurrencies namely Bitcoin, Ethereum, Ripple, Bitcoin Cash and Litecoin. Read on for a more detailed explanation on bitcoin CFD trading later in the guide.   

Centralised exchanges

Centralised exchanges such as Binance and Coinbase are relatively easier to access for bitcoin trading for beginners. By buying bitcoin on a centralised exchange you are investing in the underlying asset. You can either use it for a short-term gain (trade), or hold the coin for the long term (invest). Centralised exchanges also provide higher liquidity and improved user experience to traders. 

Decentralised exchanges

DEX includes exchanges like the Ethereum-based Uniswap. Typically, bitcoin trade on DEX requires cryptocurrency wallets. These digital wallets are used to store private keys to cryptocurrencies and interact with Web3 platforms. 

DEX provides users with a trustless way of trading, as it does not require a centralised market maker to facilitate trading. You can both trade and invest in crypto assets on DEX. 

Bitcoin ETFs 

Crypto enthusiasts can also use ETFs to trade bitcoin derivatives. As mentioned earlier, numerous bitcoin futures ETFs are available to Bitcoin traders. 

Traders who are bearish about the short-term performance of BTC can use a bitcoin short ETF to profit from the downturn, yet they are exposed to risk of losing money if BTC price rises.  Alternatively, traders can use long BTC futures ETF to both trade or invest in the coin. 

Bitcoin derivatives

Bitcoin futures and options contracts offer traders bitcoin exposure without owning the underlying asset. Future contracts refer to an agreement to buy an asset at a future date, but at an already specified price. Option contracts, on the other hand, involve an agreement to buy or sell an asset for a specific price at some point in future. 

What is a bitcoin trading strategy?

There are a wide range of bitcoin trading strategies that can be used for speculating on the coin’s value. Below are some of the popular approaches you can apply when trying to profit from bitcoin’s price fluctuations – either via the underlying asset or through derivative products. Note that all trading contains the risk of losses. 

Day trading

Day trading refers to buying and selling bitcoin within the same trading session or on the same day. This strategy could involve going long or short on the bitcoin price after analysing market sentiment and recent price movements, and is aimed at short-term price fluctuations. 

Swing trading

In swing trading a trader can hold a position for many days or even a few months. Swing traders analyse the price movement trend of an asset and hold a position until the trend reverses or slows.

Scalping 

Scalping refers to trading on small price movements and involves making numerous, frequent trades in a short period of time. Efficient scalping requires a high level of discipline in following a strict exit strategy as net gains can be eliminated by one big loss.

Hedging 

Hedging is a risk management strategy whereby a trader takes opposite positions in an asset to ensure that losses are limited if the market goes against their original position. Hedging can also reduce potential profits.

HODL

HODL is a crypto-native term and a play on ‘hold’. It refers to investing in bitcoin or other cryptocurrencies and not selling them for a while, even in the face of market turbulence. HODL has also come to stand for ‘hold on for dear life’ among the crypto faithful.

How to trade bitcoin CFDs

Are you wondering how you can trade bitcoin using CFDs? Read on to learn more about how to start trading bitcoin CFDs. 

A CFD is a contract, typically between a broker and an investor, in which one party agrees to pay the other the difference in the asset value between the opening and closing price of the trade. CFDs are typically held within shorter timeframes, rather than as long-term investments.

The five steps to learning how to trade bitcoin using CFDs are:

1. Analyse market sentiment. Read bitcoin-related news and understand the various factors influencing BTC price movements.

2. Choose a bitcoin trading strategy that suits your risk profile. You can open and close a position on the same trading day or you can keep your position open for a few days or weeks based upon your evaluation. 

It should be noted that brokers usually charge an overnight fee to keep positions open over several days. It is important to always conduct your own due diligence before trading and never trade money you cannot afford to lose.

3. Decide whether you want to go long or short: If you are bullish on the short-term price performance of bitcoin you can take a long position by choosing to ‘buy’ a BTC CFD at the current trading price. If you are bearish you can take a short position, opting to ‘sell’. 

Your gains or losses will amount to the difference between your entry and exit points. Since CFDs are leveraged products, traders can take oversized positions depending on the leverage ratio offered by the brokerage. Leverage magnifies both profits and losses. 

At Capital.com, traders are offered a leverage ratio of up to 2:1, which means a BTC position worth $20,000 will require traders to hold a margin of $10,000 in their account. 

However, if the market goes against a trader’s position, they will be required to add extra capital to their account to cover potential losses and keep their position open. It is important to note that leverage trading products can maximise gains as well as losses. 

4. Plan your risk-management strategy: Due to the use of leverage in CFD trading, they are considered high-risk financial instruments and should be used with caution. There are various risk-management tools available to CFD traders, such as stops and limits. 

A stop-loss order is one of the most used mechanisms to limit a loss when the market moves in an unfavourable direction. Stop-losses are designed to buy or sell a specific asset when its price reaches a certain level. 

You can also use limit orders to ensure tight control is kept over your strategy to prevent buying too high or selling too low.

5. Monitor your positions: Once you have opened a CFD position and placed relevant stop-loss orders, it is important to monitor your traders. There are various technical indicators that can help traders estimate market movements. 

Pros and cons of trading bitcoin CFDs

As with any trading strategy, trading CFDs has its own advantages and drawbacks. Whether CFD trading is suitable for you would depend on your risk tolerance, trading goals and strategy. 

Pros

• CFDs allow traders to speculate on future price movements without the need to buy the underlying asset.

• They are leveraged financial instruments that allow traders with less capital to take larger positions. Remember that leverage magnifies both losses and profits. 

• Successful CFD trading may result in amplified gains due to leverage, yet if market goes against a trade, it can lead to magnified losses.

• CFDs are more flexible and liquid compared to other derivatives, such as futures, and do not have an established price or date to buy or sell the underlying asset.

• They can be used to short assets in certain markets where shorting is allowed.

Cons

• CFDs are high-risk financial instruments. The use of leverage can result in oversized losses.

• Traders are at risk of margin calls if the market goes against their CFD positions.

• CFD positions may incur additional fees, like overnight fees and stop-loss fees.

• Traders may incur extra expenses on entry and exit spreads.

Why trade bitcoin CFDs with Capital.com?

Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. The neural network analyses in-app behaviour and suggests videos and articles that fit your investment strategy. 

Trading on margin: Thanks to margin trading, Capital.com provides you with the opportunity to trade bitcoin CFDs and other top-traded cryptocurrency CFDs, even with a limited amount of deposits in your account. Keep in mind that CFDs are leveraged products, which means both profits and losses can be magnified. 

Trading the difference: By trading cryptocurrency CFDs, you don’t buy the underlying asset itself. You only speculate on the rise or fall of the stock price. A CFD trader can go short or long, and apply trading scenarios that align with their objectives. CFD trading is similar to traditional trading in terms of its associated strategies. However, CFD trading is short term in nature, due to overnight charges.

All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS and Android.

Bitcoin market trading hours

Does bitcoin trade 24/7? The answer is yes, bitcoin trading hours are unlimited.The best time to trade bitcoin is after you have done your research. Unlike stocks, the cryptocurrency markets are open for buying and selling around the clock, which means bitcoin online trading is available at all times. You can trade BTC CFDs on Capital.com 24/7. Given the volatile Bitcoin price history, this allows you to actively manage your position in real-time and respond to market events timely. 

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