When bitcoin started to become more relevant, day traders saw the potential and decided to start trading through bitcoin exchanges. During its earlier days, bitcoin scams related to exchanges and wallet providers stealing the bitcoins of their users and closing down the service overnight were a very common thing. Nowadays however, the market for bitcoin trading has evolved into something much more mature.
If you’re interested in trading it’s a good idea to understand how bitcoin trading works before you jump in. Whether you want to trade manually or through bots, here are some things you should know first:
Choosing your exchange
Before even starting, you should figure out what exchange is the most convenient for you. Even though bitcoin is a decentralized currency, intended to be P2P, doing high frequency trading without the help of a centralized server is impossible with the way things work. These servers tend to be considered the main weak point of the bitcoin market, but the security measures are constantly improving throughout several exchanges, which lessen any worries regarding potential thefts.
Different to other markets, security will be your number one priority when trading in a hot wallet. You can take into consideration things like what the platform offers and some trading options that you may find unique, but the main thing you should care about is security. Two-factor authentication, longevity, proof-of-reserve and other layers of authentication are the things that you should really care about when picking an exchange.
For a traditional exchange you might have longevity and two-factor authentication as something not too important. However, proof-of-reserve should be your top priority when choosing an exchange. This is a new feature for bitcoin exchanges, and what it does is that it lets the exchange prove that they actually have the amount of bitcoin they claim to have through addresses containing big amounts of bitcoins, this way, you avoid running into scams. Exchanges like Bitstamp and Kraken offer proof-of-reserve, so you should definitely check them out.
Your trading strategy
Now that you chose your exchange and created and verified your account, thinking of a trading strategy may be a good idea. Plenty of traders time the market on a daily basis, but that involves tracking the market constantly, which can be tiresome or too time consuming. Instead, going for the buy and hold strategy might prove to be the better choice. Buying bitcoins on a regular basis is a good idea, since you never know when huge price swings can happen because of a regulatory news piece coming from china or a new app that people want to invest in. You can trade on a weekly or even a monthly basis. It’s really up to you.
It’s also important to know that purchasing without a reason or without an understanding of the market is a bad idea and a common issue. Bitcoin prices can be quite volatile, known to drop in price by as much as 50% in a single day, and sometimes even a couple of hours. So be patient, think and act objectively because it can be tempting to exit the market at a loss when prices go down like this. It’s also important to understand that most of the time the price of bitcoin increases, so be smart when purchasing if you want to profit from it, otherwise you’ll end up buying high and selling low.
Report your earnings
One very important thing to keep in mind is that when you’re using a centralized exchange anonymity isn’t really a thing, since the exchange knows everything regarding your identity. This happens because they are required to follow certain regulations to avoid money laundering schemes and other illegal activities. Because bitcoin keeps increasing its value in terms of dollars, you’re going to have a hard time hiding that from your government during tax season. So, when you’re filling out your yearly tax return, be sure to report any earnings you might have gotten with bitcoin, since in most countries it’s considered capital gain.