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Published: Aug 15, 2023, 2:28pm
With the evolution of financial markets, cryptocurrencies have emerged as a popular asset class, gaining the attention of investors in Australia, as well as globally. Bitcoin (BTC) was the first cryptocurrency and is still the largest and most well known.
However, trading Bitcoin requires a deep understanding distinct from traditional investments. For Australian investors specifically, navigating the nuances of cryptocurrency trading within our tax and regulatory framework is vital.
This guide explains how Bitcoin trading works, which factors influence Bitcoin’s price the most, and the role of technical and fundamental analysis in forming a trading strategy.
Note: Trading cryptocurrencies is extremely risky and anyone doing so should only ever invest what they can afford to lose. The cryptocurrency market is unregulated in Australia and traders have no source of redress if something goes wrong.
At its core, Bitcoin trading refers to the act of buying and selling Bitcoin in an attempt to capitalise on its price fluctuations. Unlike traditional fiat currencies which are anchored by governmental and institutional policies, Bitcoin operates on a decentralised network known as blockchain. Its price is driven by myriad factors including demand, adoption rates, regulatory news, and broader market sentiments.
For traders, there are primarily two approaches:
Spot Trading: This involves the actual buying or selling of the Bitcoin asset. Once purchased, the Bitcoin is owned and can be transferred or used as a form of payment.
Derivatives Trading: Here, traders don’t own the actual Bitcoin. Instead, they speculate on its future price movements through contracts, potentially earning profits without ever holding the cryptocurrency. This form is typically seen as more risky, as traders can be left with nothing if the trade goes south.
Sign-up to a cryptocurrency exchange: Look for an exchange that has an easy user interface and handles a wide range of coins, including Bitcoin.
Fund your account: Once you have signed up with a crypto exchange, you need to fund your account by paying money into it.
Pick Bitcoin to invest in: After putting money into your account, you can select the quantity of Bitcoin you wish to buy.
Start the process of trading in Bitcoin: Once you own Bitcoin, you can start to trade. You may want to enlist the help of a trading bot which automates the process based on your stated trading objectives.
Store your public and private keys in a digital wallet: If you are an active Bitcoin trader you might want to store your public and private keys—the credentials you need to execute trades—on your chosen crypto exchange. However, some traders prefer a non-custodial Bitcoin wallet. There are two kinds of digital wallet: ‘hot’ ones are connected to the internet, ‘cold’ ones are not; each has pros and cons, which you can read about here.
Day Trading: A high-risk method centred around short-term market movements. Traders often enter and exit positions, typically using derivatives contracts, within the same day without actually owning the Bitcoin. These contracts represent the price, allowing traders to capitalise on both upward and downward movements. Within day trading, there’s a specific approach known as scalping. Scalpers focus on securing small wins, often less than 1%, in very short timeframes, leveraging minute-by-minute price fluctuations.
Swing Trading: Leverages short to medium-term price patterns. Working on the premise that prices consistently swing and don’t just move in a single direction, traders take positions from days to weeks. They might utilise derivatives or buy Bitcoin directly.
Position Trading: With a long-term perspective, position trading involves buying and holding Bitcoin for extended periods, irrespective of short-term price fluctuations. The focus is on potential long-term growth.
Arbitrage: Involves taking advantage of price discrepancies for Bitcoin across different exchanges. Traders buy Bitcoin on one exchange where the price is lower and then sell it on another where the price is higher, pocketing the difference.
Limited supply: The price of Bitcoin depends upon supply and demand. Bitcoin has always had a finite number of coins and its current supply is capped at 21 million, which is expected to be exhausted by 2140. A limited supply means that there is a high possibility of change in the price of Bitcoin as per its rising and falling demand.
Market capitalisation: Bitcoin is known as the largest cryptocurrency in the world as it has the highest market capitalisation which means that the users perceive this currency as a sought-after investment.
Notable and key events: Any big news which is directly related to Bitcoin’s security tends to have an effect on the Bitcoin’s overall market price. For example, the ban of crypto in China led to massive sell-offs in BTC.
Smooth integration: Bitcoin is a cryptocurrency which enables smooth transactions between two parties without any involvement of regulatory or centralised authority. Therefore, it depends on its integration into a recognised payment system. If a lot of corporations or countries accept BTC as a legal payment method, then it can have a direct upwards effect on its pricing.
Do your research: Unlike other financial markets, Bitcoin markets are infamously volatile, and key events can impact and move the prices of Bitcoin both heavily and quickly. If you want to be a successful Bitcoin trader, you have to stay up-to-date on Bitcoin news and any key event that could cause market movements.
Ignore the hype: Do not take your trading calls based on social media. As Bitcoin is a hot topic and misleading news on Bitcoin tends to spread quickly, traders who trade based on the comments made by others will inevitably lose money.
Build a balanced portfolio: Bitcoin trading is still at an early stage. There is still quite a lot of ambiguity in the crypto market. Thus, it is important to build a balanced portfolio, and not a Bitcoin-heavy one. Building a balanced portfolio includes different cryptocurrencies and a mix of other financial assets. This strategy will help you beat volatility.
Be wary of scams: The world of crypto trading is the wild west of the investment world. Crypto is still relatively unregulated in Australia, which makes the markets rampant with scammers ready to steal your hard-earned money. Don’t fall for so-called ‘professional traders’ who reach out to you via social media or email, and as with anything, if it sounds too good to be true, run away.
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While Bitcoin trading presents opportunities, it remains a nascent and multifaceted market. The decentralised nature of Bitcoin opens doors to strategies like arbitrage and margin trading, potentially yielding significant short-term profits. However, this potential also comes with its set of challenges. As regulatory landscapes evolve, Bitcoin traders must stay attuned to shifts in legislation, tax implications, and market practices.
It’s essential not to be swayed by prevailing market enthusiasm but to approach Bitcoin trading with a discerning mindset. Being proactive in understanding its volatility and unpredictability will serve as an invaluable asset in your trading journey.
Remember, informed decision-making is the cornerstone of any successful investment strategy.
The advice and information provided by ForbesAdvisor is general in nature and is not intended to replace independent financial advice. ForbesAdvisor encourages readers to seek expert advice in relation to their own financial decisions and investments.
To begin trading Bitcoins, follow these steps:
If you invest $100 in Bitcoin at its current price of around $45,000 AUD per Bitcoin (13th Aug 2023), you’d own approximately 0.0022 BTC. The value of your Bitcoin can fluctuate based on market dynamics. If the price of Bitcoin rises or falls, the value of your 0.0022 BTC will move accordingly. For example, if the price of Bitcoin doubled to $90,000, your BTC would be worth $200.
Bitcoin trading has the potential to be profitable, but it also comes with significant risks. The cryptocurrency market is known for its volatility. Some traders have made substantial profits, while others have experienced considerable losses. It’s essential to conduct thorough research, understand the market trends, and have a well-thought-out strategy before trading. Never invest money that you can’t afford to lose.
Profit in Bitcoin trading comes from buying at a lower price and selling at a higher price. Here are some strategies traders often employ:
Remember, while these strategies have been profitable for some, they also come with inherent risks. Always trade based on informed decisions.
I am the UK editor for Forbes Advisor. I have been writing about all aspects of household finance for over 30 years, aiming to provide information that will help readers make good choices with their money. The financial world can be complex and challenging, so I'm always striving to make it as accessible, manageable and rewarding as possible.