Bitcoin has proven to be the most lucrative investment of the last decade. A lot of investors are clamoring to get profits through Bitcoin trading, but few understand that there are many different ways to trade Bitcoin. So here are four of the best Bitcoin trading strategies trusted by investors all over the world.
The trading strategy, known as hodling (no that’s not an error), is very popular among traders, mainly amateur traders who cannot keep up with the market’s day-to-day volatility. The term was coined from a misspelling of the word holding made on the popular Bitcoin chat forum Bitcointalk back in 2013.
At its most basic, the hodling strategy involves three basic principles.
- Investors buy up a certain amount of Bitcoin, typically in a bear market when Bitcoin’s price is on a downward slope.
- Hold on to your coin, even if the bearish run continues, and your investment value decreases.
- Sell your coin when Bitcoin rallies in a bull market to a price above your original investment.
So the principle of hodling is simple, buy a lot of Bitcoin for little money and then trade when you can sell a small Bitcoin for a lot of money. This technique may be termed more correctly as a long-term investment strategy rather than a short-term trading plan.
Due to the less technical nature of the method, it is especially appealing to entry-level traders who are new to crypto trading.
Many of us grew up always hearing the words “hedge your bets,” but how many of us truly know where the term came from?
Hedging in the world of cryptocurrency trading refers to a system built by Bitcoin traders and brokers platforms to try and work around the inherent volatility of the crypto market.
There are several different ways to “hedge your bet” in this case. Each method differs slightly but still retains the basic principle behind the strategy.
- The classical method of hedging involves a trading practice known as short-selling. Short-selling means investors will sell their coin with the hope that the market will enter or continue a bear run, allowing them to buy back more coins at a lower price.
For example, if you were to sell ten units of cryptocurrency (let’s call it A) for $1 per unit. That means you made a total of $10 ($1×10=$10). If coin A was to enter a bear market and fall from $1 to $0.80 per unit, that means with the $10 you made you can now purchase 12.5 units of A. Many traders borrow the initial coin from brokers and pay them back, collecting the extra coin (in this case 2.5) as their profit.
This strategy allows traders to increase their currency holdings quickly. There is an essential flaw to this, however. If the market price goes up instead of down, you will lose money instead of making profits.
- You can hedge using CFD’s. A CFD means a Contract For Difference. In this method, you don’t sell your coin, but bet that the price will fall using a derivative. You hold your coin hoping the price will rise, but bet it will fall using a CFD. Whether or not you make a profit depends on the way the price goes. This is a great way to mitigate your losses because you make some profit no matter the direction the price goes.
- Another way to hedge your bets is by trading with bitcoin futures. Bitcoin futures are contracts made between two parties who agree to trade bitcoin at a particular price on a specific future date. The investors have to take the profit or loss depending on whether the price of bitcoin has gone up or down on that date.
Trend trading might be the technique a lot of us are most familiar with. As the name implies, this involves trading a cryptocurrency based on its current or near-future performance in the market.
Trend trading can be done over any period. It is driven by the volatile nature of Bitcoin. The value of the currency rises as public interest in cryptocurrency and cryptocurrency investment rises.
There is a highly technical side to trend trading. You have to predict the future trends of the coin and the direction the market is going to tend towards. Besides involving an in-depth analysis and understanding of the market, you also have to understand the multitude of factors that affect Bitcoin’s price outside the market.
Growing public interest, businesses adopting the currency, government regulations, and even social media have a profound effect on the price of Bitcoin. This makes it somewhat hard to predict and map out trends as quickly as the market moves.
Breakout trading works with the same basic principles of trend trading with a significant difference; in breakout trading, you trade at the beginning or end of a market trend.
To use breakout trading successfully, you have to understand the concept of support and resistance levels. A support level is the floor of the Bitcoin price graph; the value of the coin is not expected to go below that point. While a resistance level is the ceiling of the Bitcoin price graph, the value of the coin is not likely to go above that point.
If the price of Bitcoin fluctuates above or below these lines, it’s known as the breakout point. The price of the coin becomes extremely volatile at that point, allowing investors to quickly make (or lose) large amounts of money.
All these points mentioned above involves a good understanding and analysis of the market.
Bitcoin trading is a great way to make a profit due to market volatility and the ease of entry. However, traders should make sure they understand how Bitcoin trading works before jumping into it, to avoid losing all their investments in a few bad trades.