Bitcoin is complicated. The software that makes it possible is highly complex and took years to develop. Analysing the trends of the market in order to trade it can involve considering tons of variables. But at the same time, trading Bitcoin is simple. All you need is the right app and a good guess.
When someone asks, “How do you trade Bitcoin?” they are generally looking for one of three answers.
1. They want to know the mechanical components behind how Bitcoin is traded. Essentially, that means understanding how Bitcoin works.
2. They want to know where to go in order to trade Bitcoin. In short, the places where people interested in buying and selling congregate.
3. They want to know when to buy low and when to sell high. Basically, they are interested in the technique involved in trading Bitcoin like it is a stock.
No one of these is a wrong or useless thing to know, but no one of them is the whole picture either. So, in order to get you, as a beginner, started with trading Bitcoin, let’s tackle all three.
Table of Contents:
The Components of Bitcoin Trading
It is important to start with the fundamentals. As exciting as it is to learn how to speculate the market and make money off of it, you need to know how Bitcoin works mechanically. This will help you execute trades. But more importantly, it will keep you from getting scammed.
Let’s start with the reason why Bitcoin can exist: The blockchain.
What is the Blockchain? ⛓️
The blockchain is the digital “place” where Bitcoin exists. Bitcoin, as you might know, does not have a physical component in the same way that fiat currency does (fiat currency being currency issued by a country, like British Pounds). So, how do we know who owns it if it does not have a physical presence?
Well, consider this: How do we know that you own your paycheck? Chances are that your paycheck goes straight from your job’s funds to your bank account without ever actually becoming paper money. We know that it is there because your bank trusts your job. And then, when you go to the store to buy groceries and swipe your card to pay for them, that store trusts your bank.
The blockchain is a technology that keeps track of every single Bitcoin in existence. Every computer that runs a blockchain application has a ledger of where every Bitcoin is, as well as where it was and when it was there. Because there are so many of these ledgers, they can be trusted more as more come to exist.
The important thing about the blockchain is that you cannot trade Bitcoin, or even hold it, without a blockchain app. The easiest way to get a blockchain app is to find a crypto wallet.
What is a Crypto Wallet? 👛️
A crypto wallet is a storage method for your Bitcoin… sort of. It actually stores the keys to your Bitcoin, which is very similar to storing the Bitcoin itself. The “keys” are the passwords you use to access your Bitcoin on the blockchain.
Since these passwords can get incredibly complex and storing them by more conventional means is now always safe, crypto wallets can be one of the best ways of safeguarding your holdings.
The Places Where You Can Trade Bitcoin
Let’s jump from how Bitcoin works, to where to go to buy and sell it. It is no accident that we go in this order, by the way, as you cannot find a reputable seller without knowing how Bitcoin is stored.
Consider, for a moment, the crypto wallet. It exists as a means to help consolidate your holdings on the blockchain. There are many different crypto wallets, but regardless of which one you get, it is important that you have one to make trading cryptocurrencies safer and easier for you.
So, what does it tell you if a trading platform does not connect to your crypto wallet? What does it tell you if it does not give you the keys to the Bitcoin you bought from the platform?
What this should tell you is that it is a platform with severe limitations at best, and a scam at worst.
What are the Best Trading Platforms?
It all depends on what you are looking for, but the best trading platforms for Bitcoin come in two varieties: The first is platforms that are based entirely around cryptocurrency, like eToro and crypto.com. These are great because they are usually newer and easier to use.
The second kind of Bitcoin trading platform is stock trading platforms that have grown to accommodate Bitcoin as well. Even if a stock trading platform has not incorporated many different kinds of cryptocurrency into them, they tend to at least have Bitcoin due to its popularity.
These include places like Interactive Brokers and IG, both of which have a long history of reliability and regulation. They got into the crypto trade early, so they also have good guides on Bitcoin trading.
The Technique of Buying Low and Selling High 💸️
Let’s get down to brass tacks. This is what most people look for when they look for a guide on how to trade Bitcoin. Now, you already know that we cannot teach you how to get rich quick. If you have any patience at all, you will begin to accept that fact now. But that is just the beginning of the process.
The sooner you have the thought, “I can’t get rich quick,” the better. But there is a difference between having the thought and actually internalizing the reality of it. To better teach that lesson, we are going to break our advice down into three stages.
Stage One: Starting Off Small ➡️
When you go to Reddit or read up on the research sections of any given trading platform, you are going to hear about people trading in huge numbers. Casual mentions of £500,000 investments, joking about losing dozens of pounds in single bets, and so on and so forth. It is easy to get a wrong impression here.
The impression this culture gives is that it is not only expected that you commit huge amounts of money to the Bitcoin trade, but that you are not going to get anywhere if you do not commit huge amounts of money. The problem is not that this observation is untrue. The problem is that it will hurt you.
Imagine that you are trading Bitcoin. You are watching the price of it go up and down with the intention of buying when it is cheap and selling when it is expensive. This is a reasonable thing to do.
But then, you decide that you are going to try and make £100 a day doing this. There are guides that actively encourage you to do this. You can find Tik Toks of people seeming to do this successfully.
Here is the problem: Making £100 a day from Bitcoin takes a huge initial investment in order to do it reliably. Which means you either need to dedicate weeks, if not months of whatever disposable income you have to the Bitcoin trade, or you need to take big risks with whatever money you have.
And fair enough, maybe you do successfully dedicate all that time and money to the trade. But the thing is, most people do not do that. We encourage you to do that if you can, since it is far preferable to other options. But most people get impatient within a week. They see the returns other people are getting, or the returns they could have gotten if they had invested differently, and they do something risky.
The truth about Bitcoin trading you need to learn is that you are only going to get so much out of certain levels of investment. And it is much better if you learn how much you can get in accordance with the risks you are both willing and able to take by starting small. How small? Try no more than £5 at first.
Stage Two: Experimenting with Different Strategies ➡️
One of the great things about starting off small is that it makes experimenting feel far less consequential. For instance, imagine that you wanted to get into Bitcoin options. And yes, even though they are not stocks, Bitcoin still has options and CFDs just like normal stocks do.
Options are high risk and high reward. Lots of people make huge amounts of money off of options, only to confuse their luck with foresight and lose all of it and more immediately after.
But if your entire life savings are tied up in Bitcoin, then dedicating to options will probably feel pretty high stakes. In fact, the stakes will be so high that you might just not do it. Or, you will do it, lose everything, and be in too tight of a financial spot in order to go back into the market and try again.
Hence why we recommend starting with a ridiculously small investment. £5 will not buy a whole option any more than it will buy a whole Bitcoin token. But in both cases, you can buy what is called a “fractional share” in stocks: £5 of a single Bitcoin, or £5 of a single option.
This will give you a similarly small amount of return on your investment, of course. If your Bitcoin is £20,000 and you only bought £5, then that is .0025% of a Bitcoin. If it goes up 10%, then you get .0025% of that additional value. But, as you might guess, you will also avoid the huge losses that can follow.
So, you can try options. You can also try strategies put forward by a variety of different sources. Reddit and Tik Tok are good places to find new and wild interpretations of the market. Twitter has plenty of people talking about Bitcoin trading as well. But they rarely have a complete idea of what they are talking about. These people tend to be rich kids with no formal education in securities trading.
What they offer is not sound financial advice. What they offer is a perspective that, while incomplete (and the smart ones will be the first to point out how incomplete their perspective is) will at least illuminate some corner of the market that you might not have looked at before.
If you are investing on a small scale, then you risk very little by going down a Tik Tok trading strategy rabbit hole. And who knows? Maybe you will find something interesting or educational in the process.
Step Three: Growing Your Principle ➡️
Your initial investment and learning period can be as long or as short as you want them to be. It can last forever. But the trouble is that if you do it right, then you will grow your holdings and get big whether you want to or not. And while you can always just not trade what you hold, it pays to be prepared.
How should your behaviour change once your holdings grow? Well, whether they grow through wise investments or just putting more and more money in over time, the answer remains the same: The more your holdings grow, the more cautious you should be with them.
This is not the response that a lot of people want to hear and might not even be the response you were expecting. Lots of people think that by having a lot of Bitcoin, you have a lot of room to experiment and recover from failures. And that is technically true.
But ideally, you do your experiments with a little Bitcoin, not a lot of it. Even when you have a huge surplus of Bitcoin, that huge surplus should serve to amplify good investments, not speculate.
Basic Trading Technique 📊️
In order for “amplifying good investments” to mean anything, let’s talk about what a good investment is and how to make one. The easiest place to start is with the buying and selling of Bitcoin. How do you know when to buy and when to sell? What is a good investment on just those two axes?
The simplest way to buy and sell safely is to avoid the “buy the dip” mentality that many traders fall victim to. This is a mindset wherein people wait until a business or cryptocurrency has fallen in value. The price of the stock or the currency will dip, and only then will some traders buy it.
But you can see issues with this way of investing pretty immediately. There is never a promise that something falling in value will come back up. In fact, the only thing that is promised is that which has already happened. And definitionally what is happening in this situation is that the price is lowering.
Buying the dip is not a terrible idea. The terrible idea is buying the dip the moment it seems to happen. If Bitcoin falls in value, let it. It will take time for it to bounce back up. What you should do when Bitcoin falls in value is not buying immediately. The sooner you buy the longer you will have to wait for returns.
What you should do is look into why it is falling in value. Is it a regulation being put into place? Is it responding to economic instability elsewhere? Maybe it really is just the result of some huge Bitcoin holder offloading their tokens. In any case, you should diagnose the cause of the dip in the price.
Once you figure out that this cause will end, then you can buy as if you are predicting it will end. And by that time, it will probably have fallen to an even more affordable price. In fact, the best thing to do is not to buy then, but to wait even longer. After all, it might be an affordable price, but how long are you willing to wait for it to go back up? Rather than buy the dip, buy the climb.
If Bitcoin falls from £30,000 to £20,000, then you are already getting a huge discount whether you buy at £20,000 in May or £22,000 in June. The advantage of buying the climb is that while you might lose 3% to 10% of the value of the trade, you will dodge an even greater percentage of the risk.
Conclusion: Bitcoin Trading is Risk Management
The art of making trades is the art of taking risks. Some risks will pay off, and some won’t. Knowing this, the best thing you can do is develop a strategy that nets you more money than it loses you.
A strategy like this will not fall into your lap. You have to know a lot about how Bitcoin works, where to trade it, and how to trade it in order to make your gains outpace your losses. It will take time, and no amount of hunting for lottery tickets will make that time go faster.
The best thing you can do is learn, be patient, and let the money come to you, even if it comes slow.