As soon as day traders realized that Bitcoin may be here to stay, a large number of them decided to start trading bitcoins on various Bitcoin exchanges. Although the early days of Bitcoin were plagued with plenty of scams where exchanges or wallet providers would…
Whether you’re looking to enter your trades manually or have some bots do all the work for you, it’s important to understand how Bitcoin trading actually works before you dive into the deep end.
The first thing you need to do when you want to learn how to trade bitcoins is figure out where you’re going to be doing your trading. Although this is supposed to be a decentralized, P2P currency, the reality is that it’s currently impossible to do high-frequency trading without the help of a centralized server. These centralized servers have been known as a point of weakness for the Bitcoin market as a whole, but improvements in security have slowly been rolled out to various exchanges over time.
If you’re going to trade bitcoins on a regular basis, then you’ll need to have some deposits at one or two Bitcoin exchanges at all times. While platform features and unique trading options may be the most important aspects of exchanges in other markets, the reality is that security is the most important feature to think about when trading bitcoins in a hot wallet. Factors such as longevity, two-factor authentication, and proof-of-reserve are going to be the most important features to look at when choosing an exchange.
Longevity and two-factor authentication are two factors that you probably have in the back of your head for traditional exchanges, but proof-of-reserve is a new feature for Bitcoin exchanges that should be viewed with the utmost importance. Bitcoin exchanges are able to prove that they actually have the bitcoins they say they have by signing messages from Bitcoin addresses containing large amounts of bitcoins, so this should calm some of your fears when it comes to the possibility of an exchange running a Ponzi scheme. Certain exchanges that offer proof-of-reserve, such as Kraken and Bitstamp, should be at the top of your list.
Attempting to trade bitcoins without understanding why you purchased them in the first place can also be a huge issue. Bitcoin has been known to drop in price by as much as 50% in a single day, so you cannot be tempted to exit the market at a loss when these kinds of events take place. Trading bitcoins without a view that the price will eventually go higher as the price increases can be problematic due to the fact that you will probably end up buying high and selling low.
One last thing to remember when it comes to trading bitcoins is that this currency is not really anonymous when you’re using a centralized exchange. After all, the exchange knows all about your true identity due to the various AML and KYC regulations they are all required to follow. Having your bitcoins increase in value in terms of dollars is not something that will be easy to hide from your local government during tax season. These earnings are viewed as capital gains in most countries, so you should remember to fill out your yearly tax return with that fact in mind.
Images from Shutterstock.
Last modified: January 10, 2020 2:39 PM UTC