For many traders, the focus is usually on forex, commodities or stocks. However, there is now an active market in the financial trading of cryptocurrency. Among the most well known of these, there is Bitcoin.
For seasoned traders, the idea of trading Bitcoin is quite foreign as it is often misunderstood. A digital currency that is transacted through the blockchain seems daunting to approach at first. However, how paper currency replaced gold and silver, and how the FIAT currency system replaced the gold standard, this new wave of currency should be welcomed with open arms.
The Fundamentals of Bitcoin
As mentioned, Bitcoin is a cryptocurrency that operates through a peer to peer computer network. Originally floated as an alternative to traditional FIAT currency back in 2008, it has grown tremendously over the past few years. There are many individuals these days who prefer to take payments in Bitcoin (BTC).
Unlike FIAT currencies that are merely printed, Bitcoin has to be “mined”. This is done by a number of computers that verify the authenticity of Bitcoin transactions by monitoring them in a public ledger called the Blockchain.
This Blockchain is the backbone behind Bitcoin. It essentially contains information on all Bitcoin transactions since the dawn of the era. Unlike with FIAT currency, there is no central issuing authority that controls the currency. All of the miners are spread out across the globe in this large peer to peer network.
These miners are rewarded for their efforts with Bicoin. The fastest miner who processes a Bitcoin “block” gets paid in Bitcoin. This is how Bitcoin is circulated and supplied. However, in order to limit inflation the Blockchain’s original programmer has limits of the BTC rewards in place once a certain amount has been mined. This is one of the ways in which the currency holds it’s value and is not plagued by FIAT currency ailments.
Given the supposed safe haven status of Bitcoin, the currency usually tends to be seen as a hedge against market uncertainty. It is also an incredibly volatile asset that is largely driven by demand out of Asia.
Given that total Bitcoin in circulation is now over $14 billion, it is liquid enough to use a range of technical indicators. Similarly, given the interest there is in trading Bitcoin, there are a number of online trading platforms which offer investors the oppurtunity to trade BTC.
Taking a look at the below yearly graph of BTC, we can see it appreciated by over 100% with a prounounced “Santa rally” in December. There were any number of factors which contributed to this increase. Most of these were related to fears around global macroeconomic conditions come the new year. From potential troubles in the Eurozone, to trade barriers in the US, investors are piling in. Unlike many other financial assets, holding Bitcoin is also seen as a store of value for many retail buyers. Much like how households keep Gold in safes, these individuals see BTC as another way to secure their finances going forward.
There is also another factor on the supply side that is having an impact on the price of BTC. The reward for mining bitcoins has halved recently as per the creators intentions. This has slowed the effect of BTC growth and led to an imbalance of supply and demand.
There are also a number of binary option brokers who provide the opportunity to trade BTC. This will allow an investor to make the most of the volatile nature of the currency. Entering both a CALL and a PUT option on the currency creates a straddle trade. This is a volatility maximization strategy which is well placed to profit from any extreme movements next year, irrespective of direction.