Bitcoin Trading 2021: pros & cons
Before you learn the advantages and disadvantages of Bitcoin trading, you can check our first article: What is Bitcoin Trading & how it works?
Anyway, let's go and check the main benefits of trading with Bitcoin and decide whether it's profitable to trade.
The main Benefits of Bitcoin Trading
There are several benefits of trading bitcoin, compared to the traditional forex market:
High leverage: As you saw before, most exchanges and brokers offer high leverages up to 125x.
Privacy and easier trading system: with a brokerage, you need a broker license to trade most assets, instead, with a crypto-exchange, you only need to register an account and start trading. Likewise, you don’t need to reveal your bank account or credentials to deposit your funds.
Low fees: most brokers and exchanges will take a small profit from your investment, this is why the forex market has grown to be the most liquid marketplace in the world, and the addition of cryptos has offered a unique way of experiencing digital assets.
Volatility: one of the main differences between forex and the crypto-market is extreme volatility. But this can work both ways, to your advantage and disadvantage, depending on what kind of trader you are.
You can benefit greatly from the inherent volatility of Bitcoin more than ever, now that major companies are embracing cryptocurrencies every day. For example, there were cases where traders sold all of their BTC when it reached its first All-Time High of $42K in January. And when it dipped to levels below $30K, they bought because they saw a potential buy opportunity knowing that more institutional investors would embrace cryptocurrencies, especially BTC.
For instance, if you bought Bitcoin by the time it plunged below $30K at the end of January, and still hold it today, you would make over $20,000 when Elon Musk’s Tesla announced investing $1.5B in Bitcoin, in February 8.
Supply and demand: The current institutional demand for cryptocurrencies has set a different bull run for Bitcoin, which presents several benefits for traders. Today, major financial and technological corporations —like Tesla, Grayscale, and MicroStrategy— are buying outstanding amounts of Bitcoin as it becomes a store of funds, instead of a simple medium of exchange.
The more companies join in, the less supply is available. And the less supply is available, the higher the price. In essence, the higher the demand. the greater your profits are going to be if you spot potential buying opportunities. Knowing there is heavy demand for Bitcoin, and a scarce supply, prices could reach astronomical levels over $100K in a year and a half.
On What Kind of Markets Can I trade bitcoin?
Generally, a crypto exchange is the best option to buy cryptocurrencies like Bitcoin. Although, several traditional brokerages like eToro support crypto-trading. There are two ways to get exposure to Bitcoin: Future Markets, and Spot Markets.
Future Markets: in these markets, the price is not settled at the moment of negotiation. They consist of the negotiation of contracts for the purchase and sale of certain goods at a future date through an agreement of price, quantity, and expiration date. In essence, you’re buying a contract representing the asset, which will be settled in the future.
Spot Markets: in these markets, both the transaction and the settlement of an operation coincide on the same date. Although it is considered a spot market when the delivery occurs up to a maximum of 2 days later.
Where can I trade Bitcoin?
Here is a list of crypto exchanges, including traditional brokerages that allow crypto-trading:
- Binance / eToro / Swissquote
- Avatrade / Swyftx / Huobi
- Kraken / Bitfinex / Bithub
- Bitstamp / Kucoin / Bittrex
These are currently the most popular, but there are other exchanges you can check in and choose the best that fits for you on Coinmarketcap.
Binance: Spot and Future Markets
Binance provides two main markets: Spot Markets and Futures Markets.
Simply, Spot Markets don’t have leverage. The price in this market is the most accurate and real.
Future Markets in Binance has leverage up to 125x. You are presented with margin checks against collaterals when you open a trade in future markets. A margin check is when you borrow money from the broker or exchange to invest in an asset.
The definition of collaterals is when you use your balance in your account as collateral when you borrow money from a platform to start trading.
Knowing this, Binance offers two options: Initial Margin and Maintenance Margin: In the first, your collateral needs to be greater than the Initial Margin. This means, your capital in your balance needs to be greater than the money you ask for.
In the latter, it works like a stop loss: you will be liquidated in the market if your collateral, combined with your unrealized profits fall below your Margin. This also leads to penalties and fees. You can liquidate your position before reaching that point.
BitMEX: Future Markets
BitMEX allows leverages of up to 100x on some of its contracts as traders are not required to deposit 100% of collateral as margin. Traders can only speculate on the future value of assets using Bitcoin, as all margins rely on it.
BitMEX offers interesting future market features for traders, such as inverse, quanto, and linear payouts. You can check BitMEX’s page if you would like to review some of these features.
Bitfinex: Spot and Future Markets
Bitfinex offers spot markets for traders, as well as future markets. Just like other exchanges listed above, Bitfinex offers 100x in futures leverage.
Bitfinex offers traders with perpetual contracts. These contracts are the same as futures contracts, but they don’t have an expiration date. Thus, traders can hold positions indefinitely.
Bybit: Spot and Future Markets
Bybit offers up to 100x in future markets. Bybit also offers perpetual contracts, like Bitfinex. Likewise, there are three types of orders: Market, Limit, and Conditional.
With Market, you’re trading at the prevailing price of Bitcoin. With Limit Order, the order is placed at a specific level, away from the market. And lastly, with Conditional Orders, once certain levels are reached, these levels will act like Market or Limit Orders.
Risk of Trading Bitcoin
Extreme Volatility: Bitcoin’s inherent volatility presents several advantages, but tremendous risks as well. From January 201 till February 2021, over 100 million positions were liquidated, mostly due to panic selling, while BTC holders —known as HODLERS— remained undefeated. That means over $800,000,000 were liquidated. As stated before, you need a proper money management system if you are entering the crypto-market.
Hacking: The world of crypto and DeFi —decentralised finance— have been prone to suffer all kinds of cyber-attacks, from 51% attacks, to flash loans and phishing. This is why, when choosing an exchange or broker, make sure they have insurance protection.
Exchange Rates: Exchange rates may vary considerably when trading Bitcoin. Make sure you know what rates your broker or exchange takes.
Where to Discuss Bitcoin Trading
There are several sites, forums, and Reddit where you can discuss Bitcoin trading with other traders:
- Investing’s Bitcoin Chat and Forum
- The Bitcoin Forum
- Finance Yahoo’s Bitcoin Community
Final Tip for Bitcoin Trading
When you’re trading Bitcoin —or any asset—, the only way to consistently win in these markets is to have a trading system with monetary management that allows you to be profitable over time without losing all of your capital. In addition to carrying out the correct application of all the rules indicated by this system through optimal emotional management.