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Many finance experts have compared the Bitcoin bubble to the California Gold Rush of the mid 1800’s. And for a good reason – an increasing number of investors are rushing to put their money into this digital currency, hoping that they will get rich overnight.
But everything has a drawback, and the Bitcoin market is no exception from this rule. Because it is based entirely on speculation and public perception, getting involved is a risky proposition that could cause you to lose a lot of money, so caution is advised. So, here is what you need to know should you decide to trade bitcoin.
How Bitcoin Works
Bitcoin is a digital currency generated through mining, a process that involves using the computer’s entire processing power to solve complex mathematical problems, or ‘’blocks’’. Solving one block yields 50 bitcoin. But that is not as easy as it sounds because, depending on how powerful the CPU is, solving one block can take even one year.
Short of renting a room and setting up dozens of computers for the sole purpose of mining, there is one other way of obtaining bitcoin: buying it on the bitcoin market. The Bitcoin market is its own separate thing, and there are many influencing factors that affects its dynamics. But if you do the proper research and play your cards right, you might be a part of the select few who made a name of themselves.
How the Bitcoin Market Works
The exchanges in the bitcoin market work like in any other market – you are buying one currency with another. It is common knowledge that the value of a traditional currency is given by the country financial and economic status. However, the value of Bitcoin, and any other digital currency is influenced for other factors, like public perception, news stories and random events that can be directly and indirectly related to the currency. As a result, the market, as well as its value, is
prone to fluctuations.
Another thing that is worth mentioning that the Bitcoin’s value is not based on an industrial economic base, but on the work (a.i. mining) performed by computers. The developers behind the core technology of Bitcoin have set a limit on how many coins can exist at the same time. Similar to gold, since there are only so many coins available, they are traded as a commodity.
Therefore, if you want to learn
how to trade bitcoin, this is how you do it - by internalizing market patterns and exploiting these shifts to your advantage by seeking long and short positions. Similar to forex, you can convert Bitcoin to Euro, and back and forth as many times as necessary, pocketing tidy sums every time you move the money from one market to another.
This technique is called arbitrage, and can be very profitable if applied correctly, or disastrous if the investor is not careful.
You Can Short Bitcoin
Going short is a classic maneuver specific to the financial market. It involves betting that the value of an equity, be it a stock or a currency, will go down. For example, when it comes to the stock market, you basically borrow shares you do not actually own, promising that you will pay for them when the time comes. If the value of the shares drops from the time the short sale is completed and it is closed – by buying the shares at a lower price later – the investor makes a profit.
It is simple, elegant, and a staple of the stock market. And the good news is that this technique can also be applied in the Bitcoin market with good results. There are several ways to do this. The first one is called ‘’margin trading’’, which is also the easiest way to
short the bitcoin. You borrow a certain sum of money from a broker to facilitate a trade. Make sure to take into account the leverage factor, which could determine whether or not you will make a profit, or you will lose the investment.
Prediction Markets
Next up is the prediction markets. While it is a relatively new concept in the cryptocurrency market, it can be easily applied to this domain as well. A prediction market is a collection of investors speculating on certain events directly or indirectly related to their area of activity – election results, legislation, financial reports and so on.
Using this network, you could bet that the value of Bitcoin will drop by a certain percentage, and other people will in turn bet on your prediction. If the predictions turn out to be correct, you will turn a profit. Otherwise, you could lose your investments.
Final Thoughts
The Bitcoin market is vast and still in the process of expansion. Its volatile nature and news coverage has attracted many investors who want to turn a profit. However, before getting involved in Bitcoin trading, it is important to know a few basic concepts, like ‘’going short’’, how it is produced and the mechanisms of the bitcoin market.
www.AdmiralMarkets.com