How to Trade Bitcoin

In this guide:

  1. Why You Should Care About Bitcoin
  2. History of Bitcoin
  3. What is Bitcoin?
  4. How are Bitcoins made?
  5. Reasons You Might Trade Bitcoin
  6. What Drives the Price of Bitcoin
  7. How High Could The Price of Bitcoin Go?
  8. Current Bitcoin Price
  9. Bitcoin Market Sentiment
  10. How to Buy Bitcoin

Why Care About Bitcoin?

The cryptocurrency market, and especially its Bitcoin benchmark digital currency, has shifted into high gear.

How high? Data from U.S. Equity Research estimates the cryptocurrency market is expected to grow at a 32% rate by 2023.

“The cryptocurrency market size is expected to reach $2,902.0 million by 2023 from $541.0 million in 2017 at a CAGR of 32.31% between (2017-2023),” according to RnRMarketResearch. “Growth is propelled by the benefits of compliance-free peer-to-peer transaction, cross-border remittance transfer, increase in use cases, volatility in the stock market, fluctuating monetary regulations in different countries, transparency, and immutability of the distributed ledger technology and benefits such as faster transaction and reduction in total ownership cost.

Bitcoin leads the crypto-charge, as one Wall Street analyst estimates that the digital currency’s price will climb to $25,000 in the next decade.

“What’s happening is the floodgates are opening,” says Ronnie Moas, founder of Standpoint Research, in a CNBC interview. “I believe there are hedge funds and very deep-pocketed individuals going into this now, really hundreds of millions of dollars.”

Overall, the Bitcoin market grew by 350% in 2017, a growth rate that has some leading Wall Street financiers wondering if cryptocurrencies shouldn’t play a larger role in the global currencies market. “I’m not endorsing or rejecting Bitcoin,” says Lloyd Blankfein, chief executive officer at Goldman Sachs, which is considering setting up a Bitcoin trading operation. “But I know that folks were skeptical when paper money displaced gold.”

A Brief History of Bitcoin

Bitcoin first popped up on the digital currency radar screen on August 18, 2008, when the website domain name bitcoin.org went public. Three months later, a landmark paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System,” was published by Satoshi Nakamoto (reportedly a pseudonym for multiple cryptocurrency backers), that laid out the case for Bitcoin, citing it as a peer-to-peer network that established “a system for electronic transactions without relying on trust”. In January, 2009, the first Bitcoin trading network went live, along with the issuance of the first-ever Bitcoins. Early Bitcoin traders dubbed Bitcoin as the “world’s first decentralized currency.”

What is Bitcoin?

Largely defined, Bitcoin is a member of the digital currency family, with a decided emphasis on technology. The currency is created and held electronically, with no actual printed Bitcoins, in the model of paper currencies like the U.S. dollar or Japanese yen, or in the model of gold or silver coins. Unlike most traditional currencies, Bitcoin has no central bank, government, or regulatory group backing the currency. One interesting facet of Bitcoin is that it is decentralized, with no central controlling authority presiding over Bitcoin commerce. That means no central government or big banking behemoth controls Bitcoin, enabling Bitcoin traders to have more control over their investment. Another unique facet. Unlike stocks, bonds, commodities, currencies and other “physical” investments, there are either extremely low or even no fees, in some instances, on Bitcoin transactions.

How are Bitcoins Made?

Unlike central banks and sovereign governments, which produce currencies in physical fashion, Bitcoin is created digitally, by a community of Bitcoin users. The underlying technology – called blockchain – acts as a general ledger, of sorts, cataloguing each Bitcoin transaction where the cryptocurrency changes hands. In addition, Bitcoin developers actually “mine” bitcoin – meaning they build Bitcoins via technology, leveraging computer applications that run across an unregulated digital network. That very same network handles Bitcoin transactions between cryptocurrency traders, turning Bitcoin into an anomaly among traded currencies – it acts as its own financial and investment network. It’s also important for cryptocurrency traders to know that Bitcoin is limited in capacity. By design, the Bitcoin protocol limits production to 21 million units.

Bitcoin Is Especially Popular Among Millennials

According to a 2017 LendEDU study, “The vast majority of Americans, 78.6%, heard of Bitcoin.”  Younger Americans, especially those millennials aged 18-to-34 were more likely to have heard of bitcoin as compared to their older counterparts, the report states. “86.6% of respondents between the ages of 18 and 24 have heard of bitcoin, while only 75.93% of respondents ages 55 and older have heard of bitcoin. It was a consistent trend that as respondents got older, their likelihood of hearing about bitcoin went down.”

LendEDU states that of all survey respondents who had heard of bitcoin, only 14% had ever owned some; 40% were open to the idea in the future; 34% were undecided about buying it in the future. “Asked to reveal their future intentions, 17.18% of survey respondents answered that they “plan on investing in bitcoin as an asset for the future,” the study notes.

Should You Trade Bitcoin?

Like any opportunity, there are pros and cons to trading Bitcoin – here’s a snapshot of the key issues on each side of the equation:

Pros

High growth – The Holy Grail for any financial investment is a big upside, and Bitcoin has that in abundance. If you’d purchased a $100 worth of Bitcoin in early 2010, your investment would be worth $72.9 million in late 2017. Many financial experts call for continued price growth for Bitcoin going forward (see pricing outlook for Bitcoin below.)

Increasing liquidity – Bitcoin is the most liquid of all the cryptocurrencies, with continued growth, increasing credibility (example: Japan recently began recognizing Bitcoin as legal tender and Fidelity Investments has listed the digital currency on its web site, tracking its trading value just like it does the S&P 500.) As Bitcoin trading volume grows, and as it gains more legitimacy, expect Bitcoin liquidity to expand exponentially.

Tighter security – Structurally and technologically, Bitcoin runs on blockchain technology, i.e., a new and different method of storing data using a distributed (not centralized)  financial ledger system. A big part of that system is that traders largely remain anonymous and thus are better protected against breaches and hacks. Nobody is saying Bitcoin is hack-proof, but its accounts are much harder to crack than current, traditionally centralized investment platforms.

Cons

Bitcoin isn’t a physically held asset  Unlike stocks or bonds, Bitcoin is not “real”. Instead, Bitcoin is a mathematical algorithm. In that regard, Bitcoin is more ethereal in nature, and its value rests on a technological platform that relies on mathematics to assess value, and any Bitcoin trader is going to have to trust that platform.

Lack of stability  As a digitally constructed investment asset that has no controlling central authority and no regulatory body overseeing Bitcoin commerce (as, for instance, the U.S. Securities and Exchange Commission regulates the U.S. stock market), Bitcoin can and has experienced strong volatility from time to time. Put another way, if Bitcoin can rise in value by 100% in a given time period, it can fall by that amount, or more, in another time period. Investors who aren’t comfortable with high volatility risk should take that equation into consideration before investing in Bitcoin.

Anonymity an issue  Since Bitcoin largely exists as an anonymously-traded investment, traders won’t know why they’re transacting with when dealing in the Bitcoin marketplace. Not that once a transaction is completed, there is no “undoing” the transaction, and you can’t contact the contra-trading partner if you suspect any illegal activity.

What Drives the Price of Bitcoin?

In general, Bitcoin prices are driven by old-fashioned consumer supply and demand for the digital currency, which is exploding in growth. As stated above, there is a limited amount of Bitcoins in circulation, thus creating a tighter, smaller trading market with potentially high volatility.

Even so, consider the investment growth volume of Bitcoin on a year-to-year basis:

Year# of users
201010,000
2012100,000
20141 million
201610 million

 

(Source)

Given the total, worldwide number of people using the Internet stands at 3.5 billion, using an estimated total of 20 million connected devices, the growth potential for digital currencies like Bitcoin is abundant. Couple that trend with the fact that Bitcoin has no taxes, low or no fees, free accounts, transparent trade clearing, and the promise of anonymity, and should continue to drive Bitcoin prices going forward.

What is the Price Outlook for Bitcoin, and What Do Experts Say on Prices?

With Bitcoin trading volumes skyrocketing, investment experts say Bitcoin prices still offer a tremendous upside.

Consider these estimates, from trusted, long-time Wall Street experts:

  1. Venture capitalist and crypto-currency trader Tim Draper pegs the price of Bitcoin in 2018 at $10,000.
  2. Tom Lee, co-founder of FundStrat Global Advisors estimates that the bitcoin price could reach $25,000 by 2022
  3. Morgan Creek Hedge Capital Management founder Mark Yusko says there is a 75% chance that Bitcoin prices will reach $500,000 in the next 20 years, with the possibility of reaching $1 million in price.

Lee says price growth is not only growing due to popular demand, but it’s also boosted by larger holdings from institutional traders, which are “rising significantly.” Ronnie Moas of Standpoint Research, who predicts Bitcoin prices will crest $7,500 in 2018, says that Bitcoin traders volume will skyrocket from 10 million to 100 million in “just a few years.”

What is the current price of Bitcoin?

You can see the price of Bitcoin and other leading cryptocurrencies below:


Bitcoin Market Sentiment

We’ve gathered data from leading exchanges to determine the general feeling in the Bitcoin market. Its calculation is simple; using data from the exchanges listed below, we gather buy and sell volumes for a given time period and weight this against the total transaction volumes.

Buy/Sell Sentiments:
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Source – CryptoCompare Public API. CryptoCompare gathers data from the following leading exchanges – BTC38, BTCC, BTCE, BTER, Bit2C, Bitfinex, Bitstamp, Bittrex, CCEDK, Cexio, Coinbase, Coinfloor, Coinse, Coinsetter, Cryptopia, Cryptsy, Gatecoin, Gemini, HitBTC, Huobi, itBit, Kraken, LakeBTC, LocalBitcoins, MonetaGo, OKCoin, Poloniex, Yacuna, Yunbi, Yobit, Korbit, BitBay, BTCMarkets, QuadrigaCX, CoinCheck, BitSquare, Vaultoro, MercadoBitcoin, Unocoin, Bitso, BTCXIndia, Paymium, TheRockTrading, bitFlyer, Quoine, Luno, EtherDelta, Liqui, bitFlyerFX, BitMarket, LiveCoin, Coinone, Tidex, Bleutrade and EthexIndia.


How to buy Bitcoin

Some commentators like to compare the cryptocurrency market to the wild west, an untamed frontier where anything goes. They’re not too far off. The best way to acquire Bitcoin is by using an exchange but this can be very risky. You don’t have any legal protection and you need to be very careful of potential scams and poorly protected exchanges. Remember that you’re on your own out there.

There’s a lot of exchanges to choose from and it can be a little overwhelming to choose the right one. The best exchange for you will largely depend upon your priorities.

If you want to get Bitcoin quickly and anonymously your best choice is probably LocalBitcoins. This exchange lets you buy Bitcoin in your local currency and is available all over the world. Unlike many exchanges, it doesn’t require your ID. Unfortunately, this leaves you open to scams. Some users attempt to take advantage of new traders. You should vet every user before you agree to a trade. If you’re careful LocalBitcoins’ low fee of 1% make it a good choice to invest in Bitcoins.

If you are willing to hand over your ID another choice is Coinbase. They offer an exchange, a wallet, and a user-friendly interface. You can buy Bitcoin using your credit/debit card or a bank account. The fees are competitive with 3.99% for a credit/debit card and 1.49% for most kinds of bank transfers. Coinbase is also a little more user-friendly and there is less risk of being burned by a bad trade. This safety comes in exchange for your anonymity so coinbase is unsuitable for privacy-concerned traders.

There are a lot of exchanges out there and it’s important that you do your research before settling on one. There will also be some level of risk and you’ll need to take precautions to make sure that you protect your investment and your computer. If you practice basic computer hygiene and store your access details offline in a safe location you are going in the right direction.

No matter which exchange you use, never invest more than you can afford to lose

Any investment is a risk and Bitcoin is a particularly volatile commodity. When you’re considering how to buy Bitcoin you need to remember that even if you use a safe exchange like coinbase you can still lose all of your investment. If the market turns against it you could lose some, or all, of your money.

The Future of Bitcoin

Nobody can accurately predict what the Bitcoin market might look like in 10 or 20 years.

What can be expected, however, is that given the cryptocurrency’s decentralized, global and permission-less structure, Bitcoin will continue to grow, and continue to be accepted as a legitimate investment trading platform that’s commercially accepted and widely adopted across the globe.

That’s why so many leading investment experts are saying that, for Bitcoin, the future is now.

Meet Your Bitcoin Expert

By Saul Bowden

Saul is our resident cryptocurrency expert. He spends his days searching for the next Bitcoin. A longtime advocate of blockchain technology, Saul believes that cryptocurrency represents so much more than an excellent investment, it represents the future of finance.

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