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Day-trading bitcoin can be extremely profitable if you know what you are doing. However, it is also highly risky by nature so you can both win and lose large sums of money very quickly. Bitcoin is an extremely volatile commodity, subject to sharp swings up and down in price with very little warning. That makes day trading it exciting, but it also means it can be very hard to remain cool under pressure and trust your strategy when things appear to be moving the wrong way – or to cut your losses before it gets out of hand.
Unlike ‘value’ investing on fundamentals, where you might hold your investment for months or years, day-trading involves profiting from the short-term movements of a stock or commodity. These can happen on a time scale as short as from minute-to-minute or even less, since the markets are driven by sentiment and herd mentality as well as by appreciation of the long-term value or potential . Bitcoin is still in its infancy and has a relatively small market cap, and comparatively small amounts of money (by expert day traders’ standards) put into or taken out of it can push the price significantly one way or another – only to have the effect amplified by other traders who want to get in on the next major movement.
At times of low volumes this can be particularly pronounced. It can also leave the market vulnerable to outright manipulation by those who hold large amounts of fiat money or bitcoins, and dump them on the exchanges at strategic points in order to profit shortly afterwards.
Ultimately, it’s worth remembering that the majority of people lose money from day trading. This should not come as a surprise. After all, for every buyer there has to be a seller, and unless the market continues upwards indefinitely that means anyone who takes a profit does so at the expense of someone else who loses out (for short-term trading, at least). Then there are trading fees, which are typically very low – often as little as 0.2-0.5 percent – but can stack up if you are making a large volume of trades.
Estimates suggest that some 90 percent of day traders lose money from trading. The fact that there are a small number of very experienced traders around who make a lot of money day trading makes this a reasonable assumption. As a rule, you should only day trade with money you can afford to lose. More than that: expect to lose out to begin with. You will need to experiment before you find your feet, and this will cost money as you will inevitably make mistakes. Day trading has been called a process of buying high and selling low, until you have the experience to buy low and sell high. There is a steep learning curve, and generally the only way to improve and become profitable is by getting burned a few times.
You can start day trading on any bitcoin exchange that has adequate
liquidity. Smaller exchanges will have lower volumes, and therefore a
larger ‘spread’ been bid (buy price) and ask (sell price). That means
the price has to move further before you are in profit, and trades may
take longer to execute. Therefore, sign up with a large exchange where
you can be sure that liquidity and speed of trading will be suitable.
And, as ever, make sure the exchange is reputable. It makes no sense to
make thousands of dollars (or bitcoins) day trading, only to have them
disappear when the exchange is hacked or goes bankrupt through
mismanagement. Bitstamp is a good place to start. It is the world’s
largest bitcoin exchange and has an excellent reputation. Bitstamp is an
exchange, rather than a Bitcoin trading platform.
You can buy and sell bitcoins quickly and easily, and begin to learn about the way the market tends to react. You can place orders in real time (buying and selling at the ‘spot’ price) and also set limit orders, which execute when the price reaches a certain level. However, Bitstamp is not designed for advanced day trading. Other exchanges and platforms have more advanced tools that allow you to use more sophisticated trading techniques and amplify your gains – and your losses. Use them with caution!
There are two techniques commonly used by day traders to increase their profits from market movements. Leverage, or margin trading, means borrowing money on a short-term basis to speculate on the price of bitcoin. The loan is paid back when you exit the position. For example:
Of course, you can also lose a lot of money this way: if the price goes down instead of up, you will lose ten times the price movement. This is what makes margin trading so risky – it is potentially extremely profitable, but can also be very costly.
is a way of profiting from downward movements in price. Usually you would need to buy bitcoins to profit, selling them at a higher price and pocketing the difference. If you want to profit from the price falling, you have to own bitcoins in the first place. You sell them and buy back at a lower price. This is the simplest way of shorting, but it only works if you have bitcoins in your account.
With true short selling, you effectively borrow bitcoins, sell them, and buy them back at a lower price before returning them to the lender – keeping the difference in price. This is carried out in various different ways (you may or may not actually be borrowing bitcoins from the exchange or another user), but the effect is the same. You can also leverage your short sells in the same way that you would leverage a long position.
There are many tools to help you profit, and minimise your losses.
Two you should learn about are limit orders (which execute a trade at a
certain price, whether or not you are there) and stop-losses, which can
be used to lock in profits when the price changes direction after moving
in your favour. You will also learn to read the market by keeping track
of different indicators. Technical analysis is an extremely complex
discipline, but you can start to understand the underlying trends and
forces that shape the market by learning about volumes, moving averages
of different kinds, and different patterns that emerge in the charts.
The discussions on bitcoin forums are an excellent place to start learning about these, and you can find out current and historical data from http://bitcoincharts.com/.
There are number of well-known platforms Bitcoin trading , many of the Chinese exchanges offered useful tools, but these have now been closed or had their activity severely curtailed. Some of the most popular that remain are:
Bitfinex is an advanced platform that is designed for bitcoin day trading. It provides margin trading using P2P loans from other members. Hourly interest rates are applied. The same is true for short selling, but in this instance you are borrowing bitcoins. These options require that lenders are available. You can also lend out your own funds for profit (insurance against losses can be bought).
Bitfinex has a separate wallet balance used to cover your open positions. A ‘force close’ may occur if you get close to the limits of your position against this balance. BTC-e Primarily an exchange, BTC-e nevertheless has numerous tools for day traders. They offer a certain amount of leverage, as well as trading between various different real-world and cryptocurrencies. You can also set limit orders and stop losses.
Kraken is billed as a cross between a bitcoin exchange and a Forex platform. It’s a well-presented and professional site suitable for expert traders. As well as bitcoin, you can trade Litecoin, Namecoin and Ripples. Trades are executed quickly and there are plenty of tools that go beyond basic limit orders. For example, trailing stop losses can be set. These follow the market as it rises so that your potential upside is unlimited. However, if it then falls to a set amount below its recent top, the position is closed so that you can book the profits automatically. You can also set Take Profit orders, which allow you to book a certain amount of profit whilst leaving a position open in case the market goes further in your favour. Leverage is available, but only if there is sufficient volume (otherwise, problems can arise from high volatility). Funds for leverage come from the exchange’s own trading account.