Advantages and Disadvantages of Bitcoin One Day Trading
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Bitcoin day-trading is a very profitable deal if you’re quite aware of what you’re doing at all. Anyway it’s still very attractive for traders and investors who want to make their money work for them. So, let’s go deeper on what short trading with bitcoins really is and how we can use it in our trading. Here is our short guide.
Information About One Day Trading
Comparing with long term investment strategies when you buy assets, shares, currency or futures for quite a long period of time and wait until they raise their prices to sell them off, day-trading is a really short-time strategy.
The main idea of such trading is short sharp movements which can be continued only a few minutes or even less. This approach is extremely risky and most of the traders lose their money in such trading after all, but those who succeed gain good amounts of money.
Bitcoin day-trading is quite similar to any currency trading on Forex with, let say, dollar or euro. The only feature which distinguishes bitcoins in this case is its novelty. It leads to highly vulnerable price which makes the whole trading extremely risky as we’ve already said. So there is a strong rule here like just in a casino, you may trade one this strategy with such amount of money which you can afford to lose without any severe consequences to your wealth and personal condition. To earn money, big sums of money, on one day-trading there should be cold-headed approach to your decisions and to your capital without any emotions and feelings. There are only a few number of traders can certainly say that they are really experienced enough to trade in such a risky way. Bitcoin market is even more risky because of its novelty.
However there is no problem with trading in this way for little amount of money. If you’re interested and want to get some experience in this kind of trading, you are welcome. Here we tell you about this approach of short-term investments and you’ll able to make your own decision about whether it’s really for you or not.
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Liquidity is Important
Well, first of all, obviously you need to choose a good exchange for bitcoins. We’re talking about one day-trading in bitcoin so it’s very important to find out a reputable and reliable exchange with a good rate of liquidity. High liquidity rate is provided by big exchanges where a lot of traders and big volume of money is circulating. If you choose a small one, there might be a problem with volumes which means there will be wide spreads. The wide spreads mean when you try to sell your bitcoins they need to wait more time for transaction because there are not so many buyers and traders who would like to buy them in any proper period of time. So in other words, you’re looking at the price, let’s say, $300 per bitcoin and trying to sell you 5 BTC for this price but the problem is while you’re waiting until someone buy your bitcoins the price may fall down to $290 per BTC. This means that in that case your spread will be $50 by the end of the transactions. Quite a good ‘fee’ of time, therefore you’d better find a large exchange where there is always someone who is willing to purchase bitcoins at your price.
Tactics of Trading
There are usually two different tactics of trading with short-term strategy. First of them is margin trading or leverage and the second one is short selling. We’re going to discuss them both. Well, in fact there is another one but it is too obvious and simple. You buy something in advance, wait until its price raise up and then sell with profit. It is simple and we won’t focus our attention on it.
An opposite tactic to the previous one is short selling or as they say ‘shorting’. In this case you have, let’s say, 10 BTC and sell them for a short period of time considering that Bitcoin is going to fall down. So you sell them for $450 per BTC which equal to $4,500 in your pocket. Next few minutes or more or less (depends on the market) the price of BTC falls down to $420 per BTC and then you buy them back. At the end of the deal you have your 10 BTC and the profit of $300, or you can acquire more bitcoins for this amount of money and your total bitcoin amount will equal to about 10.7 BTC. Quite simple but in this case you need to have bitcoins in advance to sell it. That’s why real shorting is a bit different.
Usually people use a particular way to trade ‘shorting’. The idea of that way is to borrow some number of BTC and make a deal with such leverage. In this case you do not need to have bitcoins in advance and your potential profit rises significantly. For example, you take a loan for 100 BTC which equal to $42,000 at the time you’re borrowing. Then you sell the bitcoins and get your money in dollars. After that you have to wait some time until the price falls down to, let’s say, $390 per a bitcoin. Here you decide to buy them back for the current price. At the end of that deal you have 100 BTC and the difference which is $3,000. Then you have to pay off your loan of 100 BTC plus a charge, let’s say, $500. Now you have $2,500 as a pure profit.
Sounds really good, but the problem is that it is an extremely high risk. Let’s imagine the opposite situation. You’ve borrowed 100 BTC and sold them for the price of $420 per each bitcoin. Then the price rises up to $450. You needed to pay off the debt and buy bitcoins for the higher price. It means that you were able to purchase only about 93 BTC for your money. So here you have an additional debt of about 7 BTC plus the fee of $500, which totally equal to $3,650. In other words, the more potential profit you can make; the more potential risk.
The next tactic is, as we said, margin trading or leverage. It seems the previous one because here you also use credit or loans to extend your capacity to trade. Well, the scheme is quite the same and even more simple. For example you borrow $8,000 to buy 20 BTC, $400 per each one. Then the price grows to $440 and you sell your bitcoins. Now you’ve got $8,800, pay back $8,000 and the charge, let’s say $150. At the end of the deal you are richer at $650.
As you may guess, there may definitely be an opposite situation when you choose the wrong period of time or you feel wrong about market’s movement or it’s simply some news appears and your asset goes to the absolutely wrong destination from what you want.
In this case, your bitcoins may drop in price and become cheaper to $370 each. Consequently you have to sell them, get your $7,400 and pay off not only the difference of $600 but also the charge of $150. So it means your total loss will be equal to $750 in this way. Not so funny, right?
Before You Start
So, if you are really certain about your knowledge of the market and Bitcoin system as a whole, you’d be more careful about your decision because as we have already studied, it’s very profitable but at the same time it’s also very risky and may lead you to bad debts.
Before you start, you should be more assured and aware about the platform or the exchange you’re going to use. Learn more about such tools like limit-orders and stop-losses. They will definitely do you a good favor and help with your potential risks and losses, and save your bitcoins. Don’t be too impatient and take some time to understand all these tools and clarify all doubts you may face there.
Mind that there is only 1 of 10 traders who succeed in one day-trading so you need to be prepared enough, experienced and aware of the bitcoin market. And do not forget, that you shouldn’t stake the amount of money you cannot afford to lose. Good luck in your trading!
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