Disclaimer: the stories shared on this blog are mine, they aren’t financial advice, endorsement, counseling of any kind. Cryptocurrencies are highly volatile and speculative assets plagued by gambling addiction and fraud. Do your own research, never EVER take loans to acquire crypto, never communicate your private keys or mnemonic seed words to anyone, and never invest what you can’t afford to loose.
In the very early days of Bitcoin, the few alpha-tester holders transitioned from “funny technological toy proof-of-concept” to actual transaction currency use. And so comes a rather fundamental question: what is the value of one Bitcoin?
Some may say “whatever people agree it’s valued”, but the early days had little hints on what value to peg a Bitcoin to. Since minting (mining) Bitcoin requires an effort (CPU computation time and electricity consumption), there was a ballpark. But of course not everyone pays the same electricity bill, nor has the same CPUs. Still: at that scale, direct negotiation was still doable, and manual exchange forums.
And so, most famously, Laszlo Hanyecz proposed to pay 10,000 Bitcoins (about $41 at the time) for two delivered Papa John’s pizzas, and a British man accepted the trade. May 22, 2010 became known as “ Bitcoin Pizza Day”. And just at the begin of the next year, Bitcoin hit parity with the US Dollar.
Whether it was to earn a profit or to have a head-start in a neat decentralized digital means of payment, more and more people wanted to get Bitcoins without the hassle of mining. And miners wanted to get even on their mining equipment. This supply and demand field demands for an already very well known system: an automated exchange market, such as MtGox famously. Users buy, sell, or both. Sometimes the supply is greater than the demand, and the market price falls. Sometimes it’s the contrary.
Those price swings open a playground for certain users, some already experienced in the field, or just greenhorns: traders.
For who can correctly predict an incoming decrease in price can sell earlier, wait out the move, and re-buy at a lower price (for less collateral, or for more Bitcoin). Or predict an incoming increase in price and buy earlier, wait out the move, and sell for a profit.
Traders often think: “ah if only I had foreseen the market movement, I could have made a profitable order”. In fact, Bitcoin trading, as with other stock markets, is not random. There are indeed signals that can give a clue about the most likely move, and in which timeframe. Signals usually fit in two categories:
- fundamental: an outside event that could impact the market (Elon Musk mentioning a crypto in a tweet, Chinese authorities banning Bitcoin mining, Cyprus capping weekly withdrawals from bank accounts…)
- technical: the parameters of the market trend hits certain thresholds (the Relative Strength Index crossing the 70 line, the ticker piercing the Ichimoku cloud, the trading bars tracing a “cup and handle” pattern..)
For who can react very fast to such signals, there is a potential to make a profit. For who misjudges or gets caught off-guard with poorly placed stoplosses, well, the consequences can hurt.
Unlike more traditional stock markets, the Bitcoin trading doesn’t “close”. It runs 24/7, so for who wants to catch the most profitable waves this requires precise monitoring. Or they’re left off with daily/weekly/monthly time frame trading, with lower yield. Or.. they use trading bots.
At begin when there was only Bitcoin and “stable” fiat collateral, things were simple enough. But: imagine you want to weight the price movement of Ripple compared to Monero while considering a position on Dogecoin and selling off Polkadot. And rather exchange against Bitcoin, Ethereum, US Dollar, Euro… who each have their own “stability” rate against each other? Good luck with that Gordian knot if you don’t have bots doing the calculations and margin estimates for you!
Overall I think Bitcoin trading (or any commodity) requires a significant set of tools to monitor many many aspects of your markets, and then again not everyone is trading on equal footing. It’s high risk low yield for non-professionals (and even them aren’t safe playing on the S&P, may it be economic crises or jokers accumulating GameStop stocks to ruin futures trading).
Remain responsible, stay safe!
