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Introduction to Bitcoin Trading · DFX Guide 2017
INTRODUCTION TO
BITCOIN TRADING
An Introduction to Bitcoin
‘First, they ignore you, then they laugh at
you, then they fight you, then you win.’
– Mahatma Gandhi
With this famous saying I would like to welcome you to this introductory Bitcoin guide. Bitcoin
as an investment product is no longer ignored or laughed at. Instead, it receives an
unprecedented amount of media attention and coverage as it increasingly moves into the
focus of investors. And while central banks regularly issue warnings related to this and other
new digital currencies, most have yet to put into place full restrictions or regulations to control
the emergent disruptor.
What is Bitcoin?
Bitcoin is a digitally created currency – or cryptocurrency – based on a decentralized peer-to-
peer application and registered on the ‘blockchain’. Invented by a developer using the
pseudonym ‘Satoshi Nakamoto’ in 2008, Bitcoin was revolutionary in having no central bank
to control its uses or movement.
Bitcoin’s value against fiat currencies – like the dollar or the euro, whose value is established by
the government that backs them – is determined by supply and demand and by market events.
Investors now see Bitcoin as a valuable alternative to other traditional government-backed
currencies. Bitcoin (BTC) is actively traded against most of the other major currencies in the world
and is held in digital wallets. These wallets have private and secure encryption and allow users to
transfer Bitcoin to other users privately and safely.
Why Bitcoin?
No banks are involved, and money doesn’t have to pass through any middle men. And since
Bitcoins aren’t tied to any country, and are completely decentralized and not subject to any
external regulation, international payments are easy.
An Atypical Currency
Bitcoin is unlike any other, traditional, fiat currency due to its decentralized nature. The digital
currency can be bought using fiat currencies and also by using other digital currencies. It is
important to realize that Bitcoin is highly volatile and has little regulation. That in turn can
translate into considerable risk with exposure that is not properly tended.
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Introduction to Bitcoin Trading · DFX Guide 2017
Where do Bitcoins come from? Hazard and Risks
The maximum number of Bitcoins allowed to Warnings by the US supervisory authority, the SEC, and the German central bank about the
be created and the methodology behind the unpredictable nature of the Bitcoin market warrant attention. In March 2017, the Winkelvoss
process of creation is set out in a so-called twins’ application to launch a Bitcoin-based exchange-traded fund (ETF) was rejected by the
‘White Paper’. SEC for lack of regulation, causing the market to temporarily collapse.
Bitcoins are computer generated using a
mathematical formula. They are created by
being ‘mined’ by individuals on the blockchain
network. To become a miner, an individual
needs a computer and special mining
software. Miners allow their computer
resources to be used to solve complex
mathematical equations, processing and
securing ‘blocks’ of bitcoin transactions which
are then added to the blockchain. In return
miners receive Bitcoins as payment.
Currently, 12.5 new Bitcoins are mined every
ten minutes. According to the rules set out by
the White Paper, in total a maximum of 21
million can be mined. These coins are mined
at a predetermined rate, and roughly every
four years the amount of coins mined is
halved. There are currently around 16.25
million coins in circulation and the maximum
of amount of Bitcoins that can be mined is
expected to be reached in 2040.
What are the Alternatives to
Bitcoin?
Alternative currencies launched after Bitcoin
are called ‘altcoins’ and created using the
same basic framework as Bitcoin. The best
known altcoin is Ethereum. Created by Vitalik
Buterin, Ethereum is based on a decentralized
platform and runs smart contracts –
applications that operate without the
possibility of censorship, fraud and downtime
or third-party interference.
How do I Invest/Trade in Bitcoins?
Market Conditions
Spot – Coins
The cryptocurrency market is extremely Many Bitcoin exchanges allow the ‘physical’ purchase of Bitcoin, stored in an electronic wallet.
volatile and requires a disciplined trading This wallet can be set up on a smart phone, a tablet or a computer, allowing the holder to see
approach. The market is still in a price movements in real time. Many of these exchanges are deregulated and offer little
developmental stage and, when coupled comeback in the case of any financial dispute. There have also been reports of exchanges being
with the extreme price moves experienced, hacked and customers losing some or all of their cryptocurrency holdings without legal
risks overheating. Many commentators see recourse.
a ‘bubble’ forming, drawing comparisons
with the financial crisis of 2008, the ‘dot- Derivatives – CFD Trading and Spread Betting
com’ bubble of the late 1990s and early
2000s, and even the ‘tulip mania’ of the Contracts for difference (CFDs) and spread betting provide a way to benefit from the
16th century. fluctuations and volatility of a digital coin. Payment is made on the difference in settlement,
without having to actually exchange the cryptocurrency. These alternative products have a
number of advantages compared to trading the underlying market. Funds generally need to
be held in a segregated and secure account, giving you greater peace of mind. And CFDs and
spread bets operate on margin, so you can use leverage. Plus you can also take short positions
to capitalize on falling markets - a feature valued by most experienced traders.
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Introduction to Bitcoin Trading · DFX Guide 2017
Bitcoin Outlook
Compared to government-backed global currencies, Bitcoin remains quite complex for the typical
user to purchase, with considerable limitations for use in regular business. However, growing
interest and significant global investment in bitcoin wallets and blockchain technologies continue
to add weight to the still-nascent market. Most important going forward is acceptance by
government agencies, which can sharply reduce any reservations people have about conducting
business in and actively trading these alternatives to traditional currency.
The way key financial centres around the world treat Bitcoin in the future will essentially dictate
how the market is shaped. There are certain critical areas like China, where a blanket ban on
initial coin offerings or ICOs (an unregulated form of crowdfunding that uses cryptocurrency) was
announced in early September. Fully open and regulated regions are rare, but there are plenty of
countries that have yet to rule on explicit rejection or forward-looking integration. Without the
legitimacy that comes with an active regulator, the markets will continue to reflect a speculative-
like activity. Those whose primary motivation is volatility will find Bitcoin an appealing target,
while those that seek steady and stable returns will remain reticent.
Ready to put your new knowledge to work?
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Test these strategies out risk free using a practice account from IG. Utilize the help of resources like this trading guide,
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High Risk Investment
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you.
Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could
sustain a loss in excess of your initial investment. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial
advisor if you have any doubts.
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