There are several ways to make money in the cryptocurrency market, and you have probably read about some of them. We have covered a few techniques on this platform too. In this post, however, I’ll explain some common trading methods you can begin using right away and give you a few tips for engaging safely in the market.
You must have heard some people refer to themselves as Bitcoin traders, but what exactly does that mean? These are some of the questions this post will try to answer.
How to Become a Bitcoin Trader
Bitcoin traders buy and sell Bitcoin with the motive of making a profit in the short term. They are mostly focused on the upward and downward movement of price rather than the fundamentals of the asset. There are many methods traders use to earn money in the market, but the two listed below are practicable for beginners.
Proprietary Trading
This is one of the simplest ways to earn from the cryptocurrency market. It involves you buying a portion of Bitcoin from a cryptocurrency exchange and selling it off when the price goes up. However, proprietary trading isn’t quite as easy as it sounds.
First, there are hundreds of cryptocurrency exchanges operating these days, and some of them are just pure scams. The critical thing you want to do then is to find the safest and most secure cryptocurrency exchange you want to use. And it is quite easy; you can ask people you know who already trade Bitcoin or check platforms (like Cryptocompare) that review cryptocurrency exchanges.
It’s also important to note that Bitcoin is extremely volatile. In other words, its price can experience sharp fluctuations in a short period. For example, the price of Bitcoin fell by about 35 percent in November alone. So, to be able to make some nice profit you have to learn how to anticipate the market correctly. Some experienced traders have identified specific patterns through the use of historical data that allow them to forecast and make a profit in the long run. So, in this case, you can choose to open a trading position and hold it open for a day, one week, or even for months depending on what the data shows.
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Market Making
A market maker is at both ends of a Bitcoin trade. Market makers earn their profits by providing liquidity for the market. They do so by creating limit orders in both directions; their profit is the spread on the bid and ask (Bid is a buy order while Ask is a sell order).
On an exchange like LocalBitcoins, for example, the price of Bitcoin could be at $3,000, so you would create a buy order for $2,999 and a sell order for $3,001. When both orders get filled, you earn $2 as profit. That seems small, but considering that you can keep doing this same thing over and over again and quickly get to 100 trades a day, it makes sense for many traders.
When Market Making Goes Wrong
Market making is profitable when Bitcoin has a relatively stable exchange rate. Let’s imagine the price of Bitcoin starts a sudden surge upwards; your buy order, the one that tries to buy low, might not get filled. However, your sell order will be taken at the price that you have set in advance, which means you have just missed the opportunity to sell at a higher price.
On the other hand, if the price takes a beating, as it did in 2013 when we saw the price of Bitcoin fall from $233 to $67 overnight (that’s a 71% drop), then your sell order might never get executed and you’ll be on the losing end if your buy order has already been taken up.
Critically, market makers increase liquidity on cryptocurrency exchange platforms, giving options for market takers to execute a trade immediately and therefore create a thriving marketplace.
There is a degree of risk attached to whichever method you choose to use. Taking a crash course on how to manage risks should, therefore, be the priority before you take a swing at trading Bitcoin.
Featured image: Pixabay
