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How to trade bitcoins

Noman Fin Images
Noman Fin Images
How to trade bitcoins

At a current market price of $564, bitcoins are currently trading around 50% lower than where they were in December 2013. The crypto currency has come under increased pressure lately after a series of security breaches and it was recently announced that one of the biggest bitcoin exchanges – Japanese based MtGox – is filing for bankruptcy protection after $400 million dollars’ worth of bitcoins were stolen from its servers.

Those who have had bitcoins stolen are likely to pursue legal action against MtGox and are not guaranteed to recoup all of their losses. With that in mind, bitcoin traders need to worry not only about how to trade bitcoins but whether they have a future at all.

Fundamental analysis

Normally, financial traders rely on either fundamental analysis, technical analysis or a combination of both.
However, this is not easy with bitcoins because hardly anyone really knows what is going to happen to them.

The reason for this is that bitcoin is unlike anything the world has ever seen. Electronic cryptocurrencies are in their infancy and are not regulated like other instruments are. In fact, many organizations and governments (for example the Vietnamese government) refuse to acknowledge bitcoin as a reliable medium of exchange. As a result, bitcoins are highly speculative, capable of big price rises but also price crashes. Indeed, speculators make up the majority of bitcoin purchases at present.

Because of this lack of knowledge and information, analysis based on supply and demand, economic cycle or macroeconomic outlook is not very useful to traders.

Traders should understand the risks involved in buying bitcoin and they should use tight money management skills and technical analysis to inform their trading decisions over fundamentals.

Technical skills

So long as bitcoins remain overrun by speculators (instead of being used predominantly for services and products), bitcoins are likely to remain risky.

Currently, the price of one bitcoin is around 50% lower than where it was in December 2013 and it’s entirely possible that traders may abandon the currency altogether if the price does not stabilize.

However, a 50% drop is not necessarily an uncommon event in a wild bull market so there is still the opportunity for bitcoin’s growth to continue.
The best option for traders is to use the exact same technical analysis skills that they would use for a violent small cap stock or thinly traded commodity.

Watching for breakouts, riding trends and using tight money management stops are the key skills needed to start trading in bitcoins today.