Bitcoin is fast becoming one of the most sought-after assets in the financial markets. Having risen sharply towards the end of 2013, the digital currency has now stabilised and presented itself as a viable means of generating profit in the market. Here’s how.
First, it’s important to get one thing straight. Many traders look at a Bitcoin chart and put off by the incredible volatility that the chart displays. Whereas major indices and currencies will move fractions of a percentage each day (major news releases and economic events aside), the value of one Bitcoin in US dollars can fluctuate between 5% to 10% in a single day, and even more in the event of a major economic shift. This, however, can be used to a Bitcoin phrases advantage. Get on the right side of one of these large valuation shifts, and you can draw large profits from the Bitcoin market.
So how do you know which side of the market to go on, long or short? There are two main ways to help you determine how to setup your position. These are fundamental analysis and technical analysis. Let’s take a look at fundamental analysis first.
Bitcoin Fundamental Analysis
Fundamental analysis is the technique of monitoring news events and major economic releases in order to form a directional bias. So, for example, Bloomberg reports that the US Federal reserve has released a statement that supports Bitcoin as a means of exchange and a viable currency. In this situation, the value of Bitcoin will almost certainly increase. A trader could buy Bitcoin versus the US dollar through a broker that allows Bitcoin trading, or place a binary trade in support of a rise in price. Once the value of Bitcoin increases, the trade would then sell Bitcoin (in the instance of the former) or allow the option to expire in the money (in the instance of the latter). Say, however, that the Chinese government released a statement saying it was banning the use of Bitcoin between consumers and businesses. This would likely have the opposite effect, and reduce the value of the Bitcoin. In this instance, the trade would sell Bitcoin over a major exchange place a binary trade in support of a decline in the price of Bitcoin versus the US dollar. The trade would then buy Bitcoin once the value declined or allow his or her option to expire, once again in the money.
Technical Analysis for BTC
Technical analysis is the technique of using a chart that maps the price of Bitcoin versus another major currency (primarily the US dollar at present) to help you predict the likely future direction of the price of Bitcoin. The principle is based on the fact that financial assets such as stocks, currencies, and Bitcoin, tend to behave similarly at certain levels. Say, for example, the price of Bitcoin fell to $565. From this level it reversed and rose to $620. When the chart shows Bitcoin once again returning to $565, the assumption a technical analyst would make would be that it would behave in the same way as previously, i.e. reverse to the upside. A trade would buy Bitcoin at this level and sell it once it had reached $620, or place a binary options trade that supports a gain in price over a period of time that mirrors the previous period. This, of course, is only one of many methods using technical analysis to profit from volatility in Bitcoin, but is a simple, easy example.
All said, in order to profit from the volatility of Bitcoin, you should build a strategy that suits you and your personal trading style. This can mean using fundamental analysis to trade around major news events or technical analysis to trade just using the charts, or even a combination of both, it all varies based on your personal situation and on factors such as how much time you can dedicate to trading, how much capital you’ve allocated to your Bitcoin trading, and what risk preferences are.