Bitcoin Trading: How to Trade Bitcoin

Bitcoin may be a foreign concept to some, but to most in the trading community it is a common concept, even to those who do not actively partake in it and who would rather trade other financial instruments such as Forex, commodities, and others.

Bitcoin and its other cryptocurrency counterparts are a frequent point of discussion amongst most investors, entrepreneurs, and stock traders. It has become increasingly popular in recent years with the advent of technology and the trading industry expansion.

Bitcoin is a digital currency which cannot and is not controlled by a central authority such as banks or the government. Bitcoin is created by what is known as a ‘miner’ who use computers as well as special hardware to:

• Process transactions such as the buying, selling, trading, and exchanging of Bitcoin
• Secure the network for and of the currency, and
• To collect Bitcoins in exchange for their services.

Miners work to solve Bitcoin’s proof of work algorithms and every time this is successfully done, a ‘block’ is mined. The miner or mining pool that mine these blocks are rewarded by receiving a ‘block reward’.

The block reward consists of a set number of Bitcoins agreed upon by the network. The Bitcoin contained in the block reward are all new Bitcoins which have been generated and mined and this is how new Bitcoins are created.

There are 50 Bitcoins per block and the block is halved after every 210,000 blocks are mined. For every block up until 210,000 mined, the reward is 50 Bitcoins and, for instance, from 210,001, the reward will be halved to 25 Bitcoins.

The Bitcoin difficult level which is in place ensures that blocks are found on an average of every 10 minutes which subsequently means that, seeing that blocks halve at 210,000 blocks mined, a halving occurs every four years.

The more blocks are mined, and the more halving occurs, it would mean that blocks will, in due time, become so small that new Bitcoins cannot be created.

There are more than 4,600 cryptocurrencies in the market and Bitcoin is the oldest and the most highly valued cryptocurrency of them all. Although it has a rocky and controversial history, its popularity has not decreased since its creation.

A quick overview of our best Bitcoin trading bots review:

• Bitcoin – despite controversy, it is a growing trend
• Is Bitcoin Legal in South Africa?
• How is Bitcoin Traded?
• Regulation, Safety of Funds and Legal Issues
• Broker Types
• Trading Conditions
• Broker Comparisons
• Bitcoin trading Pros and Cons

Bitcoin – despite controversy, it is a growing trend

Cryptocurrency has been around for approximately a decade and in recent years, it has become a growing mega-trend which has unlimited potential and endless opportunities.

When cryptocurrency emerged, there was a lot of controversy and it was believed by a lot of opposing parties that the trend would not survive but over time, as its popularity increased and more platforms were created, these naysayers have almost been silenced.

The questions that rose regarding the survival of cryptocurrency have subsequently been replaced by questions regarding the extent of the cryptocurrency industry’s evolution.

There are numerous sceptics who have raised issues and questions over the power of the digital currency in overturning financial landscapes, those of fiat currency, as it currently exists.

Some of the greatest concern regarding Bitcoin and cryptocurrency trading remain the volatility of the market, the fact that it is decentralized and there is no way to control it, and the potential for money laundering and elaborate scams.

Digital currency has been banned in numerous countries for various reasons, amidst a few of them the concerns raised, these countries include:

• Afghanistan
• Pakistan
• Algeria
• Bolivia
• Bangladesh
• Saudi Arabia
• Qatar
• Vanuatu
• Vietnam, and
• The Republic of Macedonia

There are also countries that have restricted Bitcoin trading and the use of cryptocurrency as payment instead of fiat currencies. These countries include:

• China
• India
• Ecuador
• Indonesia
• Morocco
• Zambia
• Nepal
• Egypt
• American Samoa

Despite being banned and it being illegal to trade in cryptocurrency in these countries, Bitcoin has not been explicitly eradicated as it remains decentralized and no government, bank, or other authority has control over it.

There are, however, more than 111 countries where Bitcoin is recognized by law, and it is legal to buy, sell, and trade Bitcoin.

Is Bitcoin Legal in South Africa?

The short answer is yes, Bitcoin trading, buying, and selling is legal. Although, cryptocurrencies in South Africa, as in many other countries, is unregulated due to its decentralized nature.

There have been numerous warnings from the South African Reserve Bank, or SARB, regarding the absence of Bitcoin’s legal status or regulatory framework and the number of risks that it poses to transact in cryptocurrency.

In being unregulated, and there not being any way to regulate cryptocurrency, traders and investors cannot be protected by regulatory entities that ensure that client funds are secure. There is also a wide range of scammers as well as internet hackers on the prowl.

Bitcoin does not fall within the “Legal Tender” where the South African Reserve Bank Act, 1989 (Act no. 90 of 1989) is concerned as far as the SARB’s sole right to issue coins and notes are concerned.

The SARB’s legal right begins and ends with fiat currency and this is the same for all banks around the world, so it would make sense that most, if not all, banks are against cryptocurrency although they do not have the power to eliminate or disband it.

There are more merchants who accept payment in Bitcoin and more Bitcoin ATMs which are being installed all over the world. There are currently 9 Bitcoin ATMs in South Africa in the following locations:

• Cape Town – 4
• Durban – 1
• Johannesburg – 2, and
• Pretoria – 2

These ATMs allow for the buying and selling of Bitcoin with the following coins supported:

• Bitcoin or BTC
• Lightning BTC or LBTC
• Bitcoin Cash or BCH
• Ether or ETH
• Dash or DASH
• Litecoin or LTC
• Zcash or ZEC
• Monero or XMR
• Dogecoin or DOGE
• Tether or USDT, and
• Ripple or XRP

How is Bitcoin Traded?

Bitcoin can be traded legally in South Africa, but it is imperative for traders to ensure that they do it through the correct channels due to the decentralized and unregulated nature of cryptocurrency trading.

South Africans can buy, sell, and trade Bitcoin through in the following ways:

• Forex Brokers who make cryptocurrency a part of their offering and provide traders with competitive and comprehensive trading conditions.
• Bitcoin and other Cryptocurrency Exchange Platforms such as Coinbase, Binance, Kraken, and others.
• Peer-to-Peer – which allows for the trading of Bitcoin through exchanges such as LocalBitcoins where there is extraordinarily little, or no intervention from the exchange apart from providing a platform for the sale and purchase of Bitcoin.
• Bitcoin ATMs in most major cities such as Cape Town, Durban, Johannesburg, and Pretoria.

Two of the predominant ways to trade Bitcoin in South Africa is the use of either a broker or a cryptocurrency exchange platform as it provides some security, although the security of funds remains the responsibility of the trader.

Trading Bitcoin through a broker

There are hundreds of brokers that welcome South African traders and there is an array to choose from. The process involved with selecting the right broker may seem tedious, but there is a starting point for all traders in this regard.

The first step before selecting a broker is that traders need to know their needs. Beginner traders need to prioritize educational resources, comprehensive glossaries, and access to support in the process of learning to trade.

There are some fundamentals involved in learning to trade, regardless of the financial instrument being traded and beginners must first gain some insight into the basics of trading before proceeding to what cryptocurrency trading involves.

By making use of guides and tutorials, along with demo accounts, beginners can start familiarizing themselves with the trading industry and how it operates. It may take some time, but this will minimize substantial losses in capital that traders cannot afford.

Traders need to ensure that they know what their trading objectives are, whether it is to secure additional income, become a professional trader, trading as a hobby, or looking for a way to secure long-term investments.

Regulation, Safety of Funds and Legal Issues

Regulatory compliance of a broker means that the broker’s activities are governed by an official regulatory entity which is in place to protect and promote the broker’s operations.

Brokers who are regulated by a reputable and official regulatory entity must comply with a set of rules and regulations to ensure that investor assets and capital is safeguarded.

This is one of the most important reasons why it is important to only deal with regulated brokers as regulations dictate that client funds be kept in segregated accounts separate from the broker’s funds and it may only be used for trading activities.

Broker Types

Brokers can be divided into two categories namely Dealing Desk, or DD, and No Dealing Desk, or NDD.

Dealing Desk

Dealing Desk brokers are also known as Market Maker brokers make money through spreads and provide their clients with liquidity. Dealing Desk brokers create a market for their traders and it subsequently means they take the other side of a trader’s trade.

This may be regarded as conflict of interest, although it is not as Market Makers provide traders with a sell and buy quote. This means that both the buy and sell orders of their traders are filled and they are indifferent to the decisions of a trader.

Due to the nature of their business, Market Makers are not at great risk when they set fixed spreads for traders. A spread is the difference between the bid/ask price represented in pips, and this is how brokers make their commission.

Fixed spreads are set in place and remain that way, at the discretion of the broker, regardless of the market conditions where floating or variable spreads change as the market conditions change.

No Dealing Desk

No Dealing Desk, or NDD, brokers can be sub-divided into two different types of brokers namely STP and ECN brokers.

Straight Through Processing, or STP brokers route the orders of their traders directly through their liquidity providers who can access interbank markets. Liquidity providers act as Market Makers in financial markets and they act as both the buyer and the seller.

STP brokers often have an array of liquidity providers who each provide their own bid and ask price. It is important to note that STP brokers often add mark-up on their spreads, which can be variable or fixed, as means to be compensated for their services.

Electronic Communication Network, or ECN brokers allow the orders of their traders to interact with those of other participants in the ECN. These participants can include:

• Banks
• Retail Traders
• Hedge Funds, and
• Other brokers.

These participants trade against each other in offering their best bid and ask prices, and thus financial instruments are traded back and forth between participants with little intervention from the broker.

ECN brokers, in addition, also allow their traders to see the Depth of Market which displays where the buy and sell orders of other participants in the market are. Due to the ECN nature, brokers cannot add a fixed mark-up, and instead charge commission on trades.

ECN brokers do however offer accounts where commissions are not paid, but traders may find that the spreads offered are much wider than when paying a small commission when trades are executed.

Tighter spreads make it easier for day traders and scalpers to make small profits as there is much less ground to cover for the market when considering transaction costs. Wider spreads are more favourable for long term swing or position traders.

Types of Traders

It is important for traders to realize what type of trader they are. Often traders will not be able to differentiate in the beginning, but through making use of demo accounts and even cent accounts from brokers may help identify the type of trader.

Once traders have established this, it makes it significantly easier to select a broker as brokers do not cater for all trading styles and traders may find that the offering of one broker is more suited to their needs than another.

Traders can be divided into the following types:

• Position traders – who try to hold a profitable position over a long period of time whether it is over days, weeks, or even a few months.
• Swing traders – who seek to hold a profitable position for a few hours or even a few days at the most.
• Day Traders – who buy and sell assets within the same day and who make use of leverage to increase their chance of gains on small price movements.
• Scalper – who are like day traders who try to take advantage of small price movements but who often execute a substantial number of trades.

Trading Conditions

This is one of the next important things that traders need to have an in-depth look at as it must be in accordance with their trading plan and any budgetary requirements or limitations that they may have.

Broker Fees

These are fees that brokers charge for their services that they provide. This is centralized around the facilitation of transactions between buyers and sellers and will depend on the type of broker as well as the type of service that they offer.

This can be predominantly summarized by Dealing Desk Brokers and their spreads while ECN brokers charge spreads as well as commissions.

Commissions and Spreads (Fixed and Non-Fixed fees)

Traders need to ensure that they understand the key difference between fees and commissions. This difference is that fees are represented as flat charges while commissions may vary depending on the financial instrument and the contract size.

Spreads can either be floating and variable with ECN brokers or they can be fixed, such as with STP brokers and Market Makers. Commissions are either fixed or they may depend on factors as previously mentioned.

Brokers offer different types of accounts with these fees set out which makes it easier for traders to determine whether the broker and trading fees are suited to their trading needs, objectives, or any restrictions and limitations they may have with trading capital.

Premium Services

These are additional services and perks which are offered by brokers such as education and research tools and resources, trading tips, news, trading and analytical tools, and numerous others that help provide traders with a dynamic trading experience and environment.

Overnight fees, swaps, or roll overs

These fees are applicable to Forex trading when traders hold positions or trades open for longer after the trading day has concluded. The broker considers the national currency that the trader has bought relative to the other national currency of the pair.

Should the interest-rate difference favour the currency that the trader has bought, the rollover interest, swap or overnight fee will be credited and should it be against the currency that the trader has bought, it will be debited from the trading account.

There are numerous brokers that make adequate provision for Muslim traders by offering a swap-free or Islamic Account option where Muslim traders are exempted from paying such fees.

Muslim traders who follow the Sharia Law are prohibited from paying any interest when trading and thus brokers accommodate them.

There are, however, some brokers who waive additional charges such as higher commissions or wider spreads to compensate for the absence of overnight fees, swaps, or roll over fees.

In addition, such accounts and account options are often only available to certain jurisdictions such as the Middle East whereas some brokers do allow for other traders who are not Muslim to open a swap-free account.

Margin and Leverage

Margin allows the trader to borrow from the broker with the intention of opening and controlling larger positions which the trader cannot do based on his initial capital or the current balance of this trading account.

Each trade has a margin requirement that must be paid to execute the trade. Traders are offered with varying levels of leverage that make it possible for them to open larger positions to meet, and even exceed the margin requirement.

Leverage is a useful tool, but should be used with caution as it not only increases the chances of great gains, but it increases the risks of losing substantial capital and the trading account going into a negative if negative balance protection is not offered by the broker.

Minimum Deposit Requirement

This is the first deposit that the trader makes with a broker and it is often required to finalize an application for a live trading account. These deposits vary from one broker to the next and often brokers offer deposit bonuses to new traders.

There are brokers who require incredibly low deposit amounts below ZAR 100 and although this seems quite attractive, traders need to acknowledge that there are still margin requirements to be met when executing some trades despite using leverage.

Bonuses and Promotions

These are offered by brokers and are marketing tools to draw in new clients or to reward active traders and loyal customers.

Customer Service

Customer Service is a crucial component despite the trading experience of the trader. Should there be any issues, problems, concerns, or questions, the broker must make adequate provision for communication avenues.

Traders need to weigh the availability of Customer Service with the promptness of responses and whether queries are dealt with adequately.

Trading Platforms

A trading platform is what connects the trader to the markets, and it serves as the tool for executing trades, developing, and testing strategies, performing analysis, managing trading accounts, and more.

Traders will need to research the trading platform that the broker offers thoroughly to see what the platform offers and whether it caters to the trader’s needs and objectives.

Deposits and Withdrawals

It is important for traders to be able to deposit funds and withdraw them from the trading account in a quick, safe, and reliable manner. Traders need to look at the payment methods that the broker supports, the deposit currencies, and processing times, amidst others.

Minimum Balances

This is the balance of the trading account and it is imperative for traders to know whether there are certain requirements pertaining to this to avoid any penalties or fees imposed by the broker.

Financial Instruments

Depending on the financial instrument that the trader wishes to trade, it is important to investigate what the broker has to offer before signing up for a live trading account.

Not all brokers offer cryptocurrency as a financial instrument and when trading Bitcoin through a Forex broker, it is imperative to ensure that the broker adequately provides the means to do so.

Broker Comparisons

It is unlikely that traders will find the perfect broker in their first search. Traders are advised to make a list of brokers that more adequately cater for their needs, narrow down their list, and then compare between them.

Once the trader has narrowed down their options, they are advised to open a demo account with their last choices in brokers so that they can explore the brokers offer and trading conditions in a mimicked live, but risk-free, trading environment.

Trading Bitcoin through an exchange

The process involved with finding the perfect Bitcoin or cryptocurrency exchange may be as tedious as finding a broker, but traders need to keep in mind that seeing that cryptocurrency trading is unregulated, there are additional security checks involved.

When trading through a cryptocurrency exchange, the security of the trader’s funds is predominantly in their own hands although exchanges offer a variety of security measures to protect traders.

Exchanges need to have transparency regarding hacking attempts that have been made as well as whether these attempts were successful. Exchanges also need to prove their actions taken should hacks have been successful.

Traders need to ensure that they adequately protect themselves and their funds by making use of passwords, two-factor authentication or authorization, cold wallets as opposed to hot wallets, keeping small amounts of funds on the exchange instead of large sums, and more.

Other factors that traders need to consider when choosing an exchange include:

• The liquidity and the market depth of the exchange. It must be adequate so that orders are filled out and there are decreased chances of any quick dips in the market that may result in losses.
• Trading fees along with non-trading fees which are charged by the exchange.
• The location and where the exchanges are based in addition to whether the exchange allows fiat deposits especially if the trader’s local currency is supported to allow easy deposit and withdraw in a fiat currency.

Bitcoin trading Pros and Cons

FAQ

What is Bitcoin?

Bitcoin is a digital currency also known as cryptocurrencies which can be bought, sold, traded, and exchanged. In addition, it can be used to make payments and purchases.

Who created Bitcoin?

Wei Dai, a Computer Engineer who made substantial contributions towards cryptography and cryptocurrencies first mentioned the concept in 1998 but proof of the concept was officially published by Satoshi Nakamoto in 2009, marking Bitcoin’s official birth.

Who controls the Bitcoin Network?

The Bitcoin Network is neither owned nor controlled by a singular entity but is controlled by all Bitcoin users globally.

Is Bitcoin legal in South Africa?

Yes.

Can Bitcoin be regulated?

The protocol associated with Bitcoin itself can neither be modified, controlled, or regulated as there is unanimous cooperation of all users with regards to control as users choose the software they use according to their own processes.

This makes it near impossible to regulate the entire Bitcoin network. There are, however, regulated brokers and exchanges with affiliation with regulatory entities who are regulated or at the very least licensed who offer cryptocurrency trading.

Can I make money with Bitcoin?

Bitcoin cannot be regarded as a ‘get-rich-quick’ scheme or a way to make a substantial amount of money in a short amount of time. It does allow for some small profits but there are risks involved that may lead to losses.

Is Bitcoin safe to use and trade?

Yes, but the level of safety and security will depend on various factors such as that provided by the broker or the exchange along with what the trader does to ensure the security of their own funds.

What happens if I lose my Bitcoins?

Should a trader lose their Bitcoins, they will remain on the blockchain, but they become dormant and remain that way forever as they cannot be returned to circulation after they have been mined and subsequently lost.

Bitcoin trading involves private keys held by the trader which are linked with their Bitcoins and subsequently the keys are lost with the Bitcoins with no way of finding them.

It is therefore imperative for traders to ensure that their Bitcoins are kept safe in addition to ensuring the safety of their private keys. Traders are urged to make use of physical or paper wallets.

These wallets allow for the wallet to be printed so that it can be stored safely in a safety deposit box for safekeeping.