To a skeptic, who may not be fully informed about Bitcoin’s monetary policy and general network economy, it’s easy to think of it as a swelling bubble, with an inevitably disastrous end.
Over the course of this reading, however, we hope to give you an idea as to why Bitcoin is still likely to rise significantly and that there is actually really something to it as an asset . More importantly, with this quick guide, we’d like to give you some more ideas on the different ways you can invest in Bitcoin.
Bitcoin and its growth potential
With its network usage tied to its limited and deflationary supply, Bitcoin has the quantity theory of money to its advantage. Namely, the demand for the network is rising, against a limited 21 million coin supply.
Even more, in a process called halving (or the Halvening), the release of this limited supply of Bitcoin per block that is added to the Bitcoin blockchain is reduced by a factor of 2, for every 210,000 successfully added blocks. Following this ‘deflationary process’, there is no telling how high the price of Bitcoin might go. And while there are many other factors that play into a coin’s price, based on previous Halvenings, we can almost certainly expect some movement in the market in anticipation or as a result of this event.
Bitcoin and portfolio diversification
Considering the Bitcoin supply protocol, the coin’s volatility and free-market economy, one can understand why Bitcoin’s price discovery evolves according to its own logic, rather than in correlation with other asset classes.
If you are considering the safety of a well-diversified and uncorrelated portfolio, then Bitcoin should be in your pool of assets.
Various Bitcoin investment options
Depending on your expectations and preferred investment strategy, there is a range of investment options and techniques to consider when setting out to invest in cryptocurrencies. Over the course of this explainer, we will be looking at strategies in terms of timeframe and techniques.
Daytrading (short term trades)
This involves trading as many times as possible, usually on a daily basis. Due to the volatile nature of Bitcoin as an asset class, especially when pitted against other cryptocurrencies, this trading strategy generally comes with a high risk and reward potential. In fact, price fluctuations as steep as 15-20% are pretty common in the Bitcoin and altcoin markets.
Every good trader needs a good matching engine
While sound knowledge of asset speculation is needed for successful day trading; finding the right pair, setting the right order, and low trade-latency all contribute to trading success. Aside from personal decision making, the efficiency of your trades also strongly depends on a high-performing matching engine.
This why reliable centralized crypto exchanges are the best way to execute day trades. However, unlike traditional markets (such as the Nasdaq or the London Stock Exchange), usually, crypto exchanges don’t run on sophisticated matching engines capable of dealing with serious volume. A good rule of thumb with exchange selection is, therefore, the integrity and capacity of their matching engine as well as their security architecture.
In view of matching engine reliability, AAX uses the Millennium Exchange matching engine. This technology is also used by top tier exchanges like the London Stock Exchange, Italian stock exchange, Oslo Stock Exchange, Johannesburg Stock Exchange, and several others.
AAX is among the very few virtual currency exchanges, with high-grade matching engines.
Choosing the right day trading pairs
Bitcoin trading can be highly lucrative when done against altcoins. However, with thousands of questionable coins out there, found across many crypto exchanges, it is easy to fall into the trap of trading against a hyped altcoin. This why care needs to be taken in selecting a reputable exchange with credibility. This is also why AAX does due diligence to only list top quality crypto assets that are sufficiently liquid.
Long term trades
Another way to invest in Bitcoin is simply by buying and holding. This is also referred to as HODL (Hold on for dear life) by earlier crypto traders.
Since order speed isn’t really a priority here, investors usually trade peer-to-peer or via over the counter (OTC) platforms. It is important, however, to note that peer-to-peer trades and even some OTCs come with some risks, and once again trust is key here.
At AAX, we have recently revamped our OTC platform, and we invite you to try it out.
Other trading avenues
Trading Bitcoin against fiat: This involves buying Bitcoin directly for any fiat currency, at an agreed exchange rate, and selling it before the price goes back down. Also, this is suitable for long-term and high volume trades.
Bitcoin futures contracts: This involves two parties taking a view on the future price of Bitcoin. More practically, party A enters a contract with B to sell bitcoin at a set date in the future at a set price. Upon the fulfillment date, party A is bound by the contract to sell to B at the agreed contract price, regardless of the presently, quoted market price.
AAX offers perpetual futures contracts. These contracts do not need to be settled by any date – they have no expiry. What this means in practice is that you choose either to go long, or short. If you believe the price of Bitcoin will go up, you go long; if you believe it will go down, you go short. If you are correct, and exit your position on time, you make a profit.
Learn more about how to trade perpetual futures contracts with leverage here.
Arbitrage: One way you can trade arbitrage is by buying Bitcoin from one exchange at a low price and selling it on another exchange at a higher market price. This practice is very common with high volume traders who buy Bitcoin directly from sellers on OTC exchanges and sell them off on third part exchanges at a higher price.
Finally, this guide should not be considered absolute. Before making any investment decision, further reading is advised to come to your own view on the market.