Guide to Bitcoin – Rakuten Academy

Bitcoin is a cryptocurrency, which is a digital currency that is encrypted.
Unlike traditional currencies, there is no standard Bitcoin price at any given time.
When traded as a part of a currency pair, Bitcoin can be pegged against other cryptocurrencies such as Ethereum and Litecoin or traditional currencies such as the US dollar and the British pound.
Advantages of trading Bitcoin include high levels of privacy, security, and transparency, as well as flexibility in trading options and low fees.

What is Bitcoin?

Bitcoin is a cryptocurrency, which is a type of digital currency that is encrypted. It is stored in a distributed digital ledger that uses blockchain technology, which is a decentralised electronic database that is made up of a network of computers. This network is not run by any one entity or organisation, and it is not susceptible to the interception of central banks or governmental authorities. Bitcoin is denominated as digital tokens, and they can be bought and sold on an online exchange. Participants within the Bitcoin market can buy tokens to be kept as investments or trade tokens as they would ‘traditional’ currencies. When Bitcoin was created in 2009 by the pseudonymous entity Satoshi Nakamoto, the concepts of ‘Bitcoin’ and ‘Blockchain’ were synonymous. But ‘Blockchain’ has since come into its own concept to represent a distributed digital ledger within the realm of cryptocurrency trading.

The pricing of Bitcoin

There is no standard or global Bitcoin price at any given time, as it is a digital currency that is not pegged to any major traditional currency such as the US dollar or the British pound. On top of that, given how Bitcoin was created, the Bitcoin market is decentralised. This means that market behaviour is entirely dependent on the activities and sentiments of its participants. These two factors dictate the supply and demand of Bitcoin tokens and, consequently, determine its pricing. This makes the pricing of Bitcoin rather volatile. Another point of consideration when purchasing Bitcoin is that its Bid/Ask prices are likely to vary slightly among different exchanges. This is because price trackers use different ways of calculating these values. However, very commonly, Bitcoins are pegged against the US dollar, and the value of bitcoins is linked to that of the dollar.

How to trade Bitcoin

Trading in pairs

Cryptocurrencies are always traded in pairs. Bitcoin can be pegged against other cryptocurrencies, making up pairs such as ETH/BTC (Ethereum/Bitcoin) and LTC/BTC (Litecoin/Bitcoin). They can also be pegged against ‘traditional’ currencies, making up pairs such as BTC/USD (Bitcoin/US dollar) and BTC/GBP (Bitcoin/Great Britain pound). Here at Rakuten Securities Australia, we offer trading of the cryptocurrency pair BTC/USD.

Trading fractionally

For stock and forex traders new to cryptocurrency, it may be intimidating or confusing to discover that the exchange rate of a Bitcoin pair like BTC/USD can go as high as tens of thousands. However, while that is true, Bitcoin can be traded in fractional shares. Let’s say the exchange rate of BTC/USD is 35,000, which means that $35,000 is required to buy 1 Bitcoin. Traders do not necessarily have to buy one whole bitcoin each time, nor are they only allowed to buy multiples of whole bitcoins. Each person can buy as much or as little as they want, depending on their preferences.

Example

The Bid/Ask price of BTC/USD is 32,300/32,350. In other words, it requires $32,300 to buy one Bitcoin and $32,350 to sell one Bitcoin. A trader notices that the price of Bitcoin is rising against the US dollar, and they predict this uptrend will continue. So, they decide to go long and buy BTC now, so when its value rises, they can sell it later to make a profit. The trader purchases 10 whole bitcoins at the price of 10 x $32,300 each, spending $323,000 in total. Soon after, their prediction comes true, and the new Bid/Ask price of BTC/USD rises to 32,400/32,450. Here, the trader decides to sell all 10 of his bitcoins at the price of 10 x $32,450 each, earning $324,500 in total, and making a profit of $324,500 – $323,000 = $1,500.

The above example illustrates a scenario in which the trader’s prediction is correct. However, as with all trading activities, profits are not guaranteed. The Bitcoin market is volatile and prone to fluctuations in both directions.

Example

The same trader who has bought 10 whole bitcoins at $323,000 was betting that the value of Bitcoin will continue to appreciate against the US dollar. However, against their predictions, the cryptocurrency takes a dip rather unexpectedly, and the new Bid/Ask price of BTC/USD drops to 32,100/32,150. The trader accesses the situation and concludes that the value of Bitcoin will take a further downturn, so they decide to cut their losses and sell all their bitcoins at 10 x $32,150 each, receiving $321,500 in total, and suffering a loss of $323,000 – $321,500 = $1,500.

Advantages of trading Bitcoin

Though the Bitcoin market has higher volatility and lower liquidity compared to traditional markets such as that of Forex or certain stocks, bitcoins continue to be traded worldwide and in large volumes. This is due to several attractive reasons.

High level of privacy

Bitcoin transactions can take place pseudonymously, and users who participate in the Bitcoin trading network are only identified by their blockchain address. This practice is very much unlike traditional forex and stocks trading, where users have to provide an array of personal information to intermediaries, such as brokers and banks, to handle their transactions. The privacy of trading cryptocurrency is a big draw for many traders who live in countries with oppressive governments or simply those who value their privacy.

Flexible transactions with low fees

Since transactions take place digitally and use online payment systems, those with working Internet can trade Bitcoin anytime and anywhere across devices. Additionally, traders will not need access to banks or other financial institutions, nor will they need credit or debit cards in their name to begin trading. Without the assistance of these intermediaries, wait periods are eliminated, and transaction fees are also lower.

High level of security and transparency

Firstly, as Bitcoin tokens are digital, they cannot be physically stolen. They are also encrypted and stored in digital wallets that cannot be accessed without the owner’s private keys. On top of that, Bitcoin transactions only take place after various verification and authorisation processes which require approval from all participants on the Blockchain. Each of these processes is highly complex to prevent the double-spending of tokens or any instance of fraud. Approved transactions are displayed on the digital ledger for everyone to view and cannot be edited, which gives traders further peace of mind. The bottom line Bitcoin is a relatively new trading product. However, despite its novelty, it has dominated headlines with its high level of security and ease of trading. Additionally, transactions take place entirely digitally via blockchain technology, making trading more convenient than ever, and all participants are welcome to the network regardless of race, nationality, and age. Here at Rakuten Securities Australia, we offer BTC/USD (Bitcoin/US dollar) on our sophisticated MetaTrader 4 platform so you can join the millions of Bitcoin traders out there. As all trading activities contain a certain level of risk, new traders can try a free demo account with us to get a handle on things before creating a live account.