Trading Bitcoin

November 16, 2017 02:25 PM
Despite all of the recent news, there still is much uncertainty among traders regarding what bitcoin is and how to trade it.

What is mining?
While both the miners and nodes are responsible for applying the rules and recording history, the miners do most of the work. The umpire miners are outside in the sweltering heat, wearing dark clothing, applying the rules flawlessly on every bang bang play without being wrong or getting into arguments. The nodes are in an air-conditioned press box with an open buffet table, stroking their chins, judging, and recording history.

To keep enough people willing to be miners, they are well compensated for the energy the spend working to stay cool and make all the right calls. So, every 10 minutes, the bitcoin code (back to the rule book) will create 12.5 new bitcoins every block to pay the umpires of that game. The umpire miners also collect transaction fees on top of that.  This is how bitcoin executes its monetary policy.

Bitcoin has a Monetary Policy?
There are a lot of simple but genius aspects to bitcoin. The one that is most attractive to early adopters and skeptics of government monetary policy is the hard cap limit of 21 million bitcoin. Along with a hard cap, bitcoin has a deflationary inflation policy that is used to compensate the miners.

The rate of newly minted bitcoin gets cut in half every four years. During the first four years (2009 to 2012), the block reward for miners was 50 bitcoin every 10 minutes. Then from 2012 to 2016, it was 25 per block. We are now in the 12.5 time period and in 2020, the network will move to 6.25 per block. This continues every four years until the year 2140 (see “Mining coins,” above). The economic idea is that over time, the reduced reward will be offset by rising prices and a growing number of transactions for fee collection.

How to trade Bitcoin
Trading bitcoin is a relatively simple proposition. You can open an account at a number of sites. Most sites today have a moderate level of identification requirements.  Keep in mind, the more you share the larger your daily limits to withdrawal.

Withdrawal limits can be important if you’re looking to invest a significant amount of cash but don’t want to keep your bitcoin on an exchange. Most experienced bitcoin holders like to move their bitcoin off the exchanges and hold them on their own hardware wallet (see “Where can I trade,” below).

Keep in mind, every site will have a fee structure and some have incentives for lower fees. Wire transfers are faster than bank transfers but carry elevated fees. Some sites even will allow instant buys using a credit card, but keep in mind they will add their standard fees and pass the credit card fees back to you making it the most expensive option.

When it comes to fees you can expect 1% as an industry average. The more savvy trader will easily find 0.25% fees and post-only orders can drive that to 0%.

For an example, let’s consider the largest U.S.-based exchange Coinbase and their sister trading site, GDAX. Coinbase offers a few features including recurring purchases for those interested in a dollar-cost-averaging strategy or instant buy with a linked bank account. Keep in mind, when you use your bank account, you are credited with the bitcoin at the price you bought it, but Coinbase holds the bitcoin until your ACH transfer clears. This can take up to five business days.

At that point, your bitcoin will be stored in your wallet until you decide to move it into either a cold storage wallet, an offline hardware wallet or another exchange. Coinbase also allows you to buy Litecoin and Ethereum. Other exchanges offer many other coin options to consider but we’ll stick with Bitcoin for now.

The user interface of GDAX would look more familiar to an experienced trader than the average consumer. You may prefer to move your dollars to GDAX to take advantage of the lower fee structure but at GDAX you’ll have to wait for your ACH to clear before trading. At that point, you’ll have most of the flexibility you’ll need to execute your trading and margin strategy.

So, take your time and decide which site or sites to try. Start with a small amount and get experienced moving funds from exchange to exchange to wallet. The process of moving funds will be very strange as you will notice that account numbers are very long alpha-numeric strings. If you accidentally send to a wrong address your funds may be lost forever. It may take a few dozen small transactions to build the confidence around how each of these sites work.

A good practice, resurrected from grammar school days, is the buddy system. Get a few friends or colleagues together and start practicing, but please don’t use public open wifi to access any of your accounts. If that has to be explained, then you are not ready to trade.

Practice moving small amounts between friends. If you’re on the same exchange, there may not be any transaction fees making it possible to move micro transactions between parties.

A final note to the uninitiated. While bitcoin is currently trading above $4,300, you don’t need $4,300 to buy bitcoin because each bitcoin is essentially made up of 100 million separate programmable pieces of bitcoin affectionately called a “Satoshi” after its anonymous creator. This is important to understand as bitcoin is the reserve currency of the entire crypto economy. You can trade bitcoin into any other currency or asset and those trades are priced in Satoshi’s.

The future of bitcoin is very bright. It is a fast moving 24/7 volatile global market that is seeing a million new people join the ecosystem each month.

Bitcoin as a currency is the first killer app but new second layer applications built on top of the bitcoin protocol will start allowing some amazing use cases that will continue to add more value. And with limited supply and growing value you can choose your own adventure.

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