Bitcoin is a type of digital currency which operates outside the mandate of a central authority. There are several variants of the cryptocurrency which have resulted from forks. These include bitcoin cash, bitcoin gold and bitcoin diamond. This article focuses predominantly on bitcoin.
Bitcoin was created by a person or group of people under the name Satoshi Nakamoto in 2009. It was intended to be used as a method of payment free from government supervision, transfer delays or transactions fees. However, most businesses and consumers are yet to adopt bitcoin as a form of payment, and it’s currently far too volatile to provide a legitimate alternative to traditional currencies.
Primarily, bitcoin is now used as a form of investment. Its characteristics more closely resemble commodities rather than conventional currencies. This is because it’s beyond the direct influence of a single economy and is largely unaffected by monetary policy changes. Nonetheless, there are several other factors which can influence bitcoin prices, and these should be kept in mind by traders.
Bitcoin relies on two underlying mechanisms in order to function – the blockchain and the mining process.
What is the blockchain?
The blockchain is a shared digital ledger which holds a record of all bitcoin transactions. Recent cryptocurrency transactions are grouped together into ‘blocks’ by miners. The blocks are then cryptographically secured before they get linked to the existing blockchain. The blockchain is accessible to everybody at any time, but can only be changed with the computing power of the majority of the network.
What is mining?
Mining is the process of securing each block to the existing blockchain. Once a block is secured, new units of cryptocurrency known as ‘block rewards’ get released. Miners can inject these units directly back into the market. Due to their crucial role in the process, miners can exert significant control over bitcoin.
When you buy bitcoin on an exchange, the price of one bitcoin is usually quoted against the US dollar (USD). In other words, you are selling USD in order to buy bitcoin. If the price of bitcoin rises you will be able to sell for a profit, because bitcoin is now worth more USD than when you bought it. If the price falls and you decide to sell, then you would make a loss.
With CMC Markets, you trade bitcoin via a spread bet or CFD account. This allows you to speculate on bitcoin price movements without owning the actual cryptocurrency. You aren’t taking ownership of bitcoin. Instead, you’re opening a position which will increase or decrease in value depending on bitcoin’s price movement against the dollar. Find out how to trade bitcoin for a comprehensive perspective of bitcoin trading strategy.
Spread betting and CFDs are leveraged products. This means you only need to deposit a percentage of the full value of a trade in order to open a position. You won’t have to tie up all your capital in one go by buying bitcoin outright, but can instead use an initial deposit to get exposure to larger amounts. While leveraged trading allows you to magnify your returns, losses will also be magnified as they are based on the full value of the position.
Open a long or short position*
Spread betting and CFDs allow you to trade on both rising and falling prices.
Efficient use of capital
Leveraged trading means you only deposit a small percentage of the full value of a trade in order to open a position. Remember that both profits and losses will be magnified, and you could lose more than the amount you deposit to open a position.
No exchange account or bitcoin wallet
Unlike trading the underlying bitcoin, there is no need to open an exchange account or bitcoin wallet to hold the bitcoin you have bought. This means no waiting for approval from the exchange, no concerns about keeping your wallet secure, and no fees if you want to withdraw funds later.
Trade with an established provider
CMC Markets is a regulated provider. We have nearly 30 years of experience in the industry and also offer support for all our clients whenever the markets are open.
Cryptocurrencies are still relatively new for most people and can be extremely volatile. We want our clients to have access to in-depth educational materials to support their trading.
Bitcoin’s volatility is driven by many factors, including:
Read the next article in our series, how to trade bitcoin.
*Please note we may, at our sole discretion, restrict your ability to go short.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.