A recent Bitcoin conference confidently predicts bitcoin being $2000 at years end. So simply taking a punt and buying now to hold on for a while, could be a very profitable adventure. However if that is not exciting enough for you…
Another tactic that has been recently mentioned, is what we’ve called playing the exchanges. Here you are simply buying and selling a single currency, but you are doing so very quickly and you are selling on one exchange and buying on another.
The idea here is that different exchanges, at any given moment, provide different buy/sell prices for a currency. This is because some exchanges set their own prices, and some take their prices from another authoratitive source. Also, different exchanges might update their prices at different intervals, so one might lag behind another. Let’s say you hold Bitcoins on one exchange whose values tend to be higher, and whose prices react very fast. You’ve also singled out another exchange that is more conservative in their valuations, and are slower to react to big changes in price.
For our example, let’s say the price has been hovering around $490 per Bitcoin for a while on the first exchange. And the more conservative exchange has them at $480.
You wait until you see the price rising – and you sell your Bitcoins on the first exchange. Let’s say they’ve jumped up to be $495 each. You then move over to the second exchange, and buy the same amount of Bitcoins back – before their price has had a chance to start moving with the trend. Their price may still be at $480, which means you’ve gained $15 per Bitcoin, but still own the same number of Bitcoins.
With normal currency this method would not be considered
With a normal currency, this method would rarely be considered, because there is always a gap between what an exchange will buy for, and what they will sell for. This is simply how currency exchanges work, and is how they earn their revenue.
However, with Bitcoin and other emerging cryptocurrencies, their values can change so fast and so significantly, that there is a much higher chance of you finding a buy/ sell price combo that will leave you in profit. This is added to by the relative youth of the exchanges, and the fact that they don’t all operate by the same internal rules. However, there are still several flaws with this method.
– It’s super high-risk. Windows of price difference can close very quickly – especially with such a fluctuating currency value. Plus you are putting into play a large amount, for only a small potential gain.
– Some exchanges also charge transaction fees, on top of the buy/sell divide. This could further reduce or nulify any profit margin.
– Transactions are not instant. Often transactions can take hours (or even days) to completely go through. Windows of opportunity are not likely to last that long.
– You may need additional capital. Because many exchanges use account balances – your initial sale of coin would go into your balance, which you then need to withdraw to your own coin wallet. You would then need to reverse the process to load the account of the second exchange where you wish to make the buy. It’s entirely likely that this would take too long, so you would need to have funds ready loaded in the second exchange.
– Your funds end up in the exchange that is more conservative, so if you ever try to move your holding back to the first exchange (e.g. to try it again) you are likely to reverse some of the gains made originally.
At the end of it all, you are still only left holding virtual currency, and hence any profit remains virtual too. If the price drops shortly after the buy/sell operation, so will any profit margin you had.
Playing the Currencies As we’ve mentioned before, there are dozens of cryptocurrencies in existence besides Bitcoin. Many experts will hold portfolios of several different currencies at any given time.
By keeping a close eye on each one, they learn to know when a given currency is peaking (has risen, and is likely to fall soon) and when one is in a trough (has fallen, and is likely to rise soon).
Cryptocurrencies (at the present time) tend to behave more like stocks than traditional currencies. Therefore, they are subject to the peaks and trough patterns that stocks often follow. When the price of a stock rises, people are tempted to sell in order to cash in and profit from their holding. When enough people sell, the price turns and falls. Likewise, when it falls, people see an opportunity to buy at a cheap price. When enough people do this – the price rises. This pattern tends to continue until something major causes a significant leap or drop in the price. Unlike stocks however, cryptocurrencies are not companies, and don’t have products or customers. This removes some of the less predictable elements, and makes it somewhat easier to predict their rise and fall.
By swapping their holdings between currencies (buying when low, and selling when high) it is possible to quickly increase the overall value of your portfolio. However, it does require a lot of upfront research, and then constant surveillance of the prices. Plus, of course no single individual can ever predict the future with certainty, and there are still significant risks involved. Dividends .
Some currencies you may come across, are in fact more stock than actual currency. Some exchanges or forums related to cryptocurrency might launch their own currency, and with it offer dividend payments. The cash raised by this inital sale is treated like an investment in the company and helps to keep them running. The dividends are a way of tempting new buyers.
Similar to stock dividends, these are payouts to all current holders of the currency. For example, one particular entity might set aside 30% of all profit to be assigned to dividends and returned to currency holders. This is done in proporiton to the value you own. These dividends are payable to you as long as you hold the currency. But you are not obliged to retain it, and can sell at any time. As with stocks, the price can also rise and fall over time. Unless you are investing significant amounts, it’s unlikely that dividends alone will provide much of an income boost. However, they are a nice addition to any investment currency that offers them.
With binary options, you never actually buy or sell the currency itself. What you are doing essentially is placing a bet on how that currency is going to perform.
Binary options have been around for some time, being executed on stocks, commodities and regular currencies. With the rise of Bitcoin, some of the more tech-savvy binary options brokers are adding Bitcoin to their offerings.
A typical example of a binary option trade might be as follows:
You invest $100 on your trade.
You choose to trade on the value of Bitcoin
You choose an expiry time of 5 minutes The broker offers a 90% return.
– You then decide whether the value of Bitcoin is going to be higher or lower by the end of those 5 minutes.
– For our example, lets say we think it will be higher.
The moment you hit go, the value of Bitcoin is recorded, and five minutes later, your trade closes and the new value is checked. If the value of Bitcoin is higher, like you predicted, then you get a payout of $190 (your original $100, plus the 90% return promised by the broker).
If the value had actually gone down, your trade would have failed, and your $100 would be lost. This might seem like a very tempting opportunity, given the high rate of return possible, and odds that appear to be around 1 in 2 of winning. However, if you dig deep into the graph of something like Bitcoin to see historically what it has done within any given 5 minute window, you might be surprised.
When you stand back, the Bitcoin charts seem to be mostly rises, with a few major drops dotted in. But in reality it is constantly rising and falling – it’s just that the rises are ultimately bigger than the falls. Some brokers offer practice accounts, where you can make dummy trades to see how you would have performed. These are invaluable go give you a sense of how things might go.
Experts say that Binary Options trading without informed advice is just like playing heads or tails. And that you should only make trades based on real signals. (For example, if you see a news article appear online mentioning another Bitcoin hacking disaster
– you might want to hop on and place a trade on the price going down.)
Other trades might be available, some of which might be more long-term. Example: In one month’s time the value of Bitcoin will be above $600. Yes or No? (At the time of writing, Bitcoin is trading at $492.)
Different brokers have different criteria in terms of minimum account balances and minimum trade values. All brokers tend to offer some kind of incentive or exclusive options in order to encourage you to sign up with them. Some might offer insurance on your first trade (i.e. you get your money back even if you lose) or they might offer bonus credit for your balance, etc. So it is important to shop around for ones that might suit you. Take a look at the Resources section at the end of this report for some useful links to brokers.