Bitcoin is a type of digital currency which operates outside the mandate of a central authority.
Created by a person or group of people under the name Satoshi Nakamoto in 2009, it was originally 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 is 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, as it is 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 those who trade it.
How does bitcoin work?
Bitcoin relies on two underlying mechanisms in order to function – the blockchain and the mining process.
This is a shared digital ledger which holds a record of all bitcoin transactions. Recent cryptocurrency transactions are grouped together into ‘blocks’ by miners, who then cryptographically secure each block before linking them 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.
This is the process of securing each block to the existing blockchain. Once a block is secured, new units of cryptocurrency known as ‘block rewards’ are released, which miners can inject directly back into the market. Because of their crucial role in the process, miners can exert significant control over bitcoin.
How does leveraged bitcoin trading work?
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. Instead of taking ownership of bitcoin, you’re opening a position which will increase or decrease in value depending on bitcoin’s price movement against the dollar.
Spread betting and CFDs are leveraged products, which means you only need to deposit a small 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. You could lose more than your deposit.
Why trade bitcoin with CMC Markets?
Open a long or short position – spread betting and CFDs allow you to profit from 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 your deposit)
No exchange account or wallet – there is no need to open an exchange account which 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 over 28 years of experience in the industry and also offer support for all our clients whenever the markets are open
Trade responsibly – cryptocurrencies are still relatively new for most people and can be extremely volatile – while this can provide multiple opportunities, we want our clients to have access to in-depth educational materials
What factors affect bitcoin’s price?
Bitcoin’s volatility is driven by several factors, including:
Forks: if the software of different miners becomes misaligned then a split or ‘fork’ may occur in the blockchain, resulting in the existence of two different blockchains – it is up to the network of miners to agree which version to continue using. Find out more about forks
Regulation: bitcoin is currently unregulated by both governments and central banks; there are questions about how this may change over the next few years and what impact this could have on its value
Supply: there may be a finite number of bitcoins (21 million) which are expected to be mined by 2040, plus availability fluctuates depending on the rate at which they enter the market
Press: prices can be affected by public perception, security and longevity – everyone seems to have a different opinion on bitcoin
Adoption: currently it hasn’t been widely adopted by businesses or consumers