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Bitcoin Futures Trading Strategies

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Learning the most popular Bitcoin Futures trading strategies in use today can be a smart way to improve your positioning and overall crypto skill level. Savvy investors understand that no one can predict with 100% accuracy the turns the market will take. However, there are some methods traders use to reduce their risk and improve their profits.

Every trader needs some sort of plan. This strategy provides you with a roadmap to help you remain consistent. A trading strategy helps you to separate your investment decisions from your emotions. This plan will help you decide when to enter and exit trades. It will also help you to recognize opportunities such as emerging trends.

The good news is that Bitcoin Futures are by far the most traded cryptocurrency derivatives. As such, there is more liquidity in the market than ever. Additionally, multiple platforms now offer Bitcoin Futures trading options.

What are Bitcoin Futures?

Prior to trading any asset, you need to understand its primary purpose. In the case of Bitcoin Futures, the main purpose is market speculation. This speculation also helps steer the Bitcoin market. If investors flock to Bitcoin Futures contracts with higher premiums, Bitcoin will experience a price increase in most circumstances.

Trader Speculates

When you trade Bitcoin Futures, it’s important that you utilize all the information at your disposal to make an educated guess as to the future market movements of Bitcoin. Importantly, Bitcoin Futures allows you to earn profits even when the market value of Bitcoin decreases.  When investors believe that an impending drop in Bitcoin’s value is imminent, they will open short contracts. Opposingly, if you believe the value will increase over the life of the contract, you would want to open a long contract.

Short Position

Shorting an asset is a popular strategy used by stock traders for decades. When you open a short position, you borrow Bitcoin via leveraged trades. Then you sell all of your holdings. Once the price of Bitcoin drops to your predetermined exit, you buy back Bitcoin at the lower price. You can then repay the lender and keep the difference between the sell price and the buy price as your profit.

Long Position

A long position simply means that you want to lock in Bitcoin at the price of your contract because you believe it will be much higher at the end of the agreement. You would open your contract at today’s price for a later date. When the date arrives, you can sell your Bitcoin and keep the profits.

Risk Management Strategy

Another popular use for Bitcoin Futures is by the mining community to mitigate risk exposure due to market volatility. Miners will use Bitcoin Futures to lock in their profits earned from validating transactions. A miner can use a futures contract to guarantee they don’t take losses due to volatility in the market. Not surprisingly, It’s common for miners to sell their Bitcoin at a premium via futures contracts.

Reputable Exchanges Offering Futures

Top exchanges that offer these unique financial instruments include Ameritrade, CME, OKCoin, BitMEX, and Huobi. This diversity provides investors with a wide variety of contract options. Interestingly, there are around $10 billion in Bitcoin Futures contracts trading daily. This liquidity directly equates to more market opportunities for investors willing to take the time to master their skills.

Premium

Usually, Bitcoin Futures trade at a premium rate when compared to the spot price. There are many reasons for this occurrence. The main factor for it is investor speculation. Next, there is interest parity. This is a formula that governs the relationship between Bitcoin and USD and the future value of each based on the borrow/lend rates.

Speculating on the Market

If you want to be a successful Bitcoin Futures trader, you need to polish up on your speculative skills. The first step in this process is to begin monitoring the price of Bitcoin obsessively. You will want to pay attention to the spot price and any major changes in market capitalization.

Another smart strategy is to watch the overall market momentum. The cryptomarket will often move in correlation to Bitcoin and vise versa. If you see the entire market is going green, there is a great chance that Bitcoin will follow the rest of the market. Additionally, when Bitcoin moons, it usually reverberates throughout the entire altcoin market. This linked movement isn’t guaranteed. When Bitcoin moves separately, or even opposingly,  from the altcoin market it’s known as uncoupling.

Once you have a feel for Bitcoin’s current market movements and how they play into the overall crypto markets momentum, you are ready to examine outside factors. Items such as news stories, coverage, and regulatory issues are all worthy of your attention. Any news that might improve or delay Bitcoin’s large scale adoption is worth noting. Crucially, regulatory news can have the largest effect on the price of this asset. Your job is to gather this news and make an assumption as to its impact on the network.

Educated Price Predictions

This strategy will require you to make educated guesses to the value of Bitcoin at a later date. Also, you need to determine when would be the best time to exit your investment. Your exit strategy should include both scenarios. You want to know when to cash out your profits. Also, you need to know when to exit the market and cut your losses. Remember, Bitcoin continues to experience high volatility and its market value can rise or decline very abruptly. Consequently, Bitcoin has proven to be historically difficult to predict.

Additionally, the relative newness of the entire industry leaves investors with a lack of reliable comparable. Comparables are other market situations or assets that closely resemble the ones in question. With traditional assets, studying the movements of closely related assets can help provide additional insight into potential developments in the future.

Bitcoin Futures Quotes via CME Group

Bitcoin Futures Quotes via CME Group

The good news is that Bitcoin futures usually consist of contracts with longer time periods and Bitcoin has proven itself to tend to rise in value over time. Overall, Bitcoin experienced almost 9 years of market value growth before the major corrections of 2018-2019.  When an asset continually experiences a Futures price that is over the spot price, it’s known as being in a state of contango.

Two Types of Bitcoin Futures

Today, there are two main styles of Bitcoin Futures contracts available to investors – fixed-maturity futures and perpetual contracts. These contracts share many characteristics with the main distinctions emerging in the fee format of each:

Fixed Maturity Futures

In a fixed maturity Bitcoin Futures contract you pay a predetermined premium when you open your position. You may also pay a fee at the expiration of your contract.

Perpetual Contracts

Perpetual contracts offer you a different pay structure. You pay a fluctuating rate. This rate adjusts around four times a day, or every eight hours.

Trading in Different Market Conditions

The good thing about trading Bitcoin Futures is that if done correctly, there is room for profit in either a bull or bear market scenario. It’s important to understand the contrast between these two markets and how it should correlate to your overall trading strategy.

Bull Market

In a bull market, investors will open long positions and wait out their profits. Since Futures have a tendency to trade at a higher value than the spot price, bull runs can bring higher premiums to the market. These rising prices are the direct result of investors positioning to prepare for the foreseen increase in market value.

Bear Market

Reversely, bear markets create a scenario where futures can trade at a lower value than the spot price of an asset. These price drops are the result of investors seeking to preserve capital and reposition for future movements.

Expirations Considerations

The industry standard places most futures contract expiration dates on the last Friday of the month. These contracts include both monthly and quarterly agreements. Knowing this information can help you to align your investment strategy with upcoming developments within the sector.

Bitcoin Futures Payment Structures

Currently, the most popular exchanges offering Bitcoin Futures rely on two main payment structures. The first option is the inverse pay structure. In this scenario, you put up BTC as collateral for your investment agreement. The second style of payment structure is referred to as a linear payment structure. The main contrast being that linear futures contracts require you to make your payments in USDT directly.

Interestingly, the last 2 years has also seen the emergence of hybrid payment strategies. These contracts provide investors with a bit more flexibility in terms of payment types. You can even choose different currencies to receive your profits. This scenario benefits investors who may require some profits paid in USD, while others remain in cryptocurrencies.

Arbitrage Trading

There are also opportunities to earn profits from the price variances between exchanges at times throughout your contract. Traders will often use this spread, which is also known as the “basis” to earn some quick profits. Importantly, this strategy requires you to arbitrage. Arbitrage is one of the oldest forms of commerce known to man. Bitcoin arbitrage occurs whenever an investor engages in the simultaneous buying and selling of Bitcoins in different markets or in derivative forms with the goal to leverage price inefficiencies between platforms holding the same asset. Arbitrage is possible whenever you notice:

  • The same asset trades at different prices in different markets
  • Two assets with the same cash flow are not trading at the same price
  • When an asset has a predicted future price but doesn’t trade at that price

The earliest forms of arbitrage involve simply purchasing an asset in one location and bringing over to another location and selling it for a profit. Today those that live near a border-crossing are uniquely positioned to participate in this type of commerce. Luckily, digital assets give us the ability to trade as if we were located anywhere globally.

Arbitrage Trading of Real World Goods

Arbitrage Trading of Traditional Goods

Focus

When dealing specifically with the arbitrage of cryptocurrencies, there are a few other considerations to ponder. First, you want to seek out low trading fees to ensure your profits don’t get gobbled up in the transaction. Next, you will need to consider the speed at which your asset transfers. In the case of Bitcoin Futures, the exchange times vary greatly depending on the platform you utilize. Lastly, you want an asset with high volume. Luckily, Bitcoin Futures provide all three of these scenarios frequently.

Bitcoin Futures Trading Strategies

Now that you have a better understanding of some of the basics of Bitcoin Futures trading, you are ready to learn about the three main trading strategies used by investors today. The great news is that these techniques can be used on nearly any asset class that offers futures. The two main techniques are:

  • Cash-and-Carry Futures Arbitrage
  • Inter-exchange Premium Arbitrage

Cash and Carry Premium Arbitrage

The Cash-and-Carry futures trading strategy is the most popular in the market for many reasons. Primarily, its popularity stems from its market neutral approach. If done correctly, the cash-and-carry strategy minimizes risk exposure for the investor. This reduction in risk exposure is due to the way in which this technique anticipates any market movement. The main goal of this technique is to exploit pricing inefficiencies in the spot price

Basics of Cash-and-Carry-Arbitrage

The first step in a basic cash-and-carry-arbitrage is to evaluate the market. You will need to closely monitor the percentage difference between the current spot price of Bitcoin and the price of Bitcoin Futures contracts. Begin making daily notes of the price percentage at a certain time per day. This data will allow you to compile a better awareness of how the two price points correlate.

Next, a Bitcoin Futures arbitrageur would make two purchases. The first purchase would be a long position in Bitcoin. Importantly, this is a direct investment into Bitcoin. The investor would then open a short Bitcoin futures contract at the same time and for the same amount. Critically, this contract needs to be at a price considered expensive by the investor.

Volatility

In most instances, you will notice the futures contracts experience more intense price volatility than Bitcoin directly. They also trade for a much higher value usually. However, there are instances where the Futures fall below the spot price as well. You will need to use your chart to determine when the Futures price uncouples from the spot price.

When the contract expires the investor fulfills their obligations using the Bitcoin originally purchased. The difference between Bitcoin’s current spot price and the cost of the futures contract is the profit.  This opportunity is present whenever the inflow from the short futures position exceeds the acquisition cost and carrying costs on the long asset position.

Not Full Proof

It is true that the cash-and-carry method does limit risk in certain market conditions. However, this strategy can do nothing to buff increases in carrying-costs. Keenly, you will want to monitor your fees and other factors such as margin costs. All of these can add up and chip away at your profits over time.

Inter-Exchange Premium Arbitrage

In the inter-exchange investment strategy, you are seeking to make a profit off of the variability in futures prices from one platform to another. There are many ways to accomplish this task. The simplest form is to find Bitcoin futures price gaps between platforms and trade your asset between each to earn the profit. While this may sound simplistic, there are some additional risks to avoid.

Bitcoin Futures Price Ineffeciencies Between Exchanges - Bitcoinfuturesinfo.com

Bitcoin Futures Price Inefficiencies Between Exchanges – Bitcoinfuturesinfo.com

One of the first things you want to examine is the trading pairs offered by the platforms. You may find that a certain Bitcoin trading pair is overpriced compared to the competition. Some investors may even choose to examine three trading pairs to find inefficiencies. This technique is called intra-exchange triangular arbitrage.

Automation

Today, there are a number of Dapps and bots in the market that can help simplify this process. Additionally, traders often build custom scripts to monitor the value of assets across different platforms. There are even instances of developers automating the entire process throughout the day. In this way, they can slowly stack up tiny earnings throughout their trading activities.

Inter-Exchange Arbitrage Risks

In this situation, you need to pay careful attention to the liquidity of the assets in question, the transaction fees, and the transfer times. Inter-exchange arbitrage is a time-sensitive operation that can be ruined if the asset you send takes hours to reach the other exchange. You can monitor the fee rate of Bitcoin and trading volume to feel out the approximate wait time for a transaction your time and fees. Also, be sure to make sure that the exchange is not experiencing delays in deposits or withdrawals. All of these scenarios can make you miss the narrow time window you have to complete your arbitrage trade.

Summary – Trading Bitcoin Futures

Trading Bitcoin Futures is a delicate process that takes time to master. The great news is that once you have developed a reliable trading strategy to follow, you can simply put your investment vehicle in drive and begin to gain experience immediately. The key to your success lies in your ability to assess the Bitcoin market and speculate as to the future price of this digital asset. Luckily, you are now armed with the most popular futures trading strategies in the market.

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David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com

Cryptocurrency

How to Short Bitcoin (BTC) – An Easy to Follow Guide

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Learning how to short Bitcoin (BTC) is an essential skill to learn if you intend to become a professional crypto trader. Notably, shorting is an advanced investment strategy that comes with a high level of risk. However, if you master the skill, you gain the ability to acquire massive returns during times of market value decline.

What is Short Selling?

Short selling is an investment method that allows you to benefit from drops in the price of a particular asset. When an investor speculates on the decline in a tradable asset such as Bitcoin, stocks, or other securities prices, they can gain profits using shorts. In a short sale scenario, you bet against the price of the asset in question.

Why Would You Want to Short Bitcoin?

While in the long term it’s easy to see that Bitcoin continues to see price appreciation, there are endless reasons to short this cryptocurrency. The market is volatile and rather than letting your holdings sit during times of market value decline, you can sure up your holdings using shorts.

Bitcoin Yearly Price Cycle

Bitcoin Yearly Price Cycle

How Bitcoin Shorting Works

To understand shorting, let’s first look at the industry that created this method, stocks. In the stock market, short selling is a popular investment strategy. To accomplish a short, an investor borrows a certain amount of the stock they believe will decline in value. As soon as the investor receives these stocks, they sell them at the current market value. Once the price of the assets drops, the investor then can buy the stocks back and return it to the lender.

Bitcoin Shorts

While the asset is different, shorting Bitcoin works in much the same manner. A crypto trader will borrow Bitcoin prior to a foreseen market drop. As soon as the investor receives their Bitcoin, the assets are sold. After the value of Bitcoin completes its dip, the investor repurchases Bitcoin with the original sales funds.

Because the price of Bitcoin is cheaper than when you borrowed it, you can repay your loan and keep the difference in the repayment and your total trading actions. Here is a specific example of shorting in action.

Shorting Example

Jeremy borrows 5 Bitcoin’s at $12,000 apiece. He immediately sells these coins for $60,000.00. A few days pass. On the third day, Jeremy’s hunch proved correct. The price of Bitcoin did a major correction to $10,000.00.

Jeremy then repurchases Bitcoins using the $60,000 he held from the initial sale of his holdings. Since the price of Bitcoin dropped $2,000 apiece, Jeremy receives six Bitcoins for his purchase. He then returns the five Bitcoins to the lender. The last Bitcoin is his profit.

Jeremy can sell this Bitcoin and keep the $10,000, or he can use his earnings to make other investments. Had he not shorted the market, he would only show losses in his portfolio. Even if he had traded his assets out to stable coins, he would only make the difference in price from his original holdings and the value drop. Instead, he 5x his ROI using this advanced trading method.

How to Short Bitcoin?

Shorting Bitcoin is easier than ever today. The first step is to locate a reliable platform that permits leveraged trading. These platforms specialize in high-risk shorting investment loans.

Importantly, you will need to pay back any loan you take, plus fees. If you borrow ten Bitcoin, you’ll need to have those coins back when it’s time to repay your loan. To ensure that you fulfill your promise, these platforms require users to put up a deposit, or margin.

Your margin requirements act as a form of collateral or security. These holdings back your position with the goal to ensure the shares will be repaid at the agreed-upon future date. If your short starts to go awry, your lender can, and most likely, will call your margin in. Most platforms only need to provide you with a quick notice to do this. For these reasons, it’s imperative you read all the fine details of your Bitcoin short agreement.

Ways to Short Bitcoin

Today, there is a variety of ways to short Bitcoin. Each of these techniques provides its own advantages and disadvantages. You must consider the entire situation before you decide on what strategy best suits your needs.

Short Sell – Contract for Difference (CFD)

One of the most popular ways to short Bitcoin is through the use of CFDs. CFDs allow you to short Bitcoin without purchasing any coins directly. Instead, you sign a CFD and agree to just pay the difference between the price of the asset at the time of your loan and your contract rate. CFDs are popular because they are more convenient and cost-efficient because there is no need to make additional purchases.

How to Short CFD

eToro is the premier exchange for cryptocurrency CFD trading services. You will need to create an account to get started. Luckily, the process is simple. Notably, you must verify your identity and account via an email before you can use the platform.

Once you are all set up, shorting is simple. All you need to do is open a trade on the BTC/USD instrument. Next, you need to select “Sell” from the options. You will be brought to a screen that will allow you to set up all of the details of your CFD. It doesn’t get easier than that. Best of all, eToro features an advanced interface that is easy to navigate. Form here, you can stay up-to-date on all the market’s developments.

Exchange Shorting

There are many exchanges in the market today that offer shorting services. Most of these platforms allow you to leverage your shorting strategy. Leveraged shorting is the act of borrowing more Bitcoin from the exchange than you hold prior to your sell-off.

Bitcoin Price Dump

Bitcoin Price Dump

Leveraged trading is one of the riskiest strategies in the market. It takes a firm understanding of the market conditions and your investment. Additionally, you really need impeccable timing to be successful with this strategy. If the exchange feels as if your investments are going to sour, they will close your trade early, keep your margin, and make you repay your loan.

Understanding When to Short

There are certain times when shorting Bitcoin is more complicated than others. For example, shorting Bitcoin against long-term uptrends can be tricky, to say the least. Bitcoin has a way to slowly rise in value. Reversely, this digital asset can shed thousands of dollars in market value in minutes. These scenarios put into perspective why shorting can be difficult for new investors to complete successfully.

Understanding the Mentality of the Market

It’s also important to consider the mentality of other traders in the market. If you short Bitcoin, and suddenly the price starts to shoot up quickly, you will need to rush to repurchase your assets. Unfortunately, every other investor who made the same decision will seek to accomplish the same task.

This sudden drive to repurchase Bitcoin drives the market value up sharply. When this scenario plays out, it’s what is known as a short squeeze. Short squeezes add to your losses in this position. To avoid this scenario, you must be vigilant in your market assessments.

Past Bitcoin Sell-offs 

The Bitcoin market has nine years of trading data to back it up now. A quick glimpse at the past of Bitcoin and you can easily see scenarios that initiated major sell-offs. The more you understand these scenarios, the easier it will be to identify the next major sell-off in the market. Here are some of the main reasons Bitcoin prices stuttered in the past.

Bitcoin Whale Dump - How to Short Bitcoin (BTC)

Bitcoin Whale Dump – How to Short Bitcoin (BTC)

Regulatory Concerns

Since the crypto market is still in its early stages, there is still a lot of regulatory uncertainty surrounding this industry. In the event that a major country bans or enacts some anti-Bitcoin stance, the market will adjust accordingly.

Major Exchange Hacks – Short Bitcoin

History has shown that major exchange hacks can tank Bitcoin prices in minutes. One famous example of this scenario playing out was during the Mt.Gox hack. At the time, Mt.Gox was the largest Bitcoin exchange in the world. Its hacking sent Bitcoin prices spiraling downwards for months.

Hard Forks

Hard forks occur when the community behind a crypto project is split on a certain upgrade. In a hard fork, some of the miners refuse to change over to the new protocol. This creates two separate blockchains from the moment of the fork moving forward. Consequently, hard forks also create a rift in a coins support community.

Bitcoin prices saw a decline when the community split over transaction block sizes. The row eventually led to the creation of Bitcoin Cash. Today, both coins have a strong following in the market.

Delayed Updates

There is another update related scenario that can drop the price of a digital asset. When important upgrades see considerable delays, it can cause a loss of faith by investors. This loss of faith demonstrates itself in negative price movements.

Bitcoin saw some significant price drawbacks when developers postponed the SegWit update. SegWit reduced the size of transactions in an attempt to combat market congestion on Bitcoin’s blockchain. At the time, the network’s congestion was unbearable. Consequently, every delay was met with negative price movements.

Developers Exiting the Project

Another major development that can hurt a coin’s price is the exiting of a key member from the platform. Blockchain developers are in high demand. The top programmers are respected throughout the entire industry. When one leaves a project, it can symbolize the beginning of the end for a coin. It can also represent a shift in the coin’s primary functionality moving forward. Either way, investors don’t like to see these guys go.

Future Risk Scenarios

There are also future scenarios that could occur that would affect Bitcoin’s price negatively. For example, if the cryptographic hashing algorithm of Bitcoin is broken, the coin will become unsecured and its market value will plummet. Along the same line of thought, major coding exploitations could also cause investors to lose faith in this cryptocurrency.

Future Regulations

Regulatory changes in the market are perhaps the biggest threats to Bitcoin prices. In the past, major countries, such as China have put heavy pressure on the market. In 2017, China banned all exchanges and ICOs in the country. These actions dropped Bitcoin’s price sharply following the news.

Satoshi’s Back

Bitcoins anonymous creator Satoshi Nakamoto has remained in the shadows for the last couple of years. In the early days of Bitcoin, Nakamoto mined over one million coins. These coins have sat in his wallets since day one. If these coins were to enter the market, the price of Bitcoin would see a huge correction to reflect the added supply.

Risks of Shorting Bitcoin

Short sales are considered a risky trading strategy because they limit gains even as they magnify losses. Shorting is especially risky if the lender calls in the assets before prices have a chance to drop. There are some techniques you can employ to simplify the process, however, none are full proof.

Let’s examine the same example from before using the $12,000 Bitcoins that dropped down to $10,000. In the first scenario the short completed according to plan, the price of Bitcoin dropped and the investor repaid their debts to the lender. Now let’s see what would happen if the price of Bitcoin didn’t drop.

Maximum Risk Exposure

Let’s say that the price of Bitcoin jumped up to $13,000 instead of dropping. In this situation, the lender would call in their loan. The lender would close your trade and keep your margin. Additionally, you would owe $65,000 worth of Bitcoin instead of the original $60,000 worth of Bitcoin you borrowed.

Shorting Bitcoin – Summary

Shorting is a great way to make some extra profits. However, if you are new to trading, or are unfamiliar with the market, shorting is one of the fastest ways to lose your booty. For these reasons, each investor needs to do some soul searching prior to jumping into the shorting market. That being said, shorting is a powerful tool that provides investors with huge ROIs when completed correctly.

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Cryptocurrency

How Does Bitcoin Work? – An Easy Guide for Noobs

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As Bitcoin approaches its 10 years anniversary, the world’s first and most successful cryptocurrency is still a mystery to many people in the market. Even as Bitcoin has made its way into the vocabulary of the masses, the average person still wonders “how does Bitcoin work and what makes this computer money so valuable?”

The Current State of Affairs

The crypto market continues to expand to new heights. Every week new blockchains, tokens, coins, and exchanges enter the market. Each of these products provides users with a valuable service. However, all of these technologies owe a nod of appreciation to the world’s original cryptocurrency – Bitcoin.

What is Bitcoin (BTC)?

Per Satoshi Nakamoto, Bitcoin’s anonymous creator, Bitcoin is a “Peer-to-Peer Electronic Cash System.” Let’s examine this statement in depth to really grasp exactly what Nakamoto states here. Firstly, he states Bitcoin is a “peer-to-peer” network.

Bitcoin Whitepaper

Bitcoin Whitepaper

Peer-to-peer transactions are direct transactions. A great example of this style of transaction is when you hand cash to someone. When you hand your neighbor $5 cash, that is a direct transaction. There was no intermediary involved. There was no account validation, or central bank approving your transaction. You acted freely.

Inefficiencies in Today’s System

Now look at the same transaction, but this time you pay with your debit card or a payment App. While it may appear as if the funds instantly transfer from your account to theirs, this is hardly the case. Your payment begins a long arduous journey that can take days.

First, your payment order checks with both banks to make sure that the accounts are valid and that there are funds in your account to send. Then your payment action is sent to a major payment processing firm. In most instances, this is Visa or MasterCard.

Next, your funds bounce around 30+ intermediaries before reaching their destination around 3 days later. That’s why when you refund Debit or Credit transactions it takes days to show up in your account.

A Long Journey

All of these steps add more time to your transactions. Additionally, each intermediary and verification process tacks on a fee for their services. On top of all of these concerns, your transaction still must go through the regulatory channels. If for some reason, there is a discrepancy between your government and the person’s government you want to send a payment to, you will find it impossible to send these funds.

Bitcoin Trading - Analysis via CoinMarketCap

Bitcoin Trading – Analysis via CoinMarketCapBitcoin Trading – Analysis via CoinMarketCap

Centralization vs. Decentralization

The reason behind all of these intermediaries is simple, the current financial system is centralized. In a centralized system, there is one central organization, such as a bank or government that holds all the power. They hold your funds, they approve your transactions, and they decide when to issue more currency. You’re just along for the ride.

How Does Bitcoin (BTC) Work?

In a decentralized network, you remain in control of your assets until the exact moment that they arrive at their destination. When you send Bitcoin from your wallet to another person’s wallet, there are no intermediaries between your payment and its destination.

As such, there is no third-party to approve or deny your transactions. The entire process occurs in a “peer-to-peer” fashion. It’s the same as handing someone digital cash. Basically, you regain control over your finances using a decentralized system.

Examples of Other Decentralized Systems in Use Today

At first, the concept of decentralization can seem a bit awkward to comprehend. However, a quick glimpse into the market and you will see other decentralized systems hard at work. A perfect example of a decentralized system that you are more than likely familiar with is torrent streaming services.

Bittorrent Token

BitTorrent Token

When you go to a torrent streaming website, you probably ask yourself “how do these platforms remain open, even though they offer products that they don’t have licenses to offer?” The answer is simple, they utilize decentralization to prevent censorship. Here’s how decentralization is used in this scenario to bring you all your favorite early releases and new music for free.

Decentralization = Censorship Resistance

Websites like BitTorrent don’t actually provide you with any content. In reality, they just provide a location for people to meet up and exchange data freely, whatever that data may be. Now, granted, in most cases its music or movies, but it could be anything from political messages to actual value, such as cryptocurrencies.

Because these websites only provide a location for people to meet and exchange data, they are much more difficult to close than a centralized website that offered you these downloads directly. In essence, these streaming websites have done nothing wrong.

The same concepts can be put to use in the financial sector. Though the integration of decentralization, it becomes impossible to censor, edit, or block payments on the blockchain. In this way, Bitcoin represents an ideological shift towards more financial freedom and decoupling of government from currency.

To understand Bitcoin, you first need to take a look at some of the core technologies that make this marvelous coin function. As you now know, decentralized networks are censorship-resistant. There are also a variety of different types of decentralized networks. Bitcoin relies on a blockchain network to provide you with these freedoms.

What is a Blockchain?

A blockchain is a decentralized network that utilizes “blocks” of transactions to create a complete “chain” of events from the initiation of the network. In Bitcoin’s blockchain network, there are thousands of transaction validators known as miners or nodes. Importantly, every node validates every transaction on the blockchain but not every node receives a reward.

Who Gets the Reward? – How Does Bitcoin Work

These miners compete against each other via a complicated mathematical equation. The node that gets the question correct first gets to add the next block of transactions to the blockchain. They receive a reward for their efforts. Today, the reward is set at 6.5 BTC.

Bitcoin Consensus Mechanism - SHA-256 - Blockchain Technology

Bitcoin Consensus Mechanism – SHA-256 – Blockchain Technology

SHA-256

The mathematical equation, known as SHA-256 is so difficult that your computer examines it and decides it’s better to make educated guesses rather than attempt to calculate the equation directly. This guesswork is what drives up the processing on your computer, which, in turn, drives up mining costs.

What is Bitcoin (BTC) Mining?

When you hear that someone has a Bitcoin mining rig, this simply means that they have a specially built computer processor tailored to the SHA-256 algorithm. These devices, known as Application Specific Integrated Chips (ASIC) miners are thousands of times more accurate at guessing the SHA-256 algorithm’s answer.

More Miners – The More Security

The cool thing about Bitcoin is that it’s not purely mathematical. There is a true psychological approach behind its nature. For example, the larger the Bitcoin network, the more secure it becomes, and the higher the value of BTC. Also, the higher the market value of Bitcoin, the more miners in the market.

As the value of Bitcoin rises, the SHA-256 algorithm adjusts accordingly. These adjustments ensure that the mining rewards get paid out around every ten minutes. These rewards are vital to the Bitcoin network for two main reasons. Firstly, this strategy incentivizes nodes to continue validating transactions.

Predictable Issuance

Secondly, these rewards are the only time that new BTC enters the market. There will only ever be a total of 21 million BTC available to the world. The difficulty adjustment and mining rewards system of BTC ensures that these BTC enter the market in a concise and predictable manner.

Bitcoin Mining Rig - How Does Bitcoin Work?

Bitcoin Mining Rig – How Does Bitcoin Work?

Now let’s compare this sound mathematical process to that of the Central Bankers today. In the centralized financial system, the issuance of currency is done at a whim. Just recently, the US government issued trillions in currency into the market as a part of the Covid-19 stimulus package. However, these funds are sure to disrupt the delicate supply-and-demand balance. Consequently, inflation is sure to come soon.

Why The World Needs Bitcoin

The world needs Bitcoin now more than ever. Bitcoin represents a real danger to the centralized markets because, for the first time in history, it provides the world with a secure digital alternative to the fiat systems in place. Unlike its predecessor, gold, Bitcoin is available to the entire world and requires very little overhead in terms of security.

Gold vs. Bitcoin

Now, let’s compare gold and Bitcoin for a second to see why cryptocurrencies are the future reserve currencies of the world. Firstly, it’s important to acknowledge that gold did and still serves an important purpose in the market as a safe-haven for investors. Gold is extremely stable and universally accepted.

The problems with gold are systemic. For one, gold only functions as a reserve currency. You couldn’t use gold for day-to-day micro-transactions. Imagine going to your local grocery store and chipping off some gold to pay for your items, not realistic in 2020 at all.

Where Do You Keep Your Gold Bars?

Additionally, gold isn’t an asset that you can readily get your hands on. Sure there are tons of gold investors today, but what do they really own? If your gold isn’t in a safe located on your property, you really just own a piece of paper that states you own gold. Sadly, in times of great economic strife, gold owners learn this lesson the hard way. Really, for any reason, your gold can be taken.

A perfect example of gold investors coming to terms with reality occurred in the 1930s in the US. During this time, the government of Franklin D Roosevelt seized all the citizen’s gold bullion and coins via Executive Order 6102. The order forced all citizens to sell their gold to the government at well below market rates. Those that refused had their gold confiscated.

Can’t Confiscate Bitcoin

Bitcoin holders never have to worry about this scenario. You hold your Bitcoin directly, not just a note of ownership. Bitcoin relies on a pair of cryptographic keys to keep your holdings safe. The public key is what you give people so they can send you BTC, whereas the private key is how you access your wallet. You must never give your private key out to anyone.

As you already learned, the decentralized nature of Bitcoin’s network is set up in a way that it would be impossible for governments to stop it. Additionally, the security keys also prevent overreaching governments from snagging your hard-earned BTC whenever they deem it necessary.

Fills All Use Scenarios

Bitcoin functions as both a currency and a store of value. You can HODL your BTC and enjoy the appreciation, or you can trade or spend your Bitcoin with impunity. This unique currency affords investors the flexibility of cash, the convenience of digital transactions, and the value storage capabilities of gold.

The Future of Bitcoin

The future for Bitcoin looks bright. The network is larger and more secure. Also, more people know about this revolutionary protocol than ever. The world’s first crypto also gained some new functionality recently via the Lightning Network.

Lightning Network

After the crypto craze of 2017, it became evident that BTC’s scaling issues needed resolution. The network traffic reached a point that BTC was unable to fulfill one of its primary roles. It was unable to function as a peer-to-peer cash system due to extreme volatility, delayed transaction times, and huge fees.

Luckily, developers have since corrected many of these issues via updates and other developments. The Lightning Network is one of these developments that continue to garner attention in the market. The Lightning Network is an off-chain protocol that relies on private payment channels to reduce network congestion.

Additionally, the Lighting Network provides BTC with some new functionality such as the ability to utilize smart contracts and oracles. Oracles are off-chain sensors that can trigger on-chain events such as smart contracts.

Bitcoin is Here to Stay

Today, Bitcoin is a household name. Amazingly, Nakamoto’s single coin inspired a digital revolution in the market. There are thousands of cryptocurrencies now available to investors. While many of these platforms improve upon Bitcoin’s core design, none can match Bitcoin’s network strength and overall community support. For this reason, Bitcoin continues to reign as the king of cryptocurrencies.

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Investing in Bitcoin Cash (BCH) – Everything You Need to Know

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What is Bitcoin Cash (BCH)?

Bitcoin Cash (BCH) is a peer-to-peer electronic cash system that is the result of a hard fork from Bitcoin’s blockchain. Notably, Bitcoin Cash is by far the most successful hard fork of Bitcoin to date. This project entered the market under a cloud of controversy. However, after the smoke cleared, Bitcoin Cash emerged as one of the top ten cryptocurrencies in the world in terms of market cap.

Bitcoin Cash is the direct result of scalability issues encountered on Bitcoin’s blockchain. During the 2017 crypto craze, these issues took center stage as Bitcoin’s transaction time and fees reached new heights. This increase in fees and delays were the result of too much network congestion resulting from larger transaction sizes.

That year saw Bitcoin’s use and value skyrocket as more investors learned about this digital asset. Additionally, a flood of new investors entered the market eager to get in on the digital “gold rush.” These factors pushed Bitcoin’s network to its maximum capabilities.

Put simply, Bitcoin couldn’t handle the increase in usage. It’s one thing to cater to the programming and darknet communities but it’s an entirely different story to meet the demands of the general public. To accomplish this task Bitcoin would need to scale up considerably.

Bitcoin Congestion via WooBull

Bitcoin Congestion via WooBull

More Data = More Transactions

Bitcoin Cash does away with these concerns through an increased block size. These larger blocks are able to fit more transactions per block. This strategy increases the network’s transactions-per-second (tps) rate as a whole. The goal was to allow Bitcoin Cash to function as a medium for daily transactions as was the original intention of Bitcoin per Satoshi Nakamoto’s Whitepaper.

Bigger Blocks

While increasing the block size in most blockchain’s wouldn’t be a major issue, for Bitcoinists, changing the coins core protocol is a no-no. To these individuals, known as Bitcoin Core, The 1MB block size serves a vital function in the network they argued.

Primarily, it allows anyone to participate in the network regardless of their computer. However, with the advent of ASIC mining rigs, this argument is up for debate still today. Additionally, it prevents the network from getting bogged down in spam data.

Bigger is Better

Bitcoin Cash proponents believed that increasing the size of blocks to between 8 MB and 32 MB was the best way to provide daily Bitcoin users with the services they require. These larger blocks allow more transactions to process per block. In turn, Bitcoin users could avoid fees and delays.

This increase in transactional throughput allowed Bitcoin Cash to negate the need to incorporate the Segregated Witness (SegWit) protocol. SegWit reduces the amount of data sent for each transaction. It’s a part of Bitcoin’s core coding today.

Features of Bitcoin Cash (BCH)

Bitcoin Cash’s larger block size did accomplish its task. Keenly, Bitcoin Cash is much faster than traditional Bitcoin. Interestingly, during a stress test conducted in Sep 2018 the platform registered 25,000 transactions per block. Comparingly, the average number of transactions per block for Bitcoin is between 1,000 and 1,500.

Also, it’s way cheaper to use Bitcoin Cash. BCH users only pay around $0.20 per transaction using the network. These fees are much higher using Bitcoin’s blockchain. Additionally, Bitcoin Cash is easier to mine than its predecessor thanks to the integration of some new protocols.

Bitcoin Cash has a healthy community following that is among the most vocal in the market. Although, as of recently, the coin has had some divisions regarding updates.

History of Bitcoin Cash (BCH)

The history of Bitcoin Cash starts with a philosophical debate on how to handle Bitcoin’s scalability concerns. These issues were always an issue for Bitcoin developers. By 2017, the concerns were at the point where something had to be done. Bitcoin’s network had outgrown its technical capabilities.

Bitcoin Cash vs Bitcoin via Medium

Bitcoin Cash vs Bitcoin via Medium

For example, in 2010, the average size of a block on Bitcoin’s blockchain was less than 100 KB. By January of 2015, the average block size ballooned to around 600k. This buildup of unconfirmed transactions wreaked havoc on the network. Specifically, both market transaction times and fees went skyward.

By 2017, there were multiple cases of fees being higher than the actual Bitcoin sent. Transaction times could take days during this congestion. Effectively Bitcoin was unable to scale up to function as the electronic cash system Satoshi envisioned in this state.

Debating Options

The Bitcoin community was split on how to handle this problem. Some proposed to increase the average block size to accommodate more transactions. While others suggested that the protocol excludes certain parts of the transaction to fit more data into the blockchain (BIP 91). Critically, both options had their proponents and opponents.

Proponents of increased block size, such as Roger Ver,  argued that in its current state, Bitcoin could never function as a medium for daily transactions. This camp stated that unless Bitcoin could process transactions on par with multinational credit card processing organizations, such as Visa, it would never fulfill its original purpose as a peer-to-peer electronic cash system.

Bitmain Weighs In

The creation of Bitcoin Cash was almost unavoidable after the world’s largest mining pool and hardware creator stepped into the argument. Bitmain was opposed to SegWit at first because it negated some of the advantages of their flagship miners, the AsicBoost miner. As the largest mining pool in the world, Bitmain holds incredible sway in the Bitcoin community.

Bitcoin Cash (BCH) is Born

Eventually, no consensus was reached, and the community split. Consequently, Bitcoin Cash was launched in July 2017. The new coin was the result of a hard fork to the original cryptocurrency‘s blockchain. This hard fork officially occurred a month after in August 2017.

What Are Hard Forks?

There are two types of blockchain updates, hard and soft forks. The difference between the two is that hard forks require miners to update their nodes to communicate with the network. Sometimes, not all of the miners want to switch over to the new coin’s protocol. When this situation arises, a hard fork occurs and a new coin is born.

Coin Distribution

Bitcoin holders received an equivalent amount of Bitcoin Cash during the launch. Users could claim their BCH at participating exchanges. Wisely, the total amount of Bitcoin Cash mirrors that of Bitcoin at 21 million coins.

Mixed Feelings

Bitcoin Cash was met with mixed feelings in the market. The coin entered at a respectable price point of $900. Thanks to the support of the mining community and Bitmain, the coin was able to gain major traction within the sector. In December 2017, Bitcoin Cash reached an all-time high of $4,091.

Hard Fork Inception

In Nov 2018, Bitcoin Cash experienced a hard fork inside a hard fork. The community divisions originated over a plan to integrate smart contracts onto the blockchain and increased the average block size again. The resulting hard fork created Bitcoin Cash ABC (BCH) and Bitcoin Cash SV (Satoshi Vision). The later of the two, Bitcoin Cash SV is led by the long-time cryptocurrency programmer and claimed Satoshi Nakamoto, Craig Wright.

Consensus

Bitcoin Cash utilizes a Proof of Work (PoW) consensus mechanism similar to Bitcoin to mine new coins. Both Bitcoin and Bitcoin Cash integrate a difficulty adjustment algorithm (DAA) to keep block times consistent. Originally, both Bitcoin and Bitcoin Cash used the same DAA. However, In August 2017, Bitcoin Cash introduced an addition to the DAA, called an Emergency Difficulty Adjustment (EDA) algorithm. This allows the network to be more responsive.

Mining Bitcoin Cash (BCH)

Mining Bitcoin Cash is as easy as mining Bitcoin. Luckily, the coin shares the services of Bitmain, the world’s biggest cryptocurrency miner. Additionally, the coin revised its EDA algorithm recently. This maneuver made it easier for miners to generate BCH. It’s cheaper to mine BCH as well.

Bitcoin Cash Mining Rigs

Bitcoin Cash Mining Rigs

How to Get Bitcoin Cash (BCH)

At first, major exchanges such as Coinbase denied Bitcoin Cash entry on their platforms. It was an outcry from supporters that got this coin on nearly every major exchange globally. Today, Bitcoin Cash remains one of the top ten cryptocurrencies in the world.

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Where to Store Bitcoin Cash (BCH)

There are plenty of ways to store your BCH safely. The easiest and most convenient method is to use a mobile wallet. Mobile wallets are free and allow you to access your BCH whenever you need it. They are easy to use and allow you to send and receive BCH in seconds.

If you are a serious investor, or just plan to HODL your BCH, a hardware wallet is the right choice. Companies such as Ledger produce pocket-sized devices that keep your crypto safely stored off-line. The only downside is that these wallets can cost around $100+. That’s a small price to pay for all the security you gain using a hardware wallet.

Bitcoin Cash – A Story of Perseverance

For Bitcoinist in the market, it’s easy to dismiss Bitcoin Cash as just a rip-off of Bitcoin. However, this argument falls apart as you start to evaluate the changes, updates, and community growth the coin underwent since its creation. Today, Bitcoin Cash stands by itself as a staple in the crypto community.

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