Bitcoin (BTC) is a virtual currency, using encryption algorithms and priding itself with anonymity of transactions and low fees. Since its development, back in 2009, it managed to rise from 20-30 USD, to over 580 USD for one BTC, nowadays. This huge increase also attracted traders interested to gain from the fluctuations. But how profitable really is the BTC trading?
Let’s start with one characteristic that impacts significantly the trading process: liquidity. Or the lack thereof. While not being controlled by any central bank or authority, the bitcoin is not that liquid, and the actual amount of BTC is limited. It reached, now, some 15 millions, with an expectancy to get to 21 million in several decades. This low liquidity is the root of all evils, but most of all, it brings high volatility. A small amount of BTC sold over less significant business news can move the value downwards, or in return, a buying spree can up the value without a concrete reason. In an attempt to go around the lack of liquidity, and maybe limit volatility, exchanges came up with a palliative solution: BTC holders can, let’s say “borrow” them to those in the market who want to trade BTC, but do not have enough. The borrower pays back the borrowed amount at a fix date and with a specific interest. Not many leveraging solution
Moreover, if other markets allow you to leverage your positions, the BTC trading is rather poor in such solutions. The system is quite limited. For instance, hedging is somewhat restricted to miners – those who keep track of BTC and add them to the block chain. Thus, the main characteristic of a futures contract, for example, is blocked: in order to hedge against potential losses, you need for others to continue trading. But […]
