Trading 101

Trading 101

Trading 101

The Mechanics of Trading Bitcoin.

In the Mechanics of Trading Bitcoin Lesson, we demonstrate the objective of trading digital currency or any currency. That is, to exchange one currency for another, expecting the price to change. You want the currency you bought to increase compared to the one you sold.

Example:

Trader’s Action BTC ZAR
You purchase 10 BTC at the BTC/ZAR exchange rate of 1/6000 +10 60,000
Two weeks later, you exchange your 10 BTC back into ZAR dollar at the exchange rate of 1/7000 -10 70,000
You earn a profit of ZAR 1,000 0 +10,000 (PROFIT)

An exchange rate is the value of one currency against another. So, for example, the BTC/ZAR exchange rate indicates how many BTC you can purchase for one Rand, or how many Rand you need to buy one Bitcoin. So, you are always buying one currency and selling another. Left of the slash (“/”) is the base currency. To the right is the “counter” or “quote” currency.

The base currency represents the “basis” for the buy or sell. If you buy BTC/USD this simply means that you are buying the base currency and, at the same time, selling the quote currency. You would buy the above pair if you believed the base currency (BTC in this example) will increase in value, relative to the quote currency (USD, in this example). On the other hand, if you would sell if you thought the opposite. You must also take further note when trading crypto only pairs as the decimal places can be confusing.

Bid/Ask.

All exchange market have 2 prices; the “Bid” and the “Ask”. The bid is the price at which another trader (buying) on the exchange is willing to buy the base currency (in exchange for the quote currency). So, the bid is the best available price you can sell at, on that exchange. The Bid is not always the price you will get because it will depend on the volume you need to trade and the liquidity available on the exchange.

The ask is the price at which another trader (selling) will sell the base currency, in exchange for the quote currency. This means the asking price is the best price available for buying on that exchange.

The “last” price is simply the price at which the last bid and ask matched, creating a trade of one currency for another. Lastly, the difference between the bid and the asking price is popularly known as the “spread”.

 

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