Bitcoin and Binary Options: Everything You Need to Know

An Intro to Crytocurrencies

Anyone who hasn’t spent the past few years cut off from the modern world will have heard of the rise of cryptocurrencies and Bitcoin in particular.

Positioned as an alternative to traditional central bank and government controlled national currencies such as the U.S. dollar, euro, pound or yen, cryptocurrencies are based on a de-centralised digital system. In theory at least, cryptocurrencies are completely independent, their value based on pure supply and demand and cannot be manipulated by third-parties with a vested interest. The underlying technology that cryptocurrencies are built upon is called blockchain which, very simply put, means every holder of the currency carries a complete history of every transaction units of the currency have ever been involved in. We’ll give a still very brief but slightly more extended explanation shortly.

Despite initial public skepticism and strong resistance on the part of the financial establishment, Bitcoin and a handful of other cryptocurrency pretenders are starting to break into the mainstream. Huge amounts of investment have been poured in blockchain technology and cryptocurrencies; more than had been invested in the internet at a similar stage of its development. Every big bank and financial institution in the world is now investing in blockchain technology and readying themselves for the likely future role that cryptocurrencies will play in the financial industry.

It’s not yet sure which cryptocurrency, or cryptocurrencies, will eventually be those we use, or if there will be another twist in the tale that changes current forecasts on their impending mainstream adoption. However, the smart money is certainly on blockchain-based cryptocurrencies becoming part of our daily lives, probably within the next decade. And at least for now, Bitcoin, the first cryptocurrency to be widely used, is out in front, though the race is hotting up with challengers such as Ethereum gaining traction.

Bitcoin now has a free-floating exchange rate with the U.S. dollar and other major world currencies. As a result, several big online brokers both of CFDs and binary options now offer a market on it. Bitcoin’s relative infancy means that its exchange rate has been extremely volatile over the period since its launch in 2009. This volatility has made it an attractive market for traders looking to take advantage of large swings in its value. Before we look at Bitcoin specifically as a market for binary options traders, let’s back up a little and try to concisely explain how blockchain technology and Bitcoin as a currency work.

 

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A Concise Explanation of How Bitcoin and Blockchain Work

The first thing to understand about Bitcoin is that unlike with fiat currency, digital transactions don’t require a middle man. If you want to give a friend £10 you can simply hand them a £10 note. If you want to transfer the same person £10 you at the very least need your bank, or e-wallet provider, and theirs, to facilitate the exchange. Bitcoin’s blockchain technology removes the need for a third party. It’s a pure P2P transaction.

The inherent problem with the transfer of a digital object, as opposed to a physical object, is that of preventing ‘double spending’. If person A hands person B £10, person A no longer has any control of that £10. It’s gone and in the possession of person A. But if it’s digital a 3rd party has to verify there is only one copy. Digital object need to be tracked. That requires a ledger. But what if the person in charge of the ledger simply creates more digital money? Wouldn’t that reduce the value of the £10 by creating more supply? That’s pretty much the problem many perceive in fiat currencies that cryptocurrencies hope to solve.

But what if everyone had a copy of the ledger that had recorded in it every transaction of digital money that had ever happened and it lived in every computer of everyone that had every exchanged digital money? Then no-one could cheat and make copies of digital money, right? That’s essentially how blockchain and Bitcoin works. No one person controls the record and no one person can make themselves more digital money and no third party is required. With every transaction, the information is updated on every copy of the ledger held on different computers so third-party control is controlled.

Trading Bitcoin via Binary Options

Trading Bitcoin via Binary Options works in exactly the same way as trading any other market. The broker will offer a Bitcoin price chart based upon the exchange rate of Bitcoin to major global currencies as per one or a combination of the most liquid Bitcoin exchanges. While the exchange rates on different exchanges don’t diverge much there can be small discrepancies so it is important to understand where your particular broker’s pricing information is sourced from.

Understand Factors that Influence Bitcoin’s Exchange Rate

As with any financial instrument, having success trading Bitcoin as a binary option means understanding the factors that its price is particularly sensitive to and keeping up-to-date with the news and technical trends. Bitcoin’s character as a cryptocurrency means that the factors that influence its value are slightly different to those of fiat currencies.

Interest rate changes, quantitative easing and inflation rates don’t influence Bitcoin’s value as it is not tied to any one country, economy or central bank. Geopolitical events also don’t have the same influence as they would for a fiat currency.

The only real influence of Bitcoin value is total global demand for the currency. When news of a development that can be interpreted as positive for future Bitcoin adoption, such as a major bank investing in blockchain infrastructure, breaks that can push Bitcoin higher. News of a security breach on an exchange or anything else that will dampen global faith in Bitcoin will lead to a fall. Positive news on a competitor cryptocurrency would also be expected to have a negative influence on price.

Like fiat currencies Bitcoin’s value is sentiment based. The difference is that sentiment is based on global sentiment on whether or not Bitcoin will become a mainstream currency long term rather than the country-specific influences on fiat currencies.

Trading Bitcoin successfully via binary options means educating oneself on the difference in what influences price, how and sourcing a number of reliable real-time news sources such as hodlhodl.com, bravenewcoin.com and bitcoinmagazine.com.

Because Bitcoin sentiment still swings so significantly and so often, trading the cryptocurrency smartly can be one of the most profitable markets available as a binary option for traders who take the time to educate themselves on its specifics. The