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How Bitcoin Works

Date Modified: 26/07/2023

Since its inception in 2009, Bitcoin has probably become one of the most popular cryptocurrencies out there. It is not only considered the father of digital coins, but also one of the most traded cryptocurrencies with an astounding market cap. Bitcoin’s ubiquity speaks for itself, but how does it work exactly?

Bitcoin is a form of digital currency that can be used to pay for goods and services anywhere that it is accepted. This is similar to how fiat currencies, such as the US Dollar (USD/JPY), British Pound (GBP/USD), Euro (EUR/GBP), and others are used for trade.

However, instead of being monitored by a central bank to certify authenticity and legitimacy, Bitcoin relies on a decentralized system. This means that no central system controls the currency. Rather, a collective of independent individuals offer their own computing power (nodes) to monitor, review, and approve transactions.

The Purpose Behind Bitcoin’s Creation

The main purpose behind Bitcoin was to act as a way for people to transact money over the internet without having to have a third party involved in that transaction. In other words, unlike traditional bank transactions, Bitcoin was created with the intention of it serving as an alternative payment system that operates free of control (decentralized) through the use of blockchain technology.

What is Blockchain Technology and How Does It Work?

Blockchain or Distributed Ledger Technology refers to the format followed by many cryptocurrencies to verify that a payee is the legitimate owner of the coin through decentralization and cryptographic hashing. It does this by keeping a ledger (a record-keeping system) of each coin’s movements when being passed to the new owner. Approving each transaction also ensures that movements are in line with the network’s protocols.

All independent nodes (network stakeholders) have access to ledgers that hold information as to who owns the coin at any given time and can confirm the legality of each block. Each transaction or packet of data is referred to as a ‘block’ and the ledger can link them all together in chronological order. This is how the ‘blockchain’ became synonymous with Bitcoin, since it uses blockchain methodologies to keep the system transparent and honest.

Phone with Bitcoin trading screen on the Plus500 platform.

Illustrative prices.

How to trade Bitcoin

Many traders enjoy trading cryptocurrencies, including Bitcoin because they are volatile instruments that are subject to unpredictable swings. Long-term traders may prefer to purchase the underlying asset, hoping the value grows over time, while others prefer to trade Contracts for Difference (CFDs). Each method allows traders access to the crypto market in its own way.

Owning Bitcoin

Like owning gold, silver, or any other potential store of value, the owner is speculating that in the future, the price of the item will rise.

Owners of Bitcoin are exposed to long-term risk by lacking historical data to predict if their coin will hold value in the future. In addition, they need to store their digital currency in an acceptable digital wallet. Once they want to make a purchase or sell their coin, they will need to go to the open market and ensure that they have the proper password for their wallet.

Bitcoin CFDs

With Bitcoin CFDs, traders do not need to own the underlying asset. Rather, they can use a trading platform like Plus500 to open a position against Bitcoin’s price movements by opening long or short positions. When trading with Plus500, traders can open leveraged positions, gaining greater exposure to the instrument without paying commission.

For example, if a trader believes that the price of Bitcoin is going to rise, they can open a ‘Buy’ position with a Bitcoin CFD. While they will not own any Bitcoin from this transaction, they can still profit off of the coin’s movement, should the price go higher than the value at which the position was opened. At the same time, if the value of Bitcoin drops below the value at which the position was opened, they will have a loss.

On the other hand, if they believe that the value of Bitcoin will drop, they can benefit from this too. By opening a ‘Sell’ position, they can potentially profit from Bitcon’s negative price movements. For example, if you open a Bitcoin CFD Sell position while Bitcoin is valued at $16,000 and the price drops to $15,900, you can close the position, without needing to find a buyer, and profit $100. At the same time, if you open a Sell position for the same amount but close it when the price rises to $16,100, then you would lose $100.

Word Cloud1 with Bitcoin-related terms.

Bitcoin Trading Information

Traders who trade Bitcoin with Plus500 and other cryptocurrencies can do so 24 hours a day.

Having continuous access to the real-time price for this digital coin ensures that traders can confidently open and close positions without worrying about digital wallets or a lack of buyers in the market.

While many digital currencies, such as Ethereum have risen to popularity since the minting of Bitcoin, none have reached its relatively high valuation or rate of adoption. The short history of Bitcoin is full of speculation, rapid highs, and deep lows. Traders should be aware of the volatile nature of all cryptocurrencies and remain vigilant to the price movements for their open trades.

*Subject to operator availability.

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Bitcoin FAQ

Bitcoin is a popular digital currency (also known as a cryptocurrency or Crypto) which was invented in 2009 by an unknown person or group of people using the pseudonym Satoshi Nakamoto. It is the original and most widely used cryptocurrency in circulation.

Unlike prevailing payment methods, which rely on centralised payment processing systems, Bitcoin is powered through a cryptographic peer-to-peer network that does not depend on middlemen such as banks or other financial institutions.

People who wish to invest in Bitcoin normally need to first setup a digital wallet, i.e. a smartphone or computer-based electronic device that allows users to buy the digital Bitcoins online. It is not possible to short sell digital Bitcoins.

However, Plus500 provides an alternative easier-to-implement solution in the form of an online app for trading CFDs on Bitcoin (through the BTC/USD pair).

Transactions on the Plus500 app can be carried out in both directions (Buy or Sell), and a high level of liquidity is ensured through the use of real-time price feeds from major Bitcoin exchanges.

Plus500's Bitcoin CFDs are available for trading around the clock and on weekends (except for one hour on Sundays).

Bitcoin and/or Cryptocurrencies, Forex and stocks are 3 different asset classes with different characteristics such as profit-risk, liquidity and volatility ratios. When trading these asset classes in the form of CFDs, the primary difference between them is a matter of leverage.

Plus500 offers leverage of up to 1:2 for trading Cryptocurrencies such as Bitcoin, meaning any potential profits or losses will be multiplied.

The leverage available for Forex CFDs is up to 1:30.

The leverage available for shares CFDs is 1:5.

To learn more about all the trading instruments available at Plus500, click here.

Please note that as a CFD trader you do not actually own the underlying asset – Bitcoin, Forex pair or stock – but you are rather trading on their anticipated price change, in the form of a Buy or Sell position.

We provide a number of trading tools that can be used as part of risk management strategies when trading in volatile markets such as Bitcoin and other cryptocurrencies.

You can use the ‘Close at Profit’ order to 'lock in' your potential profits - by automatically closing your trade at a predefined rate.

You can use the ‘Close at Loss’ order to minimise and prevent further losses - by automatically closing your trade at a predefined rate.

Another option is to use the ‘Trailing Stop’ order which is designed to protect profits by enabling a position to remain open as long as the price is moving in your favour, however it closes the trade as soon as the price changes direction by a predefined number of pips.

Note that these stop orders do not guarantee your position will close at the exact price level you have specified. If the price suddenly gaps or slips down or up, at a price beyond your stop level, your position may be closed at the next available price, which can be a different price than the one you have set. This is referred to as 'Slippage'.

If you wish to ensure that your trade closes at the exact rate you have set without the risk of slippage, you can place a ‘Guaranteed Stop’. This special order is available for an additional fee paid via the Bid/Ask spread.

To learn more about how you can use Plus500’s risk management tools, click here.

You can trade Bitcoin CFDs in the following steps:

  1. Log in to Plus500 or create an account.
  2. Search for Bitcoin under Categories > Crypto Currencies or type ‘Bitcoin’ or ‘BTC’ in the search bar.
  3. Check you are aware of Bitcoin’s properties (expiry, overnight fees etc) by clicking on (i).
  4. Enter your preferred trading amount.
  5. Consider placing stop orders: Close at Profit, Close at Loss, Guaranteed Stop and/or Trailing Stop.
  6. Open a Buy or Sell position based on your anticipation of Bitcoin’s price movement.
  7. Navigate to the Open Positions screen to follow your trade’s P&L (Profit & Loss). When you wish to close out your trade, simply click on the ‘Close’ button.

Read more about Cryptocurrency CFDs and Bitcoin in our "How to Buy, Sell and Trade Cryptocurrencies" and "How Bitcoin works" articles.

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