Many new cryptocurrency traders use the terms “trading” and “investing” interchangeably, even though they differ in meaning and approach. The two processes, however, are towards the same goal—profit. Understanding what they are and their differences will help you choose the one that works better for you.
Today, we’ll explain the difference between crypto trading and investing, how they work using certain parameters, and how you can choose the one that suits you better.
What Is Crypto Investing?
Cryptocurrency investing involves buying and holding crypto assets for a certain period. Investors, also known as HODLers, do this with the hope that the crypto coin they invest in will rise in value over time.
Investing demands conducting analyses to measure the possibility of a coin rising in value in the future. Therefore, they seek to buy crypto at a low price and sell when it increases to the desired level.
What Is Crypto Trading?
Crypto trading is the process of buying and selling crypto coins within a short period to make a profit. Traders can have open positions ranging from a few seconds to a few months while relying on various trading timeframes. As a result, they are not so concerned with the future of the coin they’re trading since they only hold positions for a day or a few weeks.
Trading allows traders to be more dynamic with market trends, as they can trade bullish or bearish trends. For example, they can choose to go long when a coin rises in price and go short when it starts to fall in price.
Major Differences Between Crypto Trading and Investing
These are some differences between trading and investing in cryptocurrencies.
Cryptocurrency traders often focus on the price movement in short-term timeframes. The timeframes range from seconds to minutes (scalping strategies), hours (day trading strategies), days, and weeks (swing trading and long-term trading strategies).
On the other hand, crypto investors are not concerned with short-term timeframes but focus on a crypto coin’s long-term value. For example, a crypto investor can buy a cryptocurrency asset, say Cardano, and hold it for as long as he wants. Then, the investor can choose to sell the asset when the desired profit is made. The process of holding the crypto token can last for years.
Crypto traders often focus more on using technical analysis to predict price direction. This analysis involves using technical tools and indicators to analyze and execute trades. These indicators include the Relative Strength Index, Bollinger Bands, and Moving Averages.
Investors also use technical analysis and price action to analyze prices, but they focus more on fundamental market analysis. Hence, crypto investors adopt metrics such as on-chain metrics, project metrics, and financial metrics to predict how well a crypto token is likely to do in the future before investing in it.
Another notable difference between cryptocurrency trading and investing is the frequency at which trades are executed. Crypto traders can place hundreds of trades in a year. They usually have a higher trade frequency because they want to benefit from many market opportunities. Due to the frequent trading, they often have higher profits than investors within a short time. However, trading frequently exposes them to more risks.
On the other hand, crypto investors have a lower trade frequency. The trading frequency for investors largely depends on how often they find new cryptos to invest in or get new prices at which they want to buy a cryptocurrency. Instead of entering and exiting the market often, they can hold an asset for a long time with the hope of getting a significant profit with time.
Some costs are attached to trading crypto on crypto exchanges. Many platforms charge fees for trading coins, withdrawing and depositing funds, and other services. Crypto traders tend to pay more exchange fees due to the constant trade execution and activity.
Conversely, crypto investors do not pay as much as crypto traders because they only execute trades once in a while. They also do not withdraw as often as traders.
Trading and investing in cryptocurrencies are both risky. Therefore, you must only trade or invest when you understand the amount of risk you can tolerate—the greater the risk, the greater the possibility of higher profits and losses. Thus, since crypto traders trade more often, they are exposed to far more short-term risks posed by cryptocurrency market volatility.
In contrast, crypto investors are less exposed to such short-term risks because they buy and hold for an extended period.
Rising and Falling Markets
Traders can take advantage of the price volatility in the market by profiting from both bearish and bullish trends. For instance, you may take a long position when you believe the price of crypto will rise or a short position when the price will continue to fall. Thus, you can make a profit from both market directions.
HODLers, on the other hand, do not benefit from falling prices. They may be concerned about missing out, especially if the coin they invested in drops dramatically. During this downturn, investors are unsure whether to hold or sell. Moments like that can cause some investors to make a panicked decision that may result in a loss.
The Advantages of Trading and Investing in Cryptocurrency
Traders and investors in the crypto sphere have easy and constant access to the crypto market. Unlike most financial markets, cryptocurrency is always available 24/7, allowing them to trade anytime.
Crypto traders and investors benefit from the opportunity to easily buy and sell crypto coins as they want through crypto exchanges. Transactions are also easy since they are mostly not regulated by central authorities like banks. In addition, various online platforms such as Binance allow crypto traders and investors to buy and sell crypto coins in a few clicks.
Disadvantages of Trading and Investing in Cryptocurrency
Cryptocurrencies have attracted many online scammers, making it necessary to be careful when getting involved in them. Traders and investors are not completely safe, as crypto wallets and exchanges can get hacked by malicious actors, leading to the loss of funds. The issues with cryptocurrency regulation in different regions of the world also do not help this matter.
Investors who keep their tokens offline also risk losing their accounts and money if their hard drives and wallet files are corrupted or stolen. If this happens, retrieving stolen or lost funds would be almost impossible.
Lastly, the crypto market, like other financial markets, is unpredictable, and even after thorough analysis, traders and investors might still end up losing their money.
Does Trading or Investing in Cryptocurrency Suit You Better?
Understanding the differences between trading and investing in cryptocurrencies makes it possible to be faced with the question of which is better suited for you. We suggest asking the following questions in making your choice.
How Skillful Are You With Trading?
It takes time to master trading and carry out proper crypto technical analysis. Thus, you may easily blow up your account if you are not experienced in using technical tools. On the other hand, investing is more passive, straightforward, and easier to understand. In addition, investors often do less short-term analysis, as they only hope the price increases after buying an asset.
How Can You Handle Risk?
Trading and investing are both risky. However, traders tend to take more risks because they trade more often and use leverage to magnify their profit potential. Traders are affected by short-term market volatility and price swings that can cause significant losses in trading if risk management strategies are not implemented.
HODLers are immune to short-term volatility to a great extent. For this reason, we would categorize trading as involving more risk than the buy-and-hold method.
How Much Time Do You Have to Trade?
Trading, to an extent, demands you to be actively involved with many market happenings and keep track of price action. Conversely, investing is more passive, requiring less involvement with day-to-day market activities. Thus, investors have time to focus on other parts of their life.
What Is Your Trading Goal?
How fast do you intend to secure profit? Investing requires a lot of patience; sometimes, it could take years before an asset significantly rises in value. Trading, on the contrary, requires a lesser time. Some trades can even last for just a few seconds.
Although trading and investing are two different activities, you cannot totally separate the two terms at all times. For example, trading could be somewhat like a short-term investment to get a percentage profit due to price changes. On the other hand, investing requires you to buy crypto, which is trading your fiat currency for your chosen coin.
In theory, we can try to draw a broad line between them; however, in practice, the terms can become intertwined.