Amateur investors and traders often look to legends for inspiration. Warren Buffett и Ray Dalio are known for consistently making a profit on their investments over the long term. Traders like George Soros и Paul Tudor Jonesrely on more frequent buying and selling strategies to drive trading. These professionals make a living from traditional stock markets and set the standards that investors in emerging markets such as cryptocurrencies hope to emulate or surpass.
Investing and trading are closely related methods that can be used even by the same person. The difference is mainly in the type of strategy that each method uses. Both cryptocurrency trading and investing aim to increase your investment value, but they pursue this goal in different ways.
We'll cover the main differences between investing in cryptocurrency and trading to help you decide which strategy is best for you.
What is investing?
Investing in cryptocurrencies is the strategy of making money from cryptocurrencies by buying and holding cryptoassets with the hope that their value will increase in the future. Also called HODLing is a misspelling of the word "holding" that has since become popular - investing in cryptocurrencies involves buying and holding positions over longer time horizons, often regardless of short-term prices and market fluctuations.
HODLers, as cryptocurrency investors are called, buy cryptocurrencies they truly believe in and hold onto them with confidence. They believe that the value of their assets will rise in the long term and they worry less about time to market.
Timing in the market means buying or selling an investment based on predicting the best entry or exit point. It's like believing that you have a crystal ball that can tell you which direction the market will go. With this confidence, you will be willing to wait for lower entry levels or higher sales levels.
Timing the markets is challenging for any asset class, not to mention volatile markets like cryptocurrencies where price fluctuations occur quickly. The danger of waiting to enter the market means that you can skip the trade entirely instead. Typically, long-term investors do not try to timing the markets or expect to profit from trends. A tide that lifts more boats is more important than catching a specific wave that can take one trade higher.
Crypto Investing (HODL) vs Trading: Differences
As mentioned, investing and trading are related, but sometimes the two terms are used casually and interchangeably. After all, traders can make investments and investors can enter trades to buy and sell assets. The difference between investing and trading can be nuanced in several ways. To select the best strategy, we will analyze the differences with reference to several key factors.
Investment terms and period
Investment: The critical difference between cryptocurrency and investing is the time frame. Investing in cryptocurrency is usually a long-term strategy. Investors or hodlers believe in the long-term viability of their coins. They minimize trading on short-term price fluctuations of cryptocurrencies. The typical investor will buy a cryptocurrency asset based on its long-term potential, hoping to sell it for a good profit after periods lasting perhaps years.
Cryptocurrency trading: it is a short term strategy. Trading uses the short-term volatility of cryptoasset price changes to make a profit. Typical trading time frames range from minutes to days. Although the rewards are faster, cryptocurrency trading takes a lot of effort. For those who have worked (and maybe a little lucky), cryptocurrency trading can be very profitable due to the high volatility of the cryptocurrency market.
Here are the main trading strategies in the cryptocurrency markets:
- Day Trading: Day traders trade during the day and rarely hold overnight positions. They constantly monitor the market to take advantage of intraday price movements. The duration of each trade is from minutes to hours.
- Scalping: Scalping involves buying and selling coins with minimal price fluctuations. Scalpers are the most active traders and take multiple trades to make a small profit on each trade, which can increase significantly at the end of the day. Scalping trades do not last long, minutes or even seconds. Scalpers make a lot of trades every day and try to take profits without holding positions for a long time.
- Momentum Trading: Momentum traders make trades based on the latest price trends. They jump in line with the price trend, buying low in an uptrend and selling when price interrupts momentum, and vice versa. They seek to take advantage of broader up and down trends, hoping that the direction of the asset will maintain its momentum. Impulse traders must have a good sense of timing and the ability to read the market. An impulse trade can take from an hour to weeks to enter and exit.
- Swing Trading: This method uses short-term fluctuations in the price of a coin, with a trade usually lasting from a day to several weeks. Swing traders use technical analysis to predict significant movements in coin prices in a specific direction over a short period. Time frames for trading are usually slightly longer or medium-term than for impulse trading.
Trading analysis
Trade analysis is a tool that traders use to evaluate investments and identify profitable trading opportunities, often by taking into account various factors or analyzing historical trends. This is very important for making sound investment decisions and choosing the right crypto assets.
There are two main types of trading analysis: fundamental analysis.
Fundamental analysis is an approach used by cryptocurrency investors to determine the intrinsic value of cryptoassets….
and technical analysis.
Bitcoin market cycle
Image courtesy of newsbtc.com
Cryptocurrency Investors: rely on fundamental analysis as they are betting on the long-term viability of the coin. Fundamental analysis primarily evaluates the long-term potential of a coin by establishing the intrinsic value or value of an asset. Various metrics can be used, such as project and team analysis or the level of use and adoption of the cryptocurrency.
Cryptocurrency traders: determination of price direction and market positioning. As a result, they often use technical analysis. Technical analysis involves predicting future prices through historical analysis of price data using price indicators and charting tools.
Short term cryptocurrency price movements can be very unpredictable. Hence, a trader must be well versed in technical analysis in order to try to time the market and capitalize on price volatility. This is a significant difference from investing in cryptocurrency, and this is the reason why experienced traders tend to prefer frequent trading. Traders often base their buy and sell decisions on technical analysis, which can be a repeatable strategy.
Trading frequency
Another significant difference between cryptocurrency investing and trading is how often trades are made. The frequency of transactions is directly related to the investment period. The longer the investment period, the lower the frequency of transactions.
As expected, the cryptocurrency investors usually have a low trading frequency as they tend to hold on to their assets without selling. These investors are trying to achieve investment goals that can stretch over several years.
On the other hand, cryptocurrency traders often trade. This is because they constantly monitor the movement of market prices in search of opportunities to make a profit, however small it may be. Such a high frequency potentially makes trading more profitable, but it is more risky and requires constant monitoring of the market.
Risk management
Cryptocurrencies are inherently volatile and therefore carry a high level of risk. You must understand the risk if you are going to invest in cryptocurrency. Risk tolerance refers to the degree of risk that an investor is willing to take. Keep in mind that higher risk can also be associated with higher rewards.
Although cryptocurrencies – whether you trade or invest – are notoriously risky due to high volatility, investors and traders can be distinguished by their risk appetite.
Generally, cryptocurrency investors may be less risk tolerant because they are more comfortable leaving their investments alone. The idea is that over time, the ups and downs in the price of the coin eventually level out, but still follow an upward trend.
But traderstend to thrive on risk because trading can involve frequent risk taking. Traders can make money by exploiting the high volatility of short-term cryptocurrency prices. But they can also lose a lot if they bet on the wrong horse.
Trading on margin, the practice of borrowing funds from other parties to trade, significantly increases the risk for traders as they can lose much more than their original funds. However, risk management is still critical, especially in the cryptocurrency market.
Variety of profits
Investors can use both long-term investment strategies and short-term trading strategies at the same time. This provides a diversified investment strategy and additional ways to make a profit. Often, a trader may have a longer-term investment portfolio, although investors may not have much time and interest to trade.
Annual profit / capital gain
When it comes to results, both traders and investors can be measured in terms of annualized returns or capital growth. The annualized rate of return shows how much the investment has grown each year.
Traders should take into account the transaction fees given the frequency of their trades, which could reduce their profitability. Determining their profitability may require significantly more calculations due to the large number of trades they have made.
Investorswho have fewer changes or updates to their portfolios can often calculate their annualized returns by eliminating complex factors. The actual difference in capital growth depends only on the selected investments and transactions.
Costs and capital required
The cost of trading digital currencies in general can be divided into exchange fees and network fees. Cryptocurrency exchanges charge fees for providing services such as trading, deposits, withdrawals, LiquidationA liquidation is a sale of cryptocurrencies, usually forced, as a result of an investor's inability to secure a minimum margin for their leveraged position. Notorious for their volatility in the market, cryptocurrencies can quickly and easily lead to liquidation, especially when investors lose their leveraged positions and their investment plunges into negative balance, requiring them to sell crypto assets when a position is forced out. This usually happens in cryptocurrency margin trading, when investors borrow money from a crypto exchange or broker to increase their funds or assets for trading. While leveraged trading positions can lead to higher potential profits, this is a very risky move that could lead to liquidation if the price of the asset drops sharply and you lose your initial margin or equity. If you do not have enough funds to continue trading and cannot meet the minimum margin requirements for your leveraged position, the exchange may automatically close your position, resulting in a permanent loss of funds from your initial margin. This liquidation loss can be partial or total, depending on the initial margin and the extent of the price drop. A partial liquidation occurs when a position is partially closed at an early stage in order to reduce the position and the investor's leverage, while a full liquidation occurs when almost all of the initial margin has decreased due to a price drop. To better illustrate the liquidation process in cryptocurrency margin trading, here is an example: Suppose you start with an initial margin of $100 and 10x leverage. This means that your total trading position is $1, of which $000 is borrowed from an exchange or broker. The amount of leverage corresponds to the size of your profit or loss from the position. With 10x leverage, a 5% increase in the price of an asset will give you 50% profit. The same goes for a 5% drop in the price of an asset, which will result in a loss of 50% of your initial margin. The formula for calculating profit or loss is as follows: Initial Margin × (% Price Change × Leverage) = Profit/Loss. Based on the above calculation, a 10% decrease in the price of an asset will result in a loss of 100% of your initial margin. Before you lose all of your initial margin, you can get a margin call when the liquidation threshold is reached so you can decide if you want to add more equity to your margin to keep your position open (or lose your initial margin entirely when the exchange or the broker will automatically liquidate your position). When you force-close a position, the exchange or broker may charge you a liquidation fee, but you can avoid this fee if you close the position before it is liquidated. Liquidations often occur when investors are tempted by higher leverage, which can potentially bring them greater profits, but do not consider the possibility of incurring large losses, which can also lead to liquidation. Therefore, it is very important to apply smart crypto trading strategies in order to avoid liquidations, whether starting with lower leverage or carefully monitoring margins and liquidation prices. Using a stop loss order is another way to limit your losses as the order will automatically close the position for investors when it hits the stop price to prevent further losses. Investors may also consider using exchange insurance funds to protect themselves from excessive losses. and other transactions. The network fees go to the miners who secure the networks.
Cryptocurrency fees vary by exchange, but on average, most exchanges charge between 0,1% and 1% per trade. For example, Bybit's producer fee is -0,025% while the buyer fee is 0,075%.
Compared to investing, cryptocurrency trading means you have to pay more transaction fees due to the higher trading frequency. Additionally, traders may have to worry about the capital gains tax you pay whenever you sell an asset at a profit. Short-term capital gains tax rates are usually higher than the long-term tax rates that HODLers are generally subject to.
The capital requirements for both trading and investing depend only on the desired size of the investment. You can start trading or investing in cryptocurrency from almost any amount.
Alternatives to investing and trading
Trading and investing are not the only ways to make money with cryptocurrencies. There are other alternatives as well.
Mining: cryptocurrency mining protects blockchains using a proof-of-work (PoW) mechanism. Mining solves complex mathematical problems that validate transactions to be added to a public ledger or blockchain. Mining requires experience and significant investment in specialized mining hardware, and miners are rewarded for their work with newly generated coins.
Cloud mining: Cloud mining is a way of mining cryptocurrency using cloud computing power. You do not need to own or install hardware and run the associated software. Cloud mining companies allow you to open an account and mine cryptocurrency remotely for a fee. You participate in a mining pool by buying a certain amount of "hash power" and earning a share of the profit (proportional to the amount of hash power you paid for).
Stacking: investors can also generate income through cryptocurrency betting, which means using digital assets to secure the cryptocurrency network. This includes storing coins in a network wallet PoS and receiving compensation for using their coins as active nodes in the network.
Lending: investors can lend their coins to other cryptocurrency users through lending platforms and receive interest. Crypto lending is done through DeFi
Decentralized Finance (DeFi) takes the decentralized blockchain concept and applies it to the world of finance. Build…
(Decentralized finance), peer-to-peer lending platforms and exchanges. These loans are usually oversecured, which increases the safety of the investors' assets.
Are you an investor or a trader?
Trading and investing are different approaches to making money in the cryptocurrency market. Deciding which one is best for you depends on your risk appetite and time availability.
If you are comfortable with taking frequent risks and have the ability to constantly monitor the markets, trading may be the right strategy for you. If you prefer a more casual approach, you should consider investing in the long term. You can also do both.
Final thoughts
The cryptocurrency market is as exciting as it is volatile, so proceed with caution. Before choosing the approach that suits you best, you need to understand the main differences between investing and trading cryptocurrency.
After all, the smart investor tends to recognize different parts of the market cycles in order to take advantage of market conditions and HODLs in the hope that the asset's price will rise. In contrast, traders tend to profit from bull or bear markets on short-term price movements. However, both investors and traders need to deploy a proper risk management system or contingency plan to exit the market when the market moves in an unfavorable direction.
Thank you for helping me understand trading.