Amateur investors and traders often look to the legends for inspiration. Warren Buffett and Ray Dalio are well-known for consistently profiting from their investments over the long term. Traders like George Soros and Paul Tudor Jones rely on more frequent buying and selling strategies, which defines trading. These professionals have made a living off traditional stock markets and set standards that investors in newer markets, like cryptocurrencies, hope to emulate or beat.
Investing and trading are heavily intertwined techniques that the same person can even use. The difference is mainly in the type of strategy each method employs. Cryptocurrency trading and investing both aim to increase your investment value, but they chase that goal differently.
We’ll look into the major differences between cryptocurrency investing and trading to help you decide which strategy serves you better.
What Is Crypto Investment?
Investing in cryptocurrencies is a strategy of making money from cryptocurrencies by buying and holding crypto assets with the hope that their value will appreciate in the future. Also referred to as HODLing — a misspelling of “holding” that has since caught on — cryptocurrency investing involves buying and holding positions over longer time horizons, often regardless of near-term price and market fluctuations.
HODLers, as cryptocurrency investors are called, buy cryptocurrencies they fundamentally believe in and confidently hold on to them. They reckon that the value of their assets will rise over the long term, and they worry less about timing the market.
Timing the market refers to 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 way the market will go. With that confidence, you would be willing to wait for lower entry levels into an investment or higher selling levels.
Timing the markets are challenging in any asset class, let alone volatile markets like cryptocurrencies, where price swings happen quickly. The danger of waiting to time the market means you may instead miss a trade entirely. In general, longer-term investors don’t try to time markets or look to profit off of trends. The tide that lifts more boats is more important than catching the specific wave that may propel a single trade higher.
Crypto Investing (HODL) vs. Trading: The Differences
As mentioned, investing and trading are intertwined, but sometimes the two terms are casually and interchangeably used. After all, traders can make investments, and investors can enter trades to buy and sell assets. The difference between investing and trading can be somewhat nuanced. To decide on the best strategy to adopt, we’ll analyze the differences, with reference to a few key factors.
Investment Time Frame and Period
Investing: A critical difference between crypto trading and investing is the time frame. Cryptocurrency investing is typically a long-term strategy. Investors or HODLers believe in the long-term viability of their coins. They minimize trading on the short-term price movements of cryptocurrencies. A typical investor will buy a cryptocurrency asset based on its long-term potential, with the hope of selling it for a tidy profit after periods lasting perhaps years.
Cryptocurrency trading: It is a short-term strategy. Trading leverages the short-term volatility of crypto-asset price changes for profit. Typical trading time frames range from minutes to days. Although the rewards are faster, trading crypto requires a lot of effort. For those that have put in the work (and perhaps have a bit of luck), cryptocurrency trading can be very profitable due to the high volatility of the cryptocurrency market.
Here are the main trading strategies in cryptocurrency markets:
- Day Trading: Day traders conclude trades within a day and rarely hold overnight positions. They constantly monitor the market to take advantage of intraday price movement. The time duration for each trade ranges from minutes to hours.
- Scalping: Scalping involves buying and selling coins on minimal price movements. Scalpers are the most active traders and execute several trades to make a small profit from each transaction, which could add up substantially at the end of the day. Scalping trades are short-lasting minutes or even seconds. Scalpers make many trades daily and try to skim a profit without holding positions for long.
- Momentum Trading: Momentum traders execute trades based on recent price trends. They jump on a price trend, buying low in an upward trend and selling once the price breaks momentum, and vice versa. They aim to take advantage of broader uptrends and downtrends, hoping that the direction of the asset will maintain its momentum. Momentum traders need to have a fairly good sense of timing and the ability to read the market. A momentum trade can take anywhere from an hour to weeks to enter and exit.
- Swing Trading: This technique takes advantage of a coin’s short-term price swings, with a trade typically lasting between a day and a few weeks. Swing traders use technical analysis to predict large movements in coin prices in a particular direction in a short period. The time frame for a trade is generally a bit longer or intermediate-term than that for a momentum trade.
Trade analysis is tool traders use to evaluate investments and spot profitable trading opportunities, often by considering various factors or analyzing historical trends. It’s critical for making sound investment decisions and picking the right cryptocurrency assets.
There are two basic types of trade analysis: Fundamental analysis is an approach used by cryptocurrency investors to establish the intrinsic value of a crypto asset.... and technical analysis.
Cryptocurrency investors: Rely on fundamental analysis since they bank on the long-term viability of a coin. The fundamental analysis primarily evaluates the long-term potential of a coin by establishing an intrinsic value or worth for the asset. Various metrics can be used, such as analyzing the project and team or cryptocurrency usage and adoption rates.
Cryptocurrency traders: Figuring out 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 price movements in crypto can be very unpredictable. Therefore, a trader must be deeply knowledgeable about technical analysis to try to time the market and profit from price volatility. This is a significant difference from cryptocurrency investing, and it’s the reason that experienced traders tend to be more comfortable with frequent trading. Traders often base their buying and selling decisions on technical analysis, which can be a repeatable strategy.
Another significant difference between crypto investing and trading is how often trades are executed. Trade frequency directly correlates with the period of an investment. The longer an investment period is, the lower the trade frequency.
As expected, cryptocurrency investors typically 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 may stretch over a few years.
Cryptocurrency traders, on the other hand, trade frequently. This is because they are constantly looking at market price movement for opportunities to make gains, no matter how small. This high frequency potentially makes trading more lucrative, but it is riskier and requires constant monitoring of the market.
Cryptocurrencies are inherently volatile and, hence, high-risk. You must understand the risk if you intend to venture into cryptocurrency investments. Risk tolerance refers to the degree of risk an investor is willing to take. Bear in mind that higher risk is also possibly related to greater rewards.
While cryptocurrencies — whether you’re trading or investing — are notoriously risky due to high volatility, investors and traders can be differentiated by their appetite for risk.
In general, cryptocurrency investors may have less tolerance for risk because they are more comfortable leaving their investment alone. The idea is that over time, the ups and downs of a coin’s price eventually level out but still follow an upward trend.
Traders, however, tend to thrive on the risk because trading can involve taking frequent risk-taking. Traders can make money by exploiting the high volatility of short-term crypto prices. But they can just as well lose dramatically if they back the wrong horse.
Margin trading, the practice of borrowing funds from other parties to trade, significantly raises the risk for traders since they can lose much more than their original funds. Still, risk management remains crucial, especially in the crypto market.
Investors can actually use both longer-term investing strategies and shorter-term trading strategies simultaneously. This provides diversification in investment strategy and additional ways to profit. Frequently, a trader might also have a longer-term investment portfolio, though investors may not have as much time and interest to trade.
Annual Returns/Capital Growth
When it comes to performance, both traders and investors can be evaluated in terms of annual returns or capital growth. Annual return measures how much an investment has grown each year.
Traders have to factor in transaction fees considering the high frequency of a trade they are making, which can dampen their returns. Determining their returns may involve significantly more calculations because of the high number of trades they’ve conducted.
Investors who have fewer changes or updates in their portfolios can often calculate their annual returns by excluding the complex factors. The actual difference in capital growth just depends on the investments and trades chosen.
Costs and Capital Required
The cost of trading digital currencies can be broadly classified into exchange fees and network fees. Cryptocurrency exchanges charge exchange fees for providing services like trading, deposits, withdrawals, liquidations, and other transactions. Network fees go to the miners who secure the networks.
Cryptocurrency fees vary across exchanges, but on average, most exchanges charge between 0.1% to 1% per trade. For example, Bybit’s maker fee is -0.025%, whereas a taker is 0.075%.
Compared to investing, trading crypto means you’ll have to pay more transaction fees due to higher trade frequency. In addition, traders may have to worry about capital gains tax, which you pay whenever you sell an asset at a profit. Short-term capital gains tax rates are typically higher than long-term rates, which HODLers are generally subject to.
Capital requirements for both trading and investing just depend on the investment sizes desired. You can start trading or invest in crypto with virtually any amount.
Alternatives to Investing and Trading
Trading and investing are not the only ways to make money with cryptocurrencies. There are other alternatives.
Mining: Cryptocurrency mining secures blockchains using the proof-of-work (PoW) mechanism. Mining activities solve complex mathematical problems, which verify transactions for addition to the public ledger or blockchain. Mining requires expertise and considerable investment in specialized mining equipment, and miners are rewarded for their work with newly generated coins.
Cloud mining: Cloud mining is a means of mining cryptocurrency using cloud computing power. You don’t have to own or install the hardware and run related software. Firms that offer cloud mining services allow you to open an account and remotely mine crypto for a fee. You participate in a mining pool by purchasing a certain amount of “hash power” and earn a share of the profits (proportional to the amount of hash power you paid for).
Staking: Investors can also create income by crypto staking, which refers to using digital assets to secure a cryptocurrency network. This involves holding coins in a wallet for proof-of-stake (PoS) networks and earning compensation for using their coins as active nodes in the network.
Lending: Investors can lend their coins to other crypto users through lending platforms and earn interest. Crypto lending is facilitated through Decentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the world of finance. Build... (Decentralized Finance) applications, peer-to-peer lending platforms, and exchanges. These loans are typically overcollateralized, which bolsters the safety of investors’ assets.
Are You an Investor or Trader?
Trading and investing are different approaches to earning in the cryptocurrency market. Deciding which one is better for you depends on your risk appetite and time availability.
If you’re comfortable with taking on frequent risks and have the capacity to monitor markets constantly, trading might just be the right strategy for you. If you prefer a more laid-back approach, then you should consider investing for the long term. Doing a bit of both is also an option.
The cryptocurrency market is as exciting as it is volatile — so tread with caution. Understand the key differences between investing and trading crypto before deciding the approach that suits you best.
Ultimately, a smart investor tends to recognize the different parts of market cycles to take advantage of the market conditions and HODL in the hope of the asset’s price appreciation. In contrast, traders tend to profit from a bull or bear market from the short-term price movements. Still, both investors and traders need to deploy a proper risk management system or contingency plan to exit the market when the market goes in an unfavored direction.