When people mention cryptocurrency investing vs trading, it sometimes is very hard to see the difference. However, the two are quite different. Here is all you should know.
Anyone may make money in the cryptocurrency market in a variety of ways. You can choose between becoming a miner, an investor, a trader or open an account with one of the exchanges as a holder and wait for the coin to increase in value.
Without a question, investing or trading is the most straightforward approach for the general public to make money in the cryptocurrency industry.
In the bitcoin market, the phrases “investment” and “trading” are sometimes used interchangeably. However, there are significant distinctions between the two notions that you must grasp and match your financial goals with. This article will be entirely devoted to examining the major differences.
Let’s take a deeper look at the differences between investing and trading. There are a total of 5 key differences that include:
Let’s look more closely at the distinctions between investing and trading. There are five significant distinctions, which are as follows:
Type of Analysis
The sort of study performed by both groups is perhaps the most fundamental contrast between bitcoin investors and traders. Fundamentals are an important component in determining a coin’s feasibility and potential, especially since investors make long-term bets on its worth. It should be noted that fundamental research for cryptocurrencies is radically different from stock analysis because no cryptocurrency firm has publicly available financial accounts. Merchant adoption rates and general cryptocurrency use rates are two indications of cryptocurrency basic assessments.
Technical analysis is the major weapon employed by traders since they are more concerned with forecasting price direction and market positioning. Technical analysis is the prediction of future prices based on the examination of previous price data utilizing various price indicators and charting tools. Short-term price fluctuations are sometimes unpredictable, necessitating traders’ use of technical analysis to timing the market and benefit from price volatility.
Period of Investment
Investors are often long-term thinkers who are unconcerned with short-term price fluctuations. In other words, an investor will bet on a coin’s long-term potential while investing after it, with the goal of selling it (and profiting) in a few years. The reasoning for this is because blockchain technology is still in its infancy, and it may take years (or even decades) for an infant technology to disrupt established institutions and acquire widespread acceptance.
It should be noted here that market cycles in the cryptocurrency market are significantly shorter than in the stock markets. This means that the bitcoin market undergoes bull markets (upward trends) and bear markets (downward trends) at a faster and more intense rate. A bull or bear trend in the stock market, for example, may persist for years, but a bull or bear trend in the cryptocurrency markets can be considerably shorter – generally within a year.
Traders, on the other hand, have a short-term outlook with a focus on price swings. Traders are interested in the cryptocurrency market’s hourly and daily price changes, buying and selling coins with the goal of making short-term profits. Traders’ primary objective is to purchase a coin at a low price and sell it at a higher price within the following minute, hour, day, or week. Volatility is a crucial component that traders look for while trading in the short term, because prices must have enough price movement for traders to be profitable. The cryptocurrency market‘s extraordinary volatility makes it a very rewarding venture for traders.
Frequency of Trade
This relates to the frequency with which trades are executed. The frequency of transactions is closely related to the investment term; the longer the time horizon for an investment, the fewer frequency of trades there will be. Investors often have a low transaction frequency, indicating that they will hang on to a coin without selling until their long-term goal is fulfilled, which might take several years. Cryptocurrency investors would buy a coin (or several coins) and hold them in a cryptocurrency wallet for long-term storage.
Traders, on the other hand, trade more frequently. Traders would conduct several transactions because they are always looking for ways to benefit from market opportunities. Though trading has a better chance of producing more earnings, it is a highly dangerous undertaking that necessitates active and continual monitoring of market circumstances.
The degree of risk that one is comfortable with is referred to as one’s risk profile (or “risk appetite”). It is critical that everyone understands the notion of risk in investing. As seen above, risk is closely connected to the possible profits of a certain investment:
Because of their enormous price swings, cryptocurrencies are perhaps the riskiest investment available. The idea of risk is simple enough to grasp, but it must be accompanied with knowledge of the possible benefits connected with the chances you’re taking. If you dislike risk, you are referred to as a ‘risk-averse person,’ but if you enjoy risk, you are referred to as a ‘risk-taker.’
If you’re already involved in the cryptocurrency market (by possessing coins and tokens), it’s safe to presume you’re a risk-taker, as cryptocurrencies are often regarded as one of the most volatile and risky investments available. Individuals can still be classified within the cryptocurrency environment based on the degree of risk they are willing to take. Cryptocurrency investors are less risk-averse than traders because they are more comfortable leaving their assets alone and less unconcerned with daily price fluctuation. Over time, an asset’s volatility smoothes out, making it less hazardous.
Traders, on the other hand, are ‘risk-takers,’ because regular trading entails a considerably higher level of risk. This is due to the tremendous volatility of short-term cryptocurrency values, which may provide traders with opportunities to make large sums of money but can also be devastating if they are on the wrong side of the bet. Furthermore, traders frequently participate in margin trading, which is the practice of borrowing cash from third parties in order to trade cryptocurrencies. Margin trading substantially raises the risks of trading since it allows traders to make more money (as compared to using their own funds), but it also raises their potential losses.
Techniques of Making Profit
Profit technique refers to how traders and investors want to make money and create wealth. There are four primary ways for bitcoin investors to benefit from their investments.
- Price Appreciation is the most straightforward approach to profit; it refers to the rise in the prices of cryptocurrencies. As an example, you could acquire Bitcoin for $1,000 and wait for it to appreciate to $5,000 before selling it for a profit of $4,000.
2. Dividends, on the other hand, are a stock-related notion in which shareholders are entitled to receive cash earned by the firm in proportion to the number of shares they possess. Some cryptocurrency initiatives pay out dividends to coin holders based on the money they earn. It is a type of profit-sharing scheme designed to improve the incentive for investors to keep their currency for the long term. Coin burns are a type of ‘dividend’ that is unique to the cryptocurrency market. They refer to the purposeful destruction of coins by projects in order to lower the overall coin supply and increase the value of the coin’s price.
3. Hard Forks are occurrences in which a coin splits into two and investors who possess the original currency are entitled to ‘free coins’ created as a result of the split. Bitcoin Cash (BCH) is an example of a project that deviated from Bitcoin (BTC). Following the hard fork, BTC holders were automatically compensated with BCH in their Bitcoin wallet. This is also known as ‘free money.’
4. Airdrops are an innovative approach for certain projects to give their currencies to the general public for free for publicity and marketing objectives rather than for basic economic reasons.
Traders are particularly interested with coin price changes in order to time their entry and exit locations. As a result, price appreciation is the primary goal for traders seeking to profit. Because traders are short-term focused and active in the market, they will take advantage of every chance to earn money, especially in situations of hard forks and airdrops in order to obtain free coins and then sell them on an exchange to realize gains.
A Final Word
In the cryptocurrency realm, there are significant distinctions between investing and trading. Understanding these distinctions is critical for determining which group you fall into and what you should consider while dealing with your coins. The cryptocurrency industry is still in its early stages and is constantly evolving. It is best if you only invest money that you are willing to lose.