People often mistake investing and trading for the same thing. However, they are very different and each has its own characteristics when it comes to crypto. While traders can both invest and trade in crypto, the type of strategy will be the core focus for what method serves you better to enter into the crypto markets. In this guide, traders will learn about the differences between investing vs trading crypto and discover which is better suited for certain types of investors.
What is investing?
Investing refers to buying an asset or security with the aim of profiting from an increase in its value over the medium to long term. In the crypto markets, long-term investors are also referred to as HODLers, which comes from a famous misspelling of the word “holding” that went viral.
Investors enter the market looking for crypto assets with strong fundamentals that they believe will appreciate in value over time. They are prepared to hold on to their tokens regardless of the different cycles of bull and bear seasons in the market.
The rationale behind cryptocurrency investing is similar to the strategy of value investing employed by renowned investor Warren Buffet. The approach involves searching for underpriced assets trading at a discount to their intrinsic value.
For example, an investor could observe that a coin is trading at a low price and believes its price will rise in the future based on fundamentals. Therefore, they make a purchase and hold onto the coin regardless of the current market sentiment as they think the price will increase in the future.
What is trading?
Trading involves speculating on the price movements of an asset or security to make short-term profits, often within the same day. Traders are usually not too concerned with the fundamentals of an asset as the aim is to make multiple trades within a short time frame to try and earn a profit (which can sometimes lead to losses instead).
Traders follow market-moving news and look at technical indicators to make trading decisions. The high volatility of the crypto market positions it as one of the most exciting markets for traders, enabling them to either profit or suffer a loss from sharp short-term price movements.
The plus side of trading is that traders can make profits regardless of a bull or bear market, referred to as shorting or going long on the market. Going long refers to entering the market at a lower price, hoping to sell at a higher price. Conversely, shorting is entering the market at a higher price and profiting from a price decline. Traders can enter the market through different methods including spot trading, futures trading, perpetual swaps, and crypto CFDs.
For example, a trader can enter the market by purchasing a Bitcoin CFD from a broker like Axi. If they believe the price of Bitcoin (BTC) will rise, they will open a long position. However, if they believe otherwise, they can open a short position. The trader then makes a profit or loss based on the outcome of their predictions after closing the position.
Based on the strategy employed, traders can be day traders, swing traders, scalpers, momentum traders, or arbitrage traders, to name a few.
What are the main differences between investing vs trading crypto?
Considering how both investing and trading are used interchangeably, one may think that they both imply the same process. However, investing in cryptocurrencies differs from trading them. Investing is a longer-term approach to cryptocurrencies as it involves understanding the fundamentals of a coin, opening an account with a crypto exchange to purchase the coin, and holding it in a secure cryptocurrency wallet. Therefore, investors must have the technical know-how in transferring and storing cryptocurrencies as they get into the market with the motive of holding coins for months or years until their objectives are satisfied.
Trading is a short-term approach that focuses on the daily price movements of cryptocurrencies. Traders are more concerned about volatility to enable them to speculate on the price of a coin within small time frames. Unlike investors, traders are primarily focused on conducting technical analysis and market timing.
Is it better to hold or trade crypto?
The profitability of holding or trading cryptocurrencies is dependent on a trader's goal, strategy and skillset. Moreover, both approaches have their pros and cons that market participants need to consider critically before subscribing to them. Investing doesn't involve as much risk as trading, but some may argue that the reward may not be as high. At least not if the trader is a very successful one.
Experienced traders can make several per cent return on investment (ROI) on most days in a week, while investors will see an increase in the value of their overall portfolio over the same week (if the market goes up).
Conversely, a trader can make money when the market goes down if they are skilled enough to time the market correctly. Trading also comes with the option to use leverage, allowing traders to magnify profits with little capital. However, leverage can also lead to larger losses if the market moves against the trader, increasing the risk.
Having said that, long-term crypto holding gives investors access to certain privileges that earn them additional rewards. For example, they can gain access to airdrops and use their tokens for staking or yield farming.
Traders and investors need to consider these factors along with their different risk management strategies before deciding on the method that best suits them.
What are the advantages of investing?
Before starting an investment journey into the crypto market, understand the advantages and disadvantages of investing.
- It's an easier way of building wealth over time without the stress of keeping tabs on the market
- Investing incurs fewer taxable events and commission fees
- Less risky compared to trading
- Investing allows for additional earnings through airdrops, staking, yield farming, etc.
What are the disadvantages of investing?
- Requires users to have the technical know-how of storing and transferring cryptocurrencies
- Investing requires a longer timeframe to earn a return
What are the advantages of trading?
If the appeal of trading is more suited, first discover the advantages and disadvantages of trading below.
- Trading empowers users with the option of going long or short, meaning they can earn both in bull and bear markets
- Traders can potentially make a large amount of profit in a short time frame
- Traders can trade with little capital and magnify their profits through leverage
- Traders don't necessarily need to understand how to store or transfer cryptocurrencies if they are trading with crypto CFDs
What are the disadvantages of trading?
- Trading incurs more taxable events and commission fees since it involves actively buying and selling cryptocurrencies
- The high volatility of the crypto market makes trading very risky
- The option of leverage trading can magnify the losses of users
- Traders may not be able to profit from additional yield generation methods like staking and liquidity mining
What are some alternatives to holding or trading crypto?
While “HODLing” and trading are the most popular methods people employ to gain exposure to the crypto markets, there are other profitable alternatives. The two most common include mining and liquidity mining.
Crypto mining is the process of securing a cryptocurrency network by using computing power to solve complex cryptographic problems and, in turn, getting rewards in newly minted tokens and transaction fees. Mining is a competitive process that sees only the first miner to solve the cryptographic puzzle and receive the mining reward.
Instead of holding or trading cryptocurrencies, miners invest money in computing hardware that produces a ton load of computing power, enabling them to earn mining rewards faster. After receiving mining rewards, miners can sell them in exchange for cash via a cryptocurrency exchange.
In addition, miners often pool their computing resources together to enable them to earn rewards faster. The reward is distributed fairly among the miners based on the share of computing power contributed.
Liquidity mining involves providing liquidity to facilitate the functionality of DeFi protocols, and in turn, receiving transaction fees and additional tokens as rewards.
Liquidity providers receive liquidity provider tokens (LP tokens), indicating the share of liquidity they contributed to a DeFi liquidity pool. These LP tokens can also be used to provide liquidity or staking on other crypto projects within a particular blockchain network, hence, allowing investors to earn multiple rewards at the same time.
Is crypto a good long-term investment? Cryptocurrencies have rewarded many long-term investors with good returns. For example, bitcoin is considered the asset of the decade as it has outperformed almost every other asset class in the world since its launch.
However, the crypto market is still in its infancy compared to other markets. While some have profited from cryptocurrencies by investing long-term, others have lost money with the same approach. The answer to this question is dependent on a trader's risk appetite and the type of assets that match their investment purposes.
Which is the preferred Bitcoin investment method? The preferred bitcoin investment method differs from person to person. Generally, the process, rewards, and risks associated with the different methods influence people’s decisions.
Having said that, buying a small amount of bitcoin on a regular basis (known as Bitcoin dollar-cost averaging) has become very popular among Bitcoiners lately.