Most aspiring cryptocurrency investors and traders follow the footsteps of legends who have made a lot of money from these two fields. Every cryptocurrency trading and investing professional relies on his own strategy in order to execute the right trades or make the right investments in order to profit heavily from them in the long run. In the field of cryptocurrency, the role of whale traders and investors becomes even more significant.
Both investing and trading cryptocurrency can earn you a decent income, but the key strategies used in both of these methods are very different. At the same time, the main purpose of these strategies is to earn you money in the long run, but both of these do so in very different ways.
In this guide, we will be taking a thorough look at both crypto investing and trading in order to give you a good idea about what you can choose and whether or not you can do both of them at the same time.
A Brief Introduction to Crypto Investment
In the case of cryptocurrency investments, you actually buy and hold a large sum of cryptocurrency in the hopes that it will increase in value, and you will later sell the same amount of cryptocurrency for more money to make a profit.
In this method, you actually buy cryptocurrency from an exchange of your choice and keep holding your position for long enough to make a decent profit. Most of the time, the cryptocurrency you are holding fluctuates in value, and those are the times in which you should stay strong and true to your decision to make long-term investments and earn huge profits from them.
There is a purpose behind every cryptocurrency, which is usually advertised by its creator. Investors who believe in certain cryptocurrencies actually invest in them and hold their positions for a long time. In this process, the investor does not have to time the market properly, as he is actually waiting for a significant price increase in the long run before he can sell the cryptocurrency for profit.
When you time the market, you are actually looking for the perfect time to either buy or sell the cryptocurrency of your choice in order to make a profit in a short span of time.
In this strategy, you are actually either believing your instincts or using your experience in the market to predict the future and place either buy or sell orders depending on your prediction.
The people who believe in this strategy actually wait for the market to go down in order to enter a trade and then sell their cryptocurrency when the market value appreciates.
When you think about timing the market, it is a very difficult strategy to execute, no matter what type of asset we talk about. It becomes even more difficult in the realm of cryptocurrencies since the changes in the cryptocurrency market are instantaneous, and there is almost no pattern you can read.
In the case of cryptocurrency investment, you might actually waste a lot of time waiting for the right time to enter an investment and instead lose a great chance to buy a good cryptocurrency at a great value. This is one of the reasons why you, as an investor, do not need to time the market perfectly every time you make an investment. That is because if a cryptocurrency is good, it will automatically appreciate in value in the long run.
Differences Between Crypto Investing and Trading
Although cryptocurrency investment and trading are related to each other, they still have their own differences. Still, the two terms are sometimes used interchangeably. That is because cryptocurrency traders can always find the right long-term opportunities to enter an investment, and investors are always welcome to make trades in order to buy and sell assets quickly.
Therefore, there is no clear difference between cryptocurrency investment and trading. However, as a person who is new to the world of cryptocurrency, you might need to clear some concepts in order to understand the fine lines between both of these terms.
Total Investment Time
When it comes to the key differences between cryptocurrency investment and trading, the total investment time is one of the main things you should consider.
When we talk about crypto investing, the time frame for the investment is usually longer. This happens when an investor believes in a crypto project and decides to invest in it in the hopes that it will someday increase significantly in market value and the investor will make a lot of profit.
This strategy excludes the short-term movements in the price of a cryptocurrency and rather focuses on the long-term price increase strategy. In some cases, cryptocurrency investment time can increase to several years.
On the other hand, crypto trading has a shorter time period. In crypto trading, traders are really looking to make a quick buck by the significantly and consistently changing value of a specific cryptocurrency.
Depending on the type of trade you have entered, you might need to wait for several minutes to several days in order to see a profit. In this method, you can get rewarded for your hard work pretty soon, but you will have to make lots of calculations and execute everything perfectly in order to increase your chances of making a profit.
Since the cryptocurrency market is highly volatile, you can make a lot of money as a crypto trader, but there are almost no trends you can follow every time you make a trade, and you will mostly have to trust your instincts.
Here are some of the most popular types of cryptocurrency trading.
One of the most popular types of trading cryptocurrency is day trading. In this type of trade, cryptocurrency investors try to conclude their trade within a single day without waiting overnight.
In this type of trading, the trader has to consistently keep an eye on the fluctuations in the value of a cryptocurrency and exit the trade whenever they earn a reasonable profit. These trades can take anywhere from minutes to hours in order to complete.
Momentum trading is another type of cryptocurrency trading in which the current market value and price trends of a cryptocurrency are evaluated. There is a momentum point determined by the trader, and they start buying when the price is low and sell when the market value breaks the momentum.
This type of trading strategy depends entirely on the momentum created in the market. In order to perfectly execute a market momentum trade, the trader has to follow the market trends for a long time, and the trade can take weeks to end.
A common type of crypto trading is scalping. In this type of trading, rather than waiting for large price changes, traders buy and sell coins on minimum price movements. This type of trading relies on the number of trades rather than the amount of money earned in every trade.
Scalpers make lots of trades during a single day in order to increase their profit. Most of the scalping trades last for seconds, and some go into minutes at maximum. This way, they do not have to hold a single position for a long time, and they get their money back rather quickly.
Since the cryptocurrency market and almost every crypto coin goes into price swings, swing trading is another popular type of trading used in this market. One swing means one trade for a swing trader, and it can last for days to weeks.
A lot of market analysis is required in swing trading since the trader has to find good market swings and time the trades perfectly. These trades can be significantly longer as compared to momentum trades and can take weeks to complete.
Analyzing Trades Properly
Almost every trader has to use proper trade analysis tools in order to time his trades properly, depending on the type of trading strategy he is using. Lots of factors are analyzed in these analysis tools in order to come up with beneficial results for traders using them. This way, investors have a solid understanding of the market and have a solid reason to make the investment they are looking to make.
Depending on the type of investment you are making into cryptocurrency, you might need a specific type of analysis.
If you are a cryptocurrency investor, you will need fundamental analysis. By considering the basics and fundamentals of a coin, you can see how much potential value it holds in the long run and whether you should make a long-term investment in it or not.
So, by using fundamental analysis, you can basically calculate the intrinsic value of a cryptocurrency before deciding to invest in it. For example, the whole cryptocurrency project and the team behind it are analyzed in fundamental analysis. This way, the key values are taken into consideration, and a prediction is made regarding the future value of the same cryptocurrency.
On the other hand, cryptocurrency traders rely on technical analysis. This type of analysis provides traders with an insight into the current value and market trends of a cryptocurrency. With the help of historical data on price fluctuations, careful predictions are made, which can be followed by cryptocurrency traders to make quick profits.
Without technical tools and analysis, cryptocurrency price movements can look random and leave you with no clear choices to time your trades properly.
This is why technical analysis is done to find patterns in cryptocurrency price changes and to provide traders with enough knowledge to execute the right trades and make a profit from them. This provides traders with a repeatable strategy that they can use again and again to make considerable profits in the long run.
Frequency of Trades
Trade frequency is another major difference between cryptocurrency investment and trading. The amount of time for which an investment is made affects the trade frequency significantly. For example, if an investor makes long-term investments, the frequency of investment decreases considerably.
When it comes to cryptocurrency investors, they have a low trade frequency since they tend to hold their positions for a long period of time. In some investments, the period of investment can expand to even many years.
However, in the case of cryptocurrency traders, the frequency of investment is usually high. Traders usually focus on the number of trades since each trade is closed by taking a small amount of profit. So, cryptocurrency traders are always looking to time their trades perfectly and might even enter multiple trades at the same time to maximize their profit whenever they are confident about their investment.
Because of the small time period of every trade, the frequency of cryptocurrency trading is usually high as compared to investments, and that is done deliberately to make crypto trading more lucrative.
However, high frequency also makes cryptocurrency trading a very risky strategy. As a trader, you will be required to constantly monitor the market in order to avoid big losses.
Whether you are an investor or trader in the field of cryptocurrency, you will have to keep in mind that the cryptocurrency market is very volatile. The volatility means that every investment or trade you make in the cryptocurrency market is highly risky and can cause you to lose a lot of money or provide you with substantial gains in a small period of time.
Risk tolerance is the measure through which the amount of risk an investor or trader can take is calculated. Most of the time, higher risk also means more reward.
You can also differentiate between a cryptocurrency investor and a trader by looking at the risk tolerance they have.
Usually, cryptocurrency investors have low-risk tolerance because they leave their investment as it is after opening a position. This way, by leaving the investment as it is for a long time, the investor provides the cryptocurrency with an opportunity to bounce back and eventually increase in value in the long run.
On the other hand, crypto traders have a very high-risk tolerance. That is because, in most cases, the amount of profit you can potentially make from trade depends entirely on the amount of risk you are taking.
Since the cryptocurrency market is highly volatile, crypto traders take big risks and get involved in short-term trades to make lots of profit. However, if they place their trades the wrong way, they can also lose a lot of money rather quickly.
The amount of risk a cryptocurrency trader takes significantly increases in margin trading. It is a type of cryptocurrency trading in which you borrow money from other people in order to open trading positions. In this type of trading, you can lose more money than you ever heard at the start of your trading period.
So, no matter what type of investment or trading you might be doing, you must learn proper risk management in order to keep your portfolio positive in the long run.
Another differentiating factor between cryptocurrency investment and trading is the amount of cost and capital required to start either of these.
Whenever you sign up with a cryptocurrency exchange, they will charge you service fees or exchange fees in order to provide you with services like trading, withdrawals, liquidations, borrowing and others. In addition to these costs, you will have to pay gas fees to miners who provide liquidity in the market.
The percentage of cryptocurrency fees charged by every exchange can differ. Usually, it sits at around 0.1% per trade.
Since the frequency of trading is significantly high as compared to cryptocurrency investing, this means you will have to pay more costs in order to keep trading and earning profit. You might also be required to pay capital gains tax according to the amount of money you make as a profit from your trades.
Moreover, short-term taxes for capital gains are usually higher as compared to their long-term counterparts.
There is no specific capital you require in order to start cryptocurrency investment or trading. It entirely depends on how much you are willing to put into investment or trading. One of the plus points of choosing cryptocurrency for trading and investment is that you can start with even the smallest of amounts.
The cryptocurrency market is inherently high risk. So, whether you are looking to become a cryptocurrency investor or trader, you should be ready to invest both your time and money into the market and be ready to face high risks in the long run as well.
As a smart investor, you must learn how to time the market the right way, especially if you are a cryptocurrency trader. Since the amount of risk you take as a trader is very high, the reward is higher as well. On the other hand, cryptocurrency investment is a long-term thing with significantly lower risk. You can actually wait for the market to bounce back before selling the asset for a profit.