Crypto Trading Vs Investing

This is Not Financial Advice!

Trading and investing are two of the most common ways to get involved in the crypto space. Even though they are often used interchangeably, crypto trading and investing do not mean the same thing.

It’s essential to understand the differences between crypto trading and investing to make a well-informed decision about which of these concepts aligns better with your financial goal. To make it easy for you, we’ll explore some of the differences between these two concepts in detail.

Investing in Crypto

Before diving into the differences between crypto trading and investing, let’s break down these two concepts. Crypto investing is a strategy to make money from the crypto market by buying and holding crypto assets with the hope of profiting from an increase in their value over a longer period. It attempts to create a long-term position and HODL through the downturns and upturns.

Crypto investors, often known as HODLers, are big believers in the fact that the value of their assets will increase in the long run. Thus, they are not concerned about the timing of the market, i.e., buying or selling an asset based on best entry/exit point predictions. HODLers don’t focus on profiting off trends. Instead, with fundamental analysis, they focus on analysing assets and finding undervalued projects with huge upside tendencies.

Crypto Trading

Crypto trading involves buying and selling crypto assets over a short time, i.e. minutes, days, or even weeks. Crypto trading is the process of leveraging the high volatility of the cryptocurrency market to make profit in the short term. This process usually requires more effort in monitoring market moves.

With technical analysis, a crypto trader analyses market psychology and the economics of supply/demand to determine cases where crypto assets may be overbought or oversold.

A crypto trader is all about generating a regular income by buying an asset low and selling high over a short period. Crypto traders closely pay close attention to the news, events, and market activities to look for indications of price changes.

Differences between Crypto Trading and Investing

To further understand the differences between trading and investing, let’s go a step further and examine these differences.

• Period and Time frame

One of the apparent differences between crypto trading and investing is the time frame. Crypto investing is a long-term strategy that requires most investors buying a crypto-asset to hold it for a period typically lasting for years. As such, they do not decide based on the short-term price movements of the crypto assets.

On the other hand, Crypto trading is a short-term strategy, where the trading time frame can be as short as a couple of minutes. Crypto traders leverage the short-term volatility and changes in the prices of crypto assets to make a profit.

The goal of a trader is to buy a coin/token at a low price and sell it at a higher price within a few minutes, days or weeks. Examples of trading strategies include scalping, day trading, swing trading and momentum trading.

• Trade frequency

One other significant difference between crypto trading and investing is the frequency of trading, i.e. how often trades get executed. Trade frequency is directly linked to the investment period, and the longer the time frame of an investment is, the less frequent the trades are.

In the case of crypto investing, there’s a lower frequency since crypto investors are more about holding an asset for an extended period.

Crypto trading, on the other hand, is executed frequently. A crypto trader is constantly on the lookout for market price movements and opportunities to make profit.

• Analysis

Trade analysis is the process of understanding or predicting the market. There are two types of analysis: fundamental and technical analysis. Crypto investors often rely on fundamental analysis. Fundamental analysis focuses on metrics such as the team behind the project, the use case of the project, adoption rates, big partnerships, etc. to determine the long-term potential of an investment. Therefore, it is an investor’s tool to measure the potential risk or return on investments.

Crypto trading involves the use of technical analysis to execute trades. Technical analysis is the forecasting of the future price of an asset by analysing available historical price data using charting tools and different types of price indicators.

• Risk aversion

Whether you opt to invest or trade, the crypto market is very volatile. However, with higher risk comes higher rewards. Before deciding whether to be a crypto trader or investor, you need to know your risk tolerance, i.e., the level of risk you are willing to take.

Crypto investing is ideal for those who have lower risk tolerance as it is more risk-averse. In essence, it is suitable for those reluctant to take risks. This explains why crypto investors leave their investments for years.

Crypto trading, on the other hand, involves more frequent risk-taking. Traders exploit the high volatility of the cryptocurrency market to make profit.

• Profit diversity

Frankly, both investors and traders want some level of security for their investment. As a result, many of them add long-term and short-term investments to their portfolio.

However, an investor typically spends less time or has less interest in trading daily or early during the investment period.

A crypto trader is more concerned about the price movements of the market in terms of entry and exit points.

• Capital required

The capital requirements for trading and investing depend on your desired investment size since you can start trading or investing with any amount.

However, consider that trading requires more trading fees because of the higher frequency of trading. Also, traders may be required to pay taxes (depending on the country a trader resides), which applies to selling an asset at a profit. It’s usually higher than the longer-term rates you pay for investing in crypto assets.

Wrap up

Understanding the differences between trading and investing is essential because it would help determine how you want to play in the crypto space. Experts often advise never to invest or trade more than you can afford to lose, but the choice is totally up to you, bearing in mind factors such as your risk appetite, your availability to trade, and the time frame you have in mind to profit from your involvement in the cryptocurrency market.

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