Investing and trading: what's the difference?
We offer to understand the basic definitions of the crypto market. A novice user sometimes doesn't understand the difference between the two main activities that take place with cryptocurrencies. Investing and trading. What are these? What is the difference between these approaches? And the main question: which is more profitable for the investor?
Who are traders and investors?
Who are traders and investors? Generally speaking, these are all stock or finance market participants who differ in the investment horizon they choose. This means they have different time horizons for achieving profit and different strategies for extracting returns from the asset.
Generally, it can be said that traders gain profit from short-term and medium-term market movements. They are interested in the period from a few seconds to a couple of weeks. On the contrary, investors prefer long-term forecasts and the opportunity to earn on global changes. In such case, the period can be from a month to several years.
The period for earning on the crypto market is the main difference between trading and investing. Each of the methods has numerous supporters as well as principal opponents. And only the user of digital assets can choose the appropriate way for him.
Trading
Trading is making money by forecasting the change in the price of an asset in a short period and making a profit by buying and/or selling this asset.
The occupation of trading implies using any, even the shortest movements of the cryptocurrency market. It can be scalp trading (trading super-fast deals from seconds to several minutes), trading bots or algotrading (using special software to trade super-fast deals in several seconds), intraday trading (within one trading day), trading on the news (using positive or negative market movements triggered by the news background) and many other strategies.
Besides trading with own funds, trading in other forms and tools is available to users:
- leveraged margin trading (leveraged trading);
- Futures and options trading;
- Proprietary trading (trading by means of specialized company).
What are the advantages of trading?
Trading as a way to earn has its advantages. To begin with, trading allows you to fix profits at the moment. That is, by using intraday trading and trading for a short period, users of cryptocurrencies get income very quickly. There is no need to wait a long time and freeze some funds in a long-term investment. Your assets are always in circulation and working.
Secondly, trading is suitable for very many users because of its specificity. If you have an active, lively mind, are constantly on the move, are not used to waiting, and want to see the result of your activity here and now - trading is an excellent sphere of activity.
Thirdly, trading requires a constant (or nearly constant) presence in the market for active trading. It is necessary to keep abreast of events, follow technical and fundamental data, and use special analytical instruments. It is necessary to be engaged in constant self-development and education always to understand what is happening on the market. This is a positive factor because if you're a trader, you just have to evolve constantly.
Fourthly. Trading allows earning on the price movement of a couple of percents up and down within one day. There's no need to wait for a huge percentage of profit because, very often, the profit consists not of one big chunk but of several small transactions, which are less risky.
Fifth: many exchanges offer demo accounts. Investing successfully or not is decided only by trial and error. Traders can test their strategies indefinitely without losses, and the experience will only grow.
And one more advantage of trading. For experienced market players, it doesn't matter what stage of growth or decline the digital asset is in. You can always make money, even on a neutral market. That is why trading can be the main type of activity because there is no time limit for operations.
What are the disadvantages of trading?
The disadvantages of trading include:
The need for full-time employment. The trader is chained to the market during the trading session and must always be in the center of events and track potential negatives.
Trading can be high-risk. The ease of using intraday price fluctuations is apparent. For every successful trader, there are a dozen who go bankrupt. To avoid this, always use a few simple rules:
Don't trade the entire volume of your portfolio. In case of an unsuccessful transaction, you will be able to save a part of the funds.
Have a clear trading strategy. Write down your goals, and assess the situation on the market. A prescribed, precise action plan will also save you from risky, reckless actions and help you stop in time.
Psychological pressure. The profession of a trader is very costly in terms of psycho-emotionally. It requires constant concentration, speed, and accuracy of reaction. It quickly tires you out. At the same time, you don't have to trade every day. You can skip the trading session if you don't feel confident in your abilities. Relax, distract yourself, and don't constantly think about the market. A good rest will help you get back to your new strength and greater earnings.
The disadvantages of trading can also include dependence on the crypto exchange. Not all exchanges provide the same tools. In addition, technical failures and errors can occur at a high load of the trading platform, affecting the trading results. Most exchanges charge a percentage in the form of a commission.
Investing
What is investing? It is a way to profit from the cryptocurrency market from a long-term forecast of asset price movements. The better a cryptocurrency develops, the more efficient and optional it is, and the higher the asset's value grows over several years. Everyone knows the stories of when the original crypto activists and friends of Bitcoin supported the cryptocurrency and earned thousands if not hundreds of percent. Even supporting Bitcoin in 2020, you could make up to X10 in 2 years on a COVID-19 drawdown. Competent investing is based on the fact that optimal entry and exit points are used, the occurrence of which can be waited for up to several years.
This is the difference between investing. It is the exact opposite of trading, more restrained and austere.
That said, investors don't act blindly. As with trading, a thorough fundamental analysis of assets is conducted. Many performance metrics of crypto companies of token issuers are compared. And only in the case of positive dynamics does the investor make the decision to invest.
What are the advantages of investing?
Investing is suitable as a passive income, as an additional way to increase income. Of course, before investing in a project, the user must assess the value growth prospects.
However, the time commitment is still not comparable to trading, where employment can be almost 100% free time.
Investors can also be a bit disconnected from the news background and temporary price fluctuations. Cryptocurrencies are a cyclical market. And volatility is here as one of the specific but necessary characteristics. Investors also use it to get the most profitable points to buy and sell assets rather than a daily reason for stress. Short-term price fluctuations in investing are more often than not completely ignored.
Another advantage of investing long-term in cryptocurrencies: it is an opportunity to combine promising asset growth and passive income.
For example, you could buy 32 Ethereum coins at about $240 in 2020, become a PoS network validator and sell as early as 2023 for almost $2,000. In doing so, as a validator, you would also receive additional payments from Ethereum. Or you could buy ETH at a general market stagnation for $1000 and get 100% profit already this spring, fixing the investment for $2000.
Or the simplest option - is to place in DeFi deposit at interest.
This plus can also include free time, which the investor has. Investing for the long term can be combined with your main business to use as a means of forming a financial safety cushion.
Investors are also less dependent on trading platforms and exchanges than traders. Funds can be withdrawn to non-custodial wallets or even to cold storage hardware wallets. Exchanges are used only for profitable exchange and capital formation, but no more. Therefore, dependence on these platforms is leveled.
Investors are virtually unlimited in the amount of capital. The largest Bitcoin wallets include some long-term investors who do not touch their assets for years. In the case of trading significant amounts, it is much more difficult to operate.
However, long-term investing also has its disadvantages. The main one is, of course, the time factor. Not everyone is ready to believe in long-term benefits and freeze their funds for several years. Investments cannot be withdrawn quickly because then the whole point of the process is lost.
Storage risks can also be considered a disadvantage. It turns out that the efficiency of the process depends on the method chosen to store digital assets. But there is always the risk of a virus or phishing attack, wallet malfunction, or loss of secret phrase and password key. In such a case, investors should choose several storage methods to diversify possible losses. And also observe digital hygiene on the means (PCs or smartphones) where the "gold reserve" of cryptocurrency is stored.
Conclusion
Investing or trading? As we said above - these are two sides of the same coin. In fact, they are ways to raise capital. And only the user of cryptocurrencies himself should choose which of the ways suits him. In addition, no one restricts anyone. You can combine all the earning opportunities and succeed in both.