Crypto Trading vs. Investing: Key Differences Explained
Key Questions Answered
Trading and investing are two different profit-generating methods used by various actors in the market. The main difference between the two methods is the time a person is willing to hold their positions. Trading is a method where profits are typically generated in the short term, while investing is where investors usually look to make profits in the medium to long term.
What Is Crypto Trading?
Crypto trading is the buying and selling of tokens or coins on a short-term basis, which can be hourly, daily, weekly, and any other short-term time frames. Consequently, crypto traders tend to look at short-term price movements in time frames as small as a second to time the market and make a trade at the right moment.
If a project token’s price rises, traders aim to ride the momentum buying the tokens to go long and selling the tokens later for a profit when the momentum wanes. If a project token’s price is falling, traders aim to sell their tokens and then repurchase them at a lower price by going short, thereby pocketing the difference.
For crypto traders, the potential and future of a particular project do not matter. Traders typically hold their positions for a day to a few weeks or months. They are only looking at the project token’s price rather than its fundamentals. Thus, in crypto trading, one needs to pay attention to the market sentiment. If a particular project is trending recently, traders should ride the momentum upwards.
How to pay attention to Crypto Market Sentiment?
There are various ways that traders can gauge the market sentiment. One of the ways is through news outlets. Significant events and speculative opinions all impact the spot price of a token. For example, news about crypto-based project integrations with mainstream platforms like PayPal and GameSpot tend to drive up the token prices very quickly. Hence, traders need to keep updated with the latest updates and progress within the cryptocurrency world.
As the cryptocurrency market is much more volatile than traditional markets, traders should be extra aware of the sudden spikes and slumps. To avoid huge losses and accidental price triggers, traders should also set the stop loss and take profit orders at appropriate places.
What is Crypto Investing?
Crypto investing (also referred to as “HODLing”) is the buying and holding of tokens or coins on a long-term basis, which can typically take multiple years. Unlike crypto traders, crypto investors don’t focus on the short-term price movements and usually look at weekly, monthly, or yearly time frames.
Crypto investors usually focus on continuously buying positions over extended time frames, regardless of the project token price and market situation. Thus, crypto investing requires investors to learn about a particular project’s fundamentals before committing. By learning about the project’s fundamentals, investors can choose projects with good potential so that the value of the project token has room to increase over the long term.
Even though investing is mainly about buying and holding positions, some crypto investors try to time the market. They do so by buying or selling their investment positions by predicting good entry and exit points. For example, when there is a dip in price, investors may wish to spend more capital and accumulate larger positions. Nonetheless, crypto investors usually play it much safer than crypto traders.
What are the Different Types of Trading and Investment Strategies?
In the traditional market, the four most common trading strategies include scalping, day trading, swing trading, and position trading. However, they are still somewhat relevant in cryptocurrency trading.
4 Types of Crypto Trading Strategies
- Scalping is one of the most short-term forms of trading where traders trade by the second or several minutes. Scalp traders seek to make as many trades as possible and accumulate profits through each trade. Traders looking to conduct scalping would need to choose markets with tight spreads and high trading volumes.
- Day trading is a trading strategy wherein traders trade within the day and rarely hold their positions overnight. Similar to scalp traders, day traders make profits through numerous smaller trades. However, day traders have more time studying price movements using various technical analysis tools.
- Swing trading is a type of trading strategy where traders hold their positions for several days to a few weeks. Most users who are not full-time traders can be considered as swing traders.
- Position trading involves long-term trading, making it a unique trading strategy. Position traders do not care about the fluctuations of prices in the short term and tend to focus on trades over multiple weeks, months, or years. Even though position traders seem like investors, the primary difference is that position traders look to enter and exit a particular market when the market rises and falls. On the other hand, investors look just to buy and hold a token no matter the price.
Types of Crypto Investing Strategy
For crypto investing, there is the HODL strategy. As mentioned previously, investors need only buy the tokens regardless of price (preferably ones with high potential) and hold them for the long term. Investors may also try the dollar-cost average approach by dividing a lump sum into several smaller portions and investing them periodically. This way, investors can average out the overall cost paid per token and reduce the risks of buying and selling cryptocurrency. On the other hand, some investors may look for promising projects with or without small market caps in the form of value investing or growth investing, respectively. Value investing involves looking for undervalued projects with high potential, while growth investing involves looking for projects with room for more growth, regardless of whether they are undervalued or not.
The difference between the trading and investment strategies is clear here. For example, in a day trading strategy, traders hold their stocks or cryptos for a day at most, while in any investment strategy, investors hold their positions for multiple years.
Trading vs. Investing: Which Approach is More Risky?
Regarding which profit-generating method is better, it is critical to touch upon the related risks, costs, and the required capital. Crypto traders and investors have their own risk tolerances, the costs they need to pay are not the same, and the capital required for trading and investing differs. Details are as follows:
- Risk tolerance: Traders tend to have a higher risk tolerance than investors. Trading involves a lot of speculation, which can sometimes be educated guesses or random decisions. Some trades can even be regarded as gambling. Moreover, traders choose project tokens based on the price and can only monitor a few projects at once. Therefore, there is almost no diversification, which results in higher risk. In contrast, the risk tolerance for investing is low as investors can be less hands-on than trading. Investors can leave their portfolios untouched for as long as they wish if the project token rises in value over time. Due to the long timeframe, investors can also monitor each project freely and choose to hold various project tokens, thereby achieving portfolio diversification. For example, day traders tend to have a higher risk tolerance by focusing on specific stocks or cryptos with high amounts of leverage to capitalize on the small price movements within the day. In contrast, investors rarely use leverage, thereby they are not exposed to leverage risk.
- Costs involved and capital required: Traders tend to pay higher transaction costs as they conduct more trades than investors and are exposed to tax liabilities whenever they realize profits. Also, traders may have to trade more significant amounts of money in each trade to make substantial profits, meaning that they require a more considerable capital compared to investors. Alternatively, investors do not need a large amount of capital. Instead, they can gradually increase the capital and obtain more returns over time and are usually only taxed when they withdraw their tokens for fiat currency. For example, day traders’ costs are usually based on the number and volume of their transactions while investors’ costs are based on their capital gains taxes.
Trading vs. Investing: Which Approach is More Profitable?
In terms of potential profitability, trading is superior as the ceiling is higher. However, trading is much more challenging to learn and master. Misreads can often happen, causing huge losses rather than profits if the trader is not careful. Hence, traders need to create a robust and reliable trading plan, which dictates when to buy or sell their positions. To create such a trading plan, a trader would need to spend a lot of time learning about various technical tools for better decision making, which may take up a lot of time. Nonetheless, if done right, traders can earn a lot of money in quick succession.
Conversely, investing is more straightforward, and for most people, it is the better option. Even though the profits are smaller, this passive style of investing through the buy-and-hold strategy has worked for many people.
For example, if day traders’ transactions go smoothly in quick succession, they can generate a lot of profits due to the leverage that they use during trading. These profits may even exceed those of investors that are holding their positions in the long run: traders may earn as much as 15 to 20% per week, while investors earn that in a year. However, the vast majority of day traders lose more money than they make, which is why day trading is widely regarded as doing more harm than good.
In the end, the user is the one who decides how to use their capital. If the user has other commitments or lower starting capital, they can opt for investing. If the user has a sufficiently large capital and enough time, they can choose trading. The user may even use both methods simultaneously by investing in good, promising projects for the long term and playing around with other projects to make quick profits in the short term. Nonetheless, the user needs to understand that to make successful trades. They will need to educate themselves and create a solid trading plan. On the other hand, for investing, the user will need to research the fundamentals of various projects to ensure that they avoid dead-end projects.