Investing or Trading: Difference Between These Two Terms Through a Beginner's Eyes
Main page Tutorials, Cryptocurrency
Hot topic
June 25, 2020
72 72

Every time the price of Bitcoin and other cryptocurrencies grows, digital coins and tokens make numerous headlines, and more people get interested in them. There are many success stories about cryptocurrency investors who became millionaires so many people expect the same success when making their first investment. However, the cryptocurrency bubbles often crash, leaving many people disappointed. The interest declines, and the wide audience forgets about cryptocurrencies until the next growth and new headlines.

For a beginner, cryptocurrencies may look like a gold mine — you can make a lot of money while staring at the screen of your laptop. The reality, however, is quite different. There are many traders and investors who give up as soon as the bubble crashes. The cryptocurrency market is extremely volatile, and it can be hard to predict the price dynamics. Does it mean that you cannot earn money by trading and investing in cryptocurrencies? Of course, no. However, you should know the difference between trading and investing, as well as the main features of the cryptocurrency market and effective methods that can bring you profit.

Investing in cryptocurrencies

No matter whether you’re dealing with a cryptocurrency or another type of asset, investing is aimed to get long-term profits. Investment strategies are based on long-term trends. You need to create a position at a lower price than you will sell it. However, many investors don’t rush to sell their assets because the longer you wait, the more profit you might get.

Given that investment focuses on long-term profits, sales occur rarely. Usually, investors hold their cryptocurrency during the downturns, and during the upturns, as well. However, some investors may also trade a part of their assets or hold short positions against the longer ones. If a certain cryptocurrency is oversold, you can add to a position. You can also add to a position gradually, no matter what the price is.

Therefore, your main goals are to get more coins, and to wait until the price of your coins grows as much as possible. You should be able to withstand market fluctuations, even if they are significant.

Trading cryptocurrencies

Unlike investing, trading implies getting a short-term profit. Therefore, trading strategies are usually based on short-term trends. Your ultimate goal is to buy coins at a low price and then sell them when the price grows. However, you may also buy a coin and then sell it at an even lower price because the cryptocurrency market is extremely volatile. Therefore, crypto traders are used to taking losses and they need to plan their strategy in advance. It’s important to determine what loss you can withstand and not to cross that line. The best approach is to calculate percentage gains depending on the trend. The current price is not as important as the trend, so you have to buy and follow the trend.

When trading cryptocurrencies, you should evaluate the room for the price to decrease or increase. While investors care a lot about the coin itself because their trust can make the coin stronger or weaker, traders shouldn’t care about the coin much. They should be able to get out when the price goes down, and they often trade many different coins, depending on the current trend.

Now let’s consider trading vs. investing in more detail.

1. Investment period

Investors are less concerned about short-term trends than traders. Given that cryptocurrencies and blockchain itself are quite new concepts, it makes sense to focus on the long-term benefits associated with mainstream adoption and the disruptive impact of blockchain on different industries.

However, cryptocurrencies have much shorter market cycles than the stock market. Therefore, there are more opportunities for short-term positions and for profiting off the short-term bear or bull trends. This is exactly what traders do. While the volatility of the cryptocurrency market creates a psychological pressure for investors, it serves as the main source of income for traders.

2. Trade frequency

The trading frequency directly depends on the investment period. The longer the timeframe of your investment, the less frequently you should trade. Investors have long-term objectives so they usually don’t sell their cryptocurrencies until their expectations are met. For instance, many investors hold their cryptocurrencies for a few years.

This isn’t the case with traders, as they trade much more frequently. If you’re a trader, the frequency of your trades can directly impact your profits. You should constantly monitor the market and use any opportunities. If you choose the right strategy, trading can bring you more profit than investing. You shouldn’t forget, however, that trading can also be quite risky.

3. Risk profile

A risk profile is a term that refers to the level of risk that is comfortable for a trader or investor. Risk is directly related to the level of possible profit. For instance, investing in bonds or property is less risky yet less profitable than investing in cryptocurrencies. Cryptocurrencies are the riskiest type of asset but they also enable investors and traders to make much more money than other types of assets. When buying and trading cryptocurrencies, you should clearly understand the risks and compare them to possible profits.

Although the cryptocurrency market is quite risky, in general, investing and trading are associated with different levels of risk. On the one hand, investing requires you to be comfortable with holding your coins while watching the price drop. On the other hand, trading is also risky because of the extreme volatility of the cryptocurrency market. Besides, traders often use margin trading. They borrow funds from a third party to trade larger volumes, which enables them to get much more profit. However, in this case, the risk also increases proportionally.

4. Types of analysis

Investors and traders rely on different types of analysis. Given that investors are interested in long-term profits, they use fundamental analysis, which includes analyzing news, financial statements of different projects, usage rates and merchant adoption rates.

Trades are less concerned about the future of a cryptocurrency, and their profits depend on short-term fluctuations. As a result, they use technical analysis. Technical analysis includes many types of indicators and other tools that help detect patterns in the historical data and predict short-term fluctuations.

Final Thoughts

Now you know the answer to the questions “what is trading?”, and “what is investing?” As you can see, trading and investing are two different approaches. If you’re looking for a long-term profit, you should consider investing. In this case, you will have to hold your coins for as long as you can, while analyzing news and usage statistics. If you want to make money on short-term price fluctuations, you should consider trading and analyze technical tools, making frequent trades. No matter what approach you choose, cryptocurrencies enable you to get great profits. The main thing is to keep in mind the risks and to set realistic goals.

John Edwards is a writing specialist who works at The Writing Judge and Pick The Writer. He is looking for ways of self-development in the field of writing and blogging. New horizons in his beloved business always attract with their varieties of opportunities. Therefore, it is so important for him to do the writing.

Read also:
Please describe the error