Crypto trading vs. Crypto Investing: Key Differences Explained

What is cryptocurrency trading?

Cryptocurrency trading utilizes short-term strategies, such as scalping, day trading, swing trading and position trading, to take advantage of changes in price and market trends.

Cryptocurrency trading, much like trading other traditional financial assets, involves predicting price movements and speculating on the future of digital currencies such as Bitcoin (BTC), Ether (ETH) and XRP (XRP).

Trading mainly involves “timing the market”, or buying and selling assets based on predictions about the best entry and exit points. Traders monitor market news and technical analysis indicators to inform their decisions. Some crypto trading strategies that cryptocurrency traders use are:

• Arbitrage: Arbitrage is a trading strategy that exploits an asset’s price differences across different exchanges. By quickly buying and selling assets between exchanges, traders can exploit small price deviations to make quick profits.
• Day Trading: Day traders constantly scan the market for intraday price variations to ensure daily profits, closing their trades before nightfall. Each trade can last from minutes to several hours.
• Swing trading: Swing traders take advantage of the rapid price swings of cryptocurrencies, with a trade usually lasting between a day to a couple of weeks. Swing traders use technical analysis to identify significant directional movements in cryptocurrency prices within this short period.
• Position trading: Position trading is a form of trading that also leans towards investing. It is similar to swing trading, but involves extensive study of long-term trends and patterns – and usually lasts from several months to a couple of years.
• Scalping: Scalping is a high-frequency trading strategy that involves making multiple trades within a short period of time to capture small price movements. As the most active market participants, scalpers make quick trades with short holding times – lasting minutes or even seconds in some cases – to “skim” a profit without incurring any significant risk.

What are the pros and cons of cryptocurrency trading?

The main advantages of trading cryptocurrencies are fast profit generation, safe storage of value, low fees and universal availability. Meanwhile, crypto assets’ inherent risk and volatility count as disadvantages.

The biggest advantage of cryptocurrency trading is the potential to generate quick profits by taking advantage of short-term price movements and market trends. Some cryptocurrency traders also value assets like BTC as a secure store of value, especially since cryptocurrencies were designed to function independently of central institutions.

Cryptocurrencies can also be traded peer-to-peer, incurring much lower fees than transactions involving central authorities, such as banks and financial institutions. Cryptocurrencies are also generally universally accessible, so anyone with an internet connection and mobile device or computer can create a cryptocurrency wallet and start trading.

On the other hand, crypto trading also carries significant risk due to its high volatility – meaning prices can swing up and down quickly. This can lead to significant losses if traders are not careful and do not monitor their positions.

So, is crypto trading good for beginners? While beginners can start trading small amounts as they build experience, it’s worth noting that the risk associated with crypto trading is much higher than most other forms of investment, meaning that high-stakes trading may not be the most appropriate investment method for beginners.

What is cryptocurrency investing?

On the other hand, investing in cryptocurrency is mainly concerned with buying and holding cryptocurrencies over a long period of time, in the hope that one’s investment will increase over time.

Also referred to as “hodling,” a derivative of “hold” and “hold on for dear life,” investing in cryptocurrencies is a more long-term commitment compared to crypto trading.

As such, crypto investors are less concerned with short-term market fluctuations and place more emphasis on the fundamentals of the crypto assets they purchase. Some crypto investment strategies investors use are:

• Hodl: As mentioned, hodling mainly involves buying and holding crypto-assets indefinitely. The underlying principle is that cryptocurrency prices are bound to rise over time.
• Dollar Cost Averaging: Investors using this approach buy cryptocurrency in small amounts on a regular basis, regardless of market fluctuations. Theoretically, this approach helps average prices over time and reduce the impact of volatility on one’s investment portfolio.
• Value investing: Value investing involves identifying undervalued cryptocurrencies with solid fundamentals and great potential. By buying low, investors are betting on the asset’s potential increase in value.
• Growth Investing: Growth investors invest in new assets that are expected to grow exponentially in the future in hopes of increasing an investor’s capital.
• Index Fund Investment: Cryptocurrency index funds are designed to give investors access to a wide range of digital currencies. They are structured like exchange-traded funds (ETFs) and mutual funds in that they have a basket of different assets.

What are the pros and cons of investing in cryptocurrency?

The main advantages of investing in cryptocurrency are capital growth, protection against inflation and lower risk than trading. Meanwhile, the primary downside to investing in cryptoassets is their inherent volatility.

The biggest benefit of investing in cryptocurrency is the potential for capital growth over time. Despite fluctuations in price and market sentiment, historical data shows that given the rapid growth of the cryptocurrency market over the past decade, one can potentially profit from being a long-term investor.

Another advantage is that cryptocurrencies can act as a hedge against inflation since prices tend to be more resistant to changes in market sentiment than fiat currencies. Investing in cryptocurrency also has lower risk than trading in cryptocurrency since it involves a long-term commitment.

Conversely, investing in cryptocurrency can also be extremely risky due to its high volatility. As such, investors should ensure that they are well versed in the basics of cryptocurrencies and related risks before investing their hard-earned money.

What are the main differences between cryptocurrency investing and cryptocurrency trading?

Despite their differences, investing and trading often go hand in hand. Traders can be investors and vice versa. However, it is still crucial to know the difference, especially for those looking to start their journey into the crypto market.

So, what is the difference between a cryptocurrency investor and a cryptocurrency trader? Generally speaking, investors buy cryptocurrencies with good fundamentals and expect the price to rise over time. On the other hand, traders take advantage of market volatility by holding their coins for a short period of time to maximize their profits.

It is important to note that while both trading and investing have some level of risk, investors and traders can still be differentiated based on their risk profiles. Investors are usually more risk averse and prefer to leave their investments on autopilot; they don’t worry as much about daily price changes. On the other hand, traders thrive on taking risks and must have an excellent understanding of market volatility and conditions.