Given the innovation they are, cryptocurrencies have earned great popularity en masse. Today the market capitalization of the crypto market is worth trillions and with thousands of cryptocurrencies. The crypto market works similar to a stock market (but, of course, with its own set of anomalies and peculiarities). There are days when we hear of amazing gains from the crypto market, and other days, we may see double-digit losses and the market tumbling down.
But as much as the market is profitable, it is volatile and uncertain. When it comes to making wealth from crypto assets, the two popular ways to book profits remain crypto trading and crypto investing, besides derivatives trading like Bitcoin futures or the host of passive income channels like staking and yield farming. Both these ways are a great way to attain financial freedom if you have learned the answer to ‘how.’
Both crypto investing vs crypto trading have a very different methodology and mindset that needs to be followed, no matter what market you want to put your money in. Traders and investors require a skillset of proper research, strategy, and risk analysis. Picture crypto trading as earth’s rotation – all you are concerned about is the ups and downs in the price of a particular cryptocurrency, like days and nights. While crypto investing could be the earth’s revolution around the sun – multiple factors are involved in the decision-making process that usually concerns a long-term investing horizon, like distance from the sun, seasons, etc. in the case of earth’s revolution.
Before you get started, whether as an investor or a trader, let’s first learn the differences between crypto trading vs crypto investing on a few interesting parameters.
Crypto Investing vs Crypto Trading: A Deeper Dive
When we talk about the similarity between these two, we have to know that fundamentally, both investing and trading are just buying and selling crypto assets. The biggest difference between these two is the time duration between buying and selling cryptocurrencies and booking a good profit on the same. This one difference alone sets an entirely different path for the two. The strategies differ vastly for both, and the choice among the two is more a function of the risk appetite and profile of the investor.
Crypto trading means holding on to a certain crypto asset for a short duration and then selling it based on the market conditions and booking profit in this short time. While investing is strategically putting money in crypto assets that you think will grow in price over months or even years.
Market Research
Crypto investing requires intensive fundamental analysis and research about crypto assets, including the platform, founders, and the feasibility of the product vis-a-vis the market demands. The investor needs to learn more about the vision behind the asset and its platform, its long-term goals, the team working behind it, and the blockchain it functions on. All of this research, combined with the market performance of the cryptocurrency, suggests whether or not investing in it will be profitable.
Much of such info can be found in the whitepapers, news, social media handles, and crypto communities such as Discord and Reddit, among others on the internet.
On the other hand, trading volumes, price charts, moving averages, and other dynamic variables can help the traders decide the market trends and price movements of the cryptos they hold or are seeking to trade in. After all this research, an important factor that plays a major difference in trading and investing is the time horizon. With trading, you must keep track of the trade at all times, especially when there is leverage. Traders place their bets on the price movements and the market trends while investors seek opportunities in the long-term prospects of a particular asset and focus more on the fundamentals. Traders may opt for intra-day trading or trade based on market trends, etc., while investors usually put their money for a year or so and then book profits after considerable price movement in the market.
Approaches to Take
Crypto investing and crypto trading both require a very different kind of approach. In technical terms, the active and passive approaches are the two things that any beginner requires to understand. Crypto investing requires the investors to have knowledge about the movements of the market and macro tailwinds that may impact the value of their crypto assets. Though, as an investor, there is no need to get concerned about the daily fluctuations as your income depends on the long-term performance of the crypto asset.
An investor may go for bulk investments, SIPs (Systematic Investment plans), or opt for a DCA (Dollar Cost Averaging) strategy to regularly invest in the preferred cryptocurrency. Many investors prefer buying the dip to book profits when the asset undergoes a trend reversal and starts moving up.
The income through trading depends solely upon how good you are at observing and predicting. The trader approach is a very important part of earning through daily trading. While spot trading is the most common, derivatives, such as Bitcoin futures, options, and swaps, are becoming more and more popular as leverage offers more profit at a fraction of the actual price of the underlying asset in the derivative. Traders may opt for varied strategies such as scalp trading, range trading, day trading, etc.
Profiles and Risk Appetite
Another important difference between crypto trading and crypto investing is the risk appetite and profiles of the individuals. Since the crypto market is a volatile market, there is a high risk accompanied by the opportunity to earn higher gains, but as compared to crypto traders, investors have an edge since they can balance out the long-term fluctuations and still book profits. An individual with a low-risk appetite will likely go for investing in large cap or blue chip crypto assets, while an investor with a high-risk appetite will take the trading route and try to take profits by speculating on the price movements alone for a particular crypto asset. Also, investing is usually a long-term activity; a person ready to block their capital for a considerable time is more suited for the investor profile.
To conclude, both crypto investing and crypto trading are great ways to earn profits and get financial freedom. All you need to learn is the differences between the two and maintain a proper strategy suited to you to reduce the risks of the volatile crypto market. Lastly, you also need to practice caution, diversify your portfolio, and avoid FOMO while you trade or invest your way to becoming the next crypto millionaire, maybe!