Crypto is a financial trend that arguably no one wants to miss out on. Although Bitcoin, the first cryptocurrency, was mainly created as a borderless means of exchange, many people have since adopted it as a store of value; just like Gold, people who acquired it when it was abundant usually get a huge value for their assets when the market becomes saturated.
In order to efficiently take advantage of the digital gold “Bitcoin” and other cryptocurrencies to get huge returns, many people have become cryptocurrency traders and investors. These terms are sometimes used interchangeably; however, they are different.
Traders typically seek instant profits, while investors focus on the long game. However, regardless of their differences, one person could be a trader and an investor simultaneously, depending on how well they can combine strategies to achieve increased value from purchased assets. This article dissects both terms, outlining their differences, and guides you in choosing a strategy that suits your goals.
What is Crypto Trading?
Cryptocurrency trading is a short-term strategy that aims to gain quick profits within a short period, typically within a few hours or weeks. Due to the cryptocurrency market’s volatility, prices could rise and fall very quickly; traders try to take advantage of this short-term volatility to buy assets when the price is down and sell when the price has soared.
Of course, they don’t do this blindly; they engage in a lot of technical analysis and some fundamental analysis to predict price movement and make perfect entries/exits. Some trading strategies include:
Scalping: Scalping requires the most activity of any trader. Scalpers typically look to buy and sell coins after minimal price movements aiming to earn very little profits within a few seconds or minutes. They never hold any position for too long; instead, they look to repeat these mini trades several times daily to cumulatively gather a huge profit at the end of the day.
Day Trading: Day traders carry out their trades like an employee who resumes work in the morning and closes in the evening. They set a trading window within the 24-hour cycle and always close their trades before retiring for the day. Day traders never leave open positions overnight; with each new day, they search for new opportunities to exploit the volatility in the market.
Momentum Trading: Momentum trading is a short-term strategy that seeks to ride the wave of the short-term trend. Like other financial markets, the cryptocurrency market moves in trends, so momentum traders look for uptrends, then buy the low points and sell the high points to buy back at a “higher low” and sell again at a “higher high.” Momentum traders are usually adept at technical analysis, understanding the trend direction, and predicting a new low or high point.
What is Crypto Investment?
Cryptocurrency investments involve buying and holding crypto assets to make huge long-term profits, usually within months or years. Crypto investors are unfazed by the volatility in the crypto market, and regardless of fluctuations, they “HODL” their positions for longer periods. Investors believe in the long-term potential of a coin, maybe due to its technology, utility, or other reasons borne from fundamental analysis; they also utilize technical analysis to pick a perfect entry point.
During the investment period, there may be extended bull runs and bear runs; regardless, investors hold their position until they think the coin has peaked or when they are satisfied enough with the yield to take profits.
Differences Between Cryptocurrency Trading and Investment
Apart from the obvious differences in investment duration, there are a few key differences that can help distinguish between trading and investment. They include:
Trade Frequency: As expected, traders execute many more trades than investors. Investors typically buy once and hodl, while traders could open dozens of positions daily.
Analysis Type: As mentioned earlier, crypto traders rely much on technical analysis to get immediate information on price action; sometimes, they may consider the news or some other fundamental information; however, they majorly rely on chart analysis. On the other hand, investors rely more on fundamental analysis to make an informed decision before committing long-term to a coin; they may also consider chart information to perfectly time their entry.
Risk Appetite: Traders carry on more risks than investors because they rely on volatility; in some cases, some traders use margins. All these could help traders make a lot of money in a short time; however, they can also lose a fortune in the twinkle of an eye. Conversely, investors typically engage in lower risks since they are less concerned about price volatility and instead focus on the long-term; more often than not, crypto assets appreciate with time, so crypto investors aren’t necessarily heavy risk-takers.
Profit Options: Crypto traders typically profit from the quick buying and selling of assets; as long as they accurately time their entry and exit, they will remain very profitable. However, investors have more profit options; they can get holder rewards through airdrops or redistribution.
In some crypto projects, when one holder sells their tokens, a percentage of the sold tokens will be redistributed to all other investors according to their holdings; sometimes, this is called a “crypto dividend.”
Understanding the differences between trading and investing will help you strategize smartly, helping you take advantage of volatility and not be caught up in it. First, identify your risk appetite and how soon you’d like to earn your profits and trade in that direction; if you want, you can smartly combine both strategies to have short-term earnings and bigger plans for the long term.
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