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Investing versus trading in Cryptocurrencies. What is the difference? These two types of speculators have different time horizons, with investors typically aiming to exit with profit after months or years, while traders jump in and out of deals, both long and short, usually in hours, minutes, or even seconds. Investors face the pressures of sitting tight for a long time, usually either itching to grab a profit or cut a loss prematurely. Traders face the pressures of confusion, panic, indecision and snowballing losers. Both must overcome such pressures to succeed.
Traders and investors are forced into using different channels for their operations, with traders effectively confined to the few retail brokerages offering Cryptocurrencies, or a fast-moving exchange. Investors work at a more leisurely pace, and have a much wider choice of exchanges, digital ATMs, or even private transactions.
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In the previous lesson, we learned what’s exciting about cryptocurrency markets. In this lesson, we will explore the differences between cryptocurrency trading and investing, and how to decide which method is best for you.
The first difference is availability. If you want to trade cryptocurrencies, you will need to use a broker. At the time of writing, most brokers still don’t offer cryptocurrencies, although more and more do. Usually, brokers which do have them only have the best cryptocurrencies like Bitcoin, Ethereum, and Ripple. This means that if you really want to be involved in smaller cryptocurrencies, you are probably going to have to invest in them, and find a cryptocurrency wallet to store them in.
The second difference is your time horizon. If your timeframe for an in-and-out deal is minutes, hours, or a few days, you are better off trading cryptocurrency through a brokerage, and considering yourself a trader. If you are prepared to sit tight in a single deal for weeks, months, or even years, then you are an investor.
The third difference is how much profit you aim for. Investors typically hope to sit tight for a long time and watch their investment grow exponentially. Traders hope to make several deals, a few losers, a few small winners, and some big winners. Each style imposes a different type of psychological stress.
The fourth difference is the risk of ruin, which means your risk of losing all your deposit, or potentially even more than that. Trading with a broker allows you to put stop losses on your trades, which should limit the maximum amount you can lose. The problem is, that sometimes in extreme market conditions, brokers might not honor a stop loss. This means that if you are using high leverage, you could lose a lot more than you expect. However, if you are investing, something similar can happen, as you usually have no stop loss at all and might be caught unaware by a sudden dramatic market move. Whether you want to use leverage at all is something else to consider – if you do, you will probably have to trade with a broker, unless you can find a leveraged crypto ETF.
The fifth difference is how much time it takes. If you’re too busy to be managing trades every day, or if you don’t think the stress would be worth it, then investing for the long term will be the better option for you.
Finally, keep in mind that if you want to invest, it is hard to find any way to profit by selling cryptocurrency short. This means that if you want to bet on the price going down, you will have to use a broker, or trade options.
If you are not already an experienced trader, you might want to split your capital between an investment and a cryptocurrency trading account, and try to get the best of both worlds while you learn how to trade cryptocurrencies in our next lesson!
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