Crypto Trading vs. Crypto Investing

Thursday, August 26, 2021
Crypto Trading vs. Crypto Investing


In 2017, a journalist named Derek Rose cashed out his $ 200'000 retirement account to invest in blockchain technology and made more than $7 million in profit in a single year. Then he lost it all.

Rags to riches to rags stories are relatively common in the Wild West of cryptocurrency, as it is known for extreme volatility. However, many other less risk-prone investors make big profits and hold onto them, too.

There are almost as many different theories about investing in blockchain technology as investors, but most strategies fall into one of two categories— trading or investing. So which of these is right for you?

This article will go through some of the pros and cons of each of these approaches to give you a high-level idea of the different ways investors strike it rich in the world of Bitcoin investing.

Buy low, sell high. Simple, right?

Let's cut to the chase; the fact is, most traders lose money. By some estimates, 95% of retail traders end up in the red, both when it comes to Bitcoin investing and traditional stock or forex investing.

Of course, among the few that do turn a profit, there are some very successful traders.

So what makes trading so difficult? For one, it involves swimming with sharks. Thousands of traders are waiting for each other to make a mistake so they can scoop up the profits.

Traders focus mainly on price movements. These price movements are cyclical, so there is some level of predictability. Still, prices are also affected by many other factors which can throw off predictions.

Some traders try to trade the news; if someone involved in Bitcoin trading hears some news about China taking regulatory action against Bitcoin, they might try to sell quickly, anticipating that other traders will sell and drive down prices. Then they might try to buy back low before less savvy traders realize that China can't actually kill Bitcoin.

Overall, trading tends to focus on a shorter time frame. Traders may look at the underlying value of the assets they trade, but it doesn't matter to them if a cryptocurrency they are trading will succeed or not since trading can be profitable regardless of whether an asset is thriving or floundering.

This can be an advantage in some situations. For example, it means traders can turn a profit in both bull and bear markets, whereas long-term investors have to wait out bear markets.

Trading, especially in cryptocurrency, is not for the faint of heart. It requires nerves of steel, careful planning, discipline, and paying close attention to the markets. For this reason, many successful traders are professionals who dedicate most of their waking hours to trading.

That's not to say that it's impossible for someone with a full-time job to make some money trading on the side. Many people do quite well trading cryptocurrency or stocks as a side gig. However, many, many more end up losing money at it. One blunder can wipe out the profits earned from months of successful trades.

Examples of Trading Strategies

  • Day trading. Day trading refers to attempting to profit by buying and selling an asset within a single day.
  • Swing trading. Swing traders will hold onto an asset for a longer period of time, waiting for a shift in a larger cycle. Markets go through upward and downward trends, so swing traders look for signals that a shift is about to happen and time their trades accordingly.
  • Position trading. Position trading is a form of trading that is a bit closer to investing. It's similar to swing trading but usually involves a deeper analysis of long-term trends. For example, a position trader might hold a position for months before selling.
  • Scalping. Scalping is one of the more fast-paced trading strategies. Scalpers trade small price movements for small profits but execute so many trades that the small profits (hopefully) add up.

Slow and Steady Wins the Race

A lot of people like trading because it can be very similar to gambling. There's no question; trading is much more exciting than investing. However, well-informed investing is much less risky.

Investing usually involves looking at the fundamentals of assets. With traditional stocks, this means looking at the company's revenues, its market position, the value of its assets, and other factors that could give you some idea about its future valuation.

Evaluating the fundamentals of crypto assets is much more difficult. Much of the value of cryptocurrencies is based on speculation about future adoption. Since there is no centralized entity managing them, there's no accounting information, revenue, or profits to analyze.

Evaluating the fundamentals of crypto assets is much more difficult. Much of the value of cryptocurrencies is based on speculation about future adoption. Since there is no centralized entity managing them, there's no accounting information, revenue, or profits to analyze.

Instead, investors in crypto assets will look at other factors, including:

  • The underlying technology of a network, protocol, or application.
  • Crypto economic models (token emission, rewards, security incentives).
  • The background of developers participating in a project.
  • 3rd party software integrations.
  • Which businesses are using a network or application.
  • The number of users.
  • Government support or opposition.
  • Political concerns like decentralization, privacy, etc.

Investment in crypto markets, like traditional investing, is all about choosing sound investments that will grow over the long term.

Examples of Investing Strategies

It’s always best to have a strategy in place when investing, and that’s especially true for cryptocurrencies, given their volatile nature. While no single investing strategy is perfect, there are several that are known to work quite well. Below are 3 that might suit your own investing needs:

  • HODL: This is the longest term strategy. HODL is an acronym for “Hold on for Dear Life” that was coined when a user of the Bitcointalk forum unintentionally wrote “HODL” instead of “HOLD”. In essence it means to buy and hold forever. The belief behind this strategy is that cryptocurrency prices will continue rising significantly in the long term.
  • Dollar Cost Averaging: Dollar cost averaging has been well tested and proven to work over the long term. It's also quite simple to put into practice. Basically it involves investing in your chosen digital asset in smaller amounts at regular intervals. Sometimes you'll buy at higher prices, but other times prices will be lower. Over time it will average out, and this strategy is very good at reducing the impact of market volatility on your investment.
  • Market-cap weighted portfolio of top cryptos: This strategy is similar to one from the equity markets and the most famous market cap weighted index is the S&P 500. By creating a market cap weighted portfolio the investor avoids becoming overweight in any one digital asset by rebalancing the portfolio on a monthly or quarterly basis. When the rebalancing is done those assets that have appreciated are sold at higher prices, while the underperforming assets are purchased at lower prices. Over the long term this leads to appreciation in the overall portfolio.

There are many other strategies used for investing in digital markets, but these three are proven to be highly effective, and are fairly easy to implement.

The Best Places to Trade and Invest in Crypto Assets

Traders and investors have very different needs, so exchanges or brokerages catering to traders or investors have some crucial differences. For example, a platform like Binance is more geared towards traders. It has a very technical user interface which can be intimidating for less experienced users.

Fees are also very important to traders; if they execute many trades, fees can significantly impact their profit margin. For this reason, exchanges focused on traders try to cut down on costs and provide fewer services to their users to offer lower fees.

Investors are more concerned with long-term security and prefer a more user-friendly interface. SMART VALOR is a Switzerland based digital asset platform that is more focused on the needs of investors and gives not only access to simple buy/sell and exchange functionality but also offers discretionary portfolio management such as managed accounts. Opening an account just takes a few moments— click here to get started.

The best investment you'll make.

Find out more in our Investor's Guide to Crypto
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