Two of the most common ways to use cryptocurrency are trading and investing. To some, these might be new words. To others, they might mean the same thing. Investing and trading are both important pillars of the cryptocurrency world, but there are some important differences between them.
Humans have an eye for value. It’s like a sixth sense wired into our DNA. Since we have been able to walk, talk and interact, we have been haggling, exchanging and making deals to get what we need. The earliest form of this was the barter system. Before physical money was invented, humans got something they wanted or needed by swapping it for something they already had. Humans already knew that each item had its own unique worth.
They also knew that value changed over time depending on what the object was, how many people needed it and how difficult the object would be to find again. They also wanted to be better off after the trade than they were before. These same rules apply to everything that is bought and sold today.
Trading and investment both rely on humanity’s knack for working out what is valuable and seeing how it could become more valuable in the future. In the case of cryptocurrency, investment and trading both have the same goal: Selling the cryptocurrency for more than you paid for it. Regardless of this shared goal, the two strategies are very different in approach. Here’s how:
Contrary to what some people think, investment is not a way to get rich overnight. Investment accumulates wealth, not short term profits. Investment is when someone buys cryptocurrency with the hope that it will increase in value over time. When someone decides to invest in cryptocurrency, they do not plan to use or spend it anytime soon.
Investors seek to gradually build profit through buying and holding assets for a long period of time. In the crypto world, this is called hodling. Investment in cryptocurrency is unusual in the sense that serious investors tend not to pay much attention to news or current affairs regarding the markets on a day-to-day basis. Investors are prepared to hold their cryptocurrency through several price cycles. This means that if the prices go down, investors might not sell.
The thinking behind this is that the price of most assets tends to rise over time. Cryptocurrency investors have two main reasons for holding tokens. The first is that investment has the biggest rewards for early movers.
This means that people who buy before the masses pay lower prices and earn larger profits when they eventually sell. The second is that they believe the value of Bitcoin and other cryptocurrencies will climb even higher as they begin to be adopted by mainstream finance and start to be accepted as payment by prominent companies.
Price changes do not affect investment that much short term. But investors still need to think carefully about the risks involved. Like with all financial strategies, there is a chance that the initial investment will not grow in value or may even be lost.
The world’s greatest investors often eschew the method of trying to “time the market,” instead opting for smaller and sustainable investments over a longer period. The good news is that the same applies for cryptocurrency.
Investing legend Warren Buffett has a tip for budding investors: It’s not about when you buy, it’s about how often. And that’s where Dollar cost averaging (DCA) comes in. DCA is one of the most reliable investment strategies of all time and can be tailored to suit any budget, from penny-pinchers to plutocrats.
DCA is extremely simple and perfect for investors looking to make their first crypto investment. All you have to do is decide how much you can afford to invest and then buy at regular intervals.
Nuri’s new savings plan is low maintenance, but puts you in control. Monthly savings plans are available for both bitcoin and ether, all you have to do is select how much to invest and the day to kick start it all. This way you can keep your investments running in the background, while you focus on life.
- Investing grows wealth over time, not short term profits
- Investment is easier to manage because short term price changes are not important
- Fewer taxable events
- Investors play the long game, it is not for the impatient
- Sometimes the wait is not worth the reward
- You need to have a degree of knowledge in order to know what to invest in.
The goal for most traders is the fast accumulation of wealth. While investment is a slow, measured approach, trading is often a fast-paced and high-octane way to make money. Trading is usually conducted on a short to medium term basis. Traders follow news, events and market activity at all hours of the day to look for indications that Bitcoin’s price could change. Because the cryptocurrency markets can be volatile, traders encounter more risk than cryptocurrency investors.
The aim of bitcoin trading is to buy bitcoin when its price is low and sell bitcoin when its price is high. To really break it down, buying bitcoin at a low price means that you pay a low amount of fiat currency, such as dollars or euros, for a high amount of bitcoin. Selling bitcoin at a high price means that you receive a high amount of fiat currency for a low amount of bitcoin.
Trading mostly involves medium-sized trades, but larger trades also occur. Bitcoin trading adds a new dimension to currency trading with its dynamic force and the volatility it experiences as it settles into the global market. The volatility (ups and downs) surrounding bitcoin trading creates the possibility to benefit from high yields.
Benefits of cryptocurrency trading
- Possibility of earning large profits in a short period of time
- Traders can start buying and selling cryptocurrency with a small amount of funds
- Bitcoin trading is possible 24/7
Disadvantages of cryptocurrency trading
- Market volatility increases chances of not making a profit or losing money
- Traders need to understand their risk tolerance
- Frequent buying and selling cryptocurrency for other cryptocurrencies and from cryptocurrency to fiat triggers more taxable events than investing