Investing vs Trading Cryptocurrencies: What’s The Difference?

Is there really a difference between investing and trading? Yes, there is, although it can be difficult to tell the two apart. On the surface, trading and investing can look very similar. After all, both investors and traders buy and sell cryptocurrency assets. That being said, the motivations of investors and traders are distinct and this affects the kind of cryptocurrency assets they buy and how long they hold on to these assets. Here, we’ll discuss what differentiates an investor from a trader in cryptocurrency’s volatile market.

Long Term vs Short Term

This is perhaps the most obvious difference between the two. Investors of cryptocurrency assets which have long term value. Technological advancements, the potential of new products, and other factors could help investors decide if a crypto-project is worth investing in.

While one could consider their trading activities as investing, for me, the difference between trading and investing has more to do with time. When you invest in something, you are looking to grow your money…
– Josh Brein, Brein Wealth Management

Typically, investors are involved in very little selling and are ready to hold on to their assets for many years. Warren Buffet, a renowned long-term investor, had famously said that if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes. Investors like Warren Buffet, are willing to “wait it out”. They see the potential of the blockchain technology and understand that it will take time before it can overthrow traditional systems.

Traders, on the other hand, approach buying and selling with a very different mentality. While investors are in it for the long haul, traders are looking to reap short term gains and cryptocurrency’s upward and downward cycles provide ample opportunities for traders to buy and sell. Traders are not as interested as a crypto-asset’s long term value, rather, they’re interested in the hour-to-hour price fluctuations. Typically, traders are looking to buy crypto-assets cheaply and sell them when the price rises.

Appetite For Risk

Since investors intend to buy assets and hold them for many years, investors are more risk-averse as compared to traders. Investors are not involved in multiple transactions in a day and are less concerned about daily price fluctuations. Since price tends to appreciate over time, there is a lesser risk when you hold on to an asset for a longer period of time.

On the other hand, traders thrive on market movements and price fluctuations to make a profit, hence, have a greater appetite for risk. Making multiple trades a day can reap great profits for traders, however, it can also bring great losses. Since traders are involved in speculation, there is a chance that their transaction was on the wrong side of the bet.

Tools For Analysing Cryptocurrencies

As mentioned earlier, investors are interested in the long term valuation of crypto-assets while traders are more concerned with short term price fluctuations. Because of this, the way investors analyse and decide whether a coin is worth buying will differ.

To evaluate whether a coin is worth investing, investors will be concerned about its intrinsic value and examining other financial and qualitative factors. Is there a real-world problem that a crypto-project is trying to solve? Is there a high market potential for this coin? Does the company have a clear and sound marketing strategy? These are some questions that investors will ask themselves to determine if a coin has high intrinsic value.

Traders are less concerned about the potential of coins. Rather, they are only concerned about its price. Hence, traders will look at the data of a coin’s prices and use it to predict future prices. Charting lines and trends are some ways which traders will adapt to help them forecast the best time to buy or sell a particular coin.

Generally, the cryptocurrency market is considered quite volatile, and whether you’re investing or trading, there is still a level of risk involved. That being said, traders and investors enter the cryptocurrency market with different motivations and abide by different selling patterns. Knowing the difference in trading and investing can help you understand how different individuals interact in the market and perhaps give you an idea of how you might want to participate as well.

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