When it comes to the world of cryptocurrency, there are many different ways you can choose to participate. You can buy and hold coins like Bitcoin and Ethereum, or you can trade them on exchanges for a profit. Here we will explore the pros and cons of each method, so you can make the best decision for your individual needs!
One of the key distinctions between trading and investing is the time horizon. When you are trading crypto, you are looking to buy low and sell high in a much shorter timeframe than if you were investing. This means that you will need to be glued to the market, always ready to take advantage of any price changes. Trading crypto is a very active approach to making profits.
The most popular trading strategies used in cryptocurrency markets are:
Investing, on the other hand, generally has a much longer time horizon. You are not as concerned with day-to-day or even month-to-month fluctuations. Instead, you are looking to buy crypto and hold it for years, or even decades. This means that you can afford to take a more hands-off approach, checking in on your investment from time to time.
Another key difference is the amount of research and analysis that goes into each method. When you are trading crypto, you need to be up-to-date on all the latest news and developments in the market. This means regularly reading articles, listening to podcasts, and perhaps even attending events and meetups.
Investing in crypto also requires research, but it is done much less often. Cryptocurrency investors typically perform a type of fundamental analysis before investing. In traditional stocks, fundamental analysis involves studying the financials of a company, such as its income statement, balance sheet, and cash flow statement. However, studying the fundamental value of a crypto asset is much trickier. There are no earnings or cash flows to analyze. Instead, you need to try to determine the fair value of a coin by looking at factors such as the team behind it, the technology, the adoption rate, and overall market conditions. Once you have found a project that you believe in, you can set and forget your investment for the most part. You may need to stay up-to-date on the latest news if you are worried about a major price change, but other than that, you can relax and let your money grow.
This leads us to the next point, which is the time commitment required for each method. Trading crypto can be a full-time job, especially if you are doing it professionally. Some people make a living by day trading crypto and other assets.
Investing in crypto is generally much less time-consuming. As we mentioned, you can do your research ahead of time and then just check in every so often to see how your investment is doing.
Another key consideration is risk tolerance. Trading crypto is a very risky proposition. Prices can swing wildly from one day to the next, and there is always the possibility that you could lose everything you invest, particularly if you use leverage. Adopting a good risk management strategy will help you avoid losses and remain profitable over the long term.
Investing in crypto is also risky, but the risks are generally more long-term. For example, you could lose money if the project you invest in fails to deliver on its promises. Or, the value of your investment could go down over time if the overall market shrinks. To mitigate the risks of investing in crypto you should elaborate a portfolio management strategy and stick to it.
To trade crypto you will need to have a certain amount of capital available. The exact amount required will vary depending on the size of your trades, but you will generally need at least $1,000-$2,000 to start with. Small account holders can use leverage to increase their effective trading capital. For example, if you have a $1,000 account and you use a 10:1 margin, you can trade up to $10,000 worth of crypto. This allows you to make bigger profits on your trades, but it also increases your risk. If the market moves against you, you could lose all of your money very quickly.
Investing in crypto does not require as much capital. You can get started with just a few hundred dollars, and many investors choose to dollar-cost average. Even if you don't have a lot of money to invest initially, don't worry – you can still get involved in the market.
One perk of trading is the ability to use leverage to increase your profits. Leverage is, however, a double-edged sword. Using leverage also increases your risk. As mentioned before, if the trade goes against you, you could lose more money than you originally invested. Markets can quickly turn and force liquidation cascades that can wipe up millions of dollars in value. So, it is important to only use leverage if you are comfortable with the risks involved.
Crypto investors have some perks available to earn passive income from their holdings. These perks include airdrops, yield farming, stacking, and interest-bearing accounts.
Airdrops are when a project distributes free tokens or coins to its supporters. Airdrops are usually a marketing strategy to increase awareness of the token, but why say no to free money? Token holders are given a small amount of the token for free or in return for a small favor, such as retweeting a company's message.
Yield farming is a way to earn cryptocurrencies by loaning crypto assets to DeFi platforms. Yield farmers get to choose how long they want to contribute their assets. This process, which could last a few days or up to a couple of months, allows users to earn fees daily. Though this is a popular option to earn passive income from your crypto holdings, it is not without its risks.
Staking is the practice of committing your cryptocurrency assets to a blockchain network to validate transactions and support the network. It's utilized by blockchain networks that employ the proof of stake (PoS) consensus method. Users get compensated interest on their stake while they wait for block rewards to be distributed. It also has its set of risks, though generally considered a less risky approach than yield farming.
Cryptocurrency interest-bearing accounts allow you to store your digital assets and receive a percentage of that asset as interest. Behind the scenes, the company offering the interest account may trade, lend or participate in staking using your deposit, passing you a portion of the rewards they earn. Once thought of as a generally safe approach to earning passive income on your investment, this thesis crumbled down when the giant Celsius network went bankrupt amidst a market meltdown. When choosing an interest-bearing account you must research the strategies that they use to generate yield (I personally like Midas and have been using them for many months now).
Finally, let’s look at the potential return on investment (ROI) for each method. When you are trading crypto, your goal is to buy low and sell high as often as possible. If you are successful, you could see a very high ROI. However, it is important to remember that there are no guarantees in the world of trading. In reality, due to the high risk of trading, most traders end up losing money. However, with a well-tested trading strategy and a well-defined risk management plan you can increase your chances of making money considerably.
Investing in crypto, on the other hand, generally has lower ROI than (successful) trading. This is because you are not looking to sell right away. Instead, you are hoping that the value of your investment will go up over time. While this could certainly happen, it is important to be realistic about the potential ROI and the time horizon required when you are investing. Crypto investors can turn to airdrops, stacking, yield farming, and interest-bearing accounts to increase the ROI of their investments.
When it comes to choosing between trading or investing, there is a third option, which is the trading-investing hybrid approach. This approach involves the use of wide-range grid bots that make small but consistent profits automatically over weeks or months (that is, if you set up a wide enough range).
This approach has the benefit of a higher ROI than investing while requiring very little time commitment. In addition, it is a much less risky approach than pure crypto trading. Wide-range grid bots are an excellent choice for beginners and experienced crypto users alike.
Now that we have looked at the key differences between trading and investing in crypto, it's time to decide which one is right for you. If you are the type of person who is always monitoring the market and enjoys the challenge of making trades, then trading might be the right choice for you.
On the other hand, if you are looking to invest in crypto for the long term and are comfortable with holding your assets for a while, then investing might be a better option.
It doesn't need to be black and white though, you can do both at the same time. You can allocate a portion of your capital to trading and another portion to investing. This is a great option if you are just starting and would like to test the waters before diving in.
You can also go for the hybrid approach and put your investments to work with grid bots, getting the benefits of investing and trading at the same time.