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In the world of cryptocurrency, you can choose to participate in many different ways. You can buy and hold coins like Bitcoin and Ethereum or trade them on exchanges for a profit. Here we will explore the pros and cons of each method so that you can make the best decision for your needs!

The differences between trading and investing in crypto

Time horizon

One of the key distinctions between trading and investing is the time horizon. When trading crypto, you want 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:

  • Scalping: Scalping is a trading strategy where traders buy and sell coins in-between minimal price movements to make small profits from each trade. Each position is typically held for only minutes or seconds before moving on to the next trade. They usually make many trades daily, potentially adding up to a nice profit at the end of the day.
  • Day Trading: Day traders close deals within a day and seldom keep positions overnight. They monitor the market all the time to profit from intraday price changes. Each trade lasts anywhere from minutes to hours.
  • Momentum: Momentum traders enter the trade while the price is trending upwards or downwards, and exit as soon as the trend changes. The goal is to take advantage of market momentum to make profits. This type of trading generally requires the ability to read the charts to time the entry and exit and understand how the markets work. A single trade can last anywhere from one hour to several weeks.
  • Swing Trading: This approach takes advantage of a coin's brief-term price fluctuations. Swing traders utilize technical analysis to quickly forecast significant price changes in a specified direction. Swing trades usually last longer than a momentum trades, ranging between a day and a few weeks.

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 and hold crypto for years or even decades. This means that you can afford to take a more hands-off approach, checking in on your investment occasionally.

Research and analysis

Another key difference is the amount of research and analysis into each method. When trading crypto, you must be up-to-date on all the latest news and developments. This means regularly reading articles, listening to podcasts, and attending events and meetups.

Investing in crypto also requires research, but it is done less often. Cryptocurrency investors typically perform a type of fundamental analysis before investing. In traditional stocks, fundamental analysis involves studying a company's financials, 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.

Time commitment

This leads us to the next point: the time commitment required for each method. Trading crypto can be a full-time job, especially if you do 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 and then check in every so often to see how your investment is doing.

Risk tolerance

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.

Capital required

To trade crypto, you must 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 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 and increases your risk. If the market moves against you, you could lose your money very quickly.

Investing in crypto does not require as much capital. You can start with just a few hundred dollars, and many investors choose to average dollar-cost. Even if you don't have much money to invest initially, don't worry – you can still get involved in the market.

Extra perks

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 wipe up millions of dollars in value. So, it is important only to 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 a marketing strategy to increase token awareness, but why refuse 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 few months, allows users to earn fees daily. Though this is a popular option to earn passive income from your crypto holdings, it has risks.

Staking is 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 considered a generally safe approach to earning passive income on your investment, this thesis crumbled when the giant Celsius network went bankrupt amidst a market meltdown. When choosing an interest-bearing account, you must research the strategies they use to generate yield.

Yearly ROI

Finally, look at each method’s potential return on investment (ROI). When trading crypto, you aim 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 trading world. In reality, most traders lose money due to the high risk of trading. However, with a well-tested trading strategy and a well-defined risk management plan, you can considerably increase your chances of making money.

Investing in crypto, on the other hand, generally has a lower ROI than (successful) trading. This is because you are not looking to sell right away. Instead, you are hoping that your investment's value will increase over time. While this could happen, it is important to be realistic about the potential ROI and the time horizon required when investing. Crypto investors can turn to airdrops, stacking, yield farming, and interest-bearing accounts to increase the ROI of their investments.

The hybrid trading-investing approach

When it comes to choosing between trading or investing, there is a third option, which is the trading-investing hybrid approach. This approach involves using wide-range grid bots that automatically make small but consistent profits 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.

Conclusion: which one is for you?

Now that we have examined the key differences between trading and investing in crypto, it's time to decide which 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.

On the other hand, investing might be a better option if you are looking to invest in crypto for the long term and are comfortable with holding your assets for a while.

It doesn't need to be black and white; you can do both simultaneously. You can allocate some of your capital to trading and another to invest. This is a great option if you are 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 simultaneously.

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Gainium is a publisher of financial information, not an investment adviser. We do not provide personalized or individualized investment advice. Cryptocurrencies are volatile investments and carry significant risk including the risk of permanent and total loss. Past performance is not indicative of future results. Figures and charts are correct at the time of writing or as otherwise specified. Live-tested strategies are not recommendations. Consult your financial adviser before making financial decisions.