IMAGINE, you are meeting your school-time buddies after a long time, and between all the catching up, one of your friends mentioned his investments in cryptocurrencies and how much cool stuff they are.
Fascinated, you started enquiring about how he is doing it and ways to make money in cryptocurrencies.
Sensing the excitement about cryptocurrencies, your friend advised you to start investing rather than trading like many other crypto investors do when they start.
But, now one thing is confusing you more, what’s the difference between cryptocurrency investing and trading and why he advised choosing the former.
Here, you are not alone; many others find it challenging to get the difference between investing and trading. Therefore, to make things easier for you, this guide will simplify both the terms and the key differences between the two.
Let’s walk you through it.
Cryptocurrency investing refers to the activity of allocating money to a crypto asset with an expectation that it will grow in value over time. Primarily, it’s a passive style of investing.
The primary objective of investing is to create wealth by holding fundamentally sound cryptocurrencies for an extended period, ignoring all the short term volatility in the market.
Although cryptocurrencies are a highly volatile asset class, which may affect the returns in the short term, in the longer term, the risks tend to smoothen out and result in higher returns.
For example, Warren Buffet is one of the most successful investors and is known for his value investing skills. What makes his investing style unique is his ability to spot great businesses at cheap valuations. And, when he decides to invest, he intends to hold it forever.
Another example from the cryptosphere. In April 2013, two brothers, Cameron Winklevoss and Tyler Winklevoss, famously known as Winklevoss twins, invested $11 million in Bitcoin at little less than $10 per coin. Despite the volatility and roller coaster ride of Bitcoin, they held onto their investment because they believed in the technology and its real value. Now, their Bitcoin investment is worth over $6 billion. Amazing, right?
Therefore, in crypto investing, the approach should be to choose cryptocurrencies based on their fundamentals, not past price performance. For example, technological superiority, real-world use cases, tokenomics, rate of mainstream adoption, etc. And, you should always keep a long term view.
On the other hand, cryptocurrency trading is a purely short term play, where one attempt to profit from the short term volatility/price fluctuations in crypto assets.
In trading, the duration of holding cryptocurrencies can range from a few days, hours to a few minutes. There is no defined holding period. Once trading objectives are met, you need to exit the trade.
Compared to investing, trading involves higher risks of losing capital as the price of crypto assets might go high or low in a short duration. Trading in cryptocurrencies needs real skill to profit consistently. You need to manage and monitor your trade positions actively. If done rightly, you stand a chance of earning higher returns. Missing out on any evolving price trends can lead to huge losses.
To master the art of cryptocurrency trading, you need to know technical analysis and different trading strategies.
Crypto Investing vs Crypto Trading
By now, you must have understood how trading and investing are different worlds apart. The two things that differentiate a trader from an investor are their risk-taking ability and attitude.
The following breakdown of different items in the table format will help you understand clearly.
Crypto Trading or Investing: Which is Suitable for You?
We are going back to our story, from where we started. Remember, you were meeting your school time buddies and discussing cryptocurrencies.
We hope you are not confused between cryptocurrency investing and crypto trading anymore. Adding, choosing between investing and trading depends on your risk tolerance, understanding of the market, skills, and ease with the approach.
As a beginner in the crypto market, it is always a good idea to start by investing rather than trading in the first place. Therefore, your approach should be to BUY RIGHT and SIT TIGHT.
FAQs on Crypto Trading and Investing (H2)
What cryptocurrencies are worth investing in?
The following features you should look at in a cryptocurrency before investing:
- Superior technological features
- Real-world utility of the cryptocurrency
- Attractive tokenomics
- Higher probability of mainstream adoption
How to trade cryptocurrencies for beginners?
To start trading in cryptocurrencies, you need to first create a trading strategy, then test your trading strategy on a demo account or through paper trading, check its effectiveness under different market conditions, and only after you are confident you can start trading on a live market.
Is Trading Crypto Taxable?
Yes, the profits from trading crypto are taxable.
What to Choose: Crypto Trading or Investing?
As a beginner in the crypto market, you should choose crypto investing. After getting comfortable with investing in cryptocurrencies and getting used to the market volatility, you can consider trading in cryptocurrencies.
Download the CoinSwitch Kuber App to start investing in cryptocurrencies starting at ₹100.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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