Investors and traders who are just starting out often look to the legends for ideas. Warren Buffett and Ray Dalio are known for making money from their investments over the long term.
Traders like George Soros and Paul Tudor Jones, on the other hand, use buying and selling strategies that happen more often. This is what trading is. These experts have made a living from traditional stock markets and established guidelines that investors in newer markets, like cryptocurrencies, aspire to meet or beat.
Investing and trading are very nearly identical things that can be done by the same person. The main difference is in the kind of plan each method uses. Both trading and investing in cryptocurrency are ways to make your money grow, but they do so in different ways.
In this article, we’ll look at the main differences between investing in cryptocurrency and trading it so you can decide which one is best for you.
WARREN BUFFET VS GEORGE SOROS
Before we get into the details, let’s look at two well-known giants who have a lot to do with our topic. One is a successful investor, and the other is an iconic trader. Both have made a lot of money in their lives, but they did it differently.
Warren Buffet is known for being a good long-term investor who focuses on value. Value investing means buying investments or stocks that are selling for less than what they are really worth.
Buffett knows how to find good companies and has bought, sold, and invested in hundreds of them throughout his life. Brands like Coca-Cola, Apple, American Express, and The Washington Post are among the well-known investments he has. Buffett owns Berkshire Hathaway, a giant corporation worth close to $500 billion and the world’s third-biggest public company. Buffett’s value-investing strategy is for long-term investments because it takes time for the fundamental value of an asset to go up.
On the other hand, George Soros is a famous trader known for trading in a way that goes against the status quo. He once “broke the Bank of England” by betting against the sterling pound and making more than $1 Billion on that trade alone. Not only that, but Soros went out again and bet against the currencies of Thailand (Baht) and Malaysia (Ringgit) in 1997, which made him hundreds of millions of dollars. But it didn’t come for free. Soros was blamed for starting the Asian Financial Crisis because of what he did.
Soros also ran the Quantum Fund, one of the world’s most successful hedge funds. For 30 years, investors got a mind-boggling 30% return on their money.
Invest VS Trade: What Are The Differences?
Going back to the main point, what are the major differences between trading and investing?
Investing and trading go hand in hand but sometimes, the terms are used loosely and interchangeably. After all, traders can invest, and investors can buy and sell assets through trades. It can be tricky to determine the differences between investing and trading. We’ll compare the different options based on a few key points so we can choose the best one.
Investment Timeline
Investing: The time frame is one of the most important differences between trading crypto and investing. Investing in cryptocurrencies is usually done over a long period of time. Investors or “HODLers” think that their coins will be worth something in the long run. They make it harder to trade on short-term changes in the prices of cryptocurrencies.
A typical investor will buy a cryptocurrency asset based on its long-term potential, with the hope of selling it for a nice profit a few years later.
Trading: Trading in cryptocurrency is a short-term plan. Trading uses the short-term volatility of price changes in crypto assets to make money. Most trading periods last anywhere from minutes to days.
Crypto trading takes a lot of work, but the rewards come faster. Due to the high volatility of the cryptocurrency market, those who work hard (and maybe have a little luck) can make a lot of money trading cryptocurrencies.
There are many kinds of traders, such as:
- Scalpers: Scalpers may be the most active traders because they buy and sell coins many times a day in order to “scalp” or make a small profit on each trade. The trades can take as little as a second or a few minutes. Scalpers count on making many small profits throughout the day to make a lot of money at the end of the day. Scalpers usually make dozens or even hundreds of trades in a single day.
- Momentum Traders: In momentum trading, trades are made based on the strength of current price trends in the hope that the “momentum” will keep going in the same direction (either upwards or downwards trend). Momentum traders try to “ride the wave” by taking short-term positions in a particular market direction.
For example, they buy low in an uptrend and sell when prices start to lose momentum, or they sell high in a downtrend and buy back low. To do this, you need to know a lot about the market and have a good sense of when to act. Momentum traders can be held anywhere from a few hours to a few weeks.
- Day traders: These traders make trades during the day and close out their positions at the end of the day. Most of the time, day traders don’t really hold any positions overnight. Each trade could last hours or minutes, and traders would have to keep an eye on how prices changed throughout the day to take advantage of price differences.
Trade Frequency
Another big difference between investing in crypto and trading is how often trades are made. The number of trades and the length of investment go hand in hand. The number of trades is less often the longer the investment period.
Investors: As expected, cryptocurrency investors don’t trade with their assets very often. Instead, they tend to hold on to them. These investors aim to target goals that may take a few years to reach.
Traders: On the other hand, people who trade in cryptocurrency do so often. This is because they are always watching how prices change on the market for ways to make money, no matter how small. This high frequency could make trading more profitable, but it is also riskier and needs to be watched all the time.
Risk Evaluation
Cryptocurrencies are volatile and high-risk because of this. If you want to invest in cryptocurrency, you need to know what the risks are. The amount of risk an investor is willing to take is called their risk tolerance. Keep in mind that a higher risk could also mean a bigger payoff.
Even though both trading and investing in cryptocurrencies are known to be risky because of their high volatility, investors and traders can be told apart by how much risk they are willing to take.
Investors: In general, people who invest in cryptocurrencies may be less willing to take risks because they are more comfortable leaving their money alone. The idea is that the ups and downs of a coin’s price will even out over time, but the price will still go up over time.
Traders: Traders, on the other hand, tend to thrive on the risk because they have to take risks often when trading. Traders can make money by taking advantage of how volatile crypto prices are in the short term. But if they bet on the wrong horse, they could also lose a lot.
Annual Returns Or Growth of Capital
When it comes to performance, traders and investors can both be judged by their annual returns or by how much their capital has grown. An investment’s annual return shows how much it has grown each year.
Investors: Investors with portfolios that don’t change or update as often can usually figure out their annual returns by leaving out the complicated factors. The real difference in how much money grows depends on which investments and trades are made.
Traders: Traders have to think about transaction fees because they make so many trades, which can lower their profits. Because they’ve made so many trades, it may take a lot more math to figure out how much money they’ve made.
Expenses and Capital Required
There are two main types of costs when trading digital currencies: exchange fees and network fees. For services like trading, deposits, withdrawals, liquidations, and other transactions, cryptocurrency exchanges charge fees. The miners who keep the networks safe get the money from network fees.
Different exchanges charge different fees for trading cryptocurrencies, but on average, most exchanges charge between 0.1% and 1% per trade. For example, the maker fee for Bybit is -0.025%, while the taker fee is 0.0755%.
When you trade crypto, you’ll have to pay more transaction fees than when you invest because you’ll be trading more often. Traders may also have to worry about capital gains tax, which is a tax you pay when users sell an asset for more than they bought it for. Most of the time, the tax rate on short-term capital gains is higher than the rate on long-term gains, which is what most HODLers pay.
For both trading and investing, the amount of capital you need depends on how much you want to put in. HINT: You don’t really need a lot of money to start trading or investing in crypto.
Method Of Analysis
The type of analysis investors and traders do is probably the most critical difference between the two groups.
Investors: Since investors bet long-term on a coin’s value, fundamentals are a vital part of figuring out if a currency is viable and has potential. Fundamental analysis for cryptocurrencies is very different from fundamental analysis for stocks.
This is because there are no public financial statements for any cryptocurrency project. Rates of merchant adoption and general cryptocurrency usage are two things that can be used to evaluate the basics of a cryptocurrency.
Traders: Since traders care more about predicting where prices will go and where they will be in the market, technical analysis is their primary tool. Technical analysis is a way to predict what prices will be in the future by looking at past prices and using different types of price indicators and charting tools. Short-term price changes are often random, so traders need to use technical analysis to time the market and make money from the price fluctuations.
Key Takeaway
The cryptocurrency market is both exciting and risky, so be careful what you do. Before you decide which method is best for you, you should know the main differences between investing and trading.
In the end, smart investor usually knows the different parts of market cycles so that they can use the market conditions to their advantage and HODL in the hopes that the asset’s price will go up.
On the other hand, traders tend to make money from short-term price changes in a bull or bear market. Still, both investors and traders need to use a good risk management system or backup plan to get out of the market when it moves in the wrong direction.
