July 24, 2023

Investing vs. trading cryptocurrencies – what is the difference?

When it comes to cryptocurrencies, individuals choose various methods, strategies, and approaches to acquire their tokens.

While many of these approaches have similarities, they also have distinct differences. One comparison has been a popular talking point in the financial industry long before cryptocurrency existed.

Investing vs. trading in cryptocurrencies, what is the difference between the two? Is there any difference to begin with?

The two terms, investing, and trading, get thrown around together a lot, thanks mainly to the stereotype placed on them by the mainstream media (like Hollywood) that use them interchangeably.

Whether it’s a movie about the traders on Wall Street, investment bankers, or personnel, they are treated as if they are the same but not.

This article will help define the traits of investing and trading cryptocurrencies.

The Similarities

To understand how these are different, you must first understand how they are the same.

To trade, one must invest. Both acts require one to deploy capital into an asset with the same common goal of making profits off that “investment.”

Buy low, sell high – the desired outcome to achieve by both investors and traders.

Both roles usually require time, due diligence, planning, and discipline. Sacrifice to achieve the goal of financial freedom is the “game” both investors and traders are a part of.

They both risk losing not only their capital but also their time, their emotions, energy, and so much more. With so much in common, it may not be surprising to learn that these two share a similar mindset.

Investing and trading can be compared to a marathon that is won through determination, focus, and the will to succeed.

Where Things Start to Differ

While trading technically invests, “traders” are usually placed in a different category from your investor as it is seen as more of a niche “trade”….

Investors usually make purchases and sell with a long-term outlook in mind. Their investment time horizon (the time they intend to stay invested in assets and not need to take money out) usually spans over the years.

It’s common to see investors searching for assets that pay smaller but consistent, realistic, and sustainable returns.

Investors tend not to focus so much on short-term price movements as they know they are in it for the long haul.

On the other side, traders are more involved in their positions. While there are different types of trading (day trading, swing trading, DCA – short for dollar cost averaging), most trading methods occur across a smaller time scale than the position investors enter.

Again, a trader is technically an investor since they are investing their capital into financial security. Still, they may look to enter and exit a position in a few weeks, days, hours, and sometimes even minutes. The goal for trading is to stay in positions for the least amount of time possible while attempting to extract as much profit out of the trade.

Investment Approach

Investing in cryptocurrencies may be done periodically with set or similar amounts. For instance, an individual may invest $50 from every paycheck into cryptocurrencies. For some, this may be weekly, monthly, or across longer time frames.

When trading cryptocurrencies, a trader may fund their trading account with a set amount of capital. Still, the goal is only to fund that account once and periodically withdraw profits achieved with the initial investment amount.

Once entered into a position, a trader is either constantly tracking the trade to ensure there is no suitable time to exit or, at the very least, sets a stop loss which would automatically sell the position once a certain price level is met.

An investor, on the other hand, is free of such strict price movement ranges. Should a cryptocurrency decline in price, instead of exiting the trade, an investor may look at the asset and ask themselves if now is a good time to buy more on a price dip or wait.

A worst-case scenario for a trader is losing money on a trade that didn’t go as planned, while one of the worst-case scenarios for an investor is getting stuck in an investment for longer than you intended. The investors’ motto is time in the market rather than trying to time the market.

High-Level Strategy

Dollar Cost Average, or DCA, is purchasing a specific cryptocurrency consistently over time to gradually and near seamlessly grow your holdings. Instead of debating how much capital they can afford to (or are limited to) place in one trade, investors tend to budget amounts out of their income allocated strictly to purchasing cryptocurrencies – they treat it as another form of a 401k.

For decades, it has been the staple tradition for working professionals to leverage their employers 401k benefits. It has been publicized as an action intelligent investors make, and ever since the emergence of crypto, those same professionals have been applying the traditional 401k investing methodology to their crypto holdings. 

If done responsibly, money set aside by investors allows them to continue living their lives, seldom having a financial impact. At the same time, they grow their position sizing in the markets simultaneously.

While they will indeed have underlying macro strategies, their overall strategy can be best summed up or compared to a long-term DCA.

Traders’ strategy, even on a high level, can get much more complicated (in a good way) than the investors’ high-level strategy. The tools used, such as automated trading bots, trading signal groups, trading indicators, and more, come from the masses for traders.

The path to becoming a successful trader versus a successful investor is also very different. Trading can be seen as an art that takes time and experience to master. While becoming an expert investor is no walk in the park, the risk or cost of learning lessons with this approach may have less impactful consequences.

Some tools can help facilitate traders in learning, such as paper trading. Paper trading is a real-time trade simulator that mirrors the market and allows traders to place trades, but they are not live. This will enable traders to get as much experience in trading life as possible before stepping out to do the real thing themselves.

Level of Commitment

As mentioned before in the similarities, trading, and investing share a lot in common, along with the lifestyle choices that usually come with this venture.

But trading differs from investing in this area mainly due to the level of commitment it takes, especially at first, to learn, practice and eventually become a successful trader effectively. Those serious about treating cryptocurrency trading as a primary source of income must engulf themselves in content, reading, listening, practicing, and testing as they progress.

Most take training courses that last weeks, if not months long, and sometimes receive one-on-one mentoring. Trading is just like learning to speak and adapting to a new language – going through the “checklist” as a trader becomes a daily routine.

Investing, on the other hand, while due diligence, research, and risk are still involved, one usually chooses a certain number of coins to invest in and does so once they have the capital.

Cryptocurrency investors can also be heavily involved in crypto or with a specific project. Still, their main philosophy is buying and holding, not trading to flip and increase capital and or position sizes.

Traders vs. Investors; One in The Same

The difference between investing and trading cryptocurrencies lies in the time horizon, approach, and risk tolerance. Investors embrace a long-term vision, focusing on the fundamentals of their chosen cryptocurrencies. They are willing to weather short-term market volatility. Traders seek to profit from short-term price movements, employing technical analysis and risk management strategies to maximize gains while minimizing losses.

 As with any financial endeavor, individuals must consider their financial goals, risk tolerance, and level of expertise before engaging in cryptocurrency investing or trading. Both approaches have the potential for substantial gains, but they also come with challenges and risks. It is essential to conduct thorough research and seek advice from financial professionals to make informed decisions in the dynamic and ever-evolving world of cryptocurrencies.

Passive investing, or making it a part-time hobby that plans on keeping up with and adapting lifestyle-wise, has pros and cons. Still, as long as you’re involved in cryptocurrencies and striving to hone your craft or “trade, ” you are in a great position!