Trading Crypto vs Investing in Crypto: What You Need to Know
Cryptocurrencies act as a medium of exchange using cryptography to make sure that transactions are secure, that new units are created in a controlled fashion, and that assets are transferred correctly. As decentralized currencies, virtual currencies are not regulated by governments or financial institutions. Due to this characteristic, they appeal to many investors looking for an alternative to conventional Wall Street investments. However, what is the best option for you when dealing with crypto trading or investing? The following is a brief overview of the topic.
There are two main options when dealing with crypto assets: trading and investing. Each has its strengths and weaknesses. Now let’s take a closer look at each of them.
Trading Cryptocurrencies
As with Forex trading, trading virtual coins involves speculating on the price movement of the particular currency’s price. A profit is made by buying low and selling high, or vice versa.
As opposed to traditional trading in fiat currencies (or those backed by governments), trading of digital money involves speculation on the price movement of digital currencies.
The value of a cryptocurrency can fluctuate significantly due to its volatility of cryptocurrencies. Consequently, they are a prime target for day traders seeking to make quick profits on small price fluctuations.
It’s important to keep in mind, though, that investing in cryptocurrencies carries a high level of risk. Prices might fluctuate significantly up and down due to the market’s extreme volatility. This indicates that there could be both huge losses and benefits.
The Value of Liquidity in Crypto Trading
Whenever you trade any asset, liquidity is crucial. In the case of cryptocurrencies, liquidity is paramount.
Over short periods of time, cryptocurrency prices can fluctuate dramatically, since they are often more volatile than traditional markets.
Consequently, it can be difficult to purchase or sell cryptocurrencies at a fair price when there is such volatility. Purchasing a cryptocurrency may require you to pay a higher price if there is insufficient crypto market liquidity, or you may have to accept a lower price if you wish to sell your currency.
That’s why it’s crucial to select a crypto exchange with a high level of liquidity. A high level of liquidity indicates that there are a large number of buyers and sellers in the market, and all are prepared to trade at close to the current market price. Therefore, liquidity for crypto exchange is a thing of paramount importance for its existence.
Binance and Coinbase are two popular cryptocurrency exchanges that have high liquidity.
Benefits of Trading Crypto
The following are a few reasons why cryptocurrency trading can be beneficial:
Due to the fact that cryptocurrencies are digital, they can be transferred more easily than traditional currencies. In most cases, payments can be made electronically between two or more individuals without the need for a third party, such as a bank or financial institution.
It is also important to keep in mind that cryptocurrencies have a decentralized technology, which means that they are not controlled by governments or financial institutions. In addition to providing some anonymity, this ensures the system won’t collapse if a single point of failure occurs.
Considering the global nature of cryptocurrencies, anyone can use them anywhere in the world. As such, the fact that they can be used for international transactions makes them perfect for international trade.
In comparison with traditional currencies, cryptocurrencies tend to be more volatile, causing their value to fluctuate quite dramatically. As a result, traders can profit from these fluctuations if they are able to take advantage of them.
The last aspect of trading cryptocurrencies is that you can use it to diversify your portfolio and reduce risk. Nevertheless, despite their higher returns, they also carry a higher level of risk than other asset classes. Thus, they can assist you in balancing your portfolio and reducing your overall exposure to risk.
The Dangers of Trading Crypto
There are risks associated with cryptocurrency trading. There has been a lot of money lost by traders of digital currencies due to their volatile prices.
The following are several potential dangers to consider before you begin trading cryptocurrencies:
1. Volatility
We have already discussed how unstable the prices of digital currencies are. As a result, their prices are subject to fast ups and downs, and if you’re negligent, you could easily lose money.
2. Scams
Concerning cryptocurrency, there are numerous scams. A good illustration is the innumerable false ICOs (initial coin offerings) and the huge sums of money investors lost by investing in them.
3. Hacks
Cryptocurrencies can be hacked since they are kept in digital wallets. Therefore, there is a chance that hackers will take your coins if you put them in an online wallet or exchange.
4. Regulation
The majority of countries do not regulate cryptocurrency at the moment. Therefore, you won’t be protected if you lose money.
5. Taxes
You can be required to pay capital gains tax if you make money from trading cryptocurrency. Before you begin trading, you should be aware of this.
Investing in Crypto
Trading cryptocurrencies is typically considered short-term, but you can also buy and hold them long-term. It is called investing in cryptocurrencies, and if you do it correctly, it can prove to be a lucrative endeavor.
When dealing with investing in digital assets, you have to approach it in a completely different way than when you are trading. It is important to remember that, when you invest in the cryptocurrency market, you are not necessarily concerned about the day-to-day fluctuations in price since you intend to hold the coins for a long time.
In the long run, this can be a very lucrative way of making money if you believe that the price of a particular coin will increase. Nevertheless, you should remember that investing entails risk, and you could lose money if the market declines.
The following are some things you should consider when investing in digital assets:
1. The risks
The business of investing in digital currencies is risky, as we previously mentioned. They have highly volatile prices, which means it is possible to lose money when you trade them. So, prior to investing, ensure that you are familiar with the risks involved.
2. Your investment goals
Why are you interested in investing in digital currencies? Do you want to invest for short-term gains or for long-term growth? By understanding your investment objectives, you will be able to select the currency that is most appropriate for you.
3. Your risk tolerance
Would you be willing to take a certain amount of risk? Due to the high risk associated with crypto investments, you should only invest in crypto assets that amount you are willing to lose.
4. Your time horizon
What timeframe do you need to meet your investment goals? The ability to take more risks is available if you are investing for the long term. However, if you wish to accomplish your goals quickly, you will need to take more precautions.
5. The fees
Most exchanges and digital wallets charge fees for investing in digital currencies. Thus, before you begin investing, it is important that you understand the fees involved.
It’s crucial to conduct research and comprehend the risks associated with any investment before deciding to invest. This is particularly true for assets like cryptocurrency, which are very risky and volatile. Nevertheless, if done properly, investing in digital currencies can be a great way to gain money. Just be certain that you are aware of the risks before beginning.
The Significance of Liquidity When Investing in Cryptocurrencies
When investing in digital currencies, liquidity should be considered as one of the most important factors.
Some coins are easier to buy and sell than others because they are more liquid. Since Bitcoin is the largest cryptocurrency and the most popular, it’s safe to say that Bitcoin liquidity is higher than that of most digital assets.
The fact that one coin is more liquid does not necessarily equate to the fact that it is a better investment. In order to determine whether a coin fits your portfolio, you still must do your own research.
Digital currencies with a large market capitalization and multiple exchanges are what you should look for in general. It is clear from these factors that there is enough interest from buyers and sellers to maintain a stable price.
In the event that you want to cash out your position quickly, you may have difficulty due to a lack of liquidity. This means that you may have to wait a longer period of time before finding a buyer willing to pay the price you require if you invest in a coin that is less popular.
Advantages of Investing in Crypto
A digital currency investment might be a good idea for several reasons.
To begin with, crypto assets can be highly profitable. Bitcoin, for instance, has surged by more than 1,000% in the past year. Cryptocurrency Ethereum, the second-largest by market capitalization, has gained more than 3,000% of all its existing history.
There is no guarantee that past performance will repeat itself in the future, of course. Nevertheless, if you look for an asset class that has the potential to produce significant gains, crypto is well worth considering.
The fact that digital currencies are relatively new means that there is less competition between institutional investors when dealing with investing in them. It has been a while since large institutions have been actively involved. The majority of people who buy crypto are individual investors like you and me.
In the short term, however, investors have an opportunity to get in on a potentially revolutionary asset class before it changes.
Aside from being time-efficient, investing in cryptography does not require much effort on your part. When you have completed your research and determined which coins to purchase, you place your order and let the process take its course. Due to the fact that you are not interested in short-term gains, you do not need to monitor charts and candles all the time.
Furthermore, due to the fact that digital currencies represent a relatively new asset class, there is still a lot of uncertainty regarding their future. As a result, prices are likely to increase significantly in the future if the industry continues to develop.
Disadvantages of Investing in Crypto
Prior to investing in digital currencies, there are risks to be aware of.
The first is that digital currency is incredibly unpredictable. As a result, prices are subject to quick upswings and downswings. For instance, from its peak in December 2017 to its trough in February 2018, the price of Bitcoin dropped by more than 50%. From its all-time high, reached in January 2018, Ethereum has fallen by more than 70%. Bitcoin’s price has dropped significantly, from $69,000 to $18,000.
Investing in digital currencies may not be suitable if you are unable to handle the volatility.
Cryptocurrency industry regulation remains largely unregulated, which is another risk. The lack of protections means that if anything goes wrong, there will be no recourse. As an example, you are unable to obtain compensation if your coins are lost as a result of a hack or scam.
As with any investment, digital currencies require a certain level of technical expertise. If you want your coins to be stored safely and securely, you may want to learn how to do so. In the absence of such precautions, you may risk losing your investment to hackers or thieves.
As a final consideration, there is always a risk that the entire industry could collapse. There is a possibility that we will witness a shakeout in the market as weak coins and projects are forced to exit the market. In spite of the fact that such a scenario may seem unlikely, it is vital to keep in mind that the crypto industry is still in its infancy.
So, Should You Trade or Invest in Crypto?
The answer will very much depend on what level of risk you are willing to accept and what goals you pursue in investing.
Trading digital currencies can be for you if you’re hoping to make some quick money. However, crypto assets investing can be a superior choice if you’re aiming to create a long-term portfolio.
Of course, you are not required to pick between the two. You can carry out both! Just be sure to conduct your own research before investing or engaging in digital currency trading.
