So, you are reading this article now—and that means you are doing great on your research about Bitcoin and other cryptocurrencies. As you know, in the Bitcoin market, the terms “investment” and “trading” are sometimes used interchangeably. However, investing in Bitcoin and trading it are two very different things. Each one needs certain thinking and a set of strategies.
In this article, we hope to help you understand the important distinctions between the two ideas you should be aware of and match your financial objectives.
What is Cryptocurrency?
Cryptocurrency is a virtual, decentralised form of money. Cryptocurrencies may be used to purchase and sell items, and their ability to store and build value has piqued the interest of several investors. Among thousands of them, Bitcoin is the original and most popular. It was created by the anonymous Satoshi Nakamoto in 2008 and had it officially launched in 2009. Years after, several alternative coins (altcoins) rose to popularity as well, but Bitcoin remains the world’s largest cryptocurrency up to this day.
As a crypto trader or investor, what are the cryptocurrency terms you should know?
- Alternative coins (altcoins) – anything that is not Bitcoin. Ethereum, Dogecoin, and Litcoin are three popular altcoins nowadays. Each of these cryptocurrencies has its own set of characteristics and uses. According to experts, you should invest primarily in the larger, more popular cryptocurrencies.
- Block – it is made up of transaction records, which are created as users purchase and sell currencies. Each block can only store a certain amount of data. A new block is created to continue the chain whenever it reaches that limit.
- Blockchain – the fundamental technology underpinning bitcoins and a digital type of record keeping. A blockchain is made up of successive blocks that build on top of each other to form an immutable and permanent ledger of transactions (or other data).
Additional note: Traditionally, blockchains have been decentralised since they function and alter with the permission of a majority of users rather than a central authority.
- Decentralisation – it refers to transferring of control and decision-making from a central authority to a dispersed network.
- Distributed Ledger Technology (DLT) – it is more commonly known as blockchain technology; it is a computerised system for documenting asset transactions in which transactions and their information are stored in several locations at the same time.
- Exchange – it is a digital marketplace for buying and selling cryptocurrencies.
- Market Capitalisation – it is the entire value of all the coins that have been mined. The market capitalisation (market cap) of a cryptocurrency is calculated by multiplying the current number of coins by their current value.
- Wallet – it is a safe location to save your crypto money investments. Digital wallets, also known as hot wallets, are available on several exchanges.
What is Crypto Trading?
Buying and selling cryptocurrencies for profit is what cryptocurrency trading entails. Cryptocurrencies have their digital currency exchange where users may trade coins, similar to how traditional currencies have a foreign exchange (forex). Cryptocurrency trading is a 24-hour market, unlike typical stock exchanges that close at the end of the day.
What about Crypto Investing?
It refers to buying and owning Bitcoins, and it involves the long term buy-and-hold only strategy. Investors are often focused on the long term and are unconcerned with short-term price fluctuations. In other words, by investing in a coin, an investor is betting on its long-term potential, intending to sell it (and profiting) in a few years.
The Differences Between Crypto Trading and Crypto Investing
There are a total of four significant differences, which include:
- Investment Period – crypto traders focus on market changes and have a short-term vision. Meanwhile, crypto investors gear on the long-term potential of their preferred coin.
- Trade Frequency – crypto traders have high trade frequency. Traders would make a lot of transactions since they are always looking for ways to benefit from market opportunities. Meanwhile, crypto investors often have a low trade frequency, implying that they will cling to a coin until their long-term goal is achieved, which might take many years.
- Analysis Type – crypto traders are more concerned with price movement and market positioning; hence technical analysis is what they use. This type of analysis studies historical price data and the use of numerous price indicators and charting tools to anticipate future price movements. Meanwhile, crypto investors make a long-term bet on its value, believing that fundamentals are a key component in determining a coin’s potential and feasibility; hence fundamental analysis is used.
- Risk Profile – it is critical that everyone understands the idea of risk when it comes to investing. The potential profits of a given investment are closely tied to risk. Crypto traders are referred to as risk-takers since frequent trading entails a greater level of risk. The extreme volatility of short-term cryptocurrency values may provide traders with the potential to make a lot of money but can also be devastating if they are on the losing side of the wager. Crypto investors, on the other hand, are more risk-averse than traders because they are more at ease leaving their assets alone and are unconcerned about daily price fluctuation.
Both investing and trading involve patience and emotional control, and both may be difficult to master. However, mastering either can be profitable. Anyone may combine trading and investing, but the two should not be confused.
The Bitcoin industry is still in its early phases, and it is constantly changing. It is a good idea to only invest money that you are willing to lose. If you are a newbie Bitcoin trader or investor who seeks to have a convenient trading experience, check out Bitcoin Revolution – a beginner-friendly trading platform and start your exciting journey!