Both traders and investors try to make money by buying and selling cryptocurrencies, however, how the two approach the price movements, volatility, and growth of the crypto markets is remarkably different.
The only thing common between investing and trading cryptocurrencies is that the participant aims to 'Buy Low' and 'Sell High', ideally. How an investor and a trader structure their strategy can be explained with technical distinctions and we will explain all the differences in this post.
The fundamental difference starts with their intent of putting money into the crypto markets. An investor is someone who buys crypto and looks to profit from the growth of that crypto project over time because the fundamentals increase: more revenues, more customers, more product.
The investor believes in the team and their ideas, whereas a trader is someone who makes money by placing frequent orders on trading platforms to buy and sell crypto in a short time frame to profit from short term price movements, regardless of how the company or project is doing, and whether it's going up or down. A trader can benefit from the price action in any direction.
In other words, one relies on fundamental appreciation, and the other focuses on exploiting market volatility.
Today, we will discuss some key differentiating factors between investing and trading with cryptocurrencies.
What Are the Key Differences Between Investors and Traders?
Investing is about choosing the assets you believe in and retaining them for the long-term. Investors develop their beliefs after thorough research which we will discuss later in this blog. Investors buy and hold assets to profit from their increase in value over many years to generate a long-term capital gain on the investment. Investors generally think in terms of years, so the daily 24-hour change in cryptocurrency prices is of minimal importance to them. Crypto markets also pass through short-term bearish and bullish cycles which last for a few months. Investors stay unaffected by these cycles and maintain their composure, especially during bearish months.
Investors go in with a thesis; for example, this coin will do well because of X factor. And Investors exist with a plan; for example: when X is reached, I will sell or reevaluate my holding. X can be a price level, a company development, or an ecosystem-wide change. Those “X” are usually, for investors, hypothetically happening a couple of years into the future.
Investors read pitches, company updates, community news, whitepapers, regulatory reports and look at teams building projects. In the professional world, they are angel investors, venture capitalists, and actively managed funds.
Traders buy and sell assets for short-term profit where this term lasts for a few weeks, days, or even seconds. Traders are highly concerned with the hourly, daily, and weekly price movements of the crypto markets. Traders place limit buy and sell and stop-limit orders either to fetch profits in short time-frames or to restrict their losses so that their investments are not depreciated to be traded in the future.
Traders read charts, track “technical support levels”, and resistances, and conduct a technical analysis to understand the psychology of the market. They don't care who the team is or what a project is doing. The volatility which the traders can get in the cryptocurrency markets is not available in many other financial markets in the world. Capitalizing on this volatility requires experience, analysis, and an in-depth understanding of the markets.
According to the timeframe in which coins and tokens are bought and sold, traders can be categorized as:
Scalp Traders: Scalping is the most active form of trading as scalpers will buy and sell coins frequently in a day. Scalping is done to make higher profits with each trade. Scalp traders can trade, i.e., buy or sell assets for a second or even a minute. With the chunks of profit with each trade, they aim to generate a higher amount of profit.
Day Traders: Day traders trade throughout the day and close all the positions before the end of the trading day. Day traders don't hold an overnight position. As the cryptocurrency markets are open 24x7, usually day traders close their positions before they go to bed.
Swing Traders: Swing traders hold positions from days to weeks. In this trading, the traders take advantage of short-term fluctuations in a coin's price. They sell high and wait for markets to dip. Buy again and increase the number of tokens that they can use to trade in their next step.
Momentum traders: Momentum traders make money according to the ongoing market trend, whether upwards or downwards. They can hold positions from hours to a couple of weeks.
Trade frequency refers to the number of trades executed in a specific time interval. Trade frequency is inversely proportional to the investment period. A longer investment period means less trade, i.e., lower trading frequency, whereas short term investment means frequent trades, i.e., higher trading frequency. Investors have a lower trading frequency as they hold coins for the long term, while traders have a higher trading frequency as they frequently trade according to market volatility in the race to gain immediate profits. Investors hardly place 2-3 orders at max on a coin in a whole year whereas active traders place hundreds of orders in a week.
Fundamental vs. technical analysis
Traders and investors who are new to crypto are often confused as to which method to adopt for the analysis of a coin or token. Fundamental analysis and technical analysis are very different and should each be applied for specific objectives.
Fundamental analysis is a method of examining coins or tokens to identify their intrinsic value for long-term investment.
Technical analysis, on the other hand, is a method of evaluating and forecasting the price of a coin or token in the near future, based on the price movement and volume of transactions. It's using charts to try to understand crowd psychology.
A fundamental analyst researches the whitepaper, target markets, business model, tokenomics, the team behind the project, and progress according to their roadmap. Traders read trading charts and see how the candles are developing across different time frames like 1 hour, 4 hours, and a whole day. Based on the patterns of the candles and various technical indicators like MACD, RSI, Moving Averages, Fibonacci Retracements, and many more traders forecast the prices of tokens in short time frames and place their orders based on these forecasts.
Where profits come from
This explains how traders or investors aspire to make money. There are multiple ways in which you can make money with cryptocurrencies:
Price appreciation: The most basic approach available to both investors - buy low and sell high. Traders set their price targets and place limit sell orders. They buy fast, they sell fast. As soon as the price appreciates to their target price, the order triggers. Investors evaluate their return on investment after a previously agreed planned time frame.
Staking: Staking is the process of locking up cash coins or tokens to secure the ecosystem to earn new assets in the form of staking rewards. There are certain projects which offer up to 30% rewards on staking.
Rewards, dividends, airdrops: Depending on the type of tokens (store of value, networks, decentralized apps) there are different types of rewards that are possible for holding tokens and coins.
- Some chains will do “airdrops” to kick-start interest in their projects (if you are staking Luna, for example, you get MIR and ANC airdropped every couple of days)
- Some projects might allow the distribution of “treasury cash” - most likely the result of accumulated fees - through governance vote. So if the community votes to distribute the “war chest”, you might be on the receiving end if you own some tokens.
- There are all sorts of rewards that can be gotten, the most popular being liquidity provision rewards for providing liquidity for a project's token on a decentralized exchange.
Because traders don't participate in the actual crypto ecosystem, they don't usually enjoy airdrops, dividends, or staking rewards. That requires you to actually use and become personally invested in the ecosystem.
What are some examples from traditional markets?
Now that you are well aware of the differences between trading and investing, let us step ahead to talk about two different pioneers: Warren Buffett and George Soros, the best example of an investor and a trader.
According to Forbes, Warren Buffett, known as the "Oracle of Omaha," is one of the most successful investors of all time with a real-time net worth of $110.3B. Buffett runs Berkshire Hathaway, which owns more than 60 companies. Buffett follows the Benjamin Graham School of Value Investing, which seeks securities that are unfairly priced based on their intrinsic value. Instead of focusing on the intricacies of the stock market's supply and demand, Buffett looks at firms as a whole.
Some of the factors Buffett considers are company performance, company debt, and profit margins. Other factors for value investors like Buffett include whether or not a company is publicly traded, how reliant it is on commodities, and how cheap it is. In the crypto markets Michael Saylor (CEO of Microstrategy), Winklevoss twins (Co-founders of Gemini), and Michael Novogratz (CEO of Galaxy Digital Holdings) are a few of the top Bitcoin investors in the world.
On the other hand, George Soros is a prominent trader who is recognized for taking a contrarian strategy to trade. He once 'broke the Bank of England' by shorting the sterling pound and earned over $1 billion from that single move. Soros looked for short-term trades to profit while Buffet invested in undervalued companies for the long run, but both turned out to be successful billionaires. Bitcoin Traders like Bitcoin Jack and Nicola Duke have gained popularity on Twitter for their technical analysis and insights on Bitcoin's movements.
Trading or investing, which is the superior option? Which one is the most appropriate for you?
That is entirely up to you to decide. You can see the differences in the methodologies we mentioned at the beginning of the article. Traders are active in the markets like a 9-5 full-time employee looking for opportunities to make profits and leverage on short-term trends. They need sophisticated tools to analyse prices and understand market sentiment. They compete mostly against other traders, and 80% of retail traders lose money.
Investors are looking to construct a well-diversified portfolio to meet their goals. They need to research the assets they want to invest in, and then let time do its thing, rebalancing their portfolio at most a few times a year. Those who take longer positions tend to be more successful (as can be seen here and here) even to the point that some argue that with enough time you are guaranteed to win!
You can get rich quickly like Soros, or get rich slowly like Buffett. But you need to understand that the likelihood of the first one is unpredictable and a little akin to winning the lottery while the second is historically predictable and repeatable. You can play on both fronts by dividing your portfolio into 2 parts, but make sure each is sized to the likelihood of rewards.
If you are looking to outsource the work of due-diligence of crypto projects to a team with a proven track record and the construction of your investment portfolio to an algorithm that is consistently offering a better risk-reward profile than all the portfolios we have thrown at it as benchmarks, you should definitely check out our Crypto Autopilot.