The debate over whether one should invest for the long term (or “Hodl,” as crypto enthusiasts like to call it) or trade on a daily/weekly timeframe is not new to cryptocurrency. The differing philosophies can be applied to basically anything that can be traded or invested in. Each course offers pros and cons, and with crypto there are a few nuances that are unique to this new asset class. Which one is right for you? Let’s dive in.
The Basic Differences Between Investing and Trading
Generally, the logic behind investing is to put your money into a business, asset or currency that you believe in and hope will increase in value over time. Investors are focused on long term accumulation of wealth, and as such usually will sit on investments for many years before they even consider selling. As mentioned, cryptocurrency investors are often referred to as Hodlers. Hodl is a popular mispelling of “hold,” and has become a badge of honor to many who believe we are now only in the infancy of cryptocurrency, and that selling anytime soon is missing out on much larger gains down the road.
Trading on the other hand, has less to do with the long-term outlooks of a given asset and instead aims to make profits based upon the volatility that is present in most market pricing. The law of the land here is “buy low, sell high,” and usually these types purchase and sell assets with turnovers of minutes, hours, days or even weeks. This is where technical analysis becomes very important, as does having a strategy for entering/exiting a trade. What has made trading even more compelling with crypto is that the market never stops. It is truly 24/7, 365, globally. This means in crypto there isn’t really a “trading day,” and many traders can be at their computers at any hour of the day or night trying to find the right moment to jump on an opportunity.
Pros and Cons of Investing
One of the pros of investing is that it is fairly passive. Generally it is a good idea to do some homework on what it is you are investing in and why you think it will increase in value, but once you put your money in, you let it sit. You accept that the market will rise and fall every day, but you have faith that in 5, 10, 20 years or more the price of the asset will be notably higher than when you purchased it.
With crypto, none of this technology and none of these projects have been tested on a truly long-term timeframe. That is why they are often criticized as being “purely speculative,” because there is no guarantee that any of these coins have true staying power. Even Bitcoin, by far the oldest crypto, has only been around for just over 10 years, which is still a blink of an eye compared to older markets.
That being said, this is where risk versus reward comes in. Those who choose to invest in crypto do so not because the technology is proven, but because they have faith in where it will go. If this gamble pays off, the upside for adoption is massive. Speculating what future market caps may be is outside the scope of this article, but if crypto in general manages to siphon off even a modest percentage of the global economy, then there is a lot of money to be gained.
The passivity of investing is also a con in a way, at least to anyone wanting active income. As stated, there really is no “get rich quick” with investing, it is pretty much all about getting rich slow. Certain boom moments like the recent (or hopefully future) crypto bull run can make quick millionaries, but understand that the inevitable crashes that follow these moments also destroy the wealth of many who didn’t get out in time.
Pros and Cons of Trading
For anyone who is looking to generate income in such a capacity as to support themselves, trading may be an option. As stated, traders make money on shorter timeframes by utilizing volatility in the market. They buy the dips and sell the pumps. This can be a very lucrative way to make money, but it also comes with higher short term risks than investing. An investor can weather a bad market and come out fine on the other end, but a poorly timed trade can cut into a trader’s capital. Unlike many day jobs, you can easily lose money if you do it poorly.
This comes to the fact that very few day traders can, on average, beat the market. What this means is that while a trader may have a good day over here and a bad one over there, it usually averages on longer timeframes to be no better or in fact much worse than they would have done just investing their money and leaving it. Some very skilled traders however can and do make their livings this way, and it seems the key here is discipline.
Any honest trader knows that they can’t “win” every trade. Nobody actually knows exactly what is going to happen next. However, by being emotionless in their trading and sticking to tested and proven strategies, they can average more wins than losses. This does offer a higher return than the market, but will come at the cost of likely months or years of studying markets and strategies and getting your hands dirty along the way. Just about anyone can make money investing with a bit of research and luck, but active traders have very little room for error if they want to stay ahead.
So Which One is Better?
By this point, it is probably becoming clear that whichever one sounds more attractive probably has a lot to do with your personality and how engaged you want to be with your money. Many people obviously do a bit of both active trading and passive investing, as diversifying your income is rarely a bad idea. If you take the investment route, then patience and understanding the fundamentals of your investment will be your friend. If you are a trader, then discipline and understanding of strategies will rule the day. Either way, understanding what it is you want and sticking to the philosophy behind it will be key.
In the end, it will be up to each individual to define what they want to do with their money. No matter what you do, being well informed will be essential to success. This is especially important advice as we head towards what is believed to be the next Bitcoin bull run, as no doubt emotions will be running high when it truly begins. However, with education and focus, whatever the market does, you should be able to come out ahead one way or the other.
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