Cryptocurrency Investing vs Trading: What's the Difference?

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Cryptoasset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

Last Updated August 18th 2021
18 Min Read

The fascination for cryptocurrency is growing exponentially. Are you a crypto HODLer or a crypto trader? And, do you know the difference?

Cryptocurrency is volatile and unpredictable and not a suitable environment for complete beginners to crypto. Before diving into buying or trading cryptocurrencies, a little crypto education goes a long way. If you have no experience with cryptocurrencies, investing in a few well-chosen cryptos may be a better position for beginners than attempting to trade cryptos.

The fact is that trading any financial instrument is challenging, if not impossible, for some. There's an overall trading industry failure rate of 95% for retail traders. Many think that trading is easy because there's only a choice of two options. You buy, or you sell, and you hope you choose the right direction. But hope has nothing to do with successful trading.

Trading cryptocurrencies for beginners is like swimming with hungry sharks. Before you can blink, you get swallowed up. Or, your money does, anyway. The crypto market can swing from a high to a low in a fractional time.

Trading cryptos is baffling, frustrating, and chaotic if you don't know how the crypto market works. To the experienced crypto trader, trading cryptos is an opportunity for making money. Becoming an efficient crypto trader takes time and mental discipline.

But about investing in cryptos? How hard is that? You buy low and sell high. How difficult can it be?

There are thousands of listed cryptos available. Do you choose the crypto with the highest price or the lowest price? Is buying low-cost crypto the way to riches? Not necessarily. There are things you need to know about investing in cryptocurrency. Knowledge is, as they say, power, especially if you want to make money from cryptocurrency.

Trading or investing in cryptocurrency can be an enjoyable venture, or you can end up wanting to rip out your hair with frustration. What you need is a guide to trading and investing in cryptocurrencies, and that is what this article is here to provide.

By the end of this guide, you will know how to invest in cryptos and what cryptos are best for investing. You will understand a little about trading cryptos and learn how to trade cryptos.

You'll also know what HODL means!

What Is HODL?

There are various interpretations of the term HODL. But, the overall consensus is that it's a misspelling of HOLD, but the acronym is to ‘hold on for dear life.’ Because, yes, investing in cryptos can feel like white water rafting. The prices shoot up and come crashing down, and, at times, for no apparent reason.

For example, Bitcoin shot up to almost $20k in December 2017, then plummeted like a plane without wings. By Christmas 2018, Bitcoin was in the bargain basement at $3,900. Had you purchased Bitcoin near the high, how tolerant could you be to see your investment drop by almost $17k?

It takes a lot of grit and courage to HODL with such severe price drops.

The thing is that the market corrections in crypto are always significant. It's not unusual to witness 50% to 80% corrections in a short period. Indeed, it's been the norm for as long as cryptos have been around.

So, as a crypto investor, hefty price corrections are part of the journey to profits from cryptos. And it's why you don't expect to make a profit from crypto investing in a few days or weeks, or even months.

Trading Vs. HODLing Cryptocurrency

New crypto investors typically do one of two things when they first explore cryptocurrency investing or trading.

They either:

  1. Buy and hold (HODL) their cryptos.
  2. Try to trade cryptocurrency – either to increase their crypto holdings or for dollar returns.

Which option is less risky? Trading cryptos or HODLing cryptos?

It's the devil or the deep blue sea for crypto beginners because they make poor decisions about cryptocurrencies. Generally speaking, holding onto cryptos is a better strategy for beginners. But, if you buy and HODL the wrong cryptos, the result could be the same. You lose money.

What goes wrong? Why is it so hard to make money from investing in cryptocurrency?

We mentioned the poor decisions that new crypto investors make. There are two main issues:

  1. Beginners fail to take profits – they think the price of cryptos will continue going up. They leave profits on the table as they watch the price come back down again.
  2. It is notoriously hard to trade cryptos – most people are not good at trading. It's a learned skill and can be an emotional rollercoaster. It can take years to master the mindset needed to trade cryptos successfully.

But don't give up. We're not trying to be the voice of doom. If you know what you might have to face, you can prepare, and that's the thing. Preparation for investing in cryptos is everything, and when trading cryptocurrencies, education is crucial. Address these two issues, and you have a chance of making money from cryptocurrencies, either trading or investing in cryptos.

Either way, you need a strategy to prepare for the volatile crypto market. It's what pro traders do when trading cryptocurrencies. And no crypto investor would buy crypto without a long-term exit plan.

In the next section, we provide ideas for crypto strategies. We underline the difficulties you may encounter as a new crypto trader or investor and provide ideas for overcoming the challenges of investing in cryptocurrencies.

How To Invest In Cryptocurrencies

Let's look at what it takes to invest in cryptocurrencies and what mistakes to avoid when HODLing cryptos.

Here are two mistakes beginners make when investing in cryptos.

  1. Trade and hold too long – you buy crypto at a low. You get a reasonable price and watch the price increase over weeks or months. But, you fail to take profit en-route.
    Let's take an example. You buy 3000 Dogecoin (DOGE) at $0.10 and, within a year, the price reaches $0.64. Your investment is $300, and your holdings are worth $1,920. As a beginner to cryptos, you think the price will carry on up to the moon. Bob at work prophesied it would, so it must be true. But, oh dear, within a few weeks, DOGE is $0.17 (this is true, by the way).
    What could you have done? You could have sold 1000 DOGE at $0.64 and doubled your investment. Then you could buy 1000 DOGE (or more) at $0.17.
    There's no one way to take profits, but at least cover your initial investment once there is enough profit to be able to do so.
  2. Buy at the high – you see the crypto price rising, and FOMO kicks in. You worry you will miss out on the crypto rocketing to thousands of dollars – as Bitcoin did. But, the fact is, what comes up always comes back down again. Never buy when the price is rising. Make your motto, 'give me a better price, and I'll buy.'

Assuming you manage the two things above, put your crypto into a secure wallet and leave them there. But, keep an eye on your crypto holdings. Don't check your crypto prices every day. Check your cryptos once a week.

Stay connected to a crypto media site so that you can follow crypto updates. Cryptocurrencies are sensitive to media coverage, especially if a prominent investor makes a statement regarding cryptos.

Read Also: Key Benefits of Investing In Cryptocurrencies

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

What's The Best Way To HODL?

The best way to accumulate and HODL is to gather cryptos at the lows – you can do this over days, weeks, months, or even years.

It's near impossible to time the crypto market 100%. So gathering cryptos over time helps to average out the value of your crypto investments.

Take a little profit on the way up and buy again at the low. Over time, with this strategy, you could cover the costs of your initial investments so that every price gain is pure profit.

Admittedly, it sounds easy to apply these strategies. But, it takes patience and discipline to hold your nerve and to sell some of your crypto holdings. You may fear that you sell your cryptos too low, and you might have made more money if you held for longer. The truth is that this could happen. It likely will happen, but buying and selling cryptocurrencies is not all or nothing.  Sometimes you may make a lot of profit, and the market rises. Sometimes you get lucky, and the price drops after you sell.

What can help you decide when to buy and sell is learning how to do technical analysis. Although technical analysis is typically for crypto traders, it can help you determine low and high points on the charts, making you an effective crypto HODLer.

How To Trade Cryptocurrency

Trading cryptocurrencies is a high-risk venture, especially for crypto beginners. In a heartbeat, you can make huge profits from trading cryptocurrencies. Five minutes later, the crypto markets drop like a stone. If you managed to get out of the trade for a profit, well done. If you lost your money, it's you and probably several hundred thousand other retail crypto traders.

There are countless opportunities to profit from crypto trading, but not without some trading experience and, essentially, within the crypto market. The top crypto traders understand market sentiment. They know the nature of trading cryptos and how to read the cryptocurrency market. They may follow crypto media or keep up to date with crypto developments.

Cryptos are sensitive to social media coverage.

Earlier this year, Bitcoin dropped 10% overnight after a tweet by Elon Musk disparaging the proof of work (PoW) mining, which he cited as damaging to the planet. That's true, by the way. Bitcoin mining uses significant energy resources and is a highly complex process for Bitcoin miners.

Elon Musk has made positive statements supporting Dogecoin (DOGE), and the prices shot up. Warren Buffet is anti-crypto and regularly airs his opinions publicly. As a prominent investor, the masses take note of his statements.

So, watch out for media coverage about cryptos.

Technical analysis teaches you how to read support and resistance. You can learn how to draw trendlines and channels and spot an early breakout on the crypto charts. Learning to recognise the money flow in the crypto market puts you in the realm of a professional crypto trader.

These professional cryptocurrency trading skills help you better time the market to commit to a trade, feeling more confident that your analysis might put you on the right side of a crypto trade.

There's no guarantee of success because the crypto market can still move against your trade. But technical analysis can increase your odds significantly of profiting from trading cryptocurrencies.

Another issue for beginners to crypto trading is overtrading, taking too many trades at a time and risking their accounts. Risk management is essential if you want to grow your crypto trading account. Try not to risk more than 1% per trade.

Read More: What Is Cryptocurrency Trading?

Managing Crypto Trading Risk

HODLers may outperform a poor crypto trader over a period. But if you master the art of crypto trading, a crypto trader can make significant gains.

What is essential to managing crypto trading risk?

  1. Always have a stop loss – you may think you can wing it if you watch your crypto trades. But the reality is that the crypto market can move fast. Slippage can be an issue for crypto traders even with a stop loss because of the high volatility.
    Analyse the crypto charts before trading and work out the areas of support and resistance. Place your stop loss below the last low or above the previous high.
  2. Trade cryptos with good volatility – cryptos listed in the top ten have good liquidity and volume. Prices vary from $0.25 up to $3,600 for Ethereum. Bitcoin trading is probably best left alone for beginners.
  3. Know your exit points – if your analysis shows you support or resistance, set your first profit target to reflect these areas. For instance, Bitcoin has a strong support zone at $30k, so if you were selling Bitcoin, you might target $30,100. You could lose the trade if you set a target at $29k because the Bitcoin price has to get past the support.
    Setting the wrong exit target makes it much harder to make consistent profits from crypto trading.
  4. Trade with a strategy and a plan – when you have a crypto trading strategy, you know what you need to see on the charts before taking a trade. It helps you to plan and avoid being driftwood in the crypto market flow.
  5. Cut your losses – if the crypto market goes against you, know when to quit. It's better to have multiple small losses than several significant losses.
  6. Don't be greedy – take your profit instead of striving for more money.
  7. Don't add to losses – often, crypto beginners enter the crypto market too soon, and the trade goes into a loss. When they realise they timed the market incorrectly, they add to the trade, thinking of getting into the crypto market at a better price. It's inadvisable, though you may get away with it several times and exit with profit. But, if the trade goes against you, you could end up with a big chunk of your account disappearing.
  8. Don't leave your cryptos on an open exchange – many crypto exchanges have a secure crypto wallet where you can transfer and store your cryptos. When trading cryptos, move as much crypto as you need to the trading platform. When finished trading, transfer the balance back to your secure crypto wallet.

Trading crypto is almost an art form. It takes great skill and emotional mastery. Always adopt a conservative approach to trading cryptos and, if possible, spend time practising trading crypto with a demo account.

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

Recap Of Cryptocurrency Investing Vs Trading: What's The Difference

If you have little experience with cryptos, it's best to approach crypto investing and crypto trading with caution. The crypto market is fast, so it pays to slow everything down where you can.

It's easy to HODL cryptocurrency. You buy a few coins and hold on to them. The difficulty arises in knowing when to sell and how much crypto to sell.

Trading cryptos is hard. There are more pitfalls to encounter. But if you can master the crypto trading mindset, you can make good profits from trading cryptocurrencies.

We believe cryptocurrencies are here to stay and that you can make profits from trading cryptos or investing in cryptos. Take your time to decide which you think might suit your personality and style.

Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.

Trading or investing in financial instruments such as cryptos may not be suitable for all investors. It does involve risk and the possibility of a loss of capital. There are no guarantees for profiting from cryptocurrencies, and it's advisable only to risk what you can comfortably afford to lose.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Trading Education.

eToro – The Best Platform For Traders And Investors

eToro have proven themselves trustworthy within the Crypto industry over many years – we recommend you try them out.

Crypto asset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

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Can I make a living from trading cryptocurrencies?

It's possible to make a living from trading cryptocurrencies. But it takes significant skill and practice. It may take years to develop the mindset to make a profit from trading cryptos. You can practice trading cryptos with a demo account until you have sufficient skills and make consistent profits from crypto trading.

How much money do you need to start trading cryptocurrency?

You can start trading cryptos with a few hundred dollars. But if each trade is a minimum risk of 1%, it doesn't leave a lot of room for your stop loss. For example, 1% of $100 is $1. If possible, start with $1000 or more so you can trade low risk but have sufficient room for your account protection per trade. Having too small a stop loss is a common problem for beginner crypto traders.

Is day trading cryptos worth it?

The definition of what is worth doing is different for every crypto trader.

It depends on your goals and expectations. If you anticipate becoming wealthy from day trading cryptos within a year, you may feel disheartened by your results at the end of your first crypto trading year.

Most new crypto traders give up because their expectations are too high. But those cryptocurrency traders who are determined to master crypto trading skills ultimately discover the benefits of trading cryptos for a living.

What do I need to know before buying cryptocurrency?

Before buying cryptocurrency, the main thing to know is that you may have to HODL your crypto for a few years. During that time, you may experience a rollercoaster ride of the highs and lows of the crypto market.

Don't buy crypto because it is low-priced. If it is a cryptocurrency low on the list of cryptocurrencies, you may wait many years before the price moves. Cryptos listed in the top ten, or the top twenty, cryptos by market cap, you have a chance of seeing good returns from investing in cryptos.

Do I need a crypto investing course?

You know enough from this guide to get started buying cryptocurrencies for your crypto portfolio.

Before trading cryptocurrencies, you may benefit from a trading course that teaches technical analysis for cryptocurrency.

What's the best way to learn about cryptocurrency?

The best way to learn about cryptos is to watch the crypto charts every day. At first, the crypto charts may appear chaotic and random. But, in time, you'll notice patterns and learn to identify support and resistance zones on the crypto charts.

Connect with the crypto media - set alerts and study what happens after media statements regarding cryptos. Follow updates on crypto websites such as upgrades etc.

What's the best strategy for crypto trading?

The best strategy for trading cryptos is one that you can understand and implement. It must be adaptable to variable market conditions.

Our guide to trading cryptos outlines the best crypto day trading strategies suitable for beginners and intermediate crypto-traders.