Investing VS Trading In Cryptocurrencies

How the two are often confounded in crypto-markets

When I bought my first Bitcoin (BTC) and Ethereum (ETH) in the middle of 2017, I was planning to buy it as a form of investment. I had in mind to leave it there for 2 to 5 years, and hoped for its dollar value to appreciate.

“The goal of investing is to gradually build wealth over an extended period of time through the buying of a portfolio of…. and other investment instruments”. (Investopedia, 2012)

Within a week, the price of Bitcoin was up by over 50%. Well, I do not know much about Bitcoin or blockchain then, but it has hit my investment target, so I sold it. Bitcoin’s price continued northwards.

Photo by Tom Mumford, Unsplash.

I kept my Ethers, and by the end of 2017, they were up over 300%. I also dedicated a portion of Ethers for “investing” into other altcoins, most of which flopped before the end of 2017.

You see, with wild fluctuations and volatility in the cryptocurrency market, price targets are easily met, and then eroded. Market cycles are shorter, and if you were to stick to your price targets, your investments will mirror the lifecycle of a trade. And that is where it starts to get mixed up.

If you had meant to invest in cryptocurrency, you should just leave it alone and not be concerned about the fluctuations in prices. You would take it off an exchange, store it securely, and attempt to retrieve it some 10 years later.

I realised that there were periodical dips in the cryptocurrency market because of all the uncertainties and the lack of regulations. These were opportunities to buy in at the lows. After all, what goes down in the crypto-market, will come up again right?

I also figured that if I made use of the fluctuation in prices, I can grow my pool of Ethers. Hey, that is upsizing my investment right?

I had actually moved into cryptocurrency trading. I am not a full-time trader, nor do I know any technical patterns. I was just in tune to the happenings, the news, and the sentiments surrounding the cryptocurrency market.

“Trading, on the other hand, involves the more frequent buying and selling… with the goal of generating returns that outperform buy-and-hold investing.” (Investopedia, 2012)

So here I am, matched up against traders who have plenty of experience trading Forex, stocks, and options, and whom have converted into cryptocurrency trading. However, I am unaware of the rules of the game, the tools of the game, and little did I know that I am in for a beating.

The Democratisation of Investing and Trading

The beautiful thing about cryptocurrency is that it is in the intersection of technology, business, and money. The technology will draw in the programmers and the cryptographers. The business will draw in the entrepreneurs and startup-ers. The money will draw in the institutions, the financial markets, the investors and the traders.

And then, there is also the end user who can benefit from the use of cryptocurrency and distributed ledger technology, and whom can come from any walks of life. Everyone is relevant in this ecosystem.

Satoshi designed Bitcoin to be a “peer-to-peer electronic cash transfer”, which makes money so directly tied to cryptocurrency. Giving everyone access to cryptocurrency would give everyone access to the investing and trading of it. Not everyone may want it, but anyone can do it.

Even though investing and trading have become more closely related, I realised that investors and traders have different agendas. Traders are in it for the short-term gains; they work the charts to their favour. Profit (or cut losses), then rinse and repeat with the next trade.

On another hand, investors have their skin in the game for the long run. They still want to hold a decent portion of cryptocurrency at the end of the day. An investor can also benefit from having technical charting knowledge as he will have an alternative signal to back his decision.

Although trading and investing in cryptocurrencies are quite closely related, there are still distinct traits to define the investor from the trader. Perhaps, the common trait is that they are all speculating.

My Takeaways

Cryptocurrency is Speculation

The trader speculates a certain direction of the prices based on historical data and patterns. Therein, he minimizes his risk with his tools and expertise, and either takes profits or cuts his losses.

The investor speculates on the development of the cryptocurrency application and its eventual adoption, which will bring about a premium over its current prices. He minimizes his risks by doing due diligence, and diversifying into different applications and development teams.

There is Much to Learn in Cryptocurrency

Coming from a startup background, evaluating and distilling whitepapers is a relatively easy task. However, lacking the technical analyses puts me at a severe disadvantage, which is what I hope to be better at in 2018.

Similarly, the technology-people, the business-people and the money-people can all step out of their respective fields to learn a different aspect of cryptocurrency. Cryptocurrency is a very diverse field, which is why it is difficult for a newcomer to pick up.

Risk Management

Investing or trading, we are all making calculated risks, and it all comes down to risk management. Maximise your rewards, minimise your risks.

I write about my experiences and reflections of the cryptocurrency market on Medium, and am currently working on a book about investments in cryptocurrencies. Follow me if you would like to read more crypto-related articles like My Secret Strategy to Maximise Altcoin Returns, or sign up for my mailing list if you want to be the first to read the book. Thank you!