Investopedia defines investing as having a goal to gradually build wealth over an extended period of time through the buying of a portfolio of various financial instruments. Obviously, making the right choice on which asset to invest your money in requires some skill, once the investment is made you are pretty much done. Trading, on the other hand, is the buying and selling of an asset short-term to make a profit. This requires skills and practice to determine the entry and exit points to trade successfully and make a profit.
The volatility of cryptocurrency produces sharp rises and falls in price that can happen at warp speed. Market cycles are shorter and the wild fluctuations mean price targets can be quickly met, exceeded, and then eroded. The combination of technology, business and money appeal to a mixed group. From programmers and cryptographers to entrepreneurs and start-ups, as well as financial market investors and traders. Regardless of background, a common trait for investors and traders of cryptocurrency is that they are all speculating.
Traders use different methods and here are three of the most popular:
- Day Trading which involves making multiple trades throughout the day to profit from price movements over short timeframes. They typically watch the computer screens constantly, chart trends exhaustively, read every bit of news and often use bots to execute their strategies. Day trading is stressful and making all those trades adds a bookkeeping worry to ensure taxes are calculated properly.
- Scalping is when a trader tries to make substantial profits on small price movements over very short timeframes. These traders make dozens to hundreds of daily trades, watching for sudden reversals within a trend. It requires practice and precision and uses leverage to increase the size of trades while allowing one to take a position on any side of the market. Care must be taken to use a trading account on an exchange that offers the lowest fees possible, as transaction fees can quickly eat up profits.
- Swing Trading is when a trader tries to take advantage of the swing of price cycles by spotting the start of a movement, entering a trade, and holding until just before the “swing” is exhausted to take profit. A trading position might be held open for hours, days, weeks or months until the target price is met. This method is more flexible for investors looking to trade part-time as it does not require constant monitoring of one’s positions.
Traders can maximize their chances of success by following strategies such as following technical indicators and trends, paying close attention to the latest events, developments or news, and managing risk effectively. Many will demo-trade before risking live funds and this can be done in some trading bot software programs.
Reasons day traders, scalpers, and swing traders feel bitcoin is lucrative to trade include:
- Crypto trading is more volatile than trading stocks
- Bitcoin trades 24 hours a day, 7 days a week
- Bitcoin allows for big trades with low overhead
- Bitcoin is the most liquid form of cryptocurrency
- Multiple trading opportunities typically emerge within a 24-hour period
It is important to understand the difference between trading and investing. Investing has long-term expectations that are easily managed if one does not invest more than they are prepared to lose and ignores the day-to-day price. Trading can be stressful and during downtrends in the market, effects range from temporary sadness to anxiety and panic disorders. While both trading and investing require patience and control over emotions, both can be difficult with no guarantee of success.