Distinguishing Trading From Investing

So cryptocurrency is a risky, novel and volatile asset, but with significant potential upside in both the short and long term. Your challenge is to figure out how to tap into that potential, manage the risk and make money, by learning how to trade cryptocurrency.

To keep things simple at this point, let’s assume that what we mean by making money from cryptocurrency is selling it for more than you bought it for (later in this section we’ll explain that it is potentially much more complex than that) and use Bitcoin as an example.  

With this in mind, and thinking about the two broad approaches to profiting from cryptocurrency we’ve introduced, think about these two questions:. 

1. Will bitcoin’s price go up or down over the next 24hrs?
2. Will bitcoin’s price go up or down over the next 4 years?

Both questions require you to risk your money predicting bitcoin’s future price movement, which is uncertain. The crucial difference is the time frame, as this makes you think about that uncertainty, the risk to your investment, differently. 

The reason for this is because what influences bitcoin’s price over 24hrs, is different to what influences its trajectory over four years.

Yes, the 24hr chart is a subset of the four year chart, and in aggregate daily changes will smooth out to form long term patterns, but you cannot make a long term forecast based on what happens on a given day, and visa-versa. 

The factors that influence long term change are different to those that influence short term change. 

When we talk about buying and selling over short periods of time we are talking about Trading. Making frequent bets on short-term price movement.

In contrast buying and then passively holding for an extended period of time to then sell for a profit is considered Investing.

The world of Bitcoin has even come up with a term that describes the determination to hold the asset over the long term – Hodling.

So if your interest is in making money from cryptocurrency you need to understand the distinction and the different decision-making processes associated with each. 

You don’t have to choose, you can be both a Trader and Investor, or neither, so long as you appreciate the difference and separate your activities..