Day Trading Cryptocurrencies vs Long Term Investing – Main differences
The trading of cryptocurrencies has started to pick up again after the disappointing performance of this market in 2018. But would it really be correct to say that the market performance was disappointing? Yes, it was for those who bought Bitcoin at $19,000 in January 2018 and had to scramble out of the market at $3,200 in December of the same year. But for those who saw the coming storm and decided to short Bitcoin at $17,000 and exit at $3,000, it was an exciting time.
Day trading involves trades which are done in both directions (long or short) and which have a lifespan that does not exceed one trading day. The aim is to buy in a rising market, or sell in a falling market.
Long Term Investing
The long-term investors are the “HODLers”: those who buy a crypto and have to hold on for dear life while waiting for their chosen crypto asset to take off all the way to the moon. Some long-term investors believed some of the very optimistic projections in 2017 that had Bitcoin hitting $50,000 a coin and even $100,000 a coin. What many who fell into the trap of imbibing the gospel of ever-rising Bitcoin prices did not realize, is that prices never move in a straight line, but rise and ebb like the ocean waves. It is one thing to declare that Bitcoin would rise from $8,000 to $50,000. But what the gurus never mentioned was what was to happen in between these two price levels.
This is a question that long-term investors have to be concerned with. There is something known as time value for money. Simply put, would the returns on an invested sum of say $10,000 exceed returns on shorter-term investments made with the same amount of money and in the same time frame?
Crypto Day Trading vs Long Term Investing: Which Should You Be Doing?
Comparing cryptocurrency day trading with long-term investment should not be done to prove that one style of investment is better than the other. Both can work well if the right motives, goals and methodologies suited for each investment vehicle are adopted. Trying to aim for the moon using day trading will lead the trader to take excessive risks, which could end badly. In the same vein, using a speculative mindset in long-term investing doesn’t usually end well. Remember the thousands of people (if not millions) who bought Bitcoin at such high prices believing that the price would hit $50,000? They did what they did with a speculative mindset and they got burned…very badly.
How to Invest in Cryptos for the Long Term
Long term crypto investment is a question of getting in at the right time, into the right crypto and at the best possible price. Long term investing in cryptocurrencies works best under the following circumstances:
- If the trader wants to invest in cryptos but does not have tolerance for the hefty intraday volatility of the cryptocurrency market.
- If the investment will be made in a cryptocurrency with real-life use cases, with the potential for mass adoption by the populace in the future. There are already several of such cryptos in the list of the top 30 most capitalized cryptos, and many are not even up to 20 cents a coin in price!
- The investment should be done with the lowest risk possible. This will involve aiming to either invest in an ICO featuring a project with a real product or service that is already in the market, or buying into an existing crypto project where prices are at their baseline levels. Many good cryptos already satisfy this condition and may not be as cheap as they currently are in the next one or two years. The best part is that you do not need to catch the exact market bottom.
If you wish to invest in cryptocurrencies for the long term, this may actually be the best time to do so: now that we are actually at the end of a bearish period. 2018 saw a steep crash in cryptocurrency prices, but more importantly, the crash also served to sieve out the good cryptos from the junk ones. We can expect the good cryptos to perform creditably in the next few years. We can draw an analogy from what happened in the US stock market in 2008 (after the crash due to the global financial crisis). Many of the stocks that crashed during that time have all bounced back very strongly in a space of 10 years. An example is JP Morgan. The chart for this stock is shown below. It paints an accurate picture of how a stock with good intrinsic value but with a low price that was induced by a systemic dysfunction, could rise from the ashes.
There were many other stocks like JP Morgan that experienced such price recovery. Bitcoin, Ethereum and Litecoin have already seen some of that recovery in the last month.
Day Trading Cryptocurrencies
This is the speculative arena of cryptocurrency investing. A day trader is looking to profit from short bursts of trending or non-trending price activity, either to the downside or upside. Unlike the long term “buy and hold” strategy, the day trading strategy can be to go long or to go short. Short-term news is a critical factor for being able to do this profitably, and there is also a place for technical analysis, which determines entries and exits. Entries and exits have to be as precise as possible, and the day trader only needs to trade a crypto which commands sufficient intraday volatility without necessarily having value to offer in terms of real-life use cases.
Due to the high margin requirements for day trading of cryptos (50% margin or a leverage of 1:2), risk is high and underfunded accounts will not survive this environment.
Day trading of cryptos carries more risk, but could also carry a lot of profit potential. It may also deliver better time value for money, as investment capital can be moved around quite a bit and not tied down in long-term plays.