The Difference between Investors and Traders in the Crypto Market

Beginner’s Guide / 20.03.2020

Before buying any cryptocurrency, you must decide if you want to be an investor or a trader. Familiarizing with the difference is crucial and will save you from massive loss. The worst thing you could do when entering crypto markets is being an investor who thinks like a trader, or vice versa. 

People can use the coins to purchase goods or services, to buy and hold cryptos, to diversify their portfolio, or to buy and sell cryptocurrencies to profit from short-term price movements. These participants use different tools and strategies.

Warren Buffet VS George Soros

Talking of participants in the cryptocurrency realm, let’s look at two prominent giants that are part of our subject matter. One is a legendary trader while the other is a prolific investor, and both have generated massive amounts of wealth in their lifetimes but in different ways.

Warren Buffet uses an active style of value investing in his renowned long-term investing. Value Investing merely is investing under-priced investments or stocks that are trading at a discount to their intrinsic value (the cost of an asset calculated through fundamental analysis, which requires analyzing quantitative statements).

Buffett has bought, sold, and invested in hundreds of companies over his lifetime through his ability to identify valuable companies. He also owns Berkshire Hathaway, a multinational conglomerate with a value of close to $500 billion, and is currently the third-largest public company in the world. Using Buffett’s value-investing philosophy gives a long-term investment opportunity since it takes time for the assets to appreciate fundamentally.

George Soros is a legendary trader known for going against the status quo using his contrarian approach. Soros once betted against the sterling pound – this ‘broke the Bank of England’ – and made more than $1 billion in just that trade alone. Also, in 1997 he went out again and betted against Thailand and Malaysia’s currencies (Baht & Ringgit respectively), which generated hundreds of millions of dollars in profit. He later got blamed for igniting the Asian financial Crisis for his actions. Soros also made a mind-blowing 30% return over three decades while managing the world’s most successful hedge fund (Quantum Fund).

These two individuals have different styles of wealth creation, but they share a commonality; they were highly successful in making tremendous amounts of money.

Investor VS Trader

  • Type of Analysis

Investors take a long-term bet on the value of a coin; hence fundamental analysis is their primary weapon. Fundamentals are a core component in evaluating the viability and the potential of a currency. Fundamental analysis zooms in the study of various elements of a digital asset, including technical background business model, visibility and development team, etc.

Traders, on the other hand, don’t give a damn about the actual quality of the project. Traders base their trades on technical analysis with a purpose to determine market trends analyzing historical price data using charts and indicators.

  • Investment Period

Because blockchain technology is exceptionally new and could take a while to disrupt traditional systems and gain mainstream adoption, investors aim to bet on the long-term potential of a coin when investing in it. Investors have the intention to sell it and realize a profit in a couple of years. It results in a bull market (upward trend) and a bear market (downward trend) at a shorter period with higher intensity.

Traders are geared on a short-term option with an emphasis on price movements. Traders engage in buying and selling of coins with the objective of short term profits targeting hourly and daily price movements of the cryptocurrency market. They buy a currency at a low price and sell it at a higher price in the next minute, hour, or week. Traders always look out for volatility when trading since prices must have sufficient price movements for traders to be profitable.

  • Trade Frequency

Trade frequency is the occurrence of executing trades. Similarly to the investment period, the longer the time horizon for an investment, the lesser the rate of trades there will be. Investors will experience a low trade frequency. They always tend to hold on to a coin without selling until their long-term objective is met, which can reach a few years.

However, traders have a higher trade frequency. Since traders are in constant pursuit of profiting from the market opportunities, they execute many trades. As much as trading has higher profitability of generating more profits, it is highly risky and requires active and constant monitoring of market conditions.

  • Risk Profile

It refers to the level of risk that one is comfortable using. The potential returns of a particular investment are directly related to the risk one puts in it. Cryptocurrencies are the riskiest investments out there due to their volatility nature. If you like risk, you are referred to as a ‘risk-taker,’ but if you don’t like uncertainty, you’re called ‘risk-averse.’

Crypto investors are ‘risk-averse’ since they prefer leaving their investments alone and are not concerned with the daily price volatility. It turns out to be less risky over the long-term since the volatility of an asset smoothes out.

Traders, on the other hand, are considered ‘risk-takers’ since frequent trading incurs a much higher degree of risk. Traders get the opportunity to make lots of money due to volatility of short-term cryptocurrency prices but could be equally disastrous if they end on the wrong side of the bet. Furthermore, traders engage in borrowing funds from third parties to trade cryptocurrencies, a practice known as marginal trading. Since traders can make more money, this practice significantly increases the risk of selling but also increases their potential losses.

Closing Thoughts

In the crypto world, you can try to profit both as an investor or a trader, with the right strategies and long-term goals. Comprehending the differences between investors and traders is crucial to what you should consider when dealing with your coins. Cryptocurrency is still growing, and it would be wise for you to do intensive research and only invest money that you’re prepared to lose.

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Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.