What are the differences between crypto traders and investors? Investing and trading are two terms that are often used interchangeably not only in the traditional stock markets but also in the crypto market as well.
This usually makes things difficult especially at tax time since the tax computation and treatment will largely depend on whether you are an investor or a trader.
Therefore, it is paramount that you know the difference between the two terms, at least the basic differences, and then proceed with your financial goals and tax computation process to meet the necessary obligations.
There are several criteria which will determine whether you are a crypto trader or an investor. These are:
- The amount of capital invested
- The frequency and volume of trading
- The nature of activity and
- The structure and operation, in case it is an organization.
To put it in simple terms, a crypto investor is one who typically puts in money and holds the crypto coins for a long period of time in anticipation of making a long term gain.
On the other hand, a crypto trader typically buys and sells digital assets, mostly on the same day, in order to make profits over a short period of time.
Differences between Crypto Traders and Investors
The most significant difference between a crypto trader and an investor is that the traders do not hold the crypto assets while investors hold them for a long period of time.
However, that is not all to be well abreast with the differences of the two terms which is why you should go through this article without skipping any portion of it. Check out Crypto Dollar Cost Averaging Strategy.
There are typically five key differences between a crypto investor and a crypto trader. Here they are in detail.
1. Investment Time Period
Investors are generally considered to be risk avoiders but that does not mean there is no element of risks involved in crypto investing. Usually, they hold their assets for a long term and the time depends on the potential of the particular coin.
They intend to sell it over a period of 2, 5, 10 years and realize a profit due to the differences in buying and selling price.
This minimizes their risks since they have quite a long time to wait for the price of the coins to rise significantly and are never compelled to sell them at marginal profit.
Crypto traders, on the other hand, are more focused on making profits in the short term, within a day or a week. They scrutinize the price movements of the coins they bought and sell it quickly as and when it rises.
Market cycles, volatility, bullish or bearish market, market sentiment and a lot of other factors will determine the amount of profit they make on their sales.
Their trading intensity, therefore, is much greater in comparison to a crypto investor and they are concerned more on the hourly, or at the most daily, price movements, and engage in buying and selling of the coins without holding them for a long time.
Inference: As for the investors, they cannot be categorized but a trader can be categorized into four different groups.
Scalpers who trade several times in a day, Day Traders who close out all positions at the end of the day, Momentum Traders who trade based on the current price trends and its strengths and Swing Traders, who trade within a day or a week.
2. Trading Frequency
Trading frequency refers to the number of times trades are made. It is inversely proportional to the investment period. If you are unaware of math, here it is: longer the time of investment, lower will be the frequency.
This means that an investor will have much lower trading frequency since they hold the coins for a much longer time in a safe digital wallet. They will not sell the coins unless their objective is met: to make profit in the long term.
Traders, on the other hand, will have a much higher trading frequency. Since they want to maximize their profits from the opportunities in the market and even due to a small rise in price of a coin, they will execute several trades within a short period.
This offers a much higher probability of making profit but at the same time involves a lot of risk which can only be minimized by constant and active monitoring of price movements as well as the market conditions.
Inference: Crypto investors execute trades very rarely but the crypto trader will do it often.
3. Risk Profile
Ideally, any stock market will provide you with returns on your investment within 7 to 10% annually on an average. Whereas, investing in crypto coins will offer that much in a day(!), if you are a good trader.
However, with it comes the risk of losing it all as well due to the extreme volatility, and this is where the difference between a crypto trader and an investor lies.
The risk profile or ‘appetite’ is much more in a crypto trader. They are the ‘risk takers.’ They are pretty comfortable with risking their money based on the potential returns of a coin and are okay with the inevitable and high price fluctuations.
It is this risk taking attitude that results in potentially high rewards. They typically believe in risk-reward tradeoff and make frequent trades to minimize it.
Cryptocurrency investors, on the other hand, are considered to be more ‘risk averse.’ They do not want to indulge in making frequent trades and are comfortable with letting their investment alone.
They are least interested in the daily price movements of the coins. They are more concerned with the volatility of the coins over the time which will smoothen out and make their investments less risky and more profitable.
Inference: Crypto traders are risk takers and can therefore make more profit in a short time, provided they do not end up making a wrong bet. Crypto traders avoid such situations focusing more on the long term benefits.
4. Analysis Type
Perhaps, the most significant difference between a crypto trader and crypto investor is the type of analysis they undertake to gauge the potential profits.
Crypto investors, as said earlier, believe in making a bet for a longer time period and therefore they are more concerned with the value of the particular coin in the long term that they have invested in rather than the immediate and temporary price movements.
Therefore, they rely on fundamental analysis primarily to evaluate the potential returns and viability of a coin.
Since there are no specific financial statements available publicly for a crypto project, they base their evaluation on the basics such as usage rate and merchant adoption rate of the specific crypto coin.
On the other hand, crypto traders depend on technical analysis primarily because they need to make more accurate price predictions and determine the probable direction of its movements.
They also need to know about the market conditions to open or close their positions successfully. There, technical analysis is their main weapon in the arsenal of the crypto traders.
Different charting tools and price indicators are needed to be studied to judge the often erratic price indicators in the short term.
Inference: Crypto investors rely on fundamental analysis to look at the intrinsic value of the coin through economic variables and financial statements.
Crypto traders try to forecast the price movement based on the market data, historical price data and trading volume by using different tools and charts.
5. Profit Making Tactic
The way the crypto traders and investors make profits and generate wealth also differentiates them.
As for the crypto investors, they usually make profits on their investments in four different ways. The first and most straightforward way is price appreciation of the crypto coin.
Dividends, as in stocks, may also be generated from some specific projects, especially in the form of ‘coin burns.’ Hard Forks will also let an investor earn free coins when the original coin is split in two. And, airdrops, a novel way of marketing and publicity where coins are distributed for free.
As for the crypto traders, they make profits only through price movements by timing their entry and exit points accurately and accordingly.
This means that for a crypto trader price appreciation is the only way to make money. However, they may also try to earn airdrops and hard forks to sell them right away on an exchange to make profits.
Inference: Crypto investors may earn some dividends on some specific crypto coins invested but the crypto traders rely mainly on price appreciation of the particular crypto coin they invested in with a one-off chance to make money from hard forks and airdrops.
6. Tax Treatment
Apart from the above basic differences between a crypto trader and an investor, you can also differentiate between them based on the tax implications and treatments.
As for the investors, since they do not operate like a business but mainly as an individual with less trading activities performed, the tax obligations are far too less and the tax events are fewer as well.
It is only when the investment is disposed of at a profit, it will be considered as a capital gain and capital gains tax will be calculated and required to pay.
If there was a loss, capital gains will be reduced in the following years. However, if a crypto investor holds the coins in excess of 12 months, there is a chance to receive capital gains tax discount.
As for the crypto traders, since they are involved in frequent buying and selling of their holdings over a short period of time to make quick and easy profits, it is considered to be their business.
In such a scenario, their profits are considered as an element of their assessable income with a possibility to claim deductions on operating cost. All these are subject to the rules of trading stock from which the trader usually benefits when it comes to tax treatments and implications.
Inference: The tax events in case of crypto trading are much more in comparison to the tax events of the crypto investors primarily due to the frequency of trades made.
It is very important to first know whether you are a crypto trader or an investor. This will help you in your tax calculation and in other aspects. As you can see there are lots of factors that differentiate between the two. Hope the article was helpful.