What are the differences between trading and buying crypto? While you step into the crypto world for the first time, instead of buying and investing in crypto coins right away, you should also consider whether or not you want to trade them.
There is a significant difference between these two approaches and this article will let you know all about that. As a consequence, you will be able to choose the right approach according to your needs.
It comes with a distinct and natural appeal and has come a long way with its potential and capabilities. It offers quite a handsome return if dealt with properly and strategically, which is what lures the people towards it.
If you want to try your hand at it, knowing the differences between trading and buying will surely help you to make the most out of the price movements, which are quite frequent and natural in this space.
5 Differences Between Trading and Buying Crypto
Choosing the right approach based on these differences is very necessary for that matter because it is all about your suitability and preference.
Here are some of the major differences between buying and trading crypto coins for you to know and start your journey in this exciting field with more confidence.
1. Account Setting
When you want to buy crypto coins, you will need to do it through a crypto exchange. For that, you will need to set up an account with them, after you decide which crypto exchange you prefer to go with.
It is needless to say that you should choose a reliable exchange after a proper research. Setting up an account with the exchange means that you will be offered a digital wallet to store your crypto coins.
On the other hand, if you want to trade crypto coins simply, you will simply need a brokerage account. This means that you will not have to go through an exchange directly and access them.
On your behalf, the broker will do everything that is required for trading effectively including exposing to the underlying market. Typically, this is a much faster and easier approach than crypto buying.
When it comes to suitability, trading crypto coins is not for everyone, and it is certainly not the cup of tea for the faint hearted.
You should be mentally as well as financially prepared to take on the losses and not panic due to the frequent and drastic price movements of the crypto assets.
For example, the price of Bitcoin may go as high as 19,000 on one day and as low as 1,200 on the next.
This means that you have to be a natural trader, a good speculator, and have a high risk tolerance to trade crypto coins in this exciting marketplace so that you do not end up losing a lot due to panic buying or selling.
This approach is often followed by the beginners to gain experience in this field and have hands-on trading practice.
Crypto buying is ideally good for those people who do not want to investigate or use the new technologies and opportunities that the crypto space has to offer, no matter how interesting these are.
3. Long or Short Position
In trading crypto coins, you can be long or short depending on your outlook at any given point in time. This is perhaps one of the most significant differences between trading crypto coins and purchasing them.
Making the right prediction as a trader you can position yourself dexterously in either direction so that you can make the most out of the directional trading opportunities as and when they arise in the long term. In the same way, you can also trade crypto coins based on the price swings in the short term.
On the other hand, if you buy crypto coins outright, you will be only long, obviously, because you will be compelled to hold your assets all through to do away with the ups and downs in the price due to the extreme volatility of the market.
Typically, buying and holding crypto coins for a long time at a specific price in anticipation that there will be a further rise in the price when you can sell the coins off may not always prove to be a viable and productive strategy.
4. Opportunities Offered
As a trader, you will be able to take the most advantage of the volatility that offers a host of opportunities. According to the crypto analysts, cryptocurrencies can either experience a dramatic rise in their value or their price may fall sharply.
If you trade crypto coins with leverage it will enable you to take a position with less amount of capital required.
Most importantly, when you trade crypto coins you can actively avail yourself of the opportunities and make the best use of entry orders, profit limit orders, stop losses, and risk management techniques.
On the other hand, these opportunities are simply not possible to avail when you intend to buy crypto coins outright.
It will surely prove to be a lot more expensive to own a crypto coin depending on the price of each unit at any given point in time.
Buying and trading crypto coins also differ in the approach significantly. While buying crypto coins, you can follow two specific ways mainly. One, you can create a virtual wallet of your own and buy the coins through a blockchain at the current market price of the coins.
However, when you purchase crypto coins over a digital asset exchange, it is just the same as investing in any other physical assets. Here you will own the underlying asset which you can sell off at a later point in time at a higher price, provided the value of the coin rises.
On the other hand, when you trade crypto coins, you actually need to do so on the basis of your speculation on the prices by judging the price fluctuations accurately in the crypto market.
The prices of the crypto coins are usually estimated on the major and established currencies like the USD primarily. In this type of approach, you will not need to own the underlying asset and can also trade on leverage.
This will allow you to have a greater exposure in the market and for that, you will not have to risk a large sum of money as your capital.
Which is a Better Approach – Trading and Buying Crypto?
As said earlier, trading crypto is not for all. Therefore, choosing between crypto trading and crypto buying is all about your style, knowledge, preference, risk appetite and patience.
You should decide whether you want to trade or buy crypto coins based on these factors and not because you feel that the one you choose is better than the other, which is not completely true.
However, if you are confused, here are a few points that you should consider while choosing between these two approaches.
You should choose to buy crypto coins outright instead of trading them if:
- You are okay with paying the full value of a crypto asset upfront and take full ownership of it
- You want to have direct exposure to only one single underlying exchange for each account
- You have no problems in waiting for a long time to open an exchange account and also for the price of the crypto asset to rise or fall so that you can sell them off or buy them outright respectively
- You are in favor of maximum deposits and introductory limits as and when imposed and
- You have no problems in paying additional fees to the exchanges for depositing or making withdrawals.
On the other hand, you should ideally go for crypto trading if:
- You are good at speculating on the price of the crypto coins and want to play with it not being bothered whether you make a profit or incur a loss
- You do not want to have exclusive ownership of the particular digital asset you want to trade
- You want to make the best use of margin trading and leverage your position in the best way possible
- You want to pay for only a small fraction of the value of the crypto coin upfront and not to its entirety
- You are more interested in taking the advantage of the tax benefits of trading
- You are not in favor of maximum deposit limits
- You want to have wider exposure on several exchanges from your single account instead of one
- You want to get involved right away without waiting for a long time or need to create an account with the exchange and
- You do not want to pay any fees for withdrawals or deposits.
However, in addition to the above, here are a few specific things that you should also know regarding crypto trading, especially, in order to ensure that you have chosen the right approach and make the desired profit in the end.
Trading crypto coins will need you to follow the best and most appropriate strategy because any error in it will only magnify the losses.
Apart from that, you should also be very specific when you decide which particular crypto coin you want to trade with.
This is because you will not be able to trade all of the thousands of crypto coins available in the market at a time.
To be better off, you should stick to the major crypto coins such as:
- Bitcoin cash
- XRP and
If you want to go with the new coins, make sure that you research well and be very specific about its current value and its growth potential.
Never follow a broad-brush approach while selecting your coins and never choose any based on guesswork. This will enhance the chances of incurring losses significantly.
Also, once you are done with the choice of coins that you want to trade with, develop a foolproof and productive trading strategy.
Take help from the experts and do some thorough research so that you understand the market, the price movements, and the potential, and then formulate the best trading strategy.
Remember, speculating the prices and its movements is not an easy task.
You will need to consider several other factors that influence it such as media coverage, government regulation, future and fortunes of the fiat currencies pegged in, market news and events, statements of major players and government ministers, and more.
Also, make sure that you do not deviate from your trading strategies while placing them. Be very specific about your close conditions and have a well-defined exit point from a trade.
This will minimize losses due to the volatility of the crypto coins. Remember, it is highly risky to run large open positions. Therefore, make sure that you close out your position when you reach your desired target or have had maximum losses.
You can place some filters so that this is done automatically. Remember, increasing leverage without proper knowledge will increase your risks.
Finally, when you want to trade successfully, make sure that you always start small as a beginner. It is better and recommended to test your knowledge and gain experience by using a demo or a practice account for several months.
This will help you to know how exactly the crypto market works and what are the influencing factors that might change a favorable condition into an unfavorable situation or vice versa.
Also, when a hard fork is created and you want to trade with it, make sure that you follow it only if it has the majority consensus of the crypto users.
Use this consensus as the foundation of the price speculation and also consider the approaches that the particular exchange has adopted to deal with it. This will help you immensely in determining what type of action you need to take.
The role of the exchange also plays a significant part in your trading success, especially when you want to deal with a hard fork. It may not be necessarily true that the second coin will do just as well as the parent coin.
Or, it may not be valuable and tradable on the exchange that you choose but may do quite well on other exchanges. In that case, your exchange should represent that value that is doing well.
Though it is not obligatory, the exchange may book cash adjustment in your account or make the coin available to close on that specific valuation.
However, if the second coin does not do well at all anywhere, the exchange should annul those positions that you may have created at no value on your account.
With all these factors, you may have made up your mind to go with crypto trading instead of buying the coins outright and holding them for a long time.
Well, before you jump into it, here are a few additional things that most experts want the beginners to know.
First, any profit that you make on crypto trading will be considered as a capital gain by the IRS and will be taxed at the prevailing rate.
Secondly, if you have a virtual wallet, it will be quite an expensive option because you will need to pay fees to the exchange every time you make a trade, withdraw money, or fund your wallet.
Third, it will take some time to create an account with the exchange and therefore if you are in a hurry to start, expect to be disappointed.
And finally, you should be well-versed with the inherent risks of crypto trading. It includes the difficulty to predict the foreseeable future due to high volatility, and leverage can magnify both profits and losses.
There may also be less consensus and mainstream adoption in case you want to deal with new crypto coins.
While buying and holding crypto coins, however, you should consider the future prospects of the specific crypto coin.
Therefore, make sure that it will not be replaced by an alternative cryptocurrency sooner or later or fork in the future. Also, try to find out how it will fare and respond to a financial crisis in the future.
Cryptocurrencies are now accessible for all and not only for the tech-savvy. You can either buy or trade them to expand your portfolio easily. However, knowing the difference between the two will help in choosing the right approach.