The Difference Between Investing and Trading Bitcoin

Buying and selling Bitcoin is one of the fastest and easiest ways of making money from cryptocurrency. With the value fluctuating so much during a day, it’s a dream for any experienced investor or a trader.

We’ve heard a lot of stories of those who invested in Bitcoin at the beginning and became millionaires after few years. Investing, though, requires a lot of patience and determination. And there’s another, quicker, side of the lucrative coin – trading.

Understanding the difference between investing and trading in Bitcoin is crucial while trying to choose your way of making money from cryptocurrency.

Because to the uninitiated, Bitcoin might seem like a gold mine – a dream job which you can do from your own house by clicking a mouse and staring at the screen.

The harsh reality, though, involves a high risk, high reward game during which Bitcoin can dramatically drop and go up in the span of few hours. But, that doesn’t mean you cannot get your hands on Bitcoin and own at least a bit of what is believed to be the future of money and banking system.

What Is Bitcoin

what is bitcoin

Back in 2008, when Bitcoin was first invented, it was a new and unique financial vehicle, unlike anything the world has ever seen. Nowadays, it’s just one of 700+ cryptocurrencies which all use cryptography to control the creation and transfer of money.

Nonetheless, it’s the first and most important cryptocurrency. Altcoins try to replicate or improve Bitcoin’s original code but so far none of them was able to repeat Bitcoin’s success.

Despite the name, there is no physical coin or representation to speak of – Bitcoin is an entirely a peer-to-peer digital form of money.

One of the greatest advantages of Bitcoin is a decentralised nature, which doesn’t require a central authority or a middleman to be involved. Therefore, you can send money to anyone living around the world and eliminate the need for traditional parties like banks. And you don’t have to pay extraordinary fees or wait days for the money to arrive at your bank account – it takes minutes.

All the transactions that have ever happened are recorded in the so-called public ledger. The ledger is based on blockchain technology and allows anyone who’s a member of the Bitcoin network to access the records and see every user’s history. Thus, nobody can cheat, steal money or double-spend them. If there was anything suspicious happening, the entire network would be notified.

Whether Bitcoin itself will ever be able to replace fiat currency entirely is a big question mark. But it has undeniably started a revolution that the world is still not entirely ready for.

What’s So Special About Bitcoin

Bitcoin is exciting and unique due to the technology behind it and the liberating idea of being free from a governmental control. But before you decide to jump into investing or trading Bitcoin, there are few more things you have to understand about its nature:

Bitcoin Is Global

Bitcoin isn’t a fiat currency, hence its price isn’t directly related to the economy or policies of a single country. Bitcoin has a rough history of ups and downs, many of them related to worldwide events.

For instance, the sudden price rise in 2013 was linked to the Cyprus’ economic crisis. Freezing citizens’ funds caused a huge disruption and increased interest in locating money elsewhere than a traditional bank. Cryptocurrency and Bitcoin were one of the ways to reinvest the money and avoid further loss. Which eventually led to a Bitcoin bubble.

Nonetheless, there isn’t a singular government or an individual who dictates the currency rate or is capable of controlling it.

Bitcoin Trades 24/7

There is no official Bitcoin exchange, hence there is no official Bitcoin price. Unlike stock markets, which have limited opening hours throughout a day or shut down for weekends, Bitcoin exchanges operate around the clock. Most of the exchanges stay within the same price range, but there are occasional arbitrage opportunities.

On the other hand, Bitcoin will never disappoint when it comes to delivering exhilarating shivers down your spine. If you want to, you can spend an all day long tracking different exchanges, changes in price and various predictions.

Bitcoin Is Volatile

Bitcoin is well-known for its rapid and frequent price movements, sometimes even throughout a day. For buyers and investors, it’s one of the major drawbacks. But for traders, it’s yet another exciting opportunity to gather quick profits.

Recently, in a span of 2 weeks, Bitcoin went up by almost $2,000 and reached an all-time high. This only confirmed the difficulty in price prediction and capricious nature of Bitcoin. But at the same time, that’s precisely what makes Bitcoin trading even more exciting.

What Drives Bitcoin Price

Bitcoin price rose to $3000

By now, you must be wondering what influences the Bitcoin price to go up and down so much in such a short amount of time.

Naturally, usually it’s people buying or selling it rapidly, but there are few factors that push people to do so:

Government Regulations

Each time a government releases a statement regarding cryptocurrency legislation, the price is affected. In a previously mentioned example of Cyprus, it wasn’t the economic crisis per se that caused a spike in price but people buying Bitcoins. It’s a domino effect, driven by citizens but not by a government.

Stability of the Bitcoin Network

Whenever there is a hacker’s attack or a security bridge on the network, the price is likely to drop. Naturally, people lose their trust and want to secure funds that haven’t been affected yet. Bitcoin doesn’t have the same backup as Dollars, Euros or any other fiat currency. Thus, it doesn’t come with a security comfort of banks and regulatory institutions – Bitcoin’s trust is in an open public ledger, to which everyone has an access.

Demand and Supply

Bitcoin’s availability is capped at 21 million, meaning the demand will keep rising but the supply will be decreasing. It’s believed that Bitcoin price will keep on growing even more due to a limited supply.

Technological Changes

Blockchain technology is Bitcoin’s backbone – any advancement to the technology behind cryptocurrency can benefit the network and bring it closer to people. The most recent SegWit upgrade caused a sudden price rise to over $4,000 and put Bitcoin on all major headlines. Technological advancements have a huge power when it comes to Bitcoin price.

Investing vs Trading Bitcoin

What Do You Need For Cryptocurrency Trading

There is a major distinction between investing and trading Bitcoin – just like in reality – investing money differs a lot from trading them on a stock exchange.

However, I would like to add another ingredient to the equation – buying Bitcoins.

Buying Bitcoin can be extremely simple – depending on various wallets and exchanges – but it’s nothing like buying a foreign currency when you travel abroad. All one has to do is find a right wallet, exchange and pay for some cryptocoins.

Therefore, buying Bitcoins is popular among people who either want to just try it out and invest a little or those who simply want to see what’s the fuss about. Many of those don’t track Bitcoin price or even forget about it, just to wake up one day to realise they made a huge profit.

Investing, on the other hand, is a long-term undertaking. Featuring a portfolio of different cryptocurrencies, fiat risk hedging and business objectives. In most cases, Bitcoin investors are indifferent to price volatility and unlikely to give up on the investment easily.

Investment also means holding to the cryptocurrency until there’s a perfect moment to sell. And that sometimes can be years from the initial investment.

By contrast, Bitcoin trading is more of a short-term endeavour. Getting on the market, staying in trade for a maximum of few months and moving on as soon as the price reaches its peak. Hence, Bitcoin traders are known to be price-sensitive and abandoning the market when it becomes unprofitable.

They say that a serious trader is not a day trader. But in a case of Bitcoin, a serious trader is a day trader, winning against the high volatility and price fluctuation.

The Trading Risks

While there are risks involved in both investment and trading, the latter is much more vulnerable to the dynamic spirit of Bitcoin.

Investors can wait through the crash and have the resources to prolong the bad strike. Traders, however, are often compared to professional gamblers – they have to act quickly and know when is the right time to leave the game.

Some of the most common risks are often related to mistakes of the inexperienced Bitcoin trader:

Leaving Money on an Exchange

Some of the exchanges come with a wallet to store Bitcoins, and it should make one’s life easier. But don’t be mislead that it’s the most secure option.

One of the most famous events in Bitcoin’s history is the collapse of the Japanese exchange – Mt. Gox. In Bitcoin’s early days, Gox was the largest Bitcoin exchange and the easiest way to purchase Bitcoins. The catastrophic collapse resulted in losing over 800,000 bitcoins and customers were never able to receive their money back.

Presumably, if you’re thinking about trading, you also have a large amount of money to put on the market. Be cautious and invest in a secure and reliable wallet. An exchange can be closed and busted anytime, and so are your money.

Bitcoin wallets resemble a traditional wallet – you should never keep all your eggs in one basket. Buying a hardware wallet, like TREZOR or Ledger Nano S is a small expense comparing to how much you could lose.

Your Capital is at Risk

I doubt anyone goes into Bitcoin trading before giving a first go with fiat money. You would never start with all of your capital – you would rather build the experience and understand the market properly.

Trading Bitcoin isn’t any different. Yet, a lot of beginners are deceived with an idea of how much they can make from trading Bitcoin. It surely is a more dynamic environment and rates are changing quicker than in a traditional stock exchange, but that only indicates an even higher risk.

The fluctuations in the value of a conventional currency can be measured in a fraction of a penny. Bitcoin prices, on the other hand, rise and fall dramatically throughout a day.

Leveraged Bitcoin Trading

bitcoin trading

One of the most attractive things about Bitcoin trading it the ability to use leverage. What does it mean?
In short, it gives traders an opportunity to trade larger amounts with a smaller capital. In this context, leverage trading resembles a forex trading for fiat money.

For instance, a trader who has a 50:1 leverage, can place trades that are 50 times higher than their actual capital. Due to Bitcoin’s volatility, the leverage ratios are much lower than those of forex.

The leverage can yield high returns, but so does losses. This form of trading is almost parallel to gambling – you bet a certain amount of money that a Bitcoin price could reach a certain high.

Unlike major forex currency pairs that barely move by 1% a day, Bitcoin prices can rise and fall over 30% in a day.

Platforms that specialise in leveraged Bitcoin trading:

eToro

It’s one of the latest forex brokers to offer Bitcoin trading. It uses the BitStamp data feed as a price reference and you can enter or exit the market up to four times a day. Hence, it’s better for those who aren’t looking for daily trading.

AVA Trade

Perhaps one of the most well-known trading platforms that offer Bitcoin trading through a CFD (Contract for Difference). It has two CFDs available: Bitcoin Mini and Bitcoin Weekly.

Bitcoin Weekly has 20:1 leverage and expires every Friday at 21:00 GMT, while Bitcoin Mini has a 2:1 leverage but doesn’t expire. Both contracts use the data feed from BTC-E.

Unfortunately, even though Bitcoin is decentralised and operated 24/7, AVA Trade doesn’t operate during weekends.

Magnr

More than a trading platform, it’s one of the first services to offer a Bitcoin saving account. It doesn’t accept fiat currency, only Bitcoin and it offers a 10:1 leverage. Similarly to eToro, it takes the data feed from BitStamp.

Is It Better to Invest or Trade Bitcoin?

There is no straightforward answer to this question. The choice should depend on the knowledge of Bitcoin and the available assets.

Investing in Bitcoin can start from a minuscule amount which can keep on increasing with time and experience. It’s also a long-term undertaking, which eventually might lead to accumulating a large amount of money. But it can ease the nerve-wracking volatility of Bitcoin as one would enter the market prepared for a wait.

Trading, on the other hand, should be reserved for those who know the Bitcoin nature in depth and aren’t afraid of losing. The constant fluctuation of Bitcoin can be an exhilarating experience for any trader, but at the same time, it can scare away those who do not know how to deal with it.

The difference between investing and trading Bitcoin lays not only in the technicalities of it but also in one’s character and nature. Nobody said that you cannot do both at the same time. If your budget allows you to do so, try both ways of managing Bitcoin and see what works the most for you.

Some see trading Bitcoin as a Wild West, without any regulations and legitimate backup, while others are just waiting for the governance to kick in. It’s a game of which nobody can predict the end result. But at the same time, it promises a lucrative win.

What is your personal choice, investing in trading? Share your experiences in the comments below!

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Megan is a self-taught blockchain enthusiast. She enjoys combining finance with technology, from a less-techy perspective. BiteMyCoin is her most recent project underneath the umbrella of an international digital marketing agency ANCHOVY.