The spectacular appreciation of Bitcoin and other coins has drawn in many ordinary people who have little experience of financial management. Now you have bought your cryptocurrencies what should you do with them?
The two choices are “investing” and “trading”. Investing is the primary focus of this website and so we will discuss this first.
An investor is someone who buys and asset (such as Bitcoin) with the goal of holding it until it has gone up substancially and he can sell it. In the real world market of stocks and shares investors expect to hold an asset for at least one year. When you sell an investment after a year you make a “capital gain” not a profit and in many countries you benefit from a lower rate of tax.
An investor is happy to lock away his asset and not look at the market every day, he is secure in the knowledge that he will ride out any short-term dips.
There are several investment styles,
Bitcoin investors are used to the huge volatility of the market and say that they “HODL” (Hold On for Dear Life). Having bought their Bitcoins they are going to hold them until they are worth a fortune.
An active investment strategy is one where the investor uses their skill and judgement to change the allocation of their investment in response to market conditions. For example, an active investor might decide that government regulation meant that privacy coins would show excess gains and sell Bitcoin and buy Monero. In the world of stocks and shares this is often done by investing in a fund (“mutual fund” for our North American readers).
A passive investment strategy is one where the investor allocates funds according to a rule. For example, they might spread their investment by buying one of every coin in the market. To make this easier an investor may choose to follow a published cryptocurrency index or invest in a cryptocurrency index fund.
Trading is very different from investing. Where the investor holds his assets for a long time a trader will buy and sell frequently hoping to buy low and sell high. They have to use their skill and knowledge to beat the market. When they sell an asset it they make a “profit” and they are liable for income tax.
Traders typical make an investment for a single day (day trading) or a few days (swing trading) on a public exchange. They carefully choose an entry price and then place orders on the exchange that will sell their asset at a target price or, if it falls in value at a “stop loss” price.
Trading is very easy way to lose large amounts of money very quickly.