This is a guest post by Antoine from bitemycoin.com
The Difference Between Investing and Trading Bitcoin
Each time the Bitcoin bubble creates a hype that puts Bitcoin at the front pages of news, the media becomes more interested, the price keeps on rising and investors become millionaires. That is until the bubble crashes and the circle starts all over again.
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?
The majority of traders give up after few months or after the first market crash. Because that’s the nature of Bitcoin – it’s extremely volatile and the price can dramatically drop in the span of a few hours.
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 the banking system. What you do have to understand though is the difference between investing and trading 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.
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 its decentralized 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, eliminating 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 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 an increased interest in locating money elsewhere than a traditional bank. Cryptocurrency and Bitcoin were one 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.
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 and trading.
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.
Investing vs Trading Bitcoin
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. Though, it doesn’t require much expertise. 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.
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.
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.
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.
At the same time, Bitcoin wallet resembles a traditional wallet – you should never keep all your eggs in one basket.
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.
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. It can also 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.
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.
Antoine just launched a new blog about cryptocurrency you may be interested in reading it. It’s very new but he is going to upload great content often 🙂 bitemycoin.com