For traders, one of the hot topics of discussion at the moment is cryptocurrencies. Since the massive rise and fall of Bitcoin at the end of last year and the beginning of this year, traders around the world are suddenly looking at them in a new light. There are two main approaches – trading and investing – but how do you decide which is the one for you?
Trading vs investing – what’s the difference?
To start with, let’s take a look at the difference between trading with, or investing in, a cryptocurrency. When you invest or buy a cryptocurrency you:
- Have to own the currency and put up the full value of it
- Pay any capital gains tax on profits you make from it
- Are directly affected by the changes in value to the cryptocurrency
- Have to have an exchange account to buy and sell (which often has introductory limits)
- Face deposit and/or withdrawal fees
On the other hand, if you trade with a cryptocurrency, you:
- Speculate on the price without actually owning the currency
- Can use leverage so you only need to put up a fraction of the total value (10% is a popular figure) meaning you can trade with a lower capital amount
- Won’t have to pay capital gains tax on profits
- Only have indirect exposure to the market volatility and changing values
- Don’t need an exchange account and can trade immediately
- No maximum deposits
Why you might want to invest
As with any other investment method, cryptocurrency investment has pros and cons. It is important to understand all the variables, how the market moves, which are the main actors, how big and volatile the market is and how to cover your eventual losses.
When you buy cryptocurrencies, you are purchasing the entire asset and it then becomes yours. You can only buy or sell cryptocurrencies using an exchange. To set up an exchange account, you need to register with an exchange and go through the process to create an account. This can take a little time and there may be limits as to how much you can spend at first.
Once you own the asset, you feel the full impact of changes in value. So if the asset increases in value and you sell, you make the profit. But if the value falls, you are either faced with selling at a loss or holding something worth less than before. The extreme volatility of the cryptocurrency market can make this a tricky balance.
Why you might want to trade
There are some good reasons why people are favouring trading with cryptocurrencies at the moment and top of the list is volatility. When the value of an asset changes regularly, sharply and often without clear reason, it can make it difficult to own.
But when you trade, you can make a profit from either increase in value or decrease because you don’t own the asset itself. It is also possible to start trading with a much lower capital than when you invest in the asset – you might need as little as 5-10% of the total asset value in order to make trades. It also means that if you make a loss, the overall loss is much lower than it would be if you owned the entire asset.
Finally, there’s no need to have an exchange account when you trade cryptocurrencies. You can simply use a platform such as Weiss Finance where you can start cryptocurrency trading with a low initial capital amount. Because you don’t need to own the asset and are simply leveraging it, you can trade without the need for a massive investment. And you can start trading straight away as there is no delay as there is with setting up an exchange account or limits placed on your account.
