With the rising prices of cryptocurrencies, many new investors are entering the markets. While there are dozens of ways to make profits through crypto, newcomers usually focus on two main methods — holding and trading. While both approaches can help you make some great profits in this investment niche, they differentiate quite a lot in their methodology and the risks involved.
In this article, we will try to give you a thorough overview of both of these methods, their benefits, and their drawbacks. This should give you a good idea of which is the better choice for your own investment profile.
What Does Holding Mean?
The first and most basic investment strategy in cryptocurrencies is the holding method, or HODL, if we were to use the community’s jargon. It’s a relatively simple strategy that involves buying a certain number of cryptocurrencies, at regular intervals, regardless of their price. The idea is to hold them long enough with the hope that the price of the cryptocurrencies in that portfolio will increase in value in the future so that you can sell them for profit.
Some holders even prefer to never sell their crypto, as they have an inherent trust in the potential of the technology. With that in mind, they are in for the long run and hold onto their digital assets for years. This has been a winning strategy for many early Bitcoin investors, considering the price of the original crypto has increased by a factor of 1 million since its release in the market.
Benefits and Risks of Hold Strategy
That said, every strategy has its advantages and drawbacks. Let’s have an overview of the pros and cons of holding crypto.
Holding has quite a few benefits. These include:
- Simple strategy. You don’t have to follow the markets closely, learn about complex buying and selling methods, or conduct technical analysis. Just find a reliable exchange, set yourself some portfolio goals, and you are good to go.
- Reduced stress. The fluctuating price of cryptocurrencies can be very taxing on an investor’s psyche. When holding, you don’t really have to care about short-term price spikes or dips, which makes the whole process much easier to tolerate.
- Passive method. If you don’t have a lot of time to dedicate to your crypto investment venture, holding is the way to go. It requires just a small amount of your free time, and you won’t have to follow the crypto news constantly to be efficient at it.
This strategy is especially fitting if you are a beginner in the sphere.
Risks of Holding
No investment method is flawless, and holding carries its own risks. These may include:
- Moderate gains. If you choose safer investment instruments such as bitcoin and ether, you won’t be making 100x your investment in just a few months. Holding is a long-term strategy, and to make considerable gains, you need to be in it for the long haul.
- Volatility risks. Even though it’s a less aggressive investment strategy, you are still subject to the high volatility of cryptocurrencies. Some weaker projects might not survive crashes and bear markets. While bitcoin usually recovers from price dips, this is not the case with projects that are fundamentally weak.
- Buying at the top. Crypto markets work in cycles, and if you aren’t careful, you might be buying at a market top. This means that your investment could lose most of its value shortly after, and recovering could take years.
Your risks may also depend on the specific coins you are investing in, as each project has its own unique set of characteristics.
What Does Trading Mean?
The second and much more complex method of investing in crypto is trading. This involves continuously following market movements to buy crypto at a low price and sell it quickly when the price increases. To do this effectively, you will need to acquire multiple skills.
First, you need to learn fundamental analysis, where you analyse the project from the ground up. Then you need to learn technical analysis, to help you find market entry and exit points to maximise your profits. And finally, you need to apply market sentiment analysis and assess the market trends.
All in all, mastering these three essential skills can take years. While the end result can be very gratifying, it’s a long trial-and-error process that can be both costly and time-consuming.
Benefits and Risks of Trading Strategy
Like holding, trading has its advantages and drawbacks. Let’s see what they are.
Trading is a high-risk, high-reward investment method with multiple benefits, including:
- High returns. In trading, you buy and sell the best performing cryptocurrencies at the moment and make incredible profits in the process. Thanks to the high price spikes in the crypto markets, you can make as many gains in one day as in one year of holding.
- Ability to make money in bear markets. When trading futures contracts, you will be able to bet against the market by shorting cryptos and making profits even when the price is declining.
- Margin trading for exponential gains. You can also trade cryptocurrency on loaned assets and make incredible profits by leveraging your assets from x5 to x100 gains in a single trade.
Trading is a high-reward, high-risk investment method, and you need to consider the drawbacks as well.
Risks of Trading
With that in mind, you should understand that trading brings some risks that you should consider before venturing further.
- Time-consuming. Trading requires that you master numerous skills and follow the markets constantly to remain efficient.
- High risks. Speculating on volatility is a double-edged blade. While it can bring high profits, the risks of losses are equally multiplied.
- Taxes and fees. When selling cryptocurrencies, you will be subject to crypto exchange fees. Moreover, you will need to pay capital gain taxes on your profits, which can decrease your gains considerably.
So think hard whether you are ready to face these risks on your path to great profits.
So, Which One to Choose?
So, now that you have a good overview of both of these crypto investment methods, we can draw the following conclusion. Holding is a beginner-friendly method that requires very little knowledge and maintenance. The caveat is that you will have to wait a long time to see any significant gains. Trading, on the other hand, is a risky and complex strategy that is mostly reserved for seasoned investors but provides instant gratification.
There’s no wrong decision here, as your choice should be based on your skill level and risk tolerance. That said, you should take note that holding and trading aren’t exclusive. You will most likely get the best results by combining these two strategies.