Cryptocurrency trading vs. buying and selling are two completely different aspects.
To best understand this, an example would be buying shares vs. trading in shares. In trading and investing circles, this would be nothing but investing in a share vs. speculating on the shares.
In the former, one would buy shares of a company and hold them for prolonged periods of time. During this period, the holder of those shares is entitled to benefits such as dividends, stock splits and so on.
The main aim of buying and holding, also known as investing is to take advantage of the long term appreciation of the shares.
On the other hand, trading shares is akin to short term speculation. In this aspect, the speculator’s main goal is to make profits from the short term fluctuations in price.
In cryptocurrency, buying and selling is akin to investing in cryptocurrencies, whereas trading cryptocurrencies is the same as speculating.
As the craze for cryptocurrencies continues to rise, the terms buy, sell and trade cryptocurrencies tend to get obscured. Many times people interchange these terms which can get very confusing. This article provides a beginner’s guide on how to buy, sell and trade cryptocurrencies.
You will also learn the differences and where you can execute these transactions. By the end of this article, you should be able to understand the differences between buying and selling cryptocurrencies vs. trading in cryptocurrencies.
You will learn where this form of the transaction can take place and also how the cryptocurrency instruments differ from one other.
How to buy and sell cryptocurrencies?
Buying and selling cryptocurrencies is where you actually convert your fiat currency in exchange for the cryptocurrency.
In some cases, if you already own the cryptocurrency, you can exchange one cryptocurrency for another.
In this case, you are able to actually own the cryptocurrency, which is stored in your crypto wallet. These days, you can buy cryptocurrencies via a cryptocurrency exchange such as:
- Binance
- Kraken
- Coinbase
Besides the above, there are many other different cryptocurrency exchanges through which you can engage in such transactions.
The typical process of buying cryptocurrencies is to open an account with one of the cryptocurrency exchanges. Following this, you can then deposit money using your credit or debit card. When your account is funded at one of these exchanges, you can then convert them.
Depending on which cryptocurrency exchange you use, you can convert your USD or EUR, or any other fiat currency to any crypto. This could be Bitcoin (BTC), or Ethereum (ETH) and many more.
Once the transaction is done, you are now the proud owner of cryptocurrencies. The cryptocurrencies that you purchased are saved to your wallet on the exchange.
Depending on your needs, you can further convert these newly purchased cryptocurrencies to another.
The most common cryptocurrency pairs are BTC vs. ETH. This means you can convert your Bitcoins to Ethereum, or BTC vs. LTC, where you can convert Bitcoin to Litecoin.
Based on the cryptocurrency of your interest, you can find many more cryptocurrencies as well.
If you want to sell the cryptocurrencies that you bought, you will engage in the same direction. In this transaction, you would sell the cryptocurrencies that you own. In this way, you would be selling cryptocurrencies, which are converted back to fiat currencies.
How to trade in cryptocurrencies?
If you want to trade cryptocurrencies, then the process is somewhat different.
The main purpose of trading in cryptocurrencies is for short term gains. In this scenario, the trader is not concerned about buying and holding the cryptocurrency as an investment.
On the contrary, the main goal is to take profits based on the short term volatility in the markets.
You can trade cryptocurrencies through an exchange as well. But when you convert your crypto to fiat money and back, the transaction costs are much higher.
Therefore, trading cryptocurrencies using CFDs or contracts for differences is a better and cheaper option. In this form of cryptocurrency trading, you are not involved in the actual exchanging of the cryptocurrency.
Since CFDs are derivative instruments, the prices are drawn from the underlying prices of the actual cryptocurrency. Thus, it is easy to buy and also sell when trading cryptocurrency CFDs.
When you are trading cryptocurrencies, the profits and losses you make are automatically converted to fiat money, at the prevailing exchange rates.
With crypto CFD trading, it becomes a lot easier to sell or go short as well. This is not possible if you trade on a cryptocurrency exchange. In order to sell, you would first have to own the cryptocurrency itself.
Thus, it becomes more expensive, especially since the cryptocurrency exchanges charge a fee per transaction.
Cost-wise, buying and selling through an exchange becomes more expensive. And not to forget, there is also the gas fee that you have to pay on top.
Depending on the network congestion and the gas fee you provide, the transactions may also take longer than usual. This means that if the price of the cryptocurrency changes, you would not be getting the best price.
Trading Venues for buying and selling cryptocurrencies
Depending on whether you want to buy or sell or trade cryptocurrencies, the trading venues may also differ.
As you may already know, buying and selling of cryptocurrencies take place via a cryptocurrency exchange. This means having to open an account with the crypto exchange.
On the other hand, if you want to trade cryptocurrency CFDs, then this is done OTC or over the counter.
Many brokers who offer forex CFDs these days offer trading on cryptocurrency instruments as well. These CFD contracts can be easily traded through a forex trading platform such as MT4.
Since cryptocurrency CFDs are over the counter, there is no centralized exchange. Therefore, you can open an account with any broker that offers crypto CFD trading.
Just as with any broker, there is a fee that you will pay when trading cryptocurrency CFDs. In many cases, this fee is a markup on the spread.
Therefore, if the actual ETH or Ethereum price is $3000, you may see a price of $3010 or something similar.
This extra $10 is the fee that the broker who offer cryptocurrency CFDs charges to facilitate the trading.
For those who wish to keep their cryptocurrency trading positions open overnight, then CFD cryptos come with additional costs. These are the overnight financing costs. This is because since cryptocurrency CFDs are traded on leverage, you are trading with funds borrowed from the broker.
Therefore, when you keep your position open overnight, it attracts financing costs. In many cases, these financing costs are deducted from your trading account.
When you buy and own cryptos, however, there are no overnight fees, since you actually own the cryptocurrency in question.
The Process of Trading Cryptocurrencies
The process of trading cryptocurrencies also differs depending on whether you want to invest or speculate.
Broadly speaking, if you want to buy and hold a cryptocurrency, you can place an order at the market. This means that your fiat money is exchanged for cryptos at the prevailing spot rate.
There is also an option to place a pending order. In such a case, your order is triggered only when the cryptocurrency reaches the price you specified.
The same can be said about cryptocurrency CFDs as well.
Even when you are trading on cryptocurrencies via CFDs, you can buy at the market or place a pending order. Depending on the order you place, it is triggered accordingly.
The main difference when trading cryptocurrencies is the additional orders you may have to place.
These are basically the stop loss and take profit orders (which are in essence pending orders). The stop-loss order is triggered when the price reaches the stop-loss price.
It will prevent you from taking on further losses if the price is moving against your trade’s direction.
A take profit order on the other hand is executed when your trade is in the profit.
The pending take profit order tells the broker to close your trade and settle the difference as debit the profits to your CFD trading account.
What are the drawbacks of trading cryptocurrencies?
Although cryptocurrency CFD trading is easier, there are some drawbacks.
You can already guess by now that with cryptocurrency CFD trading you don’t own the underlying asset. As a result, you can only make profits or losses through volatile market movements.
On the other hand, owning cryptocurrencies means that you are in for the long haul. This means, having to hold on to your positions for a few months or for a few years.
The only cost of investing in cryptocurrencies is the initial transaction fee that the exchange will charge you. On top of this, there is the gas fee to facilitate the initial transaction.
There are no further costs after the initial transaction. In terms of risks, the main risk with owning cryptocurrencies is that it may depreciate in value. Another risk is the safety of your cryptocurrency wallet.
There is a security risk since the exchange holds your wallet. If there is a security breach, then you may end up losing all the cryptocurrencies that you owned.
You can of course eliminate all these risks by choosing to trade cryptocurrencies.
But bear in mind that you may end up losing your trading capital, especially if you make a wrong call on the market.
Due to the high volatility in the cryptocurrency market, you can end up losing your trading capital in a short period of time.
Since cryptocurrency CFD trading does not entitle you to own any of the cryptos, you cannot obviously purchase goods using cryptos.
On the other hand, when you own the actual underlying cryptos, you can make purchases through your wallet.
Should you buy or trade cryptocurrencies?
We come to the obvious question now about whether buying cryptocurrency is better than trading or vice versa.
As with any form of investment, the answer to this question is subjective.
It will depend on the trader’s personal goals and requirements. If you are bullish on crypto and believe that the price will continue to rise, then investing in cryptocurrencies is better.
On the contrary, if you are in only for the short term, then trading or speculating in cryptocurrencies is a cheaper option. However, to be successful in trading cryptocurrencies, you need to have a good trading experience.
Factors such as the fundamentals, and technical analysis will help you to become a better cryptocurrency trader.
Meanwhile, for someone who wants to own the cryptocurrency, investing will have a longer time horizon. Most of the millionaires in cryptocurrencies were those who bought Bitcoin or Ethereum in their early days.
Through the years, the strong price appreciation of the cryptos has helped to quadruple the earnings as a result.
Another aspect to consider is the cryptocurrency itself. Many cryptocurrency CFDs offer trading only on popular cryptos. Thus, if you are looking for something new, then CFDs will not help you. In such a case, it is better to buy the underlying cryptocurrency directly.
This will help you to buy and hold and perhaps realize the gains a few years later.
In the end, as we mention it is all about the investor’s goals and the timeframe they have in mind.
Conclusion
Both investing in cryptocurrency and trading have their own pros and cons. And most importantly, both forms are risky.
Hence, the first step is to make sure that you use funds that you can afford to lose. This is no different to investing in some financial instruments such as stocks or forex.
Therefore, we highly recommend that the reader first identify their goals and then assess their risks. In doing so, you would be able to decide for yourself.
You already know what and where you should look for when it comes to investing vs. speculating in cryptocurrencies.
The answer to whether it is better to buy cryptocurrency or trade-in cryptocurrency will be clearer.
