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Betting versus Trading: What are the Similarities and Differences?Is trading really the same as betting?
There’s a subtle difference between investing, trading and gambling.
Many people conflate betting with trading. Although there are similarities between the two, there are also some important differences which we’ll highlight in this article. First, let's look at what investing is, how that differs from trading and then finally compare betting versus trading.
What is Investing?Investing involves putting money into a project with expectations of making a profit over the long term. Investors have full ownership of an asset (like cryptocurrencies, gold or real estate), generating an income from an appreciating price or by receiving cash flows associated with the asset.
Skilled investors seek opportunities to buy something that is undervalued, do their homework, and are patient, waiting enough time until it becomes more valuable in the distant future. Smart investors also take custody of the asset, whether it is a property, bar of gold or a cryptocurrency.
Investors are also much more likely to focus on a certain philosophy, usually seeking opportunities they think will change the world in a positive way. For instance, many of the earliest crypto investors identified the value of bitcoin way earlier than others. They correctly predicted that the cryptocurrency would achieve critical mass, become demanded enough as a medium of exchange and as a digital store of value to push the price to greater highs over the years. Even after all these, many people compare investing in cryptocurrency now as like investing in internet companies in the late 1990s.
Investors favour the use of fundamental analysis, which is assessing the long-term drivers of the price and underlying value of an asset. For cryptocurrencies, this can include a wide range of factors including, but not limited to:
- the number of active addresses/token holders, the number of transactions and the total dollar value of all transactions (which all indicate the usage of a cryptocurrency),
- the evolution of the hash rate for a Proof-of-Work cryptocurrency, plus how it's distributed (as a measure of security), and
- Development activity related to cryptocurrency's underlying code (a proxy for innovation potential).
What is Trading?Trading involves being a lot more active and assessing the market on a more frequent basis. They're aiming to apply a systematic and methodical approach to become consistently profitable trading the market's movements on a minute-by-minute, hourly, or daily basis.
You may have heard the term 'day trader', referring to those who take many trades throughout any given day and typically holding onto these positions for only 12 hours or less.
Another category is the 'swing trader', typically taking fewer trades and holding onto them for up to a few days at a time. On the opposite end of the spectrum are 'scalpers'. They execute a large number of trades in a day to ride smaller price movements for a much shorter duration - an hour, 30 minutes or even 30 seconds!
The aim of trading should be to at least preserve the value of your capital, and as you gain more experience, become profitable over time. With common sense, an understanding of the market and seeing trading as a game of probabilities, it’s possible to achieve profitability over the long term.
How Does Trading Compare to Investing?Since traders are more active and make more decisions on a daily basis, it’s important to remove any emotion from the equation. If you invest in something for the long-term, it’s easier to remove yourself from any emotion since if you've done your research. You’ll know why you invested and what you expect to happen in the future to either validate or invalidate your idea. Until it's clear that your idea has failed, you’d hold on to your investment.
But with trading, you are more sensitive to price movements since the situation can change rapidly and often traders use leverage to amplify their profits. However, leveraged trading is a double-edged sword, since your losses are also amplified if your trade doesn’t work out.
And here lies a major difference between investing and trading: with leveraged trading, you can lose your entire wager if the price moves far enough against you. If the leverage used is higher, the price movement that causes you to lose your entire wager is smaller. The lower leverage used, the less likely you'll lose your initial investment.
Although trading can generate profits quickly from smaller price movements as compared to investing, there are more calculations involved. You have to predict how far the price might move in either direction, as well as assess the probabilities. You also have to calculate how much risk you want to take on. It’s advised to risk only a small percentage of your total bankroll (e.g., 1% to 5% of your total balance), use lower levels of leverage to avoid major losses, and to cut losses before they eat into your capital.