The Pros and Cons of Day Trading Vs. Long-Term Crypto Investing
This is a big decision that may very well decide your appetite to invest in cryptocurrency.
Youtube and Twitter are full of people sharing their strategies for day trading and long-term holding. Thankfully this divide has not led to crypto civil war!
Whichever strategy you choose, remember that it’s best to pick one that fits your risk tolerance. A good rule of thumb to have is to never risk more than you’re willing to lose.
If you’ve already begun researching cryptocurrencies, you have undoubtedly heard of the big two: Bitcoin (BTC) and Ethereum (ETH). There are hundreds if not thousands of other cryptocurrencies to buy, sell and hold. A few other well-known cryptocurrencies you may also be looking at are Bitcoin Cash (BCH), Litecoin (LTC) and Ripple (XRP).
In this week’s edition of Netcoins Progressive Investor, we’re going to break down the pros and cons of day trading vs long-term crypto holding.
A Quick Break Down of Crypto Terminology
Before we get into the particulars of the two crypto investment strategies, we must clarify some terms as they can be confusing. Whenever humans dive into a new topic or subject matter it may seem a little intimidating as there is always so much information to learn.
Undoubtedly these are terms and acronyms that you may have already come across within the crypto space and investments in general. At the end of this post, you too will have the confidence in understanding all the terms and how they relate to crypto investment strategies.
Shamefully, I do get a kick when I throw out the acronyms and words to friends, family and just about anyone I converse with about crypto.
To hodl or not to hodl? It is a question that has plagued mankind for just over a decade.
Wait? HODL? Yes, HODL. And no, it is not a typo.
HODL is the term used for holding on to crypto. There is no history for sure whether it was a typo of the word hold or Hold On for Dear Life. Crypto can be a wild roller coaster ride!
Another general term has to do with human psychology, known as Fear of Missing Out (FOMO). You may have seen this hysteria when crypto is all over the news cycle and begins to receive celebrity endorsements. Take, for example, the impact of Elon Musk’s tweets earlier in the year.
Sometimes this hysteria is followed by Fear, Uncertainty and Doubt (FUD). Usually, following a big pump is a big crash that the media piles up to demonize cryptocurrency.
When there is a lot of FUD, it usually leads to weak hands (rookie crypto investors) selling off their assets. Sometimes these sell-offs end up leaving people REKT – wrecked, destroyed, significant losses. Some of these large swings are due to a combination of FUD and over-leveraging of traders.
Crypto flows from weak hands to the whales (large holders of crypto). These whales are also known as diamond hands as they traditionally believe in the long-term success of crypto and do not scare into selling off quickly.
Now that we have covered some essential terms let’s explore each investment strategy starting with the riskiest, day trading.
The Red and Green Candles of Emotions
Before you go ahead and dust off the cobwebs off of your monitors and light them up with red and green candles, let’s look at what makes day trading cryptocurrency very attractive and potentially lucrative.
There is nothing better than the adrenaline rush you get after successfully executing and selling a position to lock in some juicy profits. It is kind f what you feel when you hit the jackpot or win a big hand at the casino. It is a very natural human experience to feel excitement and joy when you perform well.
On the flip side of the brain, experiencing your positions tank overnight can make for a rough day at the office.
New investors buying into the FOMO only to be late to the party resulting in panic selling. Sometimes it is brought on by FUD or a sizeable amount of leveraged positions getting liquidated.
Day trading is not recommended for new investors as infamous manic swings can also move your emotions just the same. To withstand these types of stress levels daily takes some serious mental fortitude.
Some tools can help day traders and holders alike to predict price movements to avoid missing price moves.
Analytics Provide Tools for Smarter Investing
Many exchanges offer analytical tools, or one can choose specialized sites such as Glassnode, an on-chain data and intelligence platform. Tools like Glassnode provide investors with the necessary information to make the best decisions based on their strategy.
Users of the platform can see an extensive range of metrics, all of which can be used as signals to buy or sell a position.
These on-chain analytics are critically important when seeking out patterns in the market. For example, Bitcoin has a built-in event every four years called “the halving.” The rate of Bitcoin mined decreases by 50%, making Bitcoin the number of new bitcoins entering circulation more scarce every time the block reward cuts in half.
Check out the Bitcoin halving clock; the next one is in 897 days.
A savvy investor should be aware of this cycle to plan the right time to enter and exit a position.
Now that you have timed your moves correctly, what about your profits? Undoubtedly you will need to pay some taxes, and your investing strategy will determine what your fair share is to pay.
Potential Business Tax Applied to Day Trading
The Canada Revenue Agency (CRA) treats crypto income as if it is business income or capital gains.
It is up to each investor to determine if their crypto investments will be treated as income or capital. Keeping track of all your moves may seem like a daunting task. Rest assured, most platforms provide the necessary information when it comes to tax time.
If you are unfortunate to lose in some positions, the CRA will also treat income losses as either business losses or capital losses that can be claimed. Any losses claimed against your earnings will lower what you will have to pay in taxes.
Claiming business or capital losses due to impermanent loss can be used to your benefit too.
What is Impermanent Loss?
Impermanent loss is a phenomenon where trading pairs of crypto assets may result in a profit of a particular cryptocurrency, while at the same time, be at a loss in terms of the initial investment in fiat. Sounds confusing?
Let’s look at an example.
An Example of Impermanent Loss
Let’s say you buy $100 worth of BTC and the market price of that Bitcoin is $1,000, meaning you have 0.1 BTC. You then want to trade your 0.1 BTC for ETH trading at 0.01BTC/ETH. ETH has a fiat price of $10. You can purchase 10 ETH.
The cost of BTC to ETH increases to 0.02BTC/ETH, meaning the value of your ETH to BTC has gone up.
However, the fiat price for ETH has gone down to $5. Now your original purchase of ETH for $10 a token is worth $50 but is valued at 0.2 BTC.
An investor now finds themselves in a situation where the dollar value of their crypto investment has gone down, yet the value in ETH has gone up.
So what do you do?
If you are a true believer, you would likely wait it out until the price differences from fiat to crypto go back to the original value when purchased.
Trying to earn a living with day trading carries its share of risk and reward. It may not be the best move considering price volatility, emotional roller coaster, and potentially higher taxes. However, for the more patient HODLer, this is just part of the long-term game to the moon.
Long-term Crypto Investing
Now that you understand a bit more about the risks and rewards associated with day trading, let’s get into the seemingly safer and more passive approach to crypto investing.
Holding for the long term is akin to buying real estate. You invest a fixed amount, and over time, it grows in value. Think of it as a safer investment where you are more likely to make a profit if there are shortages of supply driving up demand.
How do you choose which crypto to buy for the long term and when to buy it?
Let’s think back to BTC’s preprogrammed halving events. These deflationary events make the new supply of Bitcoin entering circulation cut in half approximately every four years. This cycle has paid off remarkably for early adopters as they have seen crypto adoption increase shortly after halving events in the past.
When playing the long game, you can choose to reinvest your profits in altcoins and NFTs.
Diversify By Sprinkling Long Term Profits into Altcoins and NFTS
A robust crypto investment strategy should be well-diversified into other potentially lucrative assets like altcoins, decentralized finance projects, and NFTs (non-fungible tokens).
2020 and 2021 have been incredible years for crypto adoption and expanding newer assets and use cases. These use cases provide the roadmap for long-term crypto adoption.
Take, for example, the rise of DeFi and all the growth opportunities it provides to investors with lower fees, staking and yield farming opportunities.
DeFi’s staking and yield farming are great ways to earn passive income, contributing to the long-term stability of crypto to grow and mature.
Investors need to be aware of the potential impermanent loss of investing in staking and yield farming. Again, long-term holders are more likely to believe in the long-term success of a given project and will ride it out to greener pastures.
NFTs and Bitcoin may very well be considered some of the best strategies for long-term crypto holders. NFTs have carved out a whole new world of crypto use cases ranging from collectible art, exclusive access, and play-to-earn gaming.
Just like all other cryptocurrencies NFTs are not without their own set of risks. Unfortunately, an investor may acquire an NFT at an inflated price only to see it bottom out. However, staying true to your confidence in the project and patience can pay out handsomely.
Determining which initial strategy is best for you may take some trial and error. Always keep in mind to do your research and never risk more than you are willing to lose.
Start Your Short Term or Long-term Investing Strategy with Netcoins
Now that you have a better understanding of the risk and rewards of crypto day trading and long-term holding, what are your next steps?
The first step is to sign up for a free Netcoins account and start your lifelong journey in cryptocurrency.
You can deposit cryptocurrencies like Bitcoin, Ethereum, Litecoin and others, an online bill payment, e-transfer, or pre-authorized debit from your bank account to get started.
Remember to think about the pros and cons of the investment strategy you choose to use before making any big decisions.
Consider this blog your primer, but always consider what your personal financial situation is, and keep in mind that it is possible to lose a lot of capital if you don’t know what you’re doing.
Writer, content marketing at Netcoins.