Investing in Cryptocoin vs Trading in Cryptocoin

Published: September 19, 2017 at 10:33 am

Last Updated on October 8, 2023 at 1:47 pm

Suppose you wish to “put” some money in cryptocurrency (or cryptocoins), say Bitcoin, altcoin, litecoin, fartcoin etc. would you trade or would you invest? It is obvious that due to poor liquidity, the crypto market is volatile. So instinct would tell us caution is necessary. So trading (frequent buying and selling) with regular profit booking seems like an obvious choice to make some quick money rather than investing (buy and hold with periodic investing).  In this post, I discuss the fundamental difference between the currency market and capital markets and if something can be discerned about cryptocoin risks.

The post is a simplified digest of my learnings from “Fractal Market Analysis: applying chaos theory to investments and economics” by Edgar E. Peters, one of the Five Books That Will Redefine Your Understanding of Stock Markets.

This is not a recommendation to invest or trade in cryptocoin and merely my attempt as a student to market risk to understand where they fit in the risk-reward map. This post is meant for those who have decided to buy cryoptocoins.

If you are new to this area, you could consider having a look at : Bitcoin: Should we use it as a currency or as an investment?


Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

If you undecided, you can consider, Three Reasons to avoid Bitcoin or any other cryptocurrency

Cryptocurrency is a new kid on the block and trying to bin it in established classifications can be a big mistake. I will not take anyone who says they understand cryptocoin market volatility seriously. There is simply not enough data to make any meaningful observation.

However, there is enough data to understand the difference between, stocks, bonds, gold and conventional currencies. The question is, can we try to understand where cryptocoins fit in.

The idea is to find out if we can back our intuition or commonsense (to trade in cryptocoins) with some data based proof. The reason being, intuition can be wrong (eg. timing the market) just as often as it is right.

Now, the analysis presented in “Fractal Market Hypothesis” is extremely heavy. So I am going to keep it non-technical and represent the key results with a sketch.

Equity vs Bonds vs Gold vs currency (conventional)

The fundamental difference between the currency market and the capital market ( equity, bonds) is that in the capital market, there are actually securities being exchanged.

Equity and bonds have intrinsic value and they are exchanged for raising capital (funding an enterprise).

Currency (paper money) has no intrinsic value and need not be directly related to the growth of the economy. The central bank of a country has the power to manipulate its value (as measured against another currency) and its supply via interest rates or trading large quantities or more extreme and rare measures such as printing new money and ahem invalidating old ones.

Currency trading offers support to capital markets. Established market participants will readily recognise that currency market is a trading market.

As an economy grows, it impacts the return from the capital markets (equity and bond markets) and is correlated to economic cycles. Currency markets are not.

These key ideas which are well known should be seen in plot of risk vs investment duration.  Peters shows that this is indeed the case.  Here is a schematic (drawn by me) of his results.

The currency here is conventional currency and not cryotocoins.

Equity and bonds (capital markets) behave similarly. The risk over the long term is lower than the short term and it is range bound. That is the max risk and min risk are within a range (that cannot be predicted). Equities and bonds move within these bounds over the long term. That is there is reversionNOT mean reversion as there is NO mean.

The point is, buying and holding bonds and equity is less risky than trading in equities and bonds.

In the case of conventional currency, trading in currency has a risk similar to trading in equity and bonds. However, investing in currency is just as risky as trading in currency. In fact the risk of buying and holding currency is higher than trading in currency.

Before we consider cyrptocoins, a note about gold. Gold does not behave like conventional currencies. However, it also does not behave like equities and bonds and falls somewhere in between. In other words, it is debatable if gold has intrinsic value or not.

Cryptocurrency vs conventional currency

Cryptocurrency cannot be manipulated as easily as conventional currency, thanks to decentralization.  So it will not be linked to any particular regional economy and therefore not be linked to economic cycles. In this aspect, all currencies are the same. And if we go by this alone, our intuition is right and trading crypto is “safer” than investing in crypto.

However, cryptocoins are currently being mined (well, should I say, should be mined to ensure decentralization) and normal currency has no such (current) necessity. This means, the market forces and trading volumes are very different. This offers a possibility of investing in crypto.

The crypto investor should appreciate that the market forces can result in no appreciable movement for months or years as has been the case for Bitcoin. See this post: Bitcoin: Is it a Ponzi Scheme? A Pyramid Scheme? Or a Bubble?

If you “must” put money in crypto , then my suggestion would be to trade.

As for me, I am happy to sit on the sidelines and enjoy the irony: a decentralized currency is not of use to the trader or investor unless it is valued against a centralized one.


Use this form to ask Questions or reg. the robo template ONLY (For comments/opinions, use the form at the bottom)

And I will respond to them in the next few days. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you.  PLEASE DO NOT POST COMMENTS WITH THIS FORM it is for questions only.

[contact-form][contact-field label=”Name” type=”name” required=”1″][contact-field label=”Email” type=”email” required=”1″][contact-field label=”Ask your question (Got an opinion or comment, use comment box at the bottom of the page. DO NOT post them here)” type=”textarea” required=”1″][/contact-form]

GameChanger– Forget Startups, Join Corporate & Live The Rich Life You want

My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantco-authored with Pranav Surya is now available at Amazon as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no Kindle necessary).

It is a book that tells you how to travel anywhere on a budget (eg. to Europe at 50% lower costs) and specific investment advice for young earners.

The ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

You can Be Rich Too with Goal-Based Investing 

My first book with PV Subramanyam helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.

The book is available at:

Amazon Hardcover Rs. 271. 32% OFF

Infibeam Now just Rs. 270  32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!

Flipkart Rs. 279. 30% off

Kindle at Amazon.in (Rs.271) Read with free app

Google PlayRs. 271 Read on your PC/Tablet/Mobile

Now in Hindi!

Order the Hindi version via this link

 

 

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.

  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter with the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter, Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision-making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & it's content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)