Active trading vs passive investing: What’s the difference?

If you’re hoping to make money by trading and investing in cryptocurrency, you might be wondering whether it’s better to be an active trader or a passive investor. Both approaches can help you grow your wealth, but while one requires a lot of attention, the other calls for plenty of patience. So, which strategy is right for you?

In this AAG Academy guide, we’ll teach what active trading and passive investing are, and how they compare for those looking to make money from their investments.

What is active trading?

Active trading seems to be the most common strategy employed by cryptocurrency investors, and it involves buying and selling cryptocurrency assets on a regular basis with the goal of making a profit on each trade. Active traders are required to keep on top of the latest goings on in the cryptocurrency industry so that they know what to invest in and when.

Without constant attention, it’s easy to miss changing trends and other shifts in the market, which could be the difference between a profit and a loss. This is especially true in the cryptocurrency industry, which is significantly more volatile than something like stocks. Holding onto an investment for just half a day can make a huge difference to the outcome.

Active trading usually means much smaller profits, but on a much more regular basis.

Examples of active trading

Day trading is one of the most obvious and most extreme examples of active trading because, as its name suggests, it involves trading on a day-to-day basis and making all your moves while the market is open. Day traders buy and sell batches or securities within a short space of time, sometimes in less than a minute, to take advantage of small price fluctuations.

Of course, day trading doesn’t really happen in the cryptocurrency industry — at least not to the same extremes. But many cryptocurrency traders do buy and sell assets within a short space of time to take advantage of small fluctuations in price. This doesn’t typically yield big profits, but it can mean regular profits, and they all add up.

What is passive investing?

Passive investing is essentially the opposite of active trading. It involves carefully choosing what you want to invest in, and then holding that investment for a prolonged period of time in an effort to maximize your profit. Passive investors don’t cash in for a marginal return on their investment; they stick it out in the hope that they will see a much bigger return over time.

Passive investing requires investors to make the right decisions initially, then more or less forget about it until it is time to sell. This is not days or weeks or even months later, but many years or even decades later. A lot of investors use passive investing to save for retirement; they put spare cash into it while they’re working, then cash out when it’s time to stop.

You might be interested in: Things to look before investing in crypto assets

Examples of passive investing

Passive investing doesn’t happen very often within the cryptocurrency industry, and when it does, it is usually reserved for the biggest cryptocurrency options, such as Bitcoin and Ethereum. But there are plenty of examples of passive investing elsewhere.

Index funds are one of the most popular. These allow investors to put their spare cash into mutual funds or exchange-traded funds that are linked to a particular market index, such as the S&P 500. Index funds are passively managed, which means aside from putting your money in and then taking it out when you’re ready to cash in, you have no control over it.

Real estate is also seen as a passive investment. This one is pretty self-explanatory; it involves buying property, renting it out if you’re not using it yourself, and eventually selling it. Given the rate at which property prices increase, this can be one of the most lucrative investment strategies for those looking for a long-term option.

Active trading vs. passive investing pros and cons

There are a number of key differences between active trading and passive investing — some of which you may have already worked out after reading the above. Let’s go over them in a little more detail so that they’re clear and easy to understand.

Costs
Every time you buy, sell, and swap cryptocurrencies — and other assets — you pay a fee for using the exchange. With active trading, costs are higher because it involves buying and selling on a regular basis. With passive trading, you typically only cash out once, though you may choose to put money in regularly, depending on the investment method you’re using.

Risks
Every trading method is risky, whether you’re investing for the long-term or not. However, because more frequent moves are used in active trading, the risk is increased. If just one investment does not turn out the way you hoped, it can have a big impact on your portfolio. Passive investing, especially when it involves things like stocks, is safer.

Flexibility
Active trading gives you much greater flexibility over the moves you make, since you’re not tied into anything. If you don’t feel good about a certain asset, you can sell it right away. With passive investing, you must be prepared to deal with the ups and downs — and perhaps try to ignore them altogether — until the time comes to cash in your investment.

Active investing also gives you the freedom to simply take a break during a bear market if you want to. Furthermore, you have a much greater range of options over what to invest in, whereas those options are more limited with passive investing.

Returns
If you’re particularly skilled at active trading, it’s certainly possible to enjoy big profits over time. However, when you look at the averages, passive investing usually pays out more in the end — especially when you put your money into something like an index fund. Early Bitcoin investors can also testify to buying and holding over a prolonged period of time.

References

• Best passive income investments
• Passive investing vs active investing
• Day trading: The basics and how to get started