Crypto Investing: Profitable Or Pipe Dream?

Cryptocurrency is a decentralised payment method that can be used to conduct online transactions. The market is extremely lucrative, with numerous ways to make money ranging from investing to active trading and staking. The most common way of earning money from cryptocurrencies is by buying coins such as Bitcoin, Litecoin, Ethereum, and Ripple, and waiting for their value to rise before selling at a profit. This strategy requires identifying more stable and volatile assets that can shift in value rapidly, resulting in regular profits.

There are other ways to make money from cryptocurrencies, such as earning cryptocurrency dividends, running cryptocurrency master nodes, and staking cryptos. More than 80% of cryptocurrency investors believe that day trading is the only effective way to earn money in this space. However, it requires proper analytical and technical skills to analyse market charts and identify buying and selling opportunities.

While making money with cryptocurrency is possible, it comes with risks due to its volatility. The market is susceptible to theft from hacking, and it is crucial to use secure wallets and exchanges.

Direct investment

One of the benefits of direct investment is the potential for substantial returns. The crypto and decentralised financial markets have an excellent compound annual growth rate, outperforming many traditional markets. By investing in a diverse portfolio of crypto assets and holding them for the long term, you can take advantage of this growth. It is referred to as "HODLing" in the crypto community, which stands for "holding on for dear life" due to the turbulent nature of cryptocurrency.

When investing directly in cryptocurrency, you can choose to invest in a mix of safer options and higher-risk tokens. Safer options include well-established cryptocurrencies like Bitcoin, Ethereum, Litecoin, and Polygon (MATIC). These have a lower risk of significant losses but may offer more modest returns. On the other hand, investing in higher-risk tokens can provide the potential for larger gains but also carries a greater possibility of loss.

Crypto staking

Staking serves a similar function to mining, in that it’s the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange. Stakers also help establish which blocks are valid.

There are two main types of crypto staking: active and passive. Active crypto staking means locking your tokens to a network for the purpose of actively participating in the network. Passive crypto staking involves simply locking your tokens to a blockchain network to help keep it secure and operating efficiently.

There are also four common forms of staking:

• Delegated staking: This form of staking enables crypto stakers to delegate their staking power to a validator node operated by someone else. The rewards earned are shared among validators and delegators.
• Pool staking: A group of coin holders may combine their resources to compete more effectively for staking rewards. Any rewards earned are shared proportionally among the members of the pool.
• Exchange staking: Some cryptocurrency exchanges offer staking services, enabling users to stake their holdings directly on an exchange.
• Liquid staking: Users receive representative tokens in exchange for staking their crypto. The representative tokens can be traded or used, providing liquidity to the crypto staker.

The advantages of staking include the opportunity to earn passive income, the potential for rewards to appreciate in price, and the ability to improve network security and efficiency. However, there are also several risks associated with staking, including limited liquidity during the staking period, the possibility of losing value due to price volatility, and the risk of having your cryptocurrency slashed (partially confiscated) for violating network protocols.

Crypto lending

There are different types of lending platforms:

• Decentralised Lending Platforms (DLP) operate on blockchain technology, offering transparency and security without relying on intermediaries.
• Centralised platforms are managed by companies that facilitate lending, potentially offering higher interest rates but requiring trust in the platform's security measures.
• Peer-to-Peer (P2P) lending enables direct lending between individuals, often facilitated by platforms that match lenders with borrowers based on their terms and conditions.

The amount earned from lending crypto depends on three factors: the loan's duration, the loan's amount, and the interest rate. The top lending platforms in 2023 were Uniswap, Curve, and Balancer.

Crypto mining

To mine cryptocurrency, you need a computer with specialised software capable of solving complex, cryptographic mathematic equations. In the early days of Bitcoin, a simple CPU chip on a home computer was enough to mine. However, as the blockchain has grown, the computational power required to maintain it has increased. Today, mining cryptocurrencies requires a specialised GPU or an application-specific integrated circuit (ASIC) miner.

Mining profitability depends on factors such as hardware efficiency, electricity costs, and network difficulty levels. It also requires a significant upfront investment in equipment and operational costs. Due to these high costs, most mining is now done by specialised companies or groups of people who band their resources together in mining pools.

Mining pools allow miners to combine their computational resources to increase their chances of finding and mining blocks on a blockchain. The reward is then distributed across the mining pool, in proportion to the amount of resources that each miner contributed.

While mining can be profitable, it is important to carefully calculate the potential return on investment, especially considering the high energy costs involved.

Crypto trading

• Technical Analysis: Traders use charts, patterns, and signals to predict price movements and make informed decisions.
• Risk Management: Due to market volatility, traders must implement strategies to mitigate potential losses and capitalise on opportunities.
• Speed and Adaptability: Crypto trading requires a good understanding of market trends and the ability to act quickly in response to changes.
• Tools and Platforms: Traders use crypto exchanges like Binance, Coinbase, and Robinhood to buy and sell digital currencies.
• Diversification: It is important to diversify your portfolio by investing in a mix of safer cryptocurrencies and higher-risk tokens.
• Research and Information: Successful traders conduct thorough research, stay updated with market news, and understand the underlying technology and potential risks of each cryptocurrency.
• Emotional Discipline: It is crucial to not let emotions drive your trading decisions. Set clear rules for entry and exit points and stick to them.
• Time Commitment: Crypto trading can be a full-time endeavour, requiring constant monitoring of the market and quick responses to changes.
• Security: Ensure the security of your crypto assets by using secure wallets, enabling two-factor authentication, and regularly backing up your wallets.
• Profit Potential: Crypto trading offers the potential for substantial returns, especially during strong market years. For example, investing $1,000 in Bitcoin in 2021 would have resulted in a $632 profit.

Frequently asked questions