Crypto Investment: Money-Making Method Or Myth?

Investing in cryptocurrency is a popular way to make money. There are several ways to do this, each with its own level of risk. These include direct investment, business creation, early business investment, crypto staking, liquid staking, mining, reselling, lending, providing liquidity, arbitrage, earning interest on stablecoins, masternodes, trading, and investing in crypto startups.

Direct investment

Investing in a diverse portfolio of crypto assets is a great way to make money. This method, known as "HODLing", involves buying and holding cryptocurrencies for the long term, similar to investing in stocks. Despite the ups and downs, the crypto and decentralised financial markets have an excellent compound annual growth rate, which can lead to lucrative returns over three- to five-year time horizons.

When investing in cryptocurrencies, it is possible to mix traditional and modern finance. Investors can choose a mix of safer cryptocurrencies and higher-risk tokens, depending on their risk appetite. Safer cryptocurrencies include well-established coins like Bitcoin and Ethereum, which have stood the test of time and are less likely to disappear overnight.

Investing in crypto assets can be a volatile endeavour, and there is always the risk of losing money. Therefore, it is crucial to do your research and understand the risks involved before investing. Diversifying your portfolio across multiple cryptocurrencies can help spread the risk and potentially mitigate losses.

Additionally, it is important to find a reliable and secure way to store your cryptocurrencies. This can be done through hardware wallets, software wallets, or online exchanges. When choosing a storage method, ensure that it is secure and trustworthy to protect your investments.

Overall, direct investment in cryptocurrencies can be a profitable strategy, but it requires careful research, risk management, and a long-term perspective to navigate the inherent volatility of the crypto markets.

Crypto mining

Each block on the blockchain contains a mathematical puzzle, which crypto miners compete to solve using specialised, high-energy computers known as nodes. These computers use trial and error, making repeated guesses until they find the solution. The more computer power a crypto miner uses, the more attempts they can make.

Bitcoin mining is profitable for some individuals, but it is a competitive field with many people and organisations engaged in the activity. It is important to perform a cost-benefit analysis before investing in crypto mining, considering variables such as set-up costs, electricity costs, efficiency, bitcoin price, and pool payout schemes.

Mining rewards can be hard to come by due to the intense competition. The probability that a participant will discover the solution is related to the network's total mining capacity. Bitcoin mining requires substantial hardware and software, including a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC).

The majority of the Bitcoin network's mining capacity is owned by large mining firms and pools. It is still possible to participate in Bitcoin mining with a regular at-home personal computer, but the chances of receiving any reward are minuscule unless you join a mining pool.

Crypto staking

If a cryptocurrency you own allows staking, you can "stake" some of your holdings and earn a reward over time. The blockchain puts your crypto to work, as it uses a "consensus mechanism" called Proof of Stake to ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your staked crypto becomes part of this process.

There are two main types of crypto staking: active and passive. Active staking involves locking your tokens to a network for the purpose of actively participating in the network, such as by validating transactions and creating new blocks to earn token rewards. Passive staking, on the other hand, simply involves locking your tokens to a blockchain network to help keep it secure and operating efficiently. While this method is not time-consuming, it generally yields lower token rewards than active participation.

There are several advantages to staking. Firstly, it allows you to generate passive income on crypto assets that you plan to hold for the long term. Secondly, the rewards you earn have the potential to appreciate in price. Additionally, staking improves the security and efficiency of the blockchain network. Finally, it may enable your active participation in the blockchain network.

However, there are also several risks associated with crypto staking. Your assets will have limited or no liquidity during the staking lock-up period. Both staking rewards and staked tokens can lose value in the event of price volatility. Your cryptocurrency can also be "slashed", or partially confiscated, for violating network protocols. When many users receive staking rewards, there is a risk of cryptocurrency inflation. Additionally, an attack on a blockchain network can impact your staked crypto.

Overall, crypto staking can be a lucrative way to generate passive income, but it is important to carefully consider the risks and do your own research before getting started.

Crypto lending

Crypto loans are typically offered as collateralised lending products, requiring users to deposit a minimum of 100% (and up to 150%, depending on the lender) in crypto collateral to borrow cash or cryptocurrency. Crypto lending platforms act as an intermediary for lenders and borrowers, and both centralised and decentralised markets are available.

There are several types of crypto loans available:

• Collateralised loans: These are the most popular type of crypto loan. They require deposited cryptocurrency to be used as collateral for the loan. Most platforms require over-collateralisation, which means that borrowers can access only a certain percentage of the deposited collateral (typically below a 90% loan-to-value). The lower the loan-to-value (LTV), the lower the interest rate, as well as a lower risk of being margin called.
• Crypto line of credit: Some platforms offer a cryptocurrency line of credit instead of a traditional loan with a predetermined term length. This is a type of collateralised loan that allows users to borrow up to a certain percentage of deposited collateral, but there are no set repayment terms, and users are only charged interest on funds withdrawn.
• Uncollateralised loans: Uncollateralised loans are not as popular as they function similarly to personal loans. Borrowers must fill out a loan application, pass identity verification, and complete a creditworthiness review to be approved. These loans have a higher risk of loss for lenders because there is no collateral to liquidate in the event of a loan default.
• Flash loans: These are instant loans that are borrowed and repaid in the same transaction. They are typically used to take advantage of market arbitrage opportunities, such as buying cryptocurrency for a lower price in one market and instantly selling it for a higher price in another.

Yield farming

Yield farmers can generate yields by performing several functions. They can be a liquidity provider, lender, borrower, and staker. Liquidity providers deposit tokens on exchanges to help traders enter and exit positions. The exchange imposes a fee on trades given to liquidity providers. A yield farmer is a lender when they lend cryptocurrencies to borrowers using a smart contract and through platforms such as Compound or Aave, eventually realising yield from the interest paid on the loan.

On the other side, there are borrowers—market participants who use one token in a pair as collateral and are lent the other token of the pair. This activity allows the users to farm the yield with the borrowed coin(s). This means the farmer retains their initial holding, which could rise in value, and earns yield on their borrowed coins.

The easiest way to become a staker and start earning staking rewards is through a crypto exchange like Coinbase using its wallet. In turn, you earn rewards based on the amount you have staked.

Frequently asked questions