Crypto Investing: Strategies To Make Money

Investing in cryptocurrencies is risky, but it can be lucrative. The most common way to make money from cryptocurrencies is to buy coins such as Bitcoin, Litecoin, Ethereum, and Ripple, and wait until their value rises before selling at a profit. This strategy requires identifying 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 staking, lending, and mining. Staking involves holding coins in a live wallet and allowing you to earn additional coins for securing that particular crypto network. Lending your cryptocurrency through centralised or decentralised platforms is another way to earn interest from crypto holdings without selling them. Finally, mining involves using specialised computer hardware to solve complex mathematical puzzles, which in turn secures the network and processes transactions. Miners are rewarded with newly minted coins and transaction fees.

Buy and hold

The "buy and hold" strategy, also known as "HODLing", is a popular investment approach in the cryptocurrency space. This strategy involves purchasing and holding onto cryptocurrencies, such as Bitcoin, Ethereum, Litecoin, and Ripple, with the expectation that their value will increase over time. This approach is based on the belief that as cryptocurrencies become more widely adopted and integrated into technological and financial systems, their demand and value will rise.

• Long-Term Perspective: This strategy requires a long-term perspective and patience. Cryptocurrencies are subject to high volatility and their prices can fluctuate significantly in the short term. By taking a long-term view, investors can focus on the potential for value appreciation over months or years, rather than getting caught up in short-term market noise and price movements.
• Reduced Market Timing Pressure: Unlike short-term trading, the "buy and hold" strategy does not require perfect market timing. Investors using this approach aim to profit from the overall upward trend in cryptocurrency values over time, rather than trying to time the market perfectly. This reduces the pressure of having to enter and exit trades at precise moments.
• Lower Transaction Costs: The "buy and hold" strategy typically results in lower transaction costs compared to frequent trading. Short-term traders incur higher transaction costs due to the accumulation of fees from multiple trades. By holding for the long term, investors can avoid these excessive costs.
• Reduced Psychological Strain: Short-term and medium-term trading can be stressful and demanding, especially for less experienced traders. The "buy and hold" strategy is less taxing psychologically, as it does not require constant monitoring of price movements and technical analysis.
• Potential for Large Gains: Cryptocurrencies have seen magnificent gains, with certain coins recording unprecedented growth. The "buy and hold" strategy allows investors to capture these gains over the long term, potentially resulting in substantial profits.
• Focus on Established Cryptocurrencies: When employing a "buy and hold" strategy, it is generally advisable to focus on established, large-market capitalisation cryptocurrencies such as Bitcoin, Ethereum, Litecoin, and Ripple. These coins have a stronger track record and are less likely to "crash and burn" compared to smaller, less established coins.
• Diversification: It is important to diversify your investments across multiple cryptocurrencies to minimise risk. While the "buy and hold" strategy focuses on long-term value appreciation, diversifying your portfolio can help protect against the inherent volatility of individual coins.

In summary, the "buy and hold" strategy in cryptocurrency investing involves purchasing and holding coins for an extended period, with the expectation of profiting from long-term value appreciation. This approach requires patience, a tolerance for volatility, and a strong belief in the potential for widespread cryptocurrency adoption. While it may not be suitable for everyone, this strategy has been successful for many investors, particularly in the context of well-established cryptocurrencies.

Trade

Trading cryptocurrency is an active approach to profiting from the market's fluctuating prices. Traders use a variety of methods, including technical analysis, to identify buying and selling opportunities, often executing multiple trades within a short period to capitalize on small price movements. The goal is to make a series of small profits that add up over time, which requires a good understanding of market trends and the ability to act quickly in response to market changes.

There are three main trading styles:

• Day Trading: Day trading is a short-term trading style where you anticipate that the price of a cryptocurrency will rise or fall. Depending on how you believe the price will move, you will either buy (go long) or sell (go short). Hold time for day trading can be as short as a few minutes up to a few hours. Attempting to anticipate such short-term price movements is challenging, which is why day trading is one of the riskiest trading styles.
• Swing Trading: When swing trading, you will anticipate price movements in the same way as with day trading. The main difference is that you will be dealing with much longer time frames. Positions will typically be held for days or even weeks.
• Automated Bot Trading: An automated crypto bot is a software program that will enter and exit trades based on your predetermined trade conditions. Trading bots have the advantage of being able to trade 24/7 and eliminating human emotion, making them faster at reacting to market changes.

To get started with trading cryptocurrency, you will need to set up an account with a cryptocurrency exchange where you can buy and sell digital currencies. Successful traders often rely on a mix of technical and fundamental analysis to make informed decisions about when to execute trades. They also need to stay up-to-date with market news and events that could affect prices. It is common for traders to use tools like price charts, trading indicators, and stop-loss orders to manage risks. Discipline is essential, and traders need to be ready to cut losses and take profits at pre-defined levels.

Staking

By forcing these network participants – known as validators or "stakers" – to purchase and lock away a certain amount of tokens, it makes it unattractive to act dishonestly in the network. If the blockchain was corrupted in any way through malicious activity, the native token associated with it would likely plummet in price, and the perpetrator(s) would stand to lose money.

The stake, then, is the validator's "skin in the game" to ensure they act honestly and for the good of the network. In exchange for their commitment, validators receive rewards denominated in the native cryptocurrency. The bigger their stake, the higher the chance they have to propose a new block and collect the rewards.

The stake does not have to consist exclusively of one person's coins. Most of the time, validators run a staking pool and raise funds from a group of token holders through delegation – lowering the barrier to entry for more users to participate in staking. Any holder can participate in the staking process by delegating their coins to stake pool operators who do all the heavy lifting involved with validating transactions on the blockchain.

To begin staking, you must first own a cryptocurrency that uses a proof-of-stake blockchain. Staking locks up your assets to participate and help maintain the security of that network's blockchain. Examples of cryptocurrencies that use proof-of-stake include Ethereum, Tezos, Cosmos, Solana, and Cardano.

You can also set up a cryptocurrency wallet that supports staking. If you have your tokens in one of these wallets, you can delegate how much of your portfolio you want to put up for staking. You pick from different staking pools to find a validator. They combine your tokens with others to help your chances of generating blocks and receiving rewards.

Most of the bigger crypto exchanges, such as Coinbase, Binance, and Kraken, offer staking opportunities in-house on their platform, which is a convenient way to put your coins to work.

Risks of Staking

As with every type of investing, especially in crypto, there are risks to staking. Cryptocurrencies are volatile, and drops in price can easily outweigh the rewards earned. Some coins require a minimum lock-up period during which you cannot withdraw your assets from staking.

There is also a counterparty risk of the staking pool operator. If the validator doesn't do their job properly and gets penalized, you might miss out on rewards. Staking pools can also be hacked, resulting in a total loss of staked funds.

Benefits of Staking

Lending

Crypto lending is a decentralised finance service that allows investors to lend their crypto to borrowers. Crypto lending platforms act as intermediaries between lenders and borrowers. Lenders deposit their crypto into high-interest lending accounts, and borrowers secure loans through the lending platform. The platform then funds the loans using the crypto that lenders have deposited.

There are two main types of crypto lending platforms: decentralised crypto lenders and centralised crypto lenders. Both offer access to high-interest rates, sometimes up to 20% annual percentage yield (APY), and both typically require borrowers to deposit collateral to access a crypto loan.

Crypto lending has two components: deposits that earn interest and cryptocurrency loans. Deposit accounts function similarly to a bank account. Users deposit cryptocurrency, and the lending platform pays interest. The platform can use deposited funds to lend to borrowers or for other investment purposes.

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 set the interest rates for both lending and borrowing, allowing them to control their net interest margins. Interest rates vary from platform to platform and from cryptocurrency to cryptocurrency.

• Aave
• Compound
• DYdX
• Balancer
• Nexo
• BlockFi
• Oasis
• Celsius
• SALT Lending

However, crypto lending is not without its risks. Here are some of the risks associated with crypto lending:

• Platform security and borrower default are factors that lenders must consider.
• Crypto lending platforms are not regulated and do not offer the same protections as banks.
• Crypto loans are inherently risky because margin calls may happen if asset prices drop.
• When crypto assets are deposited onto crypto lending platforms, they may become illiquid and cannot be accessed quickly.
• Some crypto loans charge high-interest rates, with some charging up to 13% APR or more.

Despite the risks, crypto lending can be a profitable venture. It allows holders to earn interest on their cryptocurrencies as market values fluctuate. Before deciding to lend your crypto, it's best to thoroughly research the platforms to determine the risks you're exposing yourself to and how payouts work.

Mining

The challenges of mining

The computer hardware required is known as application-specific integrated circuits (ASICs) and can cost up to $10,000. ASICs consume huge amounts of electricity, which has drawn criticism from environmental groups and limits the profitability of miners.

The electricity for one ASIC can use the same amount of electricity as half a million PlayStation 3 devices, according to a 2019 report from the Congressional Research Service. As the difficulty and complexity of Bitcoin mining have increased, the computing power required has also gone up. Bitcoin mining consumes about 176 terawatt-hours of electricity each year, more than most countries.

Even if Bitcoin miners are successful, it's not clear that their efforts will end up being profitable due to the high upfront costs of equipment and the ongoing electricity costs. The volatility of Bitcoin's price also makes it difficult to know exactly how much you're working for.

One way to share some of the high costs of mining is by joining a mining pool. Pools allow miners to share resources and add more capability, but shared resources mean shared rewards, so the potential payout is less when working through a pool.

How to start

• Wallet: This is where any Bitcoin you earn will be stored. A wallet is an encrypted online account that allows you to store, transfer and accept Bitcoin or other cryptocurrencies.
• Mining software: There are a number of different providers of mining software, many of which are free to download and can run on Windows and Mac computers.
• Computer equipment: The most cost-prohibitive aspect of Bitcoin mining involves the hardware. You'll need a powerful computer that uses an enormous amount of electricity to successfully mine Bitcoin. It's not uncommon for the hardware costs to run around $10,000 or more.

Risks of mining

• Price volatility: Bitcoin's price has varied widely since it was introduced in 2009. This kind of volatility makes it difficult for miners to know if their reward will outweigh the high costs of mining.
• Regulation: Very few governments have embraced cryptocurrencies such as Bitcoin, and there is always the risk that governments could outlaw the mining of Bitcoin or cryptocurrencies altogether as China did in 2021.
• Taxes: It's important to remember the impact that taxes can have on Bitcoin mining. The fair market value of the currencies at the time of receipt will be taxed at ordinary income rates. If you sell bitcoins at a price above where you received them, that qualifies as a capital gain, which would be taxed the same way as traditional assets.
• Security: Cryptocurrencies are susceptible to theft from hacking. It's crucial to use secure wallets and exchanges to protect your investments.

Frequently asked questions