These days, everyone is looking to make a quick buck off the bitcoin market. With many investors making banks thanks to an early entering of the market, a lot of those new to the industry are hopeful that they can do the same.
Whilst there are certainly a few different ways to make money from cryptocurrency, they all come with potential downsides. As the saying goes “there’s no such thing as a free lunch”. In this article, we’ll look at some of the more popular ways individuals and companies have profited from the explosion in interest surrounding cryptocurrency. It’s vital you understand both the advantages and disadvantages of each before you just dive right in!
Different Ways to Make Money from Cryptocurrency
The most popular ways to profit from cryptocurrency are:
What Does Cryptocurrency Investing Mean?
The most straightforward way to make money from cryptocurrencies is to simply invest in them. This doesn’t require much explanation since it’s by far the least demanding of any of those methods we are going to cover in this article. As such, it’s not really the focus of this piece but it’s still important to understand what we mean by the term.
Investing in cryptocurrency is easy. You just buy some and keep hold of it in a suitable wallet. The hope is that its dollar value will increase relative to your entry point.
Cryptocurrency investing has been hugely profitable for many people – particularly those that took up positions early. Bitcoin, the most popular and longest-running cryptocurrency, currently trades just above $10,000. At the time when the digital asset was launched for the first time, it was worth nothing at all.
Thanks to its fixed cap on supply, increases in demand for Bitcoin increase its price. Over the course of its existence demand for Bitcoin has increased dramatically. The first commercial transaction of Bitcoin saw 10,000 BTC spent on a pair of pizzas in 2010. Today, 10,000 BTC worth $110 million!
However, just because you’re newer to the industry doesn’t mean that you’ve missed the boat on investing. There are many industry analysts that believe Bitcoin is heading much higher. Numbers like $100,000, $1 million, and even $10 million per Bitcoin have been put forward as Bitcoin price predictions by many experienced financial analysts and industry insiders.
Any other cryptocurrency can be an investment too. It’s just important to fully understand what it is you’re buying before doing so. Look at the project’s whitepaper, look at the team behind it, and consider the proposed use case for the asset. If the crypto has a fixed total supply and you think demand will increase, then it may indeed be a worthy investment.
Drawbacks of Cryptocurrency Investing
As mentioned above, no method of profiting from cryptocurrency is flawless. Here are some downsides associated with cryptocurrency investing:
- Volatile markets. Bitcoin and other cryptocurrency prices are incredibly volatile. They can go up and down a lot over just a few hours. Successful investing demands you to focus on the long-term. This is easier said than done when your position loses 20% or more of its value in a single day!
- Cryptocurrency isn’t guaranteed to increase in value. Since there is nothing physical (no product or hard asset) backing cryptocurrency the price of any asset could drop to zero in a very short amount of time.
All About Digital Asset Trading
Cryptocurrency trading aims to take advantage of the volatility mentioned above. A trader will analyze charts in an attempt to predict which way the price of an asset will move in relation to the asset being traded. If you think one asset will increase in value relative to the other, you want to have exposure to the one you think will rise before it does.
For example, if you were trading Bitcoin versus the US dollar and thought that the Bitcoin price was due a correction, you would trade your Bitcoin for dollars. If and when you thought the BTC price was ready to head back up again, you’d buy Bitcoin with your dollars again.
As a simple example, let’s say the price of Bitcoin was exactly $10,000 today. You, the trader, currently hold one whole Bitcoin but think the price is about to drop. You sell your Bitcoin for dollars and receive $10,000 (minus a bit in exchange fees). The price does drop over the next few days. When it reaches $8,000 exactly, your charts tell you that the price will head up again.
You buy Bitcoin again with your $10,000. This time you get 1.25 Bitcoin or close to it (mind exchange fees!). You made a profitable trade! Now, you look for another entry point at a higher price than $8,000.
Over the next few days, the Bitcoin price increases to $10,000, and once again, your charts tell you that this looks like a market top. Thinking that a reversal is imminent, you sell your 1.25 BTC for dollars and receive $12,500. This overly simple example is the bare bones of what trading is.
Traders spend hours analyzing charts with different indicators for signs that the price of an asset will increase or decrease. They look at how the price has been moving over recent days, weeks, months, or even years.
Markets do seem to follow patterns and it’s these patterns that expert traders are looking for. To identify them, they’ll use different approaches. Unfortunately, this primer on profiting from cryptocurrency is much too short to explain each in any detail but popular indicators include:
- Moving averages.
- Bollinger bands.
- Ichimoku clouds.
- Stochastic oscillators.
- Fibonacci lines.
These are just a few of the indicators out there. Some traders develop their own too with mixed successes. It’s unlikely any complete novices will understand what an Ichimoku cloud or Fibonacci line is from the name alone. If you’re serious about becoming a trader, it’s vital that you study them though!
Disadvantages of Simple Cryptocurrency Trading
- The market can move against you and never offer a profitable re-entry position.
- Cryptocurrency markets operate 24 hours a day, seven days a week. Unlike traditional markets that have a clear close for the day, crypto trading is always happening. You could miss vital information for profitable trades whilst you’re sleeping.
- You can lose a lot of money from bad calls!
If you’re not overly put-off by the downsides to trading, you can try for yourself at Godex exchange. You can start trading there without creating an account, which is great for the privacy-conscious. Just transfer funds from your wallet to the platform to get started.
More Complex (and Risky) Forms of Trading
Our above example of buying low and selling high is a very basic one. However, some traders make good money from this simple form of trading. Yet, it’s not the only one. Other tools and markets can increase the profitability of the activity but also invite much greater risk. We will briefly discuss some of them below.
Trading with Leverage
Some trading venues offer what’s known as leverage. This essentially means borrowing money from the platform to make bigger bets on the price of the traded asset.
If your trades are profitable when you’re trading with leverage, then happy days. You’ll make more money. However, if they’re not profitable you can run into trouble. Any losses you sustain are amplified by the amount of leverage you use. If you were trading on 50x leverage, and the price of the crypto asset you’re trading moved against your trade by $100, you’d actually be liable for losses of $5,000.
Futures trading is another form of riskier trading. Futures trading is essentially an agreement to buy or sell an asset at the set future date for whatever price you decide at the time you open the contract.
If you think the price will increase over the period of a futures contract, you might set the price of the futures contract at the current rate. This allows you to buy lower than the market value when the contract expires. If it does indeed increase, the difference between the price you set and the price when the contract expires is your profit. If the price drops, you will lose the difference. If the price drops a lot, you will lose a lot!
Meanwhile, if you think the price will go down over the period of a contract, you can again agree to buy the asset in the future for a price higher than you think it will end up. The same risks apply. If your trade is wrong, you’ll end up out of pocket.
Leverage can also be applied to futures trading. This makes an already risky form of trading even riskier. We don’t recommend newcomers even consider futures trading with leverage.
All About Cryptocurrency Mining
Finally, you might be able to profit from cryptocurrency mining. Mining is essential to the functioning of many digital assets. It secures the blockchain by making it prohibitively expensive for any entity to change network rules in their favor.
Mining requires expensive hardware and power but it rewards those who do it with cryptocurrency for enforcing (and effectively strengthening) the rules of the network. It’s a novel incentive structure that has proved successful over the entire course of Bitcoin’s 11-year history. Miners are essentially in competition with each other for the rewards of cryptocurrency. The computer that successfully solves a cryptographic problem first receives the prize for adding their block of transactions to the blockchain. This encourages a sort of arms race amongst miners.
Early in Bitcoin’s history, miners could solve the cryptographic puzzles with the computational power of a laptop alone. As Bitcoin became more popular, its price rose. As its price rose, the incentive to mine the network also went up.
Today, the price of Bitcoin has gone up so much that extremely high-power computer systems have been designed to solve cryptographic problems. Known as ASICs (application-specific integrated circuits), these units are expensive and incredibly power-hungry. To run one profitably, you need access to very cheap power, technical knowledge to set it up, and the capital available to buy the thing in the first place. These factors render all but a select few unable to mine Bitcoin for profits.
However, it’s not just Bitcoin that is mineable. Other digital currencies, like Litecoin, for example, rely on mining. Some crypto assets are what is known as “ASIC-resistant”, meaning that the algorithms used in their design do not enable any advantage for those deploying ASICs to mine on the networks. Profitable mining of these assets is still possible with much more affordable equipment and far lower power demands.
ASIC-resistant cryptocurrencies include:
- Ether (for now).
Disadvantages of Mining
- Expensive to mine Bitcoin thanks to huge competition. Mining pools and cloud mining services do exist but these come with their own disadvantages such as hackers, pool fees, and the potential to be locked in an expensive cloud mining contract that’s no longer profitable thanks to a drop in the crypto’s price.
- The equipment needed for profitable mining coupled with electricity bills is often too expensive to maintain.
- All mining requires technical expertise.
Conclusion: How to Profit from Cryptocurrency
As you should have found out from this article, neither investing, mining or trading will bring guaranteed profits from cryptocurrency. Each has substantial risk involved and it’s important to fully understand this before you get in.
Use this article as a starting point and read around each of the three topics in great detail. Once you fully understand the risks and have decided that the potential gains outweigh them, you will be in a much better position to get involved.
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Disclaimer: Please keep in mind that the content of this article is not financial or investing advice. The information provided is the author’s opinion only and should not be considered as direct recommendations for trading or investment. Any article reader or website visitor should consider multiple viewpoints and become familiar with all local regulations before cryptocurrency investment. We do not make any warranties about reliability and accuracy of this information.