The demand for cryptocurrency continues to rise, as does the number of new businesses entering the marketplace as a result. There are a number of platforms that allow users to buy, exchange, transfer, and store cryptocurrencies, for example.
There are also decentralized exchanges entering the market, and the availability of services and options is expanding.
For example, some platforms offer a flexible debit card so that consumers can spend crypto anywhere Visa is accepted.
While crypto demand is going up and it’s becoming more mainstream, a lot of people still don’t have an understanding of how to make money from the growing world of digital currencies.
The following are some things to know about using crypto as a vehicle to make money.
Buy and Hold
Possibly the simplest strategy to invest in crypto and potentially make money is to buy and hold. The idea of buying and holding any investment is that you get it at a low price or at least a relatively low price, and then you keep it and sell it for a higher price.
The idea is the same with any kind of long-term investment, no matter the underlying commodity.
If you get a bitcoin wallet, you invest, hold it and then sell it at the right time.
For this to work, obviously, the price of bitcoin has to go up, and you have to sell at the right time.
You might hold onto the crypto for years because it’s not a short-term investment approach.
Buying and holding are simple in the approach, but they can be complex as far as timing. Timing the market of anything isn’t easy, and if you wait too long, there’s always the chance your investment’s value can crash.
You also need to have the core belief that crypto or, more specifically, bitcoin has nowhere to go but up, at least over the long-term. This is something that’s debated. Some analysts will tell you bitcoin is going to $100,000, while others will say that it’s peaked.
Staking is a way to earn for holding certain cryptocurrencies.
If you own crypto that allows staking, you can stake some of your holdings. Then, you earn a percentage-rate reward over time. Ethereum allows staking, as do cosmos and Tezos.
You earn a reward via a staking pool, which you can compare to a savings account that earns interest.
Your crypto earns rewards while it’s staked because the blockchain is using it. If your cryptocurrency allows staking, it uses something called Proof of Stake, which is a consensus mechanism. This is the way to ensure all transactions are verified and secured without the presence of a middleman, i.e., a bank or payment processor.
If you stake your crypto, it’s part of the process.
Bitcoin doesn’t allow staking, though, which is a limitation on this option to make money.
Typically a cryptocurrency is decentralized, so there’s not a central authority running things. The consensus mechanism is how all the computers that are part of a decentralized network come to the right answer without having it given to them by a central authority.
Bitcoin uses Proof of Work as its consensus mechanism.
Through Proof of Work, the network puts a large amount of processing power toward solving problems such as the validation of transactions and making sure no one is trying to spend the same crypto twice. Miners all over the world are part of the process. The miners compete to be the first to solve a puzzle.
The winner gets the right to add the latest block of transactions onto the blockchain and gets crypto in return.
Proof of state is a newer mechanism for consensus that increases speed and efficiency and also lowers fees.
Transactions are validated by people invested in the blockchain.
The function of staking is similar to mining.
In some situations, staking could net you anywhere from 5-15% passive income a year.
Staking has some similarities to lending. Investors lend crypto to other borrowers, and in exchange, they receive interest payments.
A lender chooses an interests rate and then gives the borrower assets in exchange for bonds. The bonds prove you gave them crypto. You receive more bonds as interest. Then, when you want to get your money back, you send the bonds you receive through the smart contract.
For a borrower, you register on a platform, and then that will automatically give you a calculation for how much crypto is needed for collateral.
Then, the borrower deposits collateral applies for a loan, and waits to be approved.
For lenders, the primary benefit of making money this way is the high interest. You’ll make a profit without having to do any work, and that interest rate is likely to be significantly higher than what you’d get on a savings account.
You can also avoid some of the volatility that comes with crypto.
NFT stands for non-fungible tokens. NFTs can be videos, music, digital art, or a piece of interactive digital work. Most are on the Ethereum blockchain, and you can be a collector, a creator both.
If you’re a creator, you can put your digital work on the blockchain and get royalties as your work is traded.
If you’re a collector, you buy NFTs at what you hope is the lowest price, and then if the work goes up in value, you can sell it and make a profit.
NFTs are like the modern, digital way to invest in art. Previously the barrier to entry to invest in art was something that made it unattainable for most people, but NFTs are changing that.
Another option to make money with crypto is trading. Like actively investing in the stock market, there are several trading styles you might use.
Day trading is one.
When you day trade, you’re a highly active, engaged trader. You’re predicting whether prices will rise or fall, and you either buy which is going long or sell which is going short.
When you’re a day trader, you might only hold something for a few minutes up to a few hours. It’s an incredibly risky style of trading because you’re trying to anticipate price movements in the short term, which is extremely challenging.
Swing trading is another crypto style. When you swing trade, you’re trying to anticipate price movements similar to day trading, but you have longer time frames. You might have a time frame of days or weeks.
The third option for a crypto trading style is bot trading. These automated software programs enter and exit trades depending on the criteria you set.
Yield farming is an investing strategy where you attempt to earn returns through staking or lending crypto assets.
With yield farming, you lend your assets to Defi platforms that put them in a liquidity pool like a smart contract to hold funds.
The funds that are in the liquidity pool are then a means to provide liquidity to a Defi protocol. They’re used to facilitate lending, trading, and borrowing. The platform earns fees paid to investors based on their share of the liquidity pool. Sometimes yield farming is also known as liquidity mining.
Defi stands for decentralized finance, a blanket term for financial applications that use blockchain networks.
Yield farming is very similar to staking because you’re holding a number of assets to generate profits.
Some people consider staking as part of yield farming, but there are some differences.
For example, to earn passive income, staking tends to be simpler because you decide on the staking pool and lock in your crypto. You might have to do more work with yield farming. You chose the tokens to lend and the platform.
Yield farming can also be riskier than staking because you often do it on Defi projects that are newly created. If a developer intentionally drains assets from a liquidity pool, you’re facing losses.
Even if a smart contract is built by a reputable developer, there can be weaknesses and bugs.
Finally, another way that some people make money from the world of crypto is mining. Mining is the process of verifying and recording transactions on the blockchain. Mining is the most technical and comes with an upfront cost, which means it’s not ideal for most people.
A hobbyist probably isn’t going to find that mining bitcoin is an accessible option for them.
It takes time to understand how to mine, and you need an ecosystem to get started. It can be as much as $10,000 to buy a machine for bitcoin mining. It has to have industrial-strength power. Another option is to buy a graphics card that can mine bitcoin but can mine smaller cryptocurrencies.
Overall, depending on your technical expertise, your understanding of crypto, and how much time you want to put into it, there are a number of ways to make income from these digital currencies. Many of the options do allow for passive income, but no matter which option you take, it doesn’t change the fact that crypto is speculative and volatile, so do your research.