The digital currency boom that started early this year, fueled by news such as Tesla’s decision to buy Bitcoin worth $1.5 billion, is again bringing the crypto market to the spotlight. However, these coins are a risky bet due to their substantial price fluctuations, among others.
In this article, I will offer you some information about how people make money from cryptocurrencies. Please keep in mind that my opinions are intended to introduce this fascinating topic and not as buying advice.
Buy and HODL
This is the most basic strategy, based on price increases: to buy and keep a certain amount of a cryptocurrency. The English term comes from the phrase “buy and hold”, where the last word was misspelt by a user, on a specialized forum, in the early days of Bitcoin. In the absence of a detailed analysis, this type of asset’s extreme volatility makes the Buy and HODL strategy very dangerous, especially for beginners. We see why just by analyzing Bitcoin’s price evolution: the first bubble (massive price surge, followed by an equally impressive fall) took place in 2017 when this cryptocurrency started trading at about $1,000, only to reach over $20,000. However, the price collapsed to around $3,400 in the next two years. After the first wave of the pandemic in 2020, Bitcoin’s price sharply increased to almost $60,000.
Other cryptocurrencies, such as Ethereum or Ripple, have had similar oscillations. A straightforward analysis shows the risks of this method, which seems attractive and clear at first glance. Assuming that an investor would have wanted to build a long-term crypto portfolio, he would have been spared significant losses only if he had invested in Bitcoin before July 2017, when the price was around $ 2,700, lower than the subsequent lows. However, in July 2017, Bitcoin and cryptocurrencies, in general, were something very new and exotic, and ordinary people didn’t know what to do with them.
The revolutionary principle of cryptocurrencies is based on a simple idea: their logs are not kept in the private registers of a bank but in a public and decentralized database, thoroughly checked by many participants. This does not mean the names of crypto owners are made public—quite the contrary. The cryptocurrencies in circulation, and each investor’s transactions and assets are transparent, error-free, and perfectly secure from the user identity perspective.
The process of updating this public database is called mining. The very concept of the software on which the cryptocurrencies are based makes mining a completely free service from a crypto owner’s perspective. That’s why the technology creators have introduced rewards for the so-called crypto mining, which essentially assumes that many computers connected to the Internet constantly check and update data flow. New cryptocurrencies can be generated through the crypto mining process, and those who provide logistics for operations receive them.
The problem is that this mechanism is not nearly as simple as it seems. The computing power required is very high, hence the theory that the crypto market is ultimately an environmental threat due to the very high energy consumption generated by many powerful computers present in the network.
Again, a strategy that seems simple turns out to be very complicated in reality. You can make money from crypto mining, but the price of electricity and specialized hardware must be considered because regular computers are not good enough. Not to mention the software (in many cases, open-source) and the required technical expertise – these two are resources to consider.
Crypto mining is profitable in countries where electricity is cheap. This situation has created a derivative business: cloud mining. The necessary computing power is drawn from the cloud at lower prices than generated locally in a developed country.
This is another easy-to-understand strategy, as it resembles a standard bank deposit or a traditional loan. Unlike typical purchases of assets, where investors look to capitalize from price rises, staking (which could translate to financial support) means storing cryptocurrencies in a special operator’s wallet (account). This operator will use the available money electronically, offering an equivalent for interest on it.
Is it worth it to invest in cryptocurrencies?
There are countless other ways to make money from cryptocurrencies, from ICO (initial coin offering) to Forks (when cryptos split). However, all these concepts are highly technical and demand an excellent knowledge of the digital world, in general, and the Blockchain philosophy, the idea that cryptos are based on.
In the long run, a revolution that began in 2008 on the Dark Web, where the first cryptocurrencies were traded, slowly gained financial acceptance, turning into a global market accessible to many investors. Old-school financial regulators are also involved, banning several practices and businesses in the crypto world. Still, they will eventually end up creating a secure and legal framework for an unstoppable idea.
Earlier this year, when announcing Tesla’s massive investment in Bitcoin, Elon Musk said on Twitter: “Looking back, it was inevitable.” In other words, the Blockchain, the very idea behind cryptocurrencies, now used for many different purposes, is unstoppable. But only knowledgeable investors or those well-advised by efficient and transparent fintech platforms can benefit from it.