I am not qualified to offer investment, legal, or any other advice, nor am I trying to do so. This is an educational article aiming at teaching you about the various ways of investing in crypto for learning purposes. Any decisions, investments, or risks you take as a result of reading this article are your responsibility.
There are many different ways to make money with cryptocurrency and generate income.
We have been tracking the evolution of the cryptocurrency market for many years now – since 2010 in fact, when we first published an article on Bitcoin. We have also explored some of the ways in which people can make money with cryptocurrency over this time and provided tips on how to invest in cryptocurrencies.
In this article, we list six of the best strategies to generate income within the crypto space:
- Trading / Holding
- ICO investing
- Peer-to-peer lending
- Staking coins
We will touch upon every method in detail:
Mining is the process of confirming transactions and adding them to a public ledger on the blockchain. Miners are rewarded for their efforts by a cryptocurrency, which can be a payment or simply being added to the blockchain as part of a lottery system. These are called block rewards. As cryptocurrencies have become more valuable over time, so has mining. It is only profitable when the value of what’s mined is higher than what your mining equipment costs, as well as other associated costs such as energy consumption, cooling and internet connection (for example, if you mine from home).
Mining for Bitcoin is an interesting option and one that we have profiled in the past (see here). While it is still possible to mine Bitcoin, it has become so competitive that most new miners use dedicated mining hardware to mine altcoins instead. Alternative crypto assets are easier to mine on consumer grade hardware, which makes them more accessible to all. With altcoins, miners do not have to compete with as much hashing power and thus can start mining them earlier. They also tend to be newer and more profitable than the likes of Bitcoin – though less stable in price over time.
Mining is important in that it confirms transactions, though peers (other nodes) must approve of the blocks to ensure they are valid. What this means is that once a miner has found a block, it must then ask other nodes to confirm the block’s legitimacy before allowing it into the blockchain. The more confirmed blocks an individual node has, the more likely that individual can confirm transactions or be rewarded with cryptocurrency for their efforts.
The chart below illustrates how mining difficulty has changed over time. Click through to see how mining difficulty correlates with Bitcoin’s price.
Bitcoin’s Difficulty chart
Bitcoin’s difficulty has shot up again as mining decentralization has become a hot topic in the industry. In days gone by, miners had a server farm in their basement and used CPUs to mine Bitcoin. While they could use their computers to buy and sell whatever they wanted, the real money was made from selling them for fiat currencies. As Bitcoin became more expensive, so did mining on consumer computers with CPUs. It eventually became unprofitable so only large ASIC manufacturers could mine successfully – until the recent boom saw GPU mining become viable again.
The first chart below shows the correlation between mining difficulty and Bitcoin’s price. Note how difficulty increases as the price rises. This is because more miners join the network in search of profits or to cash in on a bubble. The second chart shows the upward trend of Bitcoin’s difficulty with its ever-increasing value.
Another option is cloud mining, which involves leasing out hash power from a particular provider via the cloud. This is a viable alternative to setting up your own mining rig as you don’t need to deal with the technical issues of building the machine or with cooling it.
However, there are often hidden costs involved in purchasing hash power for mining cryptocurrencies – some providers may be fraudulent and charge hidden fees, or they may try to sell equipment at inflated prices and take your money before you get any profit from your investment. While using a reputable provider can help, always check reviews before investing in anything including mining services.
If you want to mine a specific altcoin on your own, consider researching the hardware you’ll need. For example, to mine Bitcoin, you’ll need a powerful GPU or ASIC miner, whereas to mine Ethereum you will need an even more powerful GPU or better still ASIC machine. You can research specific miners at ASICs for all cryptocurrencies here and check out hardware prices and reviews at Data Center Knowledge’s mining page. The process of buying a mining rig is similar to that of any other computer hardware purchase and it is advisable to use an escrow service as fraudsters exist in this space too.
If you have your own crypto mining rig, it’s important to hedge it. Miners need to be protected against their own electricity costs, cooling costs and even maintenance. You can do this via properly hedging your currency. For example, if you mine Bitcoin then put an equal amount of USD into a US-based exchange such as CEX.io and use Bankrate’s ATMs to withdraw cash in and buy native fiat currency such as USD. This will lock in the USD value of Bitcoin at its current rate, which will help guard against any potential purchases of BTC at higher prices.
2) Trading / Holding
Trading refers to buying and selling crypto assets, which has many similarities to the stock market. However, as cryptocurrency is less regulated than its fiat counterpart, so there are less rules on trading cryptocurrencies on a public exchange. This means that you can trade 24/7 whereas with stocks you can only do so during opening and closing times. Additionally, because cryptocurrency exchanges are unregulated in most parts of the world (notable exceptions include South Korea and Japan), they have no restrictions on deposit or withdrawal amount. This means that you don’t need to wait for AML/KYC checks or break any transaction limits – a major plus in an industry that is becoming more mainstream.
Some people make their money trading cryptocurrencies by anticipating price movements. Traders will employ any number of strategies to profit from market fluctuations in prices; they will either buy when the price bottoms out or sell when there is a spike in demand. Technical analysis can help you to identify the optimal time for these actions and professional traders often use indicators such as moving averages, Fibonacci retracements and support and resistance levels to guide their decisions.
Another way to make money from trading is ‘swing trading’, which involves making multiple trades over a short period of time, usually hours or days instead of weeks or months. This method is riskier as it involves more frequent trades than those done by most traders, but it also has the potential to make a lot more money in the same amount of time. With swing trading, you need to be able to identify and capitalize on trends in the market. For example, if you see that Bitcoin’s price has increased steadily over a number of days and you anticipate it will continue to rise then you may wish to increase your holdings accordingly. On the other hand, if its price has dropped significantly in a day or two following its sudden rise, you may wish to sell before it drops further.
But swing trading is not for everyone; some are looking for passive income rather than active income from their crypto assets. While swing trading is all about buying and selling, and will therefore result in more transactions, holding or ‘holding’ cryptocurrencies involves buying your assets in the hope that they will go up in value. In this sense, it’s closer to investing than trading.
Holding works because the crypto market is volatile – it’s easy to make money from peaks and troughs because demand rises as more people want to get into cryptocurrencies when prices are high. This means that those who choose to hold their crypto assets can make a profit just by holding them – and even if their investment does drop in value, they still get to keep what they bought at the lower price. Holding cryptocurrencies for the long term is the best way to maximize your profit as you hold onto your assets for longer and do not need to pay tax on any gains until you sell.
Holding is by far the easiest and least risky way of making profit on cryptocurrencies because exchanges offer a wide range of trading pairs; it’s also safer in that traders can set their own limits and have no need to chase after fraudsters in need of help. The only real downside is that it can take a long time to generate enough ‘stake’ to be able to withdraw what you’ve earned, but this is often the case with most crypto assets.
Arbitrage is a trading strategy based on buying and selling an asset in different markets at different times in the hope of making a profit. One such example is when an investor buys bitcoin in exchange for another currency, as then they can sell them back into Bitcoin’s price. If they are able to sell at a higher price than they paid at then the investor has made a profit, known as an ‘arbitrage’ profit.
There are other ways to arbitrage crypto assets and all of them involve using different exchanges – some of which allow you to trade between different cryptocurrencies without having to convert them into fiat currency. By finding the price difference between two exchanges and trading on it, an investor can potentially make a lot of money – though traders often experience much larger swings in value than they would with fiat currency holdings. This means that while arbitraging can be hugely profitable, it’s also very risky.
The most common examples of arbitrage in the cryptocurrency space are cross-exchange arbitrage, fund arbitrage and ICO arbitrage. Cross-exchange arb involves trading one currency on one exchange for another on a different exchange. Fund arb allows you to arbitrage different cryptocurrencies; this often involves buying Bitcoin on Coinbase and then selling it on Poloniex, for instance. And ICO arb is when you buy into an ICO at a lower price than you can sell it for once it hits exchanges – meaning that there is more demand than supply in the market.
All of these strategies require a trader to have accounts on multiple exchanges, but it’s arguably the most profitable and high-risk of the above methods. Using multiple accounts is vital as well as it allows you to explore arbitrage opportunities across different exchanges and take advantage of price differences in the process. A few apps, including Delta and Arbitrage Crypto Trader, simplify this by showing live prices across different exchanges; this sort of tool can be very useful for those looking to trade quickly even if they don’t have accounts on all the relevant exchanges.
4) ICOs: short on time? Invest in the next big thing
Initial coin offerings (ICOs) are a new way of funding startups and have raised billions of dollars since their inception in 2013 – and they’re only getting bigger. ICOs became popular after Ethereum launched its own token sale, which raised $18m in exchange for Ether. This was a huge deal because prior to this, most cryptocurrency crowdfunding campaigns involved people simply sending money to an address and hoping that they could withdraw it later when the project was up and running. The model of purchasing tokens in order to get a return on investment from a later date was new and yet less risky for investors as it allowed them to hold onto their Ether. ICOs can be used to create a profitable investment with no risk attached, and many of you are probably familiar with Ponzi schemes because they’re effectively the same thing.
However, many ICOs are more complex than this as they will often try to introduce a new feature into the network or create a new token that could increase the value of a project. The best way to avoid falling victim to scams is read through whatever information the ICO provides before investing. Additionally, be sure to do your own research and invest on reputable platforms because there are countless reports of projects which turned out to be scams.
In addition, while there’s no guarantee that an ICO will hit its target and generate any kind of return for investors, some projects have been very profitable – and even those that don’t might be worth owning anyway simply because they could become another huge cryptocurrency token in time.
But how do you actually invest in an ICO? It’s far easier than most people think; the best thing to do is simply use an exchange that lists ICOs it’s compatible with and create an account there. You’ll then need to get yourself set up on MyEtherWallet (MEW). This wallet is great because it allows you to interact with Ethereum tokens, which can be purchased from many different exchanges or sent to your MEW account.
Once you have your Ethereum tokens in MEW, they will show up on the screen as ‘ERC20 Tokens’ – these are the tokens that most ICOs issue to their investors. From there, you’ll be able to set up a hardware wallet (if available) and load it with your new tokens. Alternatively, if an ICO has KYC requirements then you can simply send them to a different exchange, buy bitcoin with them and withdraw it into your hardware wallet or keep it on said exchange until the token register is fully supported by the network.
The best cryptocurrency exchanges will provide a variety of services for those interested in investing in ICOs; however, there are a few which offer some of the most profitable investments.
One of the most popular has to be Binance. By offering multiple cryptocurrencies for its users to trade and with easy access to fiat (USD) and cryptocurrency deposits/withdrawals, it makes it easier for newcomers to start trading emerging tokens. It also has advanced security features and its own wallet.
5) P2P lending
Peer-to-peer lending is one of the most popular ways to fund cryptocurrency ventures. P2P investment platforms allow investors to lend money to another person (or company) in exchange for a share of their future profits. This differs from regular lending, as it’s not based on a bank giving you a loan against your own assets as you need collateral. Instead, you pawn a proportion of the security you hold in order to gain access to new funds. You can then use the rest to invest in a cryptocurrency that you believe will perform well.
You need to be careful when using P2P platforms, as they’re often set up by scammers who have realized there’s a huge demand for lending money. This means they’ll use fake names and email addresses and pretend that their project will work fantastically well if only you give them enough money. In many cases, there is no real way of telling if a P2P platform is legitimate or not, so it’s important to do your own research before investing any money.
One of the more reputable P2P platforms is Bitbond. The platform is backed by a number of the world’s leading financial institutions, including Deutsche Bank and Goldman Sachs, and it only accepts contracts from credible investors. Because it works with such trusted business partners, it’s one of the most preferred P2P platforms around.
6) Staking coins
Another good way to earn with cryptocurrency is by staking, which has become popular over recent months and years – especially with the rise in value of Proof-of-Stake (PoS) cryptocurrencies. For a PoS token, staking involves buying a certain amount of tokens on an exchange and leaving them there; you then become part of the network as a ‘node’. Each time you ‘stake’ your tokens into a cryptocurrency’s network, it confirms that they are valid transactions because you hold the coins. This only happens when you make transactions on the PoS chain; the higher your stake, the more likely it is to confirm or be confirmed; this is how you generate money through PoS as opposed to trading or holding.
If you stake enough coins for enough time, it’s possible to generate a passive income. Some cryptocurrencies even reward users with a percentage of the network fees – which means that staking becomes even more lucrative if the currency gains value. This is one of the reasons why there are so many people who use these types of coins instead of others on the market today, as they’re able to make money without having to do anything other than own the currency and sit tight.
Are some cryptocurrency platforms better than others?
It’s important to note here that cryptocurrency platforms are always improving and upgrading their services. One of the most popular is Ethereum, which has so many different uses that it’s considered to be one of the best-performing blockchain projects in recent years. Another platform which holds a lot of potential is Neo, while Ripple builds on its already established network by creating their own native currencies which banks can then use for international transfers.
What coin should I invest into?
We’re not going to suggest one crypto to invest into, they all have their own areas of strength and weakness, but If you’re thinking of investing, there are many platforms on the market that offer attractive potential for making money that you should consider, and you can decide on what to go with after you have made your own research.
Below we’re listing some of the most popular crypto at this time:
a) Bitcoin: the king of all cryptocurrencies
Bitcoin is by far the most valuable cryptocurrency in existence today – and it was created almost ten years ago. It remains very popular due to its disruptive technology and can guarantee you relatively fast transactions across the globe. However, many of its peers are replacing it as the go-to cryptocurrency for investors, though Bitcoin still has plenty of potential and is definitely a solid choice when it comes to P2P lending or investing in ICOs.
Some people argue that Bitcoin’s value will always be higher than any other currency because it was the first ever cryptocurrency; however, there are some who claim that this isn’t necessarily true. Ethereum is also very valuable and it’s considered to be one of the best new cryptocurrencies on the market today. The main difference between these two is that Bitcoin relies on Blockchain technology whereas Ethereum uses smart contracts.
The latter offers a huge range of possibilities for decentralized apps (DApps) as it has its own programming language; this makes it perfect for creating and running DApps. This is why Ethereum has become so popular over recent months and years, as more people realise that it can do so much more than just transfer value around the world.
It’s still possible to make money with Bitcoin, however; one of the best ways is to trade bitcoin derivatives. While most exchanges don’t offer these yet, there are a few which do – including certain European platforms. Such derivatives are regulated in many cases, though it’s important to do your own research about each one before deciding whether or not to use them.
One of the more popular bitcoin derivatives is Bitcoin CFDs, which allow you to trade assets without having to own them. Even if you only buy BTC CFD for $100 and the asset goes up by 1% in value, you’ll make $1 in profit – an attractive proposition for those who don’t want to spend their money on something that could potentially devalue.
Bitcoin is still the most popular cryptocurrency on the planet, but there are certainly some alternatives available for investors who want to make money. However, it’s important to do your own research about each exchange before committing any funds.
b) Ethereum: a smart contract platform
Ethereum was created by a group of Blockchain enthusiasts in 2014 as a cryptocurrency that shared the same values as Bitcoin. It’s one of the world’s most popular cryptocurrencies due to its extensive list of applications such as smart contracts and DApps – especially at this time of year as we’ve seen so many ICOs come out over recent months.
Ethereum’s token is known as Ether, which is the cryptocurrency you purchase as an investment and then trade on various exchanges. While the currency is technically referred to as Ether, it is more realistically referred to as ERC20 tokens due to the fact that it’s based on standard protocols that govern other cryptocurrencies. This means that Ether has become very popular with many startups looking to launch an ICO and raise money for their project – and once they do, they can use those funds to pay back investors in Ether.
It’s important to note here that Ethereum technology runs on a blockchain network called Ethereum Virtual Machine (EVM). This is where the smart contracts live, which are essentially self-executing pieces of code that can be used to automate various tasks. In recent months, Ethereum’s price has risen so high that it’s now one of the most valuable cryptocurrencies in existence today.
c) NEO: a smart economy on the blockchain
NEO (formerly known as Antshares) was created by Chinese company Onchain in 2014. It is one of the world’s most popular cryptocurrencies due to its expansion opportunities – especially at this time of year as we’ve seen so many new ICOs come out in recent months. NEO also offers some Ethereum like features, such as smart contracts and DApps.
Unlike Ethereum, there are only a small number of developers working on NEO at this time; however, it does have a large community following both within China and beyond its borders. In many cases, this is because NEO is considered to be the Chinese Ethereum. NEO has gained a lot of popularity in China because China’s government believes that blockchain technology has potential to solve many of the problems it faces while also promoting growth and development.
NEO offers a similar platform to Ethereum; however, there are also lots of other Blockchain projects for people to choose from. It’s important to do your own research about each cryptocurrency platform before committing money as some are far more popular than others. All these platforms have one thing in common though – they all offer exceptional potential for growth if you do your own research about each one before investing money or using them for trading purposes – just be sure to take as much information into account as possible.
d) Zcash: another privacy-oriented coin
Zcash is a cryptocurrency that focuses on privacy for both users and investors. It was created by a group of renowned cryptographers and it represents one of the most lucrative and interesting Blockchain projects currently available. The currency uses two different types of addresses, known as shielded and transparent. The former are for anonymous transactions; the latter are public addresses which everyone can see.
Zcash can be used to buy and sell goods and services in much the same way as other cryptocurrencies; however, it’s most commonly used for trading purposes as it enables private transactions. This is one of the main reasons why people are willing to invest in Zcash, as they’re able to sell goods and services without being easily tracked. Because of this, there are many people who have earned millions of dollars from using a combination of cryptocurrencies with Zcash in order to protect their anonymity.
e) Monero: secure internet payments
Monero is another privacy-oriented cryptocurrency that’s based on blockchain technology. It was created by a developer named Nicolas van Saberhagen in 2014 with one primary goal: making transactions private. Monero is one of the most popular cryptocurrencies on the market today due to its high level of security.
Monero isn’t just a cryptocurrency; it’s also a cryptocurrency platform. It allows its users to make transactions both privately and publicly – which means that users can send money to someone via Monero without them being able to see who they are.
Monero has a public ledger, but there is little public information about this – this makes it perfect for those who don’t want the world to know where they’re sending money from. This also means that the transaction can’t be traced and Monero is therefore ideal for people who don’t want to give out their personal details, as they can use Monero’s private transactions to transfer funds.
f) Ripple: the future of banking?
Ripple has been named “the future of banking” because it enables fast and secure transfers between banks in real time. It’s based on a network known as RippleNet and it was created by a company called Ripple. The main focus of this platform is to make real-time international payments easier and faster. It does this by using its native currency, known as XRP.
Ripple’s end goal is to become the best cryptocurrency for international payments, but in order to achieve that it needs to be adopted by banks worldwide – which is why they’ve created their own cryptocurrency that runs on a network that enables banks to complete transactions in real time at lower costs.
At this point, Ripple works well as an investment; however, there’s no way for people to use it directly yet due to the fact that it doesn’t have enough liquidity yet.
You don’t need to invest in many cryptocurrencies in order to make money from them. In fact, it’s not uncommon for people to pick just one or two platforms and stick with them as they believe these are the best. However, if you do want to diversify your portfolio then we’d recommend that you research every cryptocurrency platform you plan on investing in before making a decision, as this will give you a better idea about their growth potential.