Digital currencies are providing lucrative opportunities to retail and institutional investors. Today, the crypto industry has close to 19,000 assets with a cumulative market cap of $825B. The crypto ecosystem is, however, in its earliest development stages since it is a fairly new concept. Many individuals are uncertain about how they can make money with virtual currencies. Investors across the world are taking advantage of common mechanisms like mining, day trading, and holding to maximize profits. This article, therefore, intends to examine which of the three strategies is more suitable for investors to make money from cryptocurrencies.
How to Make Money From Cryptocurrencies
Crypto Mining
Crypto mining is an income-generating opportunity that rewards miners for validating transactions on a blockchain. Under this mechanism, a group of decentralized computers is responsible for maintaining the public ledger. The process encourages miners to participate in solving complex algorithmic equations. As such, miners with significant computational power have a higher chance of solving the equations.
From there, the winning miner is able to update the ledger by adding new blocks to a chain. Performing this activity allows miners to earn a predetermined amount of digital currencies. Bitcoin, for instance, provides miners with a certain amount of BTCs which decreases after every four years.
During its initial stages, the mining reward for Bitcoin was 50 BTCs. Going by the asset’s current price, the amount is equivalent to $890k. Today, the block reward is currently at 6.25 BTCs which is equal to $112k.
There are several downsides that make mining an inappropriate investment strategy. For one, investors need to have access to sufficient mining energy since the process requires intensive amounts of power. What’s more, the mechanism requires powerful equipment which can be somewhat costly. Such disadvantages make crypto mining a costly venture to undertake.
Day Trading
Day trading is one of the most popular ways to make money from cryptocurrencies. It represents an investment strategy where users trade digital assets every day. The mechanism enables investors to make profits by entering and exiting the market. Strategies that fall under the day trading mechanism include:
Scalping
Scalping functions as a short-term investment strategy where users place different types of trades to generate an income. Here, traders take advantage of small gains to accumulate sufficient profits. In some cases, investors may automate their trading with bots to obtain profits within the shortest time possible.
Arbitrage
Crypto arbitrage involves the act of buying a digital asset from one exchange and selling it to another trading platform. Essentially, arbitrage relies on the discrepancies of one asset across various exchanges. Hence, investors can buy cryptocurrencies at a cheaper price and sell them to another exchange at a higher price.
Range Trading
Range trading entails the use of support and resistance levels to determine an appropriate trading range. An asset’s support level represents a value that is below its current price while the resistance level reflects a price that’s above the current price. Basically, traders sell digital assets once they reach a resistance level and buy them when they hit a support level.
Generally, day trading needs in-depth technical analysis to make the right trading decisions. The strategy heavily relies on constant market research, analyzing chart patterns, and price trends. This requirement could pose a challenge to new traders who want to maximize profits.
Holding
The third investment strategy is holding, a common practice where investors buy and store digital currencies. Holding serves as a less risky mechanism that requires little or no commitment compared to day trading. More importantly, this exercise helps investors to bypass the effects of crypto volatility.
When users hold digital coins, they genuinely believe that the asset in question will become profitable in the future. There are multiple factors that may make an asset favorable for holding. In most cases, users may select an asset based on their use cases and acceptance rate.
Like day trading and mining, holding cryptocurrencies has its own downsides which may affect an investor’s earnings. Investors may develop Fear, Uncertainty, and Doubt amid their holding journey. As a result, investors end up making little profit as they can sell their holdings at a lower price.
The other demerit is that holders will not spend their crypto as a payment medium. Holding discourages the use of virtual coins, thus limiting it to a reserve asset that cannot be used to make payments. This downside could affect the mainstream adoption goal since there is no diversification.
Bottomline
Millions of users are joining the digital asset economy with a profit-oriented goal. Crypto mining and day trading have complex procedures and requirements that may be challenging to new investors. The mining exercise is expensive since users will need adequate power and mining equipment.
On the other hand, day trading requires intensive market research and technical analysis to generate an income. Holding poses minimal risks to investors as they are simply storing their holdings for future profits.
While the three strategies may seem promising, it is upon the individual investor to embrace due diligence on the most appropriate path to follow to make money from cryptocurrencies.
