Cryptocurrencies are digital assets. They also collectively represent a class of decentralized digital currencies based on blockchain-enabled distributed pubic ledger technology. Nonetheless, since the introduction of Bitcoin by Satoshi Nakamoto in 2009 and the subsequent emergence of other cryptocurrencies and blockchain platforms such as Litecoin, the Ethereum and Cardano platforms, and Dogecoin, a number of individuals have made fortunes through cryptocurrencies, and more people are enticed to follow their lead.
Explainer: Making Money From Cryptocurrencies
There are four general ways to make money or earn from cryptocurrencies. The first is through trading or buying crypto-coins and crypto-tokens and selling them for or having them exchanged with other cryptocurrencies or fiat money. The second is through capital appreciation in consideration of medium-term to long-term investment objectives while the third is through participation in blockchain networks as miners or forgers.
Participation in blockchain networks is another way to earn cryptocurrencies. Blockchains based on proof-of-work or PoW consensus mechanism reward so-called miners with cryptocurrencies for successfully adding blocks to the chain by solving complex mathematical problems while those based on proof-of-stake or PoS pay so-called forgers a portion of the transaction fee for authenticating individual blockchain transactions.
Individuals can also make money from cryptocurrencies by buying and trading non-fungible tokens or NFTs. There are several platforms that tokenize digital files into NFTs. These include decentralized blockchain exchanges and NFT markets. Furthermore, the emergence of NFT or blockchain video gaming provides an opportunity for individuals to earn non-fungible tokens and crypto-tokens have these digital assets converted to crypto-coins.
Below are expanded descriptions of the aforementioned:
1. Trading Cryptocurrency Coins and Cryptocurrency Tokens
Remember that cryptocurrencies are digital assets. Hence, similar to fiat currencies, stocks and shares, bond certificates, mortgaged-back securities, commodities such as precious metals and agricultural produce, futures and options contracts, real estate properties, and intellectual properties, among others, they can be bought and traded in exchange markets
Several platforms allow cryptocurrency trading. Some of these include Binance, the largest cryptocurrency exchange network in the world in terms of daily trading volume, and Coinbase Exchange, one of the top five largest platforms, as well as Gemini, FTX, Huobi Global, Bitstamp, Gate.io, Bitfinex, and Kraken, among others.
How does cryptocurrency trading exactly work? For starters, cryptocurrencies rise or fall in value. Prices are quoted in traditional currencies such as the U.S. dollar. Those who want to earn from cryptocurrencies will have to speculate whether the value of their chosen coin or token will rise or fall within a short-term to long-term period.
As an example, when someone buys a crypto-coin for USD 50 and it appreciates to USD 75 after several hours or weeks, then he or she can sell it to the market. Cryptocurrency traders essentially earn from the spread, or the difference between the buy and sell prices quoted for a cryptocurrency. The process is similar to stocks or forex trading.
2. Earning From Cryptocurrencies Through Capital Appreciation
It is important to reiterate that the value of cryptocurrency rises and falls. The variation in prices within a given period is influenced by different factors. These include the supply of the coin in circulation, market capitalization or the value of all units of a particular cryptocurrency in existence, integration or acceptability, and key events and media portrayal.
Because cryptocurrencies are assets, buying and holding them can be a worthwhile investment. The logic is somewhat similar to cryptocurrency trading. An individual buys a particular cryptocurrency in hopes that its value will appreciate in the future. However, it is important to note that trading is different from investing.
Investing centers on long-term buy-and-hold strategies aimed at profiting from the appreciation of the value of an asset. Trading refers to buy-and-sell strategies undertaken in shorter time frames and in greater frequencies to take smaller albeit more frequent profits. Both investing and trading are two different methods of endeavoring to profit in the financial markets.
To earn from cryptocurrencies through capital appreciation, an individual should take the investment route. Because the goal of investment is to maximize larger returns over an extended period, these individuals must buy and hold crypto-coins or crypto-tokens for at least 5 years for short-term investment to at least 10 years for long-term investment.
Several people have made fortunes from buying and holding cryptocurrencies. Note that the dollar-equivalent value of Bitcoin in May 2010 was around USD 0.01, and it appreciated to USD 1.00 in April 2011. In November 2013, its price was around USD 1000.00, and it further appreciated to around USD 50000.00 by February 2021.
3. Blockchain and Cryptocurrency Mining and Minting
Cryptocurrencies are powered by blockchain technology. As a backgrounder, a blockchain is a decentralized database and a specific type of a distributed ledger of transactions operated and maintained by participants of a peer-to-peer network of computers. This decentralized or distributed setup provides the key advantages of blockchains and cryptocurrencies.
A block contains all relevant data about a particular transaction and it is linked or chained together with a block from previous transactions. The participants of a blockchain network all have a copy of the same ledger. Their primary task is to add a block to a chain by validating transactions. These participants must reach a consensus for each transaction.
There are two popular mechanisms for achieving consensus. The first is the proof-of-work or PoW algorithm popularized by the Blockchain platform and other platforms such as Ethereum and Litecoin. The second one is the proof-of-stake or PoS algorithm first introduced by the Peercoin blockchain platform and used by other platforms such as Cardano.
Participants of PoW-based blockchains are called miners. They add blocks to the chain by expending computational resources to solve complex mathematical problems. A miner who successfully solves this problem earns a cryptocurrency native to a particular blockchain. To achieve consensus, other participants verify the transaction on their end.
On the other hand, participants of PoS-based blockchains add blocks to the chain by getting selected by the network. Each participant needs to use cryptocurrencies and have them put on hold. The higher the stake, the higher the chance to become selected. The selected participant verifies a transaction and earns a portion of the transaction fee.
4. Earning From Cryptocurrencies Through NFTs and NFT Gaming
Another way to earn or make money from cryptocurrencies is through the non-fungible token or NFT market. A non-fungible token or NFT is a unit of data stored on a digital ledger that can be added to a digital file to certify its uniqueness. NFTs also represent a class of digital assets that have been certified to be unique and, therefore, not interchangeable.
NFTs are created and recorded on the same blockchain-based distributed ledger of transactions that forms the foundation of cryptocurrencies. To a certain extent, NFTs and cryptocurrencies are the same because they are both digital assets based on blockchain technology. However, NFTs are non-fungible, while cryptocurrencies are fungible.
There are three ways to earn from NFTs. The first is by creating digital contents and selling them as NFTs in an NFT market. The second is by buying or more appropriately, investing in NFTs in hopes that their value will accumulate in the future. A lot of digital contents such as memes, video clips, audio or music, and even tweets have been sold for thousands of dollars.
So-called NFT or blockchain gaming is also another way to earn money from NFTs, as well as from cryptocurrencies. An NFT game allows players to accumulate crypto-token and/or collect in-game assets that have been tokenized as NFTs. These tokens and in-game NFTs can be sold in an NFT market or converted into cryptocurrencies.
A Note on the Risks in the Cryptocurrency Market
Attempting to make money from cryptocurrencies is not a guaranteed get-rich-quick scheme. Similar to other financial instruments and assets, there are certain risks involved. But cryptocurrencies have been extremely volatile. It is also worth mentioning that several groups of individuals have strong criticisms against cryptocurrencies. Hence, regardless of how a person plans to earn from the cryptocurrency market, it is important to constantly take note of the factors affecting the value or price of specific crypto-coins and crypto-tokens, as well as his or her risk appetite.