Cryptocurrencies represent a new and exciting opportunity for wealth generation. How to make money with crypto? For example, Erik Finman invested $1,000 in Bitcoin in 2011 when he was 12. By the time he turned 18, he became a millionaire as the price of Bitcoin soared to $20,000. There’s also the story of Christopher Koch, who put $5 million into Bitcoin in 2011, and by 2019, his fortune was estimated at nearly $9 billion due to the rising exchange rates.
However, despite such success stories, the crypto world is full of risks. Price volatility, lack of regulation, and anonymity attract fraudsters — in September 2023, losses from crypto fraud amounted to $329.8 million. Money laundering and fund withdrawals from cryptocurrency exchanges are also prevalent. Therefore, success here requires in-depth knowledge, a well-thought-out strategy, and a cautious approach.
In this article, we will delve into the basics of cryptocurrency trading and provide a guide on how to make money with cryptocurrency.
Cryptocurrency is a digital currency protected by cryptography and operates based on blockchain technology. Blockchain is a distributed database. It consists of a chain of blocks, each of which references the previous one and contains a certain number of transactions.
Transactions are grouped into blocks through a process called mining. Miners use the computational power of their ASICs or GPUs to solve cryptographic puzzles that require significant electricity consumption. In return, they receive rewards in the form of fees and newly minted coins.
The first cryptocurrency was Bitcoin, created in 2009. Its mining algorithm is called Proof-of-Work and demands increasing computational power. The average transaction time in the Bitcoin network is about 10 minutes.
Since then, many alternative coins, known as altcoins, have emerged, including Ethereum, Litecoin, Monero, and others. They differ in technical details, such as transaction speed, mining methods, and the level of anonymity.
For example, Ethereum is focused on smart contracts, while Ripple specializes in interbank payments and can handle 1,500 transactions per second.
Compared to fiat currencies, cryptocurrencies are decentralized and not controlled by governments. They allow for fast, inexpensive, and intermediary-free transactions. However, there are disadvantages: high price volatility and the lack of regulation.
To start trading cryptocurrency, you need to choose a suitable trading platform. There are two main types:
Custodial exchanges — Coinbase, Binance, Kraken, Gemini, and Bybit. In these exchanges, users entrust their coins to the platform, which acts as the custodian of keys and funds. It is convenient for beginners, but there is a risk of exchange hacks or bankruptcy.
For example, Mt.Gox, once the world’s largest cryptocurrency exchange, went bankrupt in 2014 due to a hack, resulting in customers losing $450 million worth of Bitcoins.
Non-custodial exchanges — HodlHodl, LocalCoinSwap. In these exchanges, users have control over their keys and wallets. There are fewer risks associated with custody, but it requires more responsibility from the user.
When choosing an exchange, it’s important to consider:
- The reputation and history of the exchange.
- Trading volumes and liquidity.
- Available trading pairs and altcoins.
- Transaction speed and fees.
- Security measures in place.
After registering, you should undergo KYC (Know Your Customer) verification and set up two-factor authentication (2FA) for account security.
There are some investment strategies in crypto:
This strategy involves opening and closing positions within the same day to profit from short-term price fluctuations. Day traders rely on technical analysis of charts to identify trends and chart patterns such as “Head and Shoulders,” “Flag,” “Triangle,” and others.
Popular indicators used by day traders include RSI, MACD, and Stochastic. Scalping and arbitrage strategies can be effective for day trading. For example, buying a coin on one exchange and selling it at a higher price on another due to price differences. It’s significant to check cryptocurrency rates live.
In this case, you hold positions for several days or weeks to take advantage of larger-scale trends. Swing traders pay attention to longer-term trends and use news analysis, events, and social sentiment in their decision-making.
It involves buying cryptocurrency to hold it for a long time, anticipating its value will increase over time. Holders research fundamental factors and the long-term potential of the crypto asset. Many follow a Dollar-Cost Averaging (DCA) strategy, which involves regularly purchasing fixed amounts to reduce risk.
For beginners, starting with “Buy and Hold” is a common approach, gradually transitioning to more risky strategies as they gain experience.
Now we know how to trade cryptocurrency and make a profit. But this market is known for its high volatility, making cryptocurrency security critically important. Here are some tips:
- Set Stop-Loss Orders: Establish stop-loss orders to automatically close losing positions. For example, you can set a market sell order if the price drops by 10% below your purchase price.
- Diversify Your Portfolio: Spread your investments across multiple coins and asset classes to reduce the impact of price fluctuations in individual cryptocurrencies. Diversification can help mitigate risk.
- Invest Only What You Can Afford to Lose: Determine the amount of risk you can comfortably bear and invest only that amount. Properly defining your acceptable risk level is crucial for survival in a volatile market.
- Use Moderate Leverage: If you decide to use leverage, keep it at a moderate level (up to 5x). Leverage can amplify profits but also increase the risk of liquidation, so it should be used with caution.
- Conduct Thorough Analysis: Carefully analyze and plan your trading strategy. This includes technical and fundamental analysis, setting clear entry and exit points, and having a well-thought-out plan for different scenarios.
Following these risk management strategies can help you navigate the challenges of cryptocurrency trading and increase your chances of success while minimizing potential losses.
Legal and Tax Implications
While cryptocurrencies are currently subject to relatively light regulation in many countries, it’s essential to be aware of certain legal and tax considerations:
- Adhere to Tax Laws: Ensure that you comply with the tax regulations of your country. This includes reporting cryptocurrency transactions and capital gains for tax purposes. Tax authorities in various countries are increasingly scrutinizing crypto-related activities.
- Be Mindful of Local Regulations: In some countries like China and others, there are outright bans on cryptocurrency exchanges and operations. Make sure to check the legality of your actions in your jurisdiction to avoid legal issues.
- Keep Detailed Records: Maintain meticulous records of all your cryptocurrency transactions for tax reporting purposes. This should include transaction amounts, dates, and the purpose of each transaction. Proper record-keeping is essential for accurate tax reporting.
- Stay Informed: Stay vigilant about the potential introduction of new laws and regulations regarding cryptocurrencies. Regulatory landscapes are evolving, and being informed can help you mitigate regulatory risks.
Understanding and following legal and tax requirements is crucial for a smooth and compliant cryptocurrency trading experience. It’s advisable to consult with a tax professional or legal advisor who specializes in cryptocurrency matters to ensure full compliance with local laws and regulations.
Despite the high volatility, the cryptocurrency market is actively evolving and holds promising prospects. Key trends to watch for include:
- Expansion of Blockchain Usage: Blockchain technology is being increasingly adopted in traditional businesses and the public sector. Leading banks are testing blockchain-based payment systems, and various industries are exploring its potential for supply chain management, identity verification, and more.
- Central Bank Digital Currencies (CBDCs): Several central banks are conducting pilot projects to explore the feasibility of issuing their digital currencies. CBDCs could revolutionize the way traditional fiat currencies are transacted and managed.
- Integration of Crypto Assets into Traditional Investment Products: The integration of cryptocurrencies into traditional investment products like Exchange-Traded Funds (ETFs) and futures contracts is expected to increase institutional investor confidence and participation in the crypto market.
It’s essential to stay well-informed and keep an eye on news and technological developments in the cryptocurrency sphere. It will allow you to know how to earn money from cryptocurrency without risk.
Crypto VS Stocks
On the one hand, the potential profitability of investing in crypto is significantly higher due to greater volatility. However, the risks are also significant. The traditional stock and bond market is stable and predictable. It is easier to apply fundamental analysis here to choose promising assets. However, the growth potential is not as high, and trading opportunities are limited.
Regardless of the earnings strategy, the main thing is not to rush, assess the situation soberly, and constantly improve your qualifications. Good luck in exploring the exciting world of cryptocurrencies!