In slightly over a decade, cryptocurrencies have evolved to become an important asset class in the financial market.
There are now more than 20,000 cryptocurrencies that are collectively valued at over $900 billion. While cryptocurrencies are highly volatile, it is still possible to generate substantial returns in the industry.
Cryptocurrencies and volatility
As a relatively new and unregulated industry, cryptocurrencies tend to be highly volatile. For example, after soaring to an all-time high of $67,000 in November 2021, Bitcoin pulled back to about $15,000 a year earlier.
In the same period, the total market cap of all digital coins slipped from over $3 trillion to about $850 billion.
Therefore, this volatility means that it is possible for crypto investors to lose money in the industry.
As prices dropped from their record highs, holders lost over $2 trillion in collective value. Therefore, risk management is an important part of both trading and investing.
One of the easiest approaches to making money in crypto in all market conditions is known as crypto arbitrage.
This is a process where traders take advantage of cryptocurrency differentials between different exchanges.
The most popular approach is to use peer-to-peer exchanges, where crypto holders set their own price.
For example, you might buy bitcoin from a seller for $15,200 and then list it for sale on the same or an alternative exchange for $15,500. If you find a seller, that translates to a $300 profit.
Crypto arbitrage can also occur on traditional exchanges. At times, an exchange like Coinbase will list Bitcoin at $15,000 while another one like XBO.com will list the same asset at $15,100. An arbitrage trader can take advantage of such differences.
Another way to make money in the crypto industry is by investing or hodling. Investing is the concept of buying and holding an asset for a few months or years.
A good example of people who made money using this form of crypto investments are those who bought Bitcoin in 2010.
While BTC has dropped from its all-time high, these investors remain in the money. In its earlier days, Bitcoin was trading for less than $5. Similarly, Ethereum has jumped from less than $5 to over $1,300.
The main risk in crypto investments is volatility. It is not uncommon for the price of a cryptocurrency to fall or rise by double digits within a day.
Another profitable way of participating in the crypto industry is through staking. Staking is the process of locking your proof-of-stake coins like Cardano and Ethereum for a fixed duration.
A good way to think about staking is to imagine locking your funds in a fixed deposit account and getting interest.
The staking returns mostly come from network revenue. For example, a network like Ethereum distributes most of its income to stakers through its validators.
At the time of writing, Ethereum had an APR of 3.8%, with the total ETH staked being over $16.5 million.
Staking has several risks. The most common risk is known as slashing, which is a penalty enforced at the protocol level. In most cases, slashing happens when a penalty is applied to a validator.
Mining is another profitable way to make money in crypto. It works in proof-of-work cryptocurrencies like Bitcoin, Ravencoin, and Ethereum Classic.
In most cases, mining involves solving complicated algorithmic calculations and earning rewards.
For a beginner, you just need to buy mining hardware, install the software, and then run the process. You can then sell your coins through exchanges.
Cryptocurrencies have become well-known in the past few years. In this article, we have looked at some of the most profitable ways of making money in the industry.
They all have risks. Therefore, you should always risk a small portion of your funds in crypto.