Cryptocurrencies have been with us for just over a decade now. Most of us have had the privilege of seeing them rise from their lowest and peak at their highest over the years.
This is most evident with the pioneer currency, Bitcoin, which was created in 2009 and is the most well-known and most valuable today. Since then, we have seen thousands of cryptocurrencies created, including Ethereum, Litecoin, Ripple, Bitcoin Cash, and more.
Cryptocurrencies can be sold and bought on exchanges. They can also be used to purchase services and goods from businesses that accept them as a form of payment.
The main advantage of using cryptocurrencies is that they give greater control over the transactions and money to their users. This is because they aren’t subject to central authorities. However, the biggest disadvantage is that they’re highly volatile and they’re subject to rapid fluctuations and price changes — this makes them a high-risk investment.
As an investor, you should always conduct some thorough research and consider the risk before investing in cryptocurrencies.
Methods of Profiting from Cryptocurrencies
There are various ways of profiting from cryptocurrencies. We’ll look at a few of them and show you why they are risky.
Buying and Holding
Buying and holding is a long-term strategy where an investor purchases a cryptocurrency and holds it, hoping that the price will increase over time.
The negative aspect of this is that the time you will have to wait is undefined, depending on the end goal you have. It could be days, months or even years. This is a risky form of hoping to profit, because there’s a possibility the price could never increase.
Cryptocurrency shorting involves borrowing the cryptocurrency and selling it at the current market price, then buying it back at a lower price to return the principal amount to the lender. If the price of the cryptocurrency falls between the time of the selling and the buying back, it means the seller profits from the difference.
Shorting cryptocurrencies is also seen as a risky strategy because of the high volatility of the crypto market. The market experiences rapid price swings in any direction. Additionally, the crypto market is considered to be illiquid, which means it is extremely difficult to find someone willing to lend you a cryptocurrency for you to short. The cost of borrowing could also be high.
Mining cryptocurrency involves complex mathematical algorithms to validate transactions on a blockchain network with the goal of earning new coins as a reward. This can be profitable, although it requires some expensive hardware and a lot of electricity to be profitable.
Mining is an important process in the cryptocurrency world because it ensures the security and integrity of the network by verifying transactions and preventing double-spending. Miners are then rewarded with newly generated coins as well as some transaction fees for their effort.
This is risky because of the cost involved in acquiring the necessary hardware. It could take some time before you get back the amount you’ve invested. Mining also requires maintenance and plenty of technical expertise.
Arbitrage involves buying a cryptocurrency on one exchange platform where the prices are lower and selling it on another where the prices are higher. The difference between the lower and higher prices is the profit.
The Arbitrage method takes advantage of the cryptocurrencies’ high fragmentation. The cryptocurrency market is filled with different exchanges having different prices for the same currency. This creates an opportunity for operators to profit from these price differences. It can either be done manually by monitoring different exchanges or by executing a trade. It can also be automated using trading bots that are programmed to identify and execute profitable trades automatically.
While Arbitrage can be profitable, it is also highly competitive and requires access to multiple exchanges and quick reflexes. It’s also associated with high risks as the price differences between exchanges could change rapidly. There’s always a risk of losing money if the price moves against the arbitrageur.
Most forms of making a profit from cryptocurrencies come with some form of risk. If you’re considering any form of investment in cryptocurrencies, you should always do some research and consider the risk tolerance before you invest.