Disclaimer: Nothing in this post is financial or investment advice in any respect. Technical accuracy has intentionally been sacrificed for the sake of simplicity and relatability.
One of the biggest news stories over the past few years has been the rise of cryptocurrency and its impact on the economy, technology, and, frankly, all of humanity. This article will give investors a high-level view of various income opportunities in crypto.
Making the case for crypto
I promise we’ll get to the fun bits about making money, but first I want to highlight how disruptive and innovative this technology is. It will change every industry, and, in a few years, we’ll all be using it whether we know it or not.
First, the terms cryptocurrencies and blockchain are often used interchangeably, but are two separate technologies. For the sake of our discussion today, we’ll use some simplified definitions.
Blockchains are persistent, transparent, append-only, public ledgers. Think of a blockchain like a spreadsheet that anyone can interact with. Blockchain technology answers the question of “who did what when,” while preserving the integrity of that data via complex math. In practical terms it facilitates direct trade at scale.
Cryptocurrencies are digital assets that circulate on the internet as a medium of exchange. They use blockchain technology to operate. The first iteration, Bitcoin, started as a “Peer-to-Peer Electronic Cash System.”
A helpful analogy is me handing you $100 in cash at a restaurant. I gave the money directly to you. We didn’t have to both go to a bank to process a withdrawal from my account, exchange the cash, and deposit it into your account.
Cryptocurrencies let me give you $100 directly from anywhere in the world no matter where either of us are, almost instantly, and without any middlemen involved. The Blockchain allows the direct trade, and the cryptocurrency provides the monetary value.
Only thinking of the basic peer-to-peer digital cash applications, think of the real-world implications of this innovation:
- We are no longer limited to banker’s hours for access to our money.
- The 3–5-day settlement of transactions is now just a few seconds.
- Sending money internationally is simple, quick, and almost free.
- No more credit card transaction fees for your business.
- Those without bank accounts only need a smartphone to participate in the modern financial system.
And this is just with Bitcoin! We haven’t even touched on the potential of Smart Contracts, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), Oracle networks, integration with AI, automation, or other decentralized systems (like Airbnb or Uber)!
So how do you make money with cryptocurrencies?
There are a few different ways to make money with crypto, each with degrees of management, technical skills, and risk. I’ll give a high-level overview of them here. I will not be discussing rates of return because they fluctuate daily. Suffice it to say that a range of returns between 8-20% are considered normal for lower risk strategies. The aggressive and highly speculative returns can bump into the 80-110% range.
Holding
Approach: Passive
Risk: Low-to-Medium
Tax Treatment: Capital Gains
Buy and hold crypto for years passively. As with all investments, perform sufficient due diligence on any cryptocurrency you plan to buy. In your exchange account, you can set up recurring weekly or monthly purchases. With this “set-it-and forget-it” method, you don’t need to check in on your account more than two or three times a year.
This simple strategy applied to Bitcoin (BTC) has outperformed every other investment opportunity on the planet. Also known as “Hodling” after an accidental misspelling on the Bitcointalk forum.
Trading
Approach: Active
Risk: High
Tax Treatment: Capital Gains
This is exactly what you think it is. You buy and sell crypto on exchanges much like you would trade stocks. Similarly, you can use either technical or fundamental analysis.
One key point to remember is that crypto prices move much quicker and with higher volatility than stocks. It is not unusual to see 5-10% movement per day. Smaller cap coins will often have even more volatility.
Advanced strategies employ exchange price arbitrage, leverage, Non Fungible Tokens (NFTs) and automation.
Lending
Approach: Passive
Risk: Low-to-Medium
Tax Treatment: Ordinary Income
When you own crypto, you can lend it to a third party to receive interest income. Your crypto is then used by the borrower for more profitable activities, such as issuing higher rate loans or facilitating trades on exchanges. There is a massive volume of trading and borrowing in Decentralized Finance (DeFi), and many decentralized exchanges require cash on hand to fulfill those trades.
For those just getting started, I recommend you stick with U.S.-based centralized exchanges (CeFi) like Gemini and their U.S. Dollar backed stablecoin “GUSD.”
More advanced strategies are automated yield farming and using compounding leverage.
Validators
Approach: Active
Risk: Low-to-Medium
Tax Treatment: Ordinary Income + Self-employment Tax
This is more of a business than an investment and requires a significant amount of specialized technical skill and in some cases, specialized hardware.
This strategy encompasses mining via Proof of Work (PoW) as well as Masternodes via Proof of Stake (PoS).
Proof of Work (PoW) mining is what Bitcoin uses to validate transactions. Operators purchase and configure specialized hardware and provide value to the network in the form of computing power, which is used to validate other users’ transactions.
Proof of Stake (PoS) accomplishes the same function as traditional PoW mining, but does so in a more elegant, efficient, and democratic way. Operators purchase and commit a significant amount of crypto to ‘buy’ the network’s trust to validate transactions with weak computing power. Operators no longer need cheap electricity, a datacenter, or a hardware supplier to profit from mining.
Conclusion
There are tailored options to participate in cryptocurrency for various levels of involvement, risk, and skillset. If you do nothing other than the “Holding” strategy, you will most likely thank yourself in a few years.
Many news outlets claim that we have missed the boat on crypto, but I disagree.
By taking the time to educate yourself, you are already in the top 1% of the population on this subject.
With mainstream adoption rapidly approaching, I believe we are at the precipice of another Internet revolution and the accompanying earth-shaking transfer of wealth that came along with it.
Of course, we all wish we could have bought Bitcoin back in 2010 but as the saying goes, “the second-best time to plant a tree is today.” We have plenty of runway left.
A crypto veteran and enthusiast, Patrick Will’s passion is helping non-technical people use crypto in their daily lives. In 2010, he read the Bitcoin white paper, mined his first block, and was hooked. As crypto evolved and matured, he started educating friends and family about the new uses of peer-to-peer electronic cash.
With mainstream adoption rapidly approaching, he wants to prepare as many hard-working W2 earners as possible to take advantage of this massive transfer of wealth to the new financial system.
Patrick is an Infielder in the Left Field Investors Community and he can be contacted at pat@leftfieldinvestors.com
Nothing on this website should be considered financial advice. Investing involves risks which you assume. It is your duty to do your own due diligence. Read all documents and agreements before signing or investing in anything. It is your duty to consult with your own legal, financial and tax advisors regarding any investment.
