Since its introduction over a decade ago, bitcoin has become a household name around the globe. Even today, this popular cryptocurrency continues to generate headlines, driving a growing awareness of the digital asset class. Although there are now thousands of altcoins in circulation, bitcoin accounts for more than two-thirds of total market cap.
However, for those choosing to invest in this emerging asset, the journey has been famously volatile. After climbing to unprecedented heights through 2017, the price of BTC began to plummet early the following year. Now, with a year-long crypto winter behind us, digital asset prices have seen substantial appreciation.
As with any emerging asset class, market maturity remains a significant hurdle to broad adoption. However, as the cryptocurrency ecosystem evolves, investment opportunities have become increasingly diverse. Many companies have begun to roll out investment products and financial services that aim to bring BTC in line with conventional financial markets. Also, BTC rewards programs have become a popular way to encourage market participation.
In this article, we’ll explore some of the ways investors and everyday crypto users can make money with BTC. Contrary to media coverage, the inherent volatility of cryptocurrency markets can also generate profits, especially when hedging your market exposure. Further still, some methods of making money with bitcoin don’t require investing at all.
The Growth of Digital Assets
Before delving into the many opportunities to make money with bitcoin, it’s essential to understand the underlying market trends. As mentioned, bitcoin and other cryptocurrencies have been on a wild ride over the past few years. However, despite this volatility, the number of cryptocurrency users continues to grow.
According to Statista figures, there were approximately 40 million unique blockchain wallet users at the end of June this year. This number is up from 34 million users in 2018, representing an annual growth rate of almost 18%. As the primary storage mechanism for cryptocurrency, the growth in blockchain wallet users indicates a growing crypto community. This trend suggests that despite the apparent risks, more people are exploring this emerging asset class.
Although it’s unlikely that all of these new market entrants are buying bitcoin, we can safely assume that many are, given its persistent market dominance. For those that want to enter this growing bitcoin market, there are many paths to take. Let’s begin by analyzing options that most closely emulate traditional financial markets.
Investing in Bitcoin Markets
There are several ways to invest in the bitcoin market, each driven by unique price speculation strategies. In fact, despite emerging as an alternative payment network, bitcoin has primarily become a speculative asset. According to research from the blockchain intelligence firm Chainalysis, only 1.3% of bitcoin economic transactions came from merchants in the first four months of 2019.
This low merchant figure reveals the speculative nature of bitcoin and how it prevents the cryptocurrency from being widely adopted for payments. According to Bloomberg, “as bitcoin continues to see significant volatility and renewed valuation gains, its nature as a speculative asset purportedly disincentivizes users from using it as a unit for spending.”
In short, many see the cryptocurrency as an investment product, not a method of payment. However, this isn’t necessarily a negative trait for those looking to make money with bitcoin.
Regular trading refers to the use of a cryptocurrency exchange platform. These platforms operate similarly to traditional stock markets and are usually only accessible online. When using a digital currency exchange such as Bitbuy, investors first need to fund their account using fiat currency. This process usually involves using a credit card or bank wire transfer, though some exchanges offer additional funding options. When funding an account, the exchange will apply processing fees to the transaction.
Once funds are in the account, investors can exchange fiat money for digital currency at current market rates. During this exchange, transaction fees are applied based on the total trade value or a set percentage, depending on the platform. Once the trade goes through, users can opt to keep their cryptocurrency in their exchange wallet or transfer it to a crypto wallet held elsewhere.
Many in the industry advise against storing cryptocurrency on exchanges given the high frequency of hacks. In 2018 alone, a record $865 million was stolen from six exchanges as a result of hacks. This amount was more than double that lost in 2017. It’s important to note that while exchanges remain a safe place to buy and trade cryptocurrency, investors may want to consider external storage options.
How to Make Money With Regular Bitcoin Trading
When using an exchange to execute conventional bitcoin trading, there are two traditional approaches to investing.
When investors take a long position in bitcoin, it merely means that they purchase with the intent to hold. If prices appreciate as anticipated, investors can exit their position and convert their bitcoin back into cash.
Investors that take a short position in bitcoin are expecting the price to fall. Under this scenario, an investor would borrow bitcoin at a set market price, immediately sell it at market value, and then repurchase it when the price falls. The originally borrowed bitcoin is returned, and the investor pockets the difference. The most popular cryptocurrency exchanges that allow you to short bitcoin are Bitmex, Bitfinex, and Kraken.
Source: The Balance
Futures trading is a relatively new development in the digital asset class. This market involves investors negotiating and trading futures contracts through intermediary exchange platforms. But what exactly is futures trading? In short, futures are an agreement to buy or sell an asset on a specific future date at a particular price. Once two parties enter a futures contract, both must buy and sell at the agreed-upon price, regardless of the prevailing market price at contract execution.
When engaging in futures trading, the goal is not always profit maximization; it’s a risk management tool. Long available in traditional markets, futures act as a hedge against the risk of fluctuating asset prices, especially those traded frequently. As part of a portfolio, futures can also help balance out price fluctuations on investments, where the underlying asset is particularly volatile.
Where to Trade Bitcoin Futures
Investors have two options when looking to trade bitcoin futures. The first option is to select a cryptocurrency exchange, such as BitMex and OKCoin. Although some crypto exchanges have been offering future trading for many years, these platforms remain mostly unregulated, introducing potential risks.
The second option is on publicly regulated exchanges such as the Chicago Mercantile Exchange (CME) and Bakkt. In December of 2017, the CME was the second exchange to bring bitcoin futures to market, following the Chicago Board Options Exchange (CBOE).
Although the CBOE abandoned bitcoin futures earlier this year, The Intercontinental Exchange (ICE) recently launched physically-settled futures contracts through its Bakkt platform. Because these exchanges are fully regulated, many hope they’ll bring further legitimacy to the digital asset class while driving institutional investment.
Source: The Wall Street Journal
How to Make Money With Bitcoin Futures
Making money with bitcoin futures is possible if you follow a few simple guidelines:
- Watch Market Trends: Conducting extensive research and market analysis is a crucial first step when investing in bitcoin futures. By identifying trends, traders are more likely to generate profits. Typically, research includes assessing the factors that impact the supply and demand of the underlying asset.
- Mitigate Losses: If a trader regularly invests in bitcoin futures, the potential for losses is a real risk. However, the important part is mitigating this risk by cutting losses short and selling. This decisive action will maximize the return an investor generates to invest elsewhere, while offsetting other gains when capital gains taxes are calculated.
- Minimize Expenses: In the digital age, traders can conduct their own market analysis and use online brokers, dramatically reducing costs. It’s also important that investors track all expenses to maximize deductions during tax time.
- Margins and Expiration Dates: Many investors trade futures on margin, paying as little as 10% of the contract value while retaining the right to control and sell it until it expires. Although margin trading can result in multiplied profits, the risk of losing money is also far greater. It’s crucial to remember that trading on a margin brings inherent risks.
Of course, the easiest way to make money with bitcoin futures is through simple contract appreciation.
Margin trading is another investment strategy borrowed from traditional financial markets. This option allows traders to open a position with leverage or borrowed funds. While standard trades are executed with leverage of 1:1, margin trading gives investors the ability to increase this ratio dramatically.
Where to Margin Trade Bitcoin
In some cases, exchange users provide loans to the margin market, and in others the exchange provides them. For instance, the Poloniex exchange uses P2P lending so that anyone can loan their bitcoin and earn interest on the loan. The downside of this arrangement is that the coins need to be in the exchange’s wallet, which is far less secure than an external wallet. In contrast, exchanges such as Prime XBT and Kraken lend directly to investors so that they may execute trades on margin.
How to Make Money Margin Trading Bitcoin
The existence of a robust lending market makes margin trading possible. As mentioned, these lenders provide loans to traders so that they can buy more bitcoin, increasing the potential for profit should prices rise. For example, if a trader opens a margin position with 3X leverage and the underlying asset price increases by 10%, the investors’ position would yield 30%.
Source: First Trade Margin Trading
Advantage of Bitcoin Margin Trading
Bitcoin margin trading is an excellent way to generate significant profits quickly. A trader can achieve a substantial return with even a small movement in the price of bitcoin. In turn, lenders benefit from the interest they earn on the loans given to traders.
The Disadvantage of Bitcoin Margin Trading
Trading on margin is risky, and the cryptocurrency market only amplifies this risk — a small drop in price results in a significant loss. Because inherent risk increases with the leverage gained, traders would be wise to use stop-losses to reduce the risk of losing all funds (liquidation). Stop-loss gives users a second chance to overcome losses.
Source: First Trade Margin Trading
Bitcoin Savings Accounts
Bitcoin savings accounts are a great way to earn passive income on bitcoin that might otherwise sit idle in a wallet.
The Celsius platform asserts that investors can earn up to 10% APR on their bitcoin deposits. Immediately after depositing bitcoin into the Celcius Network wallet, these bitcoin holders begin earning interest on otherwise idle crypto assets. Because the platform takes custody of deposits, it offers insured custody to protect investor assets.
Among other functions, the popular Nexo platform allows investors to earn interest on their cryptocurrency deposits. Because the platform takes custody of deposits, it’s important to note the inclusion of custodial insurance to protect investor assets.
Lending Your Bitcoin (Earning Interest)
In contrast to lending fiat currency to facilitate margin trading, this approach involves loaning digital money. Those holding bitcoin assets can use select platforms to lend out their cryptocurrency while earning interest on the loan.
Along with allowing investors to lend and borrow cryptocurrency, Nuo supports on margin trading. However, lending bitcoin on the platform requires an additional step given the use of wrapped bitcoin (WBTC) versus bitcoin (BTC).
In short, WBTC is an ERC-20 token with a 1:1 peg to bitcoin. It was introduced to make bitcoin compatible with the Ethereum blockchain. As such, investors will need to convert their BTC to WBTC to lend it on Nuo and earn interest.
Bitcoin Reward Programs
Countless brands use loyalty programs to influence buyer behaviour and drive additional sales. As such, it’s no surprise that those in the cryptocurrency community have caught on. Although these loyalty programs are attractive to consumers, they often see a low rate of point redemption.
According to Bond Brand Loyalty, $100 billion worth of loyalty points goes unclaimed. Further, redeemers are twice as satisfied with loyalty programs as non-redeemers. However, one-fifth of program members have never redeemed their points. The anticipation of reward and the ease of redemption remain more critical than the actual reward.
With this in mind, it’s apparent why bitcoin rewards programs are more effective. Rather than offering arbitrary points that may be difficult to redeem, these platforms payout in bitcoin, streamlining reward issuance and providing immediate value.
Sats App from Casa
The Sats App from Casa is meant to facilitate a simplified approach to using bitcoin and the Lightning Network for purchases. According to the platform, this rewards feature aims to increase the adoption of Bitcoin, Lightning, and cyberspace nodes.
Lolli offers a browser extension that tracks online purchases, offering up 30% back in bitcoin rewards when purchasing from its network of over 500 partners. Lolli operates similarly to the popular Ebates (now Rakuten) platform, with the web browser extension further streamlining the reward-earning process.
The functionality of the Fold platform is similar to that of Lolli, with some additional features on offer. Fold works by integrating its payments solution with the prepaid access programs and point-of-sale (POS) systems of its partner merchants. This process enables users to earn bitcoin rewards of up to 20% while keeping personal information private, an especially important feature for bitcoin users.
The Path to Making Money With Bitcoin
Despite the ongoing volatility in bitcoin markets, the popular cryptocurrency continues to dominate the digital asset class. Although there are countless altcoins to choose from, bitcoin easily takes the top spot in terms of market capitalization.
Regardless of the path chosen, there are several ways investors and enthusiasts can make money with bitcoin. Ongoing price speculation will undoubtedly drive the growth of platforms that enable traditional, margin, and future bitcoin trading. Further, bitcoin savings accounts, lending platforms, and rewards programs will only grow in popularity as more enter the realm of digital currency. Chances are, we’ve only seen the beginning of bitcoin investment products and associated financial services.