As the popularity and legitimacy of cryptocurrencies grow, more and more people perceive them as a way of earning money. There are several methods of raising capital. Some require knowledge and effort from the user and some only time. This article will look at two popular earning methods, analyze their pros and cons, and help you choose the one that suits you.
Are You Active or Passive?
Even before you buy a cryptocurrency, you need to decide how you want to increase your portfolio. That is, to go into profit. There are several ways:
- to invest to trade (sell/buy and earn on price fluctuations);
- invest in top coins and hold them until the profit on its sale seems satisfactory;
- invest in coins to earn interest: staking or lending.
It is crucial to decide on a strategy before the first purchase of cryptocurrency: because it will depend, banal, on how much time per week you will devote to tracking the exchange rate. And if you are determined not to lose money, then you understand the importance of such awareness.
Choose the Asset Wisely
Evaluate the crypto assets you want to buy. First, you must give the cryptocurrency you want to buy your definition. And obviously, the first thing you need to understand is whether it is a reliable asset. To do this, answer several very simple questions:
- How long has this cryptocurrency been on the market?
- Have there been bright ups and downs during this time? When and against what background did this happen? Media monitoring is needed here. This is important if you don’t want to “point your finger at the sky.” Thus, you will now understand whether something significant influences a particular crypto asset. So that, if you still choose an asset, you can understand for the future what it can “storm” from and what news to track.
- Does any influencer directly affect this asset? For example, Elon Musk, the Winklevoss brothers, Michael J. Saylor, and so on.
- Was the cryptocurrency’s price able to recover or reach new all-time highs after the fall?
- Does the asset have liquidity on the exchange where you trade?
- What are the trading volumes on the coin — the higher, the better. Low trading volumes mean that the asset is not available on many platforms, or traders are not interested in it.
Crypto Trading Explained
Trading on the crypto exchange requires knowledge and skills that come from many months of practice. Getting to know trading should start with an overview of the main tools. When opening a trading terminal on any crypto exchange, you will see approximately the same set of tools: a price chart for the selected trading pair, an order book, information on trading volumes, and transaction history. You need to read charts, analyze them, have fundamental and technical analysis skills, analyze crypto market sentiment, and track the news background.
Many exchanges provide a demo account where you can practice and try out new strategies. The principle of operation is similar to real trading, so it is strongly recommended that every beginner first test their strength in this way. This will allow you to understand the terminology and essential tools.
In addition to the usual trading, the essence of which boils down to “buy cheaper and sell more expensive”, other varieties are especially popular during periods of a bearish trend and allow you to make money even during falling markets. For example, futures trading is a kind of betting on whether the rate will go up or down after a particular time. Or margin trading — this opportunity is now provided by almost all well-known crypto exchanges. In this case, the platform provides users with leverage in an amount several times higher than the amount the trader possesses. In this way, you can significantly increase your profit, but keep in mind that the risks are also growing.
If you intend to trade, you need to understand how active: weekly, daily, or every minute. It is mandatory to be able to read an order book. It would also be nice to understand indicators and chart patterns. Analyze whether whales operate and whether market making takes place. Also, analyze market sentiment, that is, who dominates bulls or bears.
Among other things, knowledge of technical and fundamental analysis is required from the trader:
- Technical analysis. A forecasting method based on the study of past asset quotes. It is believed that the dynamics of the cryptocurrency exchange rate are cyclical. The growth and fall in demand for BTC and altcoins occur according to the same patterns. To identify these recurring situations, users look for patterns on the chart of a trading pair, determine the support and resistance levels, and try to predict reversal points using Elliott waves or Fibonacci levels.
- Fundamental analysis. It is based on studying economic, political, and news prerequisites for changing quotes. To trade using this method, users follow the news, and speeches of major investors and politicians, evaluate the prospects of cryptocurrencies, compare their technical characteristics, and analyze the economic situation and sentiment in other markets (stock, commodity, currency).
Trading can be both short-term, medium-term, and long-term. Day traders or scalpers who open a lot of orders within one trading day are more focused on technical analysis. Due to the short time intervals, transactions of day traders and scalpers usually bring a small profit, less than 1%. Medium-term and long-term traders typically focus on fundamental analysis. Technical analysis is used only as an addition that eliminates unnecessary noise in price fluctuations and helps find the optimal market entry points. Trades are carried out less frequently than with scalping. The order can remain open for up to several weeks. At the same time, the user can expect a high income from each trade.
How Much Can You Earn?
You can both earn a lot and lose all your funds. Trading requires experience and involves high risks. Trading is much riskier than staking: a trader makes a lot of trades, which is why he incurs more costs for fees. And if the cumulative losses exceed the total profit, the deposit will be reset very quickly.
Trading: Pros & Cons
- High potential profit. Cryptocurrencies are very volatile, sometimes allowing traders to earn significant amounts in just one day.
- Low entry threshold. It is enough to make the first trade on the market to have only $10. This is the average size of the minimum order on the crypto exchange. However, it is better to start trading at least $100 so that there is always a reserve of free money in case you need to average a position or buy another crypto asset.
- There is no payback time. You don’t need to buy expensive equipment, as in the case of mining, count interest on loans, or lock your assets for specific time periods.
- Thanks to futures and margin trading, there is an opportunity to earn both on the growth and the fall of cryptocurrencies.
- High risks. Where there is a large profit, there are high risks. Moreover, the risks are always directly proportional to the potential profitability. When trading with leverage, the risks only grow.
- Constant training and discipline. Trading is a full-fledged, extremely resource-intensive work. Traders need to learn and analyze their mistakes constantly.
Crypto Staking Explained
Cryptocurrency staking is the voluntary locking of one’s assets for the purpose of passive income. Staking is available in blockchains using Proof of Stake and its varieties, for example, Delegated PoS (Tron, Cosmos, etc.) or Liquid PoS (Tezos). Classic solo staking has a high entry threshold. For example, to become a solo staker on the Ethereum network, you will need at least 32 ETH (about $60,000) and a computer connected to the internet ~24/7. However, users can deposit a smaller amount into the staking pools, thus delegating coins to validators. This way, they do not need to run their own node, but the profit will be less. The disadvantage of the staking pool: if this pool does not sign the block, the user may not receive a reward.
The main principle of staking is universal for all its types — a certain amount of cryptocurrency is on the user’s account, for which he receives passive income. The amount of capital determines the level of profit. Also, the operation mechanism can be supplemented by other conditions that depend on the type of staking. For example, some systems provide payments only to validators. Then, stakeholders sometimes combine assets, creating pools and becoming validators, and draw up a common contract. The profit is divided among the pool participants in multiples of the contribution size.
- Locked Staking
With this type of staking, the user locks his assets for a specific period. The duration of this period cannot be changed. The main advantage of this type is the high-interest rate. Usually, the APR that the staker will receive at the end of the specified period is indicated in advance, but the reward may vary. Locked staking is characterized by high profitability compared to other types of staking.
- Flexible Staking
In this case, the contract does not provide a specific period of holding coins. The user, at will, can terminate it at any time and withdraw the cryptocurrency. The interest is accrued until the staker transfers the funds to another wallet or places an order in exchange for the sale of tokens. Earnings, in this case, are insignificant (from 1% to a maximum of 20% per year). Flexible staking is suitable for users who are not ready for long-term agreements on the retention of cryptocurrencies and want permanent access to their capital.
- Cold Staking
The most secure option. The locking of cryptocurrencies occurs on a hardware wallet that does not have a permanent Internet connection. This option is not available for all coins and trading platforms. In addition, the coins must always be located at the same address. In case of relocation, the contract is terminated, and the reward is not paid.
Cold staking is relevant for owners of large volumes of coins that do not want to risk their loss in the event of a crypto exchange being hacked.
- Liquid Staking
Liquid staking allows token holders to stake their tokens, forcing them to work in DeFi. This is the best of both worlds: Staking and DeFi, with no cryptocurrency lock-up periods, which can sometimes take up to 28 days. Liquid staking solves the incompatibility crisis between DeFi chains by allowing the use of derivative assets in DeFi protocols to generate income and staking rewards, helping to unlock liquidity locked in PoS networks. One of the most popular liquid staking platforms is the Lido. The protocol allows you to stake ETH, SOL, MATIC, DOT, and KSM. After adding tokens to the staking pool, the user receives a similar number of derivative tokens (for example, if you deposit 1000 ETH, you will receive 1000 stETH). Further, stETH can be used as a regular ETH, for example, to generate income in other DeFi protocols. The crucial point is that the staker receives a staking reward and additional income for using stTokens in DeFi protocols.
- DeFi Staking
DeFi staking is not exactly staking in its traditional sense. With the help of DeFi staking, users can stake not only PoS blockchain tokens but also PoW, such as BTC, LTC, USDT, USDC, and others. In the DeFi staking, there are counterparties — platforms that take your coins at interest. At the same time, the security of the transaction is provided by a smart contract and completely depends on the presence or absence of vulnerabilities in it. Many platforms offer DeFi staking services. For example, the well-known crypto exchange Binance allows you to stake 15 assets, including BTC, ETH, USDT, DAI, and other major coins. The exchange acts as a showcase and cooperates with several leading DeFi protocols, such as Venus, Aave, dYdX, and others. Users can deposit tokens for a floating or locked period, after which the Binance redirects the deposited amount to one of the DeFi protocols to generate profit.
How Much Can You Earn?
It is impossible to give an exact number: the interest may vary depending on the selected token. Also, note that if you stake tokens using third-party platforms, the profitability varies from platform to platform. It should also be understood that you can not just earn a little but even lose a lot in some cases.
For example, you bought $1000 worth of the coin and staked it at 100% APR. However, this does not mean that in a year, you will get $2000. The profit will depend on the exchange rate of the coin. If it remains at the same level, your profit will double. If the exchange rate has increased, the earnings will be even more. But if the coin has dropped significantly in price, then, in the end, you may be left with only $100-200, depending on the depth of the fall.
Risks are present, as in any other type of investment. But even here, they can be minimized. Stablecoins will help in this. The most famous are USDT, BUSD, and USDC. There are platforms within which you can earn up to 10-20% APR for the staking stablecoins.
Staking: Pros & Cons
- Minimal risks of losing funds, especially when it comes to stablecoin staking.
- Passive income. The user earns simply for depositing their tokens into the staking pool. Moreover, the yield is higher than that of any bank deposit.
- Large stakeholders receive voting power and can participate in the project's further development.
- You do not need to have special knowledge and skills.
- Stocking types: locked, flexible, liquid, and DeFi staking.
- Loss in the price of a digital asset. The more the exchange rate of the coin decreases, the smaller the amount of interest specified in the contract will be. This is especially acute when concluding a contract for a locked term. Noticing a sharp price decrease, the user will be unable to sell the asset.
- Relatively low profitability by the standards of the crypto market.
In this article, we have considered two ways of earning — trading and staking. Trading is an active way of earning money. In other words, a full-fledged job requires the user to have deep technical knowledge, constant involvement, risk management skills, market sentiment analysis, news background, and much more. Trading involves great risks, but this method can bring the biggest profit. On the other hand, staking is a passive type of earnings that does not require much knowledge, time, and effort. At the same time, staking is not so risky and is more regarded as a way to get little extra earnings.