Investing in cryptocurrency has many differences from investing in traditional stocks. One of the primary differences is that, unlike many stocks, cryptocurrencies such as Bitcoins do not pay investors dividends since Bitcoin and other cryptos are not operating businesses; they are currencies. Instead, owning crypto can be considered like buying gold bars, where your wealth accumulates based on the value going up (or down), but no actual money is earned or lost until sold. However, this does not mean that there aren’t any opportunities in the cryptocurrency market to make money without selling your coins.
Making money from your crypto holdings without selling requires putting your investment to work. Popular (and sometimes risky) strategies include arbitrage trading, P2P lending, crypto rewards, and staking. These all come with potential gains and risks. In addition, most of these opportunities come with the added risk of losing custody of your coins for some time.
As with fiat money (such as the Aussie dollar) being put into a bank account to earn interest, there are opportunities to make your cryptocurrency work for you. However, the cryptocurrency market is not backed by a government like a bank is, so there is no bailout if the crypto exchange or company you do business with fails. The risks are higher with these crypto opportunities, as are the rewards.
Searching for yield from your cryptocurrency comes with several pros and cons; a few questions to ask yourself before selecting a strategy may include:
Each method of making money from your cryptocurrency comes with a price, be it time, control, risk, or a combination of the three. Knowing what you are comfortable with will help you select a crypto strategy that suits you. Keeping a journal of what you want to achieve, why you want to achieve it, and what your thoughts are at the time of making your decision is an excellent way to self-check your thinking and reflect on it to improve your skills.
Arbitrage is a money-making (or losing) strategy where you buy a cryptocurrency off one exchange and sell it elsewhere on a different business for a profit (hopefully). It’s like flipping a house in a shorter period with slightly less hassle but plenty of risks.
The price discrepancy for the same coin on different exchanges happens for a few reasons. Still, the main one is due to the cryptocurrency market’s lack of central regulations and controls. For example, BHP Group, one of Australia’s largest companies, is traded on the ASX at a specific price per share. It is not sold on the Chinese stock market at a different price. If it was, theoretically, you could buy it in Australia, transfer the shares to a Chinese exchange and sell it at a (hopefully) higher price. However, with crypto, the same coin can be traded on multiple exchanges at a slightly different price.
So, in theory, arbitrage trading (or ‘arb-trading’) is simple: buy here, sell over there. However, some details impact this strategy, such as exchange fees, which will be paid twice: for the purchase and the sale.
Another challenge is transaction speeds, which are significantly slower than debit or credit cards. Consequently, during the time it takes to finalize a transaction, the market may have changed, for better or worse.
This means there are plenty of risks to arb-trading. So in our humble opinion, stay away from it. However, if you can’t stop the urge to try it, it’s best to only “play” this game with a small amount of money you can afford to lose or with coins you don’t mind holding should the market shift into a loss. Ideally, the coins used to implement the arb-trade strategy don’t come from your core cryptocurrency investment. Instead, these are just coins you buy and sell when you have to focus on the game.
P2P Lending stands for peer-to-peer lending. The idea originated with the cryptocurrency Ethereum, a blockchain that allows smart contracts (programs stored on a blockchain that run when predetermined conditions are met) to be entered into the blockchain, which helps protect both parties. If one party to the transaction wants to renege on the deal, they can’t since it’s written into the code. The core idea of P2P Lending is that one party has cryptocurrency to lend, and the other party wishes to borrow it. The parties agree on the fees, interest, and period for this deal, write it into a smart contract and lock it into the blockchain.
As with loaning anything, you do not have access to your coins for the period you have lent them. So no matter what the market does, you can’t touch your coins since you lent them out. However, if you have a HODL (long-term buy and hold) strategy and are not planning to sell anytime soon, P2P may be a method of earning a yield on your coins without selling.
Of course, there are plenty of risks with lending cryptocurrency. However, smart contracts help minimize it by guaranteeing that you are paid back your tokens with interest, although the value of those tokens may change during that period.
At the start of this post, we told you that cryptocurrency doesn’t produce dividends in the same way it does with stocks. This is empirically true, as “dividends” typically mean something else in the crypto market than in the stock market. In crypto, ‘dividends’ are more commonly called ‘rewards.’
Dividends or rewards in crypto are typically earned by agreeing to keep your coins in specific online wallets. Some require you to hold the coin in a hot wallet on an exchange. One risk might be if the exchange folds, your coins can be lost. Some dividend/reward options provide you with a choice of a few soft wallets. However, as we explained in our post, Hardware Wallets vs. Software Wallets, soft wallets are not as secure as hard wallets.
Dividend/reward requirements may include locking your coins in a wallet for a set period. As a coin holder, this means that you will be prevented from moving your coins during the dividend/reward period, no matter what the market is doing. In exchange for this risk (not being able to sell), you will earn dividends and rewards. However, it’s worth noting that the rewards are usually paid in the currency you are holding, not in Aussie or US dollars. So, for example, if you lock in your Solana (SOL) coins (a cryptocurrency) into a wallet for one month at an agreed rewards rate of 1 SOL per day, the value of SOL vs. the Aussie or US dollar may change. If 1 SOL = $50 when you started on Day 1 but falls to 1 SOL = $10 when your lock-in period is over, then you will have lost a considerable amount of capital despite the ‘rewards’ you earned since the value of the coin has fallen relative to other fiat currencies.
Additionally, as a rule of thumb, the higher the dividend/rewards rate, the riskier the strategy. A coin that offers you a rewards rate of 20% or 30% per year typically means that the coin in question is quite risky. It also means the coin is inflationary, meaning the coin creators are simply ‘minting’ new coins out of thin air to pay you, which, over time, devalues the coin and your capital.
Consequently, when looking into cryptocurrencies that offer dividends/rewards, be sure to understand what you will require to earn those rewards so you can evaluate the risks and the overall financial benefit. These deals can vary widely, as the term “dividend” itself is not regulated in the crypto market and thus can have different interpretations.
Staking is another way to generate yield; unlike ‘rewards,’ which simply pay you for locking coins into a wallet or protocol, staking has a specific purpose of securing the blockchain the coin is built on. Initially, the most common method to secure a blockchain was to use a technique called “proof-of-work,” which is a costly and time-consuming method, albeit very secure, and is still used by Bitcoin and a few other cryptocurrencies. However, more recently, newer blockchains have migrated to a technique called “proof-of-stake” as it requires less actual physical computing work and is a more scalable and environmentally friendly model; however, it also comes at the cost of being less secure.
Staking is fundamental to how ‘Proof of Stake’ blockchains works. Staking your cryptocurrency is a passive way to earn money with your coins while supporting the blockchain. To stake your coins, you must agree to place them in a specific place and not use them. This means your cryptocurrency is “locked” and cannot be sold or moved to a different wallet. Hence, it is a strategy that favors those who already prefer to HODL (buy and hold).
Staking sounds simple enough, but there are several details to consider beyond which coin to invest in and stake. The amount of currency staked can impact the dividend you receive. For example, a coin creator might have a protocol where 100 staked coins will earn you a 10% yield per year, but 1,000 staked coins will earn you 15% for the same period.
Who you “pool” with for your stake can also impact the yield you receive. A Pool is a group of coin-holders who ‘pool’ their coins together in one wallet to earn a higher reward for staking more coins. However, choosing a pool with the highest rates is not always the best strategy. Pools are not guaranteed to be used by the currency as an actual ‘stake.’ So typically, the higher interest the pool offers, the less chance the pool thinks it will be chosen. (Think of horse betting: the higher potential returns from the bet, the less likely your bet will actually win.)
Like most things in cryptocurrency and investing, staking requires a lot of research and education. Please contact us if you want more information; we’re always happy to help.
It is possible to make money with cryptocurrency without selling your initial investment. However, like anything in the crypto market, every strategy comes with potential rewards and risks. Therefore it is essential to learn as much as possible and consider your financial plan before diving into the next opportunity.
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