Synopsis: In this article, we will discuss how returns are generated through crypto investing, so that you can get to know more about these sustainable and speculative returns and make a decision about it yourself.
I am sure that most of you want to invest in cryptocurrencies as there is a huge social buzz on profits from cryptocurrencies. Many get lured, but they don’t even know how we get returns from crypto investments. For instance, we get returns from companies from appreciation of share prices or attractive dividends. Similarly, investments in crypto yield profit only when its prices increase or when there is an attractive incentive.
How do we benefit from price increases?
The price can only change when demand or supply changes. Hence, the price of a cryptocurrency can only increase when demand increases as supply is fixed.
Demand can increase when people look up to owning cryptocurrencies to store value. Not only individuals, but also demand from institutional investors have caused the prices to increase. The demands of a cryptocurrency can be determined through:
- widespread adoption from individuals and institutional investors
- positive expectations and speculations
The main ways of earning from cryptocurrency through price increases are summarised below:
1. HODLing
HODLing means holding onto bitcoin holdings. It is a long-term strategy followed while investing cryptocurrencies. In this strategy, you are supposed to hold on to the crypto for a long duration. You are not supposed to buy or sell even when the prices are moving up or down. The main underlying concept is to ignore the short term profit and believe in the long term profit by holding on to it and selling it after years.
2. Crypto Arbitrage
Arbitrage means buying and selling of the same instrument at same time and sample place to take advantage of price differences. Arbitrage can also be used, while dealing with cryptocurrencies. The types of crypto arbitrage include profiting from one or more platforms.
Making gains from this strategy can include taking advantage of price discrepancies within regions and trading of three currencies in one exchange. No crypto markets are dependent on similar determinants, since the change is due to a different set of reasons, arbitraging is very profitable in these situations.
3. Crypto Trading
Trading is buying at low price and selling at high price. In crypto trading, the capital required is less, but the risk exposure is huge. Most of the trading terminologies are similar to trading in stocks/ bonds/ commodities. There are rules and regulations while trading in stocks/ bonds/ commodities as it is controlled by market regulators. No one controls crypto markets, the trading strategies of crypto whales (Those who own huge cryptocurrencies) can affect this market tremendously.
What are the other ways of earning from cryptocurrency?
1. Staking
It is the most passive way of earning money from cryptocurrency. It requires an individual to set aside some amount of cryptocurrency and lock it to ensure the smooth flow of blockchain. Here, you will earn incentives for helping blockchain to function, similar to that of interest from fixed deposits. There are two types of staking: active and passive. A successful staking requires highly advanced knowledge, but staking is not properly regulated.
2. Lending
You can lend your crypto amounts to other people on the platform. This can help you either earn an interest from borrowers or platform share fees. These crypto lending platforms can be either centralised or decentralised. In a decentralised crypto lending platform, it is more of a peer-to-peer lending, whereas in a centralised crypto lending platform, these lenders act as traditional banks. The main risks are volatility and security of lending platforms.
3. Mining
Crypto mining is carried out to add blocks to blockchains for more crypto currencies. First, crypto transactions will be verified along with a processing fee. The transactions, which do not get verified, will be bundled into a block. The miners will race to solve this complex math problem.
Upon solving this math problem, a hash will be created combined with the block’s data. The fastest miner will solve it, whereas other miners will verify the solution given by the fastest miner. If the solution is correct, then a new block will be added and mining rewards will be provided in proportion to their contribution.
In short, returns from cryptocurrency can be segregated through price appreciation and platform incentives. These returns can either be long-lasting or short-lasting.
- If the returns generated from network usage and fee generation, then it is long lasting and sustainable
- If the returns are speculative and pure hype, then it is short lasting
“Cryptocurrencies are speculative in nature. It’s always recommended to do your own due diligence.”
Written by Parvati Anilkumar
