How to Make Money by Investing in Cryptocurrency: A Beginner’s Guide

Cryptocurrency is a form of digital money that is secured by blockchain technology. Blockchain is a system of distributed ledgers that records and verifies transactions without the need for a central authority. Cryptocurrency can be used to buy goods and services, transfer value, or store wealth.

Investing in cryptocurrency can be a lucrative way to make money, but it also involves risks and challenges. Cryptocurrency prices are volatile and unpredictable, and there are many factors that can affect their supply and demand. Moreover, cryptocurrency investing requires technical knowledge, security awareness, and regulatory compliance.

In this article, we will provide a beginner’s guide to making money by investing in cryptocurrency. We will cover the following topics:

• The different types of cryptocurrency investing
• The pros and cons of each type
• The best practices and tips for each type
• The frequently asked questions about cryptocurrency investing

The Different Types of Cryptocurrency Investing

There are many ways to invest in cryptocurrency, but we will focus on four main types:

• Buying and holding cryptocurrency
• Trading cryptocurrency
• Mining or validating cryptocurrency
• Investing in cryptocurrency-related companies or funds

Buying and Holding Cryptocurrency

Buying and holding cryptocurrency is the most common and straightforward way to invest in cryptocurrency. It involves purchasing one or more cryptocurrencies and storing them in a secure wallet for a long-term period. The goal is to benefit from the potential appreciation of the cryptocurrency over time.

Some of the advantages of buying and holding cryptocurrency are:

• It is easy to start and requires minimal technical skills
• It can offer high returns if the cryptocurrency increases in value significantly
• It can diversify your portfolio and hedge against inflation or currency devaluation

Some of the disadvantages of buying and holding cryptocurrency are:

• It is risky and unpredictable, as the cryptocurrency price can drop sharply or become worthless
• It is subject to hacking, theft, or loss if the wallet is not secure or backed up
• It may incur high fees or taxes depending on the exchange or jurisdiction

Some of the best practices and tips for buying and holding cryptocurrency are:

• Do your research before buying any cryptocurrency. Learn about its history, technology, team, roadmap, use cases, competitors, and market potential.
• Choose a reputable and regulated exchange or broker-dealer to buy your cryptocurrency. Compare their fees, features, security, customer service, and reviews.
• Choose a secure and user-friendly wallet to store your cryptocurrency. There are different types of wallets, such as hardware wallets, software wallets, web wallets, and paper wallets. Hardware wallets are considered the most secure, as they store your private keys offline.
• Diversify your portfolio by investing in different cryptocurrencies with different characteristics and risks. Avoid putting all your eggs in one basket.
• Be patient and disciplined. Do not invest more than you can afford to lose. Do not panic sell when the price drops or chase the hype when the price rises. Have a clear exit strategy and stick to it.

Trading Cryptocurrency

Trading cryptocurrency is another way to invest in cryptocurrency. It involves buying and selling cryptocurrencies within a short-term period, usually ranging from minutes to days. The goal is to profit from the price fluctuations of the cryptocurrencies.

Some of the advantages of trading cryptocurrency are:

• It can offer high returns if you can predict the market movements correctly
• It can take advantage of both rising and falling markets by using different strategies, such as long (buy low, sell high) or short (sell high, buy low)
• It can leverage your capital by using margin trading or derivatives, such as futures or options

Some of the disadvantages of trading cryptocurrency are:

• It is risky and complex, as the cryptocurrency market is volatile and influenced by many factors
• It requires technical skills, market knowledge, analytical tools, and trading platforms
• It may incur high fees or taxes depending on the exchange or jurisdiction

Some of the best practices and tips for trading cryptocurrency are:

• Do your research before trading any cryptocurrency. Learn about its price history, trends, patterns, indicators, news, events, and sentiment.
• Choose a reputable and regulated exchange or broker-dealer to trade your cryptocurrency. Compare their fees, features, security, customer service, and reviews.
• Choose a suitable trading strategy based on your risk appetite, time horizon, and goals. There are different types of trading strategies, such as scalping (making small profits from frequent price changes), day trading (making profits from daily price movements), swing trading (holding positions for a few days or weeks), or position trading (holding positions for months or years).
  • Manage your risk by using stop-loss orders, limit orders, and trailing stops. These are tools that can help you exit a trade at a predetermined price level or lock in your profits when the price moves in your favor.
  • Keep a trading journal and track your performance. This can help you learn from your mistakes, improve your skills, and optimize your strategy.

  Mining or Validating Cryptocurrency

  Mining or validating cryptocurrency is another way to invest in cryptocurrency. It involves using specialized hardware and software to solve complex mathematical problems and verify transactions on a blockchain network. The reward for doing so is new cryptocurrency units or transaction fees.

  Some of the advantages of mining or validating cryptocurrency are:

  • It can offer steady income if you can mine or validate successfully and consistently
  • It can contribute to the security and decentralization of the blockchain network
  • It can give you more control over your cryptocurrency as you do not need to rely on third parties

  Some of the disadvantages of mining or validating cryptocurrency are:

  • It is costly and competitive, as you need to invest in expensive equipment, electricity, cooling, and maintenance
  • It is technically challenging and requires specialized knowledge and skills
  • It may have environmental and regulatory implications depending on the source of energy and the jurisdiction

  Some of the best practices and tips for mining or validating cryptocurrency are:

  • Do your research before mining or validating any cryptocurrency. Learn about its mining or validation algorithm, difficulty, reward, profitability, and competition.
  • Choose a reputable and reliable mining pool or validator service to join. A mining pool or validator service is a group of miners or validators who share their resources and rewards. Compare their fees, features, security, customer service, and reviews.
  • Choose a suitable mining hardware or software based on your budget, performance, efficiency, and compatibility. There are different types of mining hardware, such as ASICs (application-specific integrated circuits), GPUs (graphics processing units), CPUs (central processing units), and FPGAs (field-programmable gate arrays). There are also different types of mining software, such as NiceHash Miner1, CGMiner2, BFGMiner3, etc.
  • Optimize your mining or validation setup by adjusting the settings, overclocking, undervolting, cooling, etc. This can help you improve your hash rate (the speed at which you can solve problems), reduce your power consumption, and increase your profitability.
  • Monitor your mining or validation activity and keep track of your earnings, expenses, and performance.

  Investing in Cryptocurrency-related Companies or Funds

  Investing in cryptocurrency-related companies or funds is another way to invest in cryptocurrency. It involves buying shares or units of companies or funds that have exposure to cryptocurrency or blockchain technology. The goal is to benefit from the growth potential of the cryptocurrency industry.

  Some of the advantages of investing in cryptocurrency-related companies or funds are:

  • It is easy and convenient, as you can use traditional platforms such as stock exchanges or brokers to buy and sell them
  • It can offer diversification and risk reduction by investing in a basket of cryptocurrencies or companies rather than a single one
  • It can offer access to professional management and expertise by investing in funds that are managed by experienced fund managers

  Some of the disadvantages of investing in cryptocurrency-related companies or funds are:

  • It is indirect and diluted, as you do not own the underlying cryptocurrencies or have direct control over them
  • It may incur high fees or taxes depending on the platform or jurisdiction
  • It may have lower returns than direct investing in cryptocurrencies due to fees, expenses, discounts, premiums, etc.

  Some of the best practices and tips for investing in cryptocurrency-related companies or funds are:

  • Do your research before investing in any company or fund. Learn about its history, performance, strategy, portfolio, fees, risks, and returns. Some examples of cryptocurrency-related companies are MicroStrategy Inc. (MSTR), which holds large amounts of Bitcoin on its balance sheet, and Bitdeer Technologies Group (BDX), which is one of the top crypto miners by computer power. Some examples of cryptocurrency-related funds are Grayscale Bitcoin Trust (GBTC), which invests in Bitcoin directly, and Amplify Transformational Data Sharing ETF (BLOK), which invests in companies that use blockchain technology.
    • Diversify your portfolio by investing in different companies or funds with different characteristics and risks. Avoid putting all your eggs in one basket.
    • Be patient and disciplined. Do not invest more than you can afford to lose. Do not panic sell when the price drops or chase the hype when the price rises. Have a clear exit strategy and stick to it.

    Frequently Asked Questions About Cryptocurrency Investing

    Here are some of the common questions that beginners may have about cryptocurrency investing:

    • How do I choose which cryptocurrency to invest in?

    There is no definitive answer to this question, as different cryptocurrencies have different features, advantages, disadvantages, and risks. However, some of the factors that you may want to consider are:

    • The market capitalization, which is the total value of all the coins in circulation. This can indicate the popularity, stability, and liquidity of the cryptocurrency.

    • The price history, which shows the past performance and volatility of the cryptocurrency. This can indicate the potential for future growth or decline.

    • The technology, which is the underlying system that powers the cryptocurrency. This can indicate the innovation, security, scalability, and efficiency of the cryptocurrency.

    • The team, which is the group of developers and supporters behind the cryptocurrency. This can indicate the vision, expertise, credibility, and community of the cryptocurrency.

    • The use cases, which are the real-world applications and benefits of the cryptocurrency. This can indicate the demand, utility, and adoption of the cryptocurrency.

    • How do I buy cryptocurrency?

    There are two main ways to buy cryptocurrency: using a crypto exchange or using a broker-dealer.

    • A crypto exchange is a platform that allows you to buy and sell cryptocurrencies directly with other users or with the exchange itself. You need to create an account, verify your identity, deposit funds, and place an order. Some examples of crypto exchanges are Coinbase1, Binance2, and Kraken3.

    • A broker-dealer is a company that acts as an intermediary between you and the crypto market. You need to create an account, verify your identity, deposit funds, and place an order. The broker-dealer will execute your order on your behalf and charge you a fee or commission. Some examples of broker-dealers are Robinhood4, eToro, and SoFi.

    • How do I store cryptocurrency?

    There are two main ways to store cryptocurrency: using a wallet or using a custodian.

    • A wallet is a software or hardware device that allows you to store your private keys, which are like passwords that give you access to your cryptocurrencies. You need to choose a wallet that supports your cryptocurrencies, download it or buy it, set it up, and transfer your cryptocurrencies from the exchange or broker-dealer to your wallet address. Some examples of wallets are Ledger, Trezor, and Exodus.

    • A custodian is a company that holds your cryptocurrencies for you in their own wallets. You need to trust them with your private keys and pay them a fee or commission for their service. Some examples of custodians are Coinbase Custody, BitGo, and Gemini Custody.

    • How do I sell cryptocurrency?

    There are two main ways to sell cryptocurrency: using a crypto exchange or using a broker-dealer.

    • A crypto exchange is a platform that allows you to sell cryptocurrencies directly with other users or with the exchange itself. You need to create an account, verify your identity, transfer your cryptocurrencies from your wallet or custodian to your exchange address, and place an order. Some examples of crypto exchanges are Coinbase1, Binance2, and Kraken3.

      • A broker-dealer is a company that acts as an intermediary between you and the crypto market. You need to create an account, verify your identity, transfer your cryptocurrencies from your wallet or custodian to your broker-dealer address, and place an order. The broker-dealer will execute your order on your behalf and charge you a fee or commission. Some examples of broker-dealers are Robinhood4, eToro, and SoFi.

      • How do I pay taxes on cryptocurrency?

      The IRS treats cryptocurrency as property for federal tax purposes. This means that every time you sell, exchange, or use cryptocurrency, you have a taxable event that may result in capital gains or losses. You need to report these transactions on Form 8949 and Schedule D of your tax return. You also need to keep records of your transactions, such as dates, amounts, prices, and receipts.

      Some of the factors that affect your taxes on cryptocurrency are:

      • The type of transaction, such as selling, exchanging, spending, donating, gifting, or receiving cryptocurrency

      • The holding period, which is the length of time you own the cryptocurrency before disposing of it. If you hold it for more than a year, you have long-term capital gains or losses; if you hold it for a year or less, you have short-term capital gains or losses

      • The cost basis, which is the amount you paid to acquire the cryptocurrency, including fees and commissions

      • The fair market value, which is the amount you received or the value of the property or service you exchanged for the cryptocurrency

      • The tax rate, which depends on your income level and filing status. Long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%; short-term capital gains are taxed at ordinary income tax rates

      • What are the risks of investing in cryptocurrency?

      Investing in cryptocurrency involves various risks that you should be aware of and prepared for. Some of the common risks are:

      • Market risk, which is the risk of losing money due to price fluctuations caused by supply and demand, competition, innovation, regulation, news, events, sentiment, etc.
      • Liquidity risk, which is the risk of not being able to buy or sell cryptocurrency quickly or at a fair price due to low trading volume, network congestion, technical issues, etc.
      • Fraud risk, which is the risk of losing money due to scams, hacks, thefts, phishing, spoofing, malware, etc. perpetrated by criminals who target crypto users, exchanges, wallets, miners, or validators.

        • Regulatory risk, which is the risk of facing legal or compliance issues due to changing laws, rules, or regulations that affect cryptocurrency in different jurisdictions.

        • Operational risk, which is the risk of encountering technical glitches, human errors, or system failures that affect cryptocurrency transactions, storage, or security.

        • What are the benefits of investing in cryptocurrency?

        Investing in cryptocurrency also involves various benefits that you should be aware of and leverage. Some of the common benefits are:

        • Decentralization, which is the feature of cryptocurrency that eliminates the need for intermediaries, such as banks, governments, or corporations, that may control, censor, or manipulate your money or transactions.
        • Transparency, which is the feature of cryptocurrency that allows you to verify and audit your transactions and balances on a public ledger that is accessible to anyone.
        • Privacy, which is the feature of cryptocurrency that allows you to transact anonymously or pseudonymously without revealing your identity or personal information.
        • Innovation, which is the feature of cryptocurrency that enables you to access new and cutting-edge technologies, such as smart contracts, decentralized applications, and digital assets, that may offer new opportunities and solutions for various problems.
        • Inclusion, which is the feature of cryptocurrency that enables you to participate in the global economy without barriers, such as geographic location, bank account status, credit history, or identity verification.

        Conclusion

        Cryptocurrency is a fascinating and dynamic phenomenon that has captured the attention and imagination of millions of people around the world. Investing in cryptocurrency can be a rewarding and exciting way to make money, but it also involves risks and challenges that require careful consideration and preparation. By understanding the different types of cryptocurrency investing, the pros and cons of each type, the best practices and tips for each type, and the frequently asked questions about cryptocurrency investing, you can make informed and confident decisions that suit your goals and preferences. Remember to always do your own research before investing in any cryptocurrency and consult a professional financial advisor if you need guidance or advice.