IMPORTANT NOTICE: This article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up and you may lose all of your capital. You should always consult a professional advisor before making any investment decisions.

  • In this article, we look at how to make money with cryptocurrency for both seasoned digital asset investors and those new to cryptocurrency investing
  • Different types of strategies involve different levels of risk and it is therefore up to the individual which strategy they want to adopt
  • A few examples include trading coins and tokens in the cryptocurrency markets, utilizing decentralized finance (DeFi) to earn money on their crypto, or buying crypto and storing it long-term on a hardware wallet
  • It's important not to forget that crypto is a volatile market and there are no government guarantees on crypto assets, so caution must always be exercised

The cryptocurrency market is volatile by nature and significant price swings are not uncommon. As such, investing in digital assets can be a stressful experience, especially during a sell-off. This blog looks at how to make money with cryptocurrency safely in all market conditions.

During the latest market downturn, the global cryptocurrency market cap dropped from around $3 trillion to $1.1 trillion as of 12 September 2022 (Source: CoinGecko). However, these types of bear markets create opportunities for investors to acquire digital assets at attractive prices and represent the perfect time to review and tweak one's portfolio strategy.

Choosing a strategy that fits your portfolio

Unlike long-term traditional investment assets like equities, cryptocurrencies are not just about buying and holding. In the cryptocurrency world, a plethora of opportunities are open to you: from active trading to passive income generation.

The choice of strategy depends on your level of knowledge of the crypto market, your technical expertise, your preferred crypto assets, and your risk tolerance. While some options may only be suitable for experienced investors, there are ways to make money with cryptocurrency regardless of your level of knowledge in the cryptocurrency market.

Furthermore, different strategies can be combined in one portfolio to maximize yield generation. Alone or combined, these strategies can help investors to avoid losses and continue to make money with cryptocurrency, whether the market is heading north or south.

Creating a crypto wallet

Setting up a crypto wallet for buying, trading and storing crypto is the first step before you can begin making money with cryptocurrency. There are two types of crypto wallets: hot wallets and cold wallets.

READ: The best cryptocurrency wallets for DeFi

Cold wallets are hardware devices that are disconnected from the internet when they are not in use, making them the most secure way to store cryptocurrency. Hot wallets, on the other hand, are connected to the internet at all times. This makes hot wallets less secure, but they are necessary to interact with decentralized apps (dApps) and execute transactions such as swapping digital currencies.

Using a DeFi hot wallet or a cold wallet means your assets are held in self-custody. The advantage of this is that you always have full control of your crypto. However, this exposes you to self-custody risks, meaning that if your private key is lost or compromised, your funds can be stolen or left inaccessible.

Crypto exchanges and digital wealth management platforms like Yield App also offer wallets for storing your crypto assets and deploying them into interest-generating strategies. Storing your crypto assets in such a wallet means you will no longer be exposed to self-custody risks. However, it's important to choose a platform or exchange that has strong risk management frameworks in place to ensure your crypto funds are safe in its custody.

Investment strategies in the cryptocurrency market

1. Trading tokens and other crypto assets

Trading crypto coins, or indeed any type of financial asset, is all about finding the best times to buy and sell that asset in order to make the most profit. For traders, even a bear market isn’t necessarily bad news, as long as there is volatility that facilitates trading crypto.

Traders can make a significant profit from the swings in crypto prices by buying at a low point when they expect the price to go up, and selling once the price has reached a certain target that warrants profit-taking.

Trading can happen over longer time periods (e.g. swing trading), a 24-hour period (day trading), or even within minutes or seconds (scalping).

In order to execute a trading strategy, a crypto investor must use a crypto exchange or an automatic trading platform. There are two different types of exchanges: centralized and decentralized exchanges (CEXs and DEXs). Visit our blog to find out what cryptocurrency exchanges are and why you need one.

What makes a successful trader?

There are many ways to determine a price target at which to buy or sell a token. Two common frameworks are fundamental analysis and technical analysis.

Fundamental analysis studies economic and financial indicators to determine whether the market value of an asset is fair or, in other words, if it’s overvalued or undervalued.

Technical analysis, meanwhile, relies on historical price action, such as trading volume, chart patterns and other charting tools to predict how a market will behave in the future. Cryptocurrency traders can use one or both of these strategies to make trading decisions.

It’s worth remembering, however, that trading is inherently risky as markets are notoriously hard to predict. Frequent trading, such as day trading, can also incur high costs that will erode potential profits.

Finally, it takes a lot of work to keep up with events in the crypto market, while traders looking to analyze market charts require additional analytical skills. Investors looking to trade crypto tokens should tread carefully, conduct thorough research, and never forget they could lose money through trading practices.

2. Buy and hold strategy

On the opposite side of the spectrum is long-term investing, also called buy-and-hold. In the cryptocurrency market, the term typically used to describe this is “HODL”, which stands for Hold On for Dear Life.

This strategy allows you to make money with cryptocurrency over the long term by buying into crypto assets and remaining invested for a relatively long time period: typically a year or longer. Price swings and bear markets should not affect such a strategy, as markets usually correct themselves over longer periods of time.

READ: Bear market strategy: Relax and focus on the long term

For example, although the price of Bitcoin is down by more than 70% from its all-time highs as of 8 September 2022 (Source: CoinGecko), over the longer term the digital asset is still up 91% over three years, 357% over five years and 15,748% over nine years.

Conducting your crypto market research

Of course, it doesn’t have to be Bitcoin. You can research various projects in the crypto market and follow market trends using tools like CoinMarketCap and CoinGecko, the crypto-Twittersphere, cryptocurrency YouTuber channels, or any number of news outlets such as Cointelegraph, CoinDesk, or The Defiant.

Then, when you spot a crypto project you believe has promising future value, you can buy its token and hold it for some time. This investing strategy requires a degree of patience, but can pay off significantly over time, even when investing in volatile assets such as cryptocurrencies.

The benefits of diversification

Investors can mitigate the risk of a long-term strategy through diversification. Whatever asset class you choose to invest in, experts always suggest you shouldn't put all your eggs in one basket. This is in order to minimize the risk associated with each single investment.

Holding a number of different tokens backed by projects that are quite different from each other can help to protect your portfolio if the value of one of these tokens declines significantly, as the others should behave in different ways. In addition, holding a small proportion of your portfolio in one investment means the potential loss from this one position has a minimal affect on the overall performance of the portfolio.

3. Dollar cost averaging

Of course, in the volatile world of cryptocurrency, this may not offer as much protection as one might want, and there is never any guarantee that the price of your chosen crypto coin or token will continue rising after you make an investment.

This can be mitigated through dollar cost averaging - a strategy that involves buying equal amounts of an assets at equal time intervals. This can help an investor take advantage of opportune market entry points and capitalize on market price rises, while minimizing the risk of making a lump sum investment at the top of the market.

4. Passive crypto income investing strategy

For those who don't have the time or expertise to execute a trading strategy, earning passive income on your crypto could be a suitable option to make money from cryptocurrency.

Passive crypto income strategies like the portfolios offered by Yield App allow crypto holders to earn regular interest on their cryptocurrrency that far exceeds that on offer from a traditional bank account.

Such strategies are available for a range of cryptocurrencies, including Bitcoin, Ethereum and stablecoins (USDC, USDT, and others). The latter can be a particularly attractive option for cautious investors as stablecoins are a relatively safe investment option (though they are not without risk).

READ: How to build a stablecoin strategy to protect and grow your portfolio

Stablecoins are tokens that are pegged to a fiat, or “real world” currency, such as the US dollar. Examples include USD Tether (USDT) and USD Coin (USDC). Using stablecoins allows investors to avoid the volatility inherent with most other cryptocurrencies while earning yields on their deposits on a daily basis.

Unlike day trading, such passive interest strategies also incur much lower fees. However, it's important to choose a crypto earning platform that takes security extremely seriously, while also paying competitive yields on your crypto assets.

To demonstrate the power of higher yields, we can look at the “Rule of 72”, which calculates how long it will take an investor to double their money by dividing 72 by the yield. For example, an annual yield of 10% would mean an investor doubles their money in 7 years (72/10=7), whereas it would take 10 years at 7% (72/7=10).

Having said that, the safety of your digital currencies should never be compromised in an effort to earn a higher yield. The example of the UST stablecoin, which collapsed in May 2022 causing a liquidity crisis across the crypto space, shows that higher yields could mean a risky investment.

If you want to know how to detect if a crypto staking opportunity is too good to be true, check out these tips from our CIO Lucas Kiely.

5. Yield farming in DeFi

For the more seasoned DeFi user, additional income can be earned from yield farming (also called liquidity mining) – a process of moving coins and tokens around the DeFi ecosystem in return for greater and greater yields.

This process usually begins with the user (referred to as a “liquidity provider”) depositing tokens into a so-called “liquidity pool” within a protocol. By providing liquidity to the pool, the user gains reward tokens, which can then be deposited into other liquidity pools to earn more rewards.

Historically, much of this activity has happened on the Ethereum blockchain using ERC-20 tokens, but as the DeFi ecosystem has expanded, yield farming is now possible across a wide variety of blockchains, including Binance Smart Chain (BSC), Ethereum layer-2 solution Polygon, Solana, and others.

Like day trading, though, yield farming is a lot of work. It typically involves moving funds around a number of different liquidity pools on a regular basis. This strategy also exposes the user to risks related to automated smart contracts, crypto lending, and impermanent loss. For those familiar with the DeFi space, rewards can be high, but yield farming remains a very complex area for individual investors.

6. Becoming an Ethereum validator

In the early days of the crypto industry, cryptocurrency mining was another avenue to make money in the cryptocurrency market. Bitcoin miners would receive rewards for mining new blocks on the Bitcoin blockchain. These rewards started at 50 BTC back in 2009 and have been cut in half every four years (the Bitcoin halving). Today, a BTC miner earns 6.25 BTC for mining each block.

Rewards for cryptocurrency mining BTC 2009-2020

Rewards for cryptocurrency mining BTC 2009-2020

Mining crypto requires a huge amount of computing power and is generally an inaccessible option for the majority of individuals. However, with the advent of the Proof of Stake (PoS) consensus mechanism, cryptocurrency investors have an alternative option to become staking validators.

For example, this will be an option when Ethereum transitions to a PoS blockchain this week as part of the long-awaited Ethereum Merge. To become a staking validator on the new Ethereum PoS blockchain, it is necessary to deposit 32 ETH. A validator's role is to validate transactions on the Ethereum blockchain and they earn a yield on their ETH as a reward.

To date, there are already 425,054 total validators on the Ethereum PoS blockchain. However, this requires a large lump sum as initial collateral (32 ETH was worth around $55,000 at the time of writing).

Total ETH validators September 2022 pre-Merge

Total ETH validators September 2022 pre-Merge

7. Becoming an early investor

For the truly committed crypto investor with a lot of time and money on their hands, there is also another option: to become an early investor in pre-launch projects. This usually involves investing in very early-stage projects as part of a private investment group such as Pantera Capital, DAO Capital, and others.

Crypto VCs provide funding or sometimes just their know-how to start-ups in the cryptocurrency space, usually in exchange for a stake in the business. This is a risky investment option, but one that can generate high returns over time if the business is successful.

As with other forms of investing, diversifying a VC portfolio by investing in various businesses can reduce risk, but risks remain.

How to make money with cryptocurrency safely

With the exception of using stablecoins to make money with cryptocurrency, digital currency strategies are relatively high-risk investments. As such investors should only allocate the funds they can afford to lose and try to view market swings with a calm, dispassionate eye.

However, there are ways to minimize risks when investing in cryptocurrency. The first step is to understand the common risks associated with the crypto market. These include the risk of smart contract failure, counterparty risk, and self-custody risks, among others.

In our blog looking at how to secure your digital assets, you can learn more about these risks and what Yield App does to keep your assets safe. We have also previously written about the steps you can take to secure your crypto account, as well as tips on how to spot and avoid crypto scams such as rug pulls.

As with any investment strategy, being aware of the risks and choosing a reputable company as your financial service provider is the key to making money in the crypto market safely. Yield App always puts the safety of its customers' assets first and invests assets following a strict due diligence process.

Do you want to make a safe and sustainable yield on your digital assets? Sign up for a Yield App account today!