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. But fear not, because there are ways to make money from cryptocurrency in all market conditions. 

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

Alone or combined, these strategies can help investors to avoid losses and continue making money. Here, we take a look at the five main ways to continue making profits whether the market is heading north or south.

1. Trading coins and tokens

Trading cryptocurrency, 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, a even bear market isn’t necessarily bad news, as long as it remains volatile. 

Traders make money from the price swings 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).

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 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 can also incur high costs that will erode potential profits. Finally, it takes a lot of work to keep up with what’s going on in the crypto market. So investors should tread carefully, do their research, and never forget they could lose some or all of their money.

2. Investing for the long term

On the opposite side of the spectrum is long-term investing, also called buy-and-hold – or “HODL” (Hold On for Dear Life) in crypto-lingo. The idea of a HODL strategy is that you buy into an asset and remain invested for a relatively long time period: typically a year or longer. 

For such a strategy, price swings are also not a huge problem, as markets usually correct themselves over longer periods of time. For example, although the price of Bitcoin fell by more than 50% between April and July 2021 to below $30,000 (Source: CoinGecko), it has since recovered to trade at around $63,000 (as of November 3, 2021). Longer term, the digital asset is up 365% over one year, 888% over three years, 9,100% over five years, and 1,941,715% over 10 years.

Of course, it doesn’t have to be Bitcoin. You can research various projects using tools like Coinmarketcap, the crypto-Twittersphere, cryptocurrency YouTuber channels, or any number of news outlets such as Cointelegraph, Coindesk, or the Defiant. Then, when you spot one you think has good long-term growth potential, you can buy its token and hold it for some time. For example, the price of Chainlink’s token is up 197% over one year.

Investors can mitigate the risk of a long-term strategy through diversification: the proverbial not putting all your eggs in one basket. Holding a number of different tokens backed by projects that are quite different to each other can help to protect portfolios if one of these tokens crashes, as the others should behave in different ways. 

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 token will continue rising from when you bought it.

3. Passive income through DeFi

If you’re skeptical about the first two options, or indeed if you lack the time and energy for trading or hefty research, you might consider earning passive income from your cryptocurrencies. In the growing world of Decentralized Finance (DeFi), you can earn an annual percentage yield (APY) of up to 18% simply by depositing your crypto assets into a DeFi platform or protocol such as YIELD App. 

Crucially, you can do this using stablecoins – 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 high yields on their deposits on a daily basis. And unlike day trading, this can be done with much lower fees.

Investors might have to scout around a little to ensure they are earning as much yield on their deposits as they can. 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) The point being, of course, that the higher the yield, the better. 

Investors can get the best yields through protocols and apps that find an optimum yield. The yield an investor can get will often depend on what tokens/combination of tokens they want to hold and how much money they have to deposit. In DeFi, yields are usually paid on a daily basis and investors can usually take their money out at any time.

4. 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 (often 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, and on-and-on ad infinitum.

Historically, much of this activity has happened on the Ethereum blockchain using ERC-20 tokens, but 2021 has witnessed significant expansion of yield farming onto Binance Smart Chain (BSC) as well as Ethereum layer-2 solution Polygon and brand-new blockchain Solana, among 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, while there are also risks concerning automated smart contracts. For those familiar with the DeFi space, rewards can be high however yield farming remains a very complex area for individual investors. 

5. Become 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 more. 

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 your VC portfolio by investing in various businesses can reduce risk, but risks remain. With the exception of using stablecoins to earn passive income, cryptocurrency investing is a risky, volatile business and investors should only put in what they can afford to lose and try to view market swings with a calm, dispassionate eye.

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