Steven Gleiser - April 21, 2019
Bitcoin caught the imagination of many people just through its sheer potential for appreciation in fiat terms. This brought a lot of speculative funds into cryptocurrency, which have heightened volatility. If Bitcoin is taken as an investment, there are certainly a number of ways that people can make money with it. But before we get into those, a disclaimer is necessary: Bitcoin Chaser and its staff are not financial advisors, so this piece is meant to be purely informative. Do not invest based on the contents of this article.
Bitcoin was always meant to be an alternative to the traditional financial system. It is definitely built as such. Bitcoin offers the following features to an investor:
Therefore, the first and most obvious way of making money with Bitcoin is to buy it and wait for the traditional economy to hit the skids. There are variants on this strategy, but in principle it is the simplest one: Buy and hold.
Bitcoin prices went up until December 2017 in part because the traditional economy had very little profit to offer to traditional investors. Due to an environment of low interest rates, rising debt and economic growth stagnation, there was more money in the market than the market could absorb, looking for profits. Bitcoin and other cryptocurrencies were a natural choice in such an environment, especially for those with an appetite for risk.
Nevertheless, this buy and hold strategy is not necessarily a good fit for everyone. Often times it looks like this is a strategy to make Bitcoin with money and a tool to proselytize more than it is a tool for fiat gain. For those who feel that way and still want to make money off the Bitcoin craze, then there are a few other strategies they can employ.
One of the most popular strategies that discards the buy and hold paradigm, is the buy and trade paradigm. This is a riskier strategy, because it involves making money trading Bitcoin for lesser known cryptocurrencies and exchanging it back to Bitcoin once their price relative to Bitcoin is up. This strategy also allows investors to limit their exposure to cryptocurrency in terms of the timeframe of their investment. In many cases, investors can make money using this strategy in a few days and then cash out.
If you are reading this post, chances are you don’t believe in the core philosophy of Bitcoin, or if you believe in it, you still want to take advantage of an opportunity to make fiat profits. Nevertheless, if you don’t believe in buying and holding Bitcoin, or find it too cumbersome to deal with the technical side of how to secure your coins, you might want to play the game many pundits in the traditional market – like Nouriel Roubini – would advise you to play: Short Bitcoin!
This is a very risky strategy, but due to the speculative nature of Bitcoin prices, and general malaise in traditional financial markets, it works sometimes. In fact, if you would have shorted Bitcoin on December 16th, 2017, you would have made a big fat profit by now. The ultimate allure for those who do not believe in Bitcoin, is that they can implement this strategy through traditional financial instruments. Since Bitcoin is traded on the CME and CBOE, you can acquire short positions there.
The problem With this strategy, regardless of where you stand on Bitcoin, is that Bitcoin is deflationary, so if demand is there, prices have all the necessary conditions to move up. Alternatively, since the traditional economy is inflationary, the price of fiat currencies will always move downward. Therefore, this kind of strategy relies on short-term opportunities.
Despite the myriad strategies there are to make money with Bitcoin, there are a lot of people out there who invested in it and lost money, or at least saw the price plummet after they invested so they became de facto Bitcoin holders. For us that is not necessarily a bad outcome. If you have Bitcoin and you control your private keys, then you bought yourself an insurance policy against the excess of government and traditional financial markets. Remember, you don’t realize any gains or any losses in fiat terms if you don’t sell, so you can stick with it. You might end up loving Bitcoin as much as we do!
This leads to the part where we warn you against treating Bitcoin as an investment. There is a chance that you will never make money with Bitcoin, because it was not designed as a rent-seeking financial instrument. Remember that whenever you play the markets, you are playing with the aggregate will of people who have a lot of power – therefore they can make moves large enough to affect price – and who are not necessarily rational.
Bitcoin is a small market by any measure. It is about 1/800 as big as the market for gold for example. This means that actors with thick wallets have disproportionate market-making power. It is worse for smaller cap coins, raising the risk of investing in those as well. On the other hand, traditionally speaking, when financial markets fail, people tend to move into the USD – which makes absolutely no sense whatsoever, but compounded irrationality is a great breeding ground for self-fulfilled prophecies! Make sure you are aware of the difference between theory and practice when you attempt to make money with Bitcoin, and always keep in mind that as an investor, it is all about the opportunity cost!