Ways to profit with crypto

This is not financial advice, just a very broad overview. Be aware that you may as well lose money.

Honestly, I consider much more inspiring the organisational opportunities that smart contracts open to the world, e.g. DAOs. However, profit is a powerful incentive to gather attention1. Let us see the different ways from the most widely known to the least.

1. Mining

With proof of work blockchains, miners get a reward for each block that they help to mine. Normally, this approach requires a significant investment in hardware, joining a pool of miners, or both. In rare cases, you may just “get lucky”.

Competition in mining squeezes its margins. Therefore, it is an interesting option if you have a competitive advantage, e.g. “free” energy or hardware. Otherwise, it is probably not a good option for you.

2. HODLing

Buy some reliable crypto, e.g. BTC or ETH, keep it for years, and sell it. So far, they have behaved much better than commodities like gold.

This approach does not provide recurring revenue, which may be an advantage, e.g. easier when paying taxes. But it may also be an inconvenience, or even a trap, e.g. without an exit strategy there is no profit, only HODLing, which is at first with diamond hands, and eventually with cold, dead hands.

As usual, greater risk implies greater profit opportunities, e.g. ICOs when available, are an option to HODL since the earliest of times some token. They may not be openly available for everyone, so much for crypto empowering the 99%.

3. Staking

Proof of stake cryptocurrencies may be staked, providing more coins when new blocks are added to their blockchains. Normally, staking requires significant amounts of a token, and most people do not stake directly but delegate their stake. This introduces the validator as a handler for delegators, and it has implications in slashing, which may have impact on delegators too.

Tokenized staking allows providing liquidity (see point 5) on the staked tokens, e.g. the Balancer wstETH-WETH pool yields BAL (point 6). Hence, DeFi receives the nickname of “money lego blocks”.

4. Trading

Buy low and sell high to keep the difference, repeatedly. The volatility of crypto implies high risk and high earning potential. It is a popular approach due to its relative simplicity2. However, buying high and selling low is more likely for inexperienced traders. Trade tread carefully3, and before committing any real money try to “simulate” on paper if you do not know what you are doing.

The usual options for trading are normally available in centralised exchanges. The blockchain provides additional options. For example:

• Shorting is possible by borrowing the token to be sorted and exchanging it before the price drops.
• Leverage is possible with tokenized leverage, e.g. ETH2X-FLI.

5. Providing liquidity

For lending and automatic market making (AMM). Centralised exchanges may give you some interest and take the risk themselves, or you can get higher returns, and some yield participating in DeFi4. Beware of impermanent loss for AMM options.

Providing liquidity is often but not necessarily rewarded with yield, resulting in the next method: yield farming.

6. Yield farming

“It ain’t much, but it’s honest work.” — Mandatory meme reference

Participating in DeFi will often result in profitable yield. Trends.vc provides a general overview. Note that some aspects have changed, e.g. the “lack of loyalty” has been the main influencing aspect for DeFi 2.0. Yield aggregators may automatically compound yield by adding an additional lego tokenization layer. While automation is normally good (less manual work), in this case it implies the additional benefit of saving on gas fees.

7. Airdrops

Airdrops are very similar to yield farming. Some actions may lead to receiving some airdrops unaware of them, and some require awareness and requesting explicitly the corresponding tokens.

While in some cases the amount may not seem significant, the volatility of crypto may increase the value of the tokens in orders of magnitude over short periods of time.

Interlude

So far we have seen some options that are usually going to provide some profit as a percentage of the initial investment. In the case of crypto this may be a very high percentage compared with other options. It is a percentage nonetheless, and implies the risk of losing the initial investment or part of it. However, there are options that may require more time and effort to turn a profit, but lower or no initial investment. The next part of the list focuses on those.

Read more

Cross-posted from the Sigmoid newsletter