Cryptocurrencies are digital currencies in which encryption techniques are used to regulate the generation of units of currencies and verify the transfer of funds, operating independently of a central bank.
“decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation”
How to Make Money from Cryptocurrency
Cryptocurrency has proven to be a source of good income and highly profitable investment before the regulatory clamp down by the government. Owners of Bitcoin in year 2016/2017 have enjoyed huge profit from the price increase in bitcoin. There are several ways of making money form cryptocurrency.
- Mining: This is the first known way of making money from cryptocurrency, as explained above, miners solve mathematical questions speedily in order to process crypto transactions around the world. They in turn earn cryptocurrencies.
- Trading: This is the most common way of making money from cryptocurrency. Traders of cryptocurrency are buyers/sellers of coins who meet on crypto exchanges such as Binance, Bitmex, etc. to exchange cryptocurrencies.
Think of it as the stock exchange or foreign exchange market. The same thing
- Filling Airdrops: Airdrops also known as bounties are free cryptocurrencies given by the owners in exchange of tasks such as social media publicity of the coin before the coin gets listed on an exchange. The goal is to increase the awareness of the coin before the coin is launched for sale in the global crypto market. Many have made it big filling airdrops only. Certain coins gotten via airdrops have shoot above their ICO price when finally listed on the exchange. Examples of such coins include etherum, dash, e.t.c
- Initial Coin Offering: This is known as the first public sale of the coin before it finally gets listed on exchanges for trading. People who miss out of a coin airdrop can take advantage of the ICO which sells at a very low price compared to when it finally gets listed on the exchange. However, not all coins make a bull price after the ICO, in fact some coins have fallen far below their ICO price when finally listed on the exchange.
Factors that affects the Price of Cryptocurrency
- Supply and Demand: Just like any substance of value, the demand and supply of a coin affects its price. The more demand a coin has, the higher the price of the coin and the more supply a coin has, the price tends to decrease. Other factors that affect the price of a coin also affect the supply and demand cycle of a coin.
- Use Cases: Several cryptocurrencies have their specific uses which differs from the other. How viable and solution-fit the use case of a coin is, determines its wider acceptance. Ethereum is one of the cryptocurrencies with a viable use case. Its Blockchain, the Ethereum Blockchain provides blockchain developers the opportunity to develop decentralised applications. Other coins have been built on the Ethereum blockchain.
- Exchange Listing: There are top cryptocurrency exchanges such as Bittrex, Binance, Bitmex, etc. Coins listed on these top exchanges are often given greater value than other coins not listed on these exchanges
- Initial Coin Offering (ICO) Subscription: Most cryptocurrency that have been successful i.e. have large market-cap/huge trading volume owe their successes to the large subscription of their Initial Coin Offering (ICO) by the public. While this is not true in all cases, it contributes greatly to the perceived value of the coin by the public when finally listed on an exchange. Most coins that have enjoyed huge sales volume at its ICO stage have experienced increase in their price when finally listed on an exchange either as a token/coin.
- Mining Difficulty: As minting is to fiat currency, so is mining to cryptocurrency. Mining has to do with solving mathematical problems in order to process crypto transactions. Miners earn cryptocurrency as a reward for their mining activity. This is a quite a complex subject that cannot be discussed at length here. The more mining activity done on a particular coin, the more difficult the coin becomes to mine which later leads to increase in the price of the coin.
- Currency Token: A currency token is your classic and old school cryptocurrency like Bitcoin which on coin market-cap you will find referred to as ‘coin’ as well as ‘currency’. Now in this case, there is further classification into minable and non-minable cryptocurrency. The minable ones will most probably be using Proof of Work algorithm and can be mined using hardware devices. Non-minable crypto will use other consensus algorithms for the distribution of their coins. A currency token is an attempt for the respective coin to be actually used as a currency, i.e. a medium of payment for goods and services.
- Platform Token : These types of crypto tokens allow the creation of decentralized applications on their platform and thus are called as platform tokens. Ethereum and EOS are two basic examples of this type. Ethereum though is both a minable currency token as well as a platform token. However, the main aim of the Ethereum Foundation is to not use Ethereum as a currency like bitcoin is aiming but to become a platform for decentralized applications and organizations. EOS are looking to achieve similarly along with other projects also.
- Utility Token: A utility token is not meant to be used directly as a medium of exchange for goods and services, although it can be done so. The aim of a utility token as its name suggests is to provide some sort of digital utility which can be utilized to improve a digital business model and incentivize people who help build the business. These tokens can serve digital utility in many areas of commerce such as e-commerce, social media, supply chain and many others also. There are many utility tokens which are built using platform tokens especially.
- Security Token: One can refer to a security token as a tokenized stock which has received the approval of the USA based SEC. Security tokens are not meant to fulfil any of the previously mentioned types of tokens but they act like tokenized stocks which can also provide investors the option of earning incentives like dividends. However, a security token can also serve the purpose of a utility token as there are projects having a utility token and applying for the security token status. On the other hand, there can also be security tokens which do not serve the purpose of utility tokens.
- Asset Token: This is an asset token is one that is backed by real world physical assets like gold, diamond or real estate. These types of crypto tokens can also be termed as commodity tokens as they can be backed by a commodity or a basket of commodities. One of the advantages of these types of tokens is the backing of physical assets which ensures stable price appreciation as time passes by. The disadvantage of this type of token is that it might not provide the technological and business advantages many other types of crypto tokens provide. However, I am not particularly sure about this point but a security token might also serve as an asset token. This type of tokenization will help improve real asset trading markets significantly. Governments can also take advantage by issuing their own asset tokens relying on cryptocurrency instead of a debt-based fiat scheme.
- Fiat Token: A fiat token is a crypto token which is pegged to a fiat currency like the USD or INR. This is a big mistake in my opinion especially if governments adopt this approach. All fiat currencies are bound to decrease in value over time and this is precisely why pegging a crypto token to fiat makes no sense at all other than ideas like Tether which only helps the Tether founder and crypto traders to store their money in a relatively stable Tether over a highly fluctuating bitcoin.
- Reward Token: A reward token is a method of incentivizing people for using some sort of business/service. Cashback rewards can be one example of this token along with another one being the Indian government looking to use these types of tokens to reward people for using some of their services. The value of the reward token will depend on the kind of entity that issues it.
My conclusion is that currency tokens and platform tokens have the highest technological benefits among all of the others followed by utility tokens. However, it is highly debatable which one can have the best business benefits.