Are you looking to make some extra income or increase your wealth portfolio? Well you came to the right place, since its inception in 2009, Bitcoin has captured the public’s imagination, from tabloids to major news outlets, even your barista probably speaks about it.
With the tremendous growth last year, it isn’t hard to see why the search phrase “How to buy Bitcoin” is trending on Google.
This bitcoin boom has brought in tons of new opportunities. It isn’t a bad thing. The problem with a once in a lifetime lucrative opportunities is misinformation and right now the cryptocurrency market is rife with that.
Have no fear, let’s run through some of the most popular methods of generating bitcoins and other more reliable ways of profiting with bitcoin. You probably heard about some of the methods before but I would highly recommend reading right up to the end. There is always something new for everyone…
Mining
Since the inception of Bitcoin, mining has been one of the predominant ways of making a profit from cryptocurrency.
For those who are not familiar with the term, Bitcoin mining refers to the process by which you (as the miner) verify transactions and add them to a public ledger known as the blockchain.
In simpler terms, a miner compiles recent transactions into what is known as blocks. Specifically, this involves solving mathematical equations (algorithms) and is done by a computer.
This network of computers also known as nodes work to solve these algorithms and they verify and make sure that all the transactions taking place on the Bitcoin network are secured.
Miners in essence make up the backbone of the Bitcoin network.
So the question then becomes, how do you make money from mining then? Well, the short answer is that for every algorithm solved, every block generated also produces a number of bitcoins.
Bitcoin LifecycleBlockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential.” Marc Kenigsberg, Founder of bitcoinschaser.com
So what do you need to mine bitcoin? On its early days, all you needed was a simple computer and the necessary software installed and you were ready to go, but as the network grew and mining pools (a group of computers working on a single block)became more and more competitive, we needed more horsepower.
It didn’t take long for people to realize that graphics cards initially meant for gaming setups were able to crunch these algorithms quicker and faster than normal CPUs and so most of the mining evolved from there.
Price is the least interesting thing about bitcoin. Roger Ver, Bitcoin Investor
This of course grew to a point where companies started to create dedicated hardware specifically dedicated for mining, thus the ASIC- Application Specific Integrated Circuit.
However these were far more expensive than graphics card and even now the greater majority of small scale miners still use GPU’s.
As to whether mining is still profitable in 2018, the simple answer is that it depends on the hardware you are using. This together with the cost of electricity in your area weighs heavily on whether you should consider mining as a worthwhile venture.
Here you can find a mining profitability calculator that tells you whether your setup would be profitable or not.
Bitcoin calculator exampleBitcoin Faucets
You have probably heard about Bitcoin faucets one way or the other, you just didn’t know that’s what they are.
To put it simply, bitcoin faucets come in the form of websites or apps that dispense Bitcoin in the form of rewards for accomplishing what is usually a simple task.
Most times the payout is in the form of a satoshi, which is the hundredth of a millionth of a bitcoin.
Don’t get me wrong using these faucets will not necessarily make you rich but they are a great way to involve yourself in the cryptocurrency market.
Another approach to this method is that instead of just being the end-users of these faucets, you can actually own one. It is not as complicated as you might think, no advanced programming skills are needed. All you need is a basic working knowledge of computers, this together with the fact that they are relative inexpensive to set up makes it a worthwhile venture.
Another advantage to this approach is that you would make more money than you would otherwise as an end user.
Faucets are a way to generate passive income on the side and as I mentioned above, will also serve to get you through that door into the cryptocurrency world.
Trading on Exchange Sites
As you most probably already know, Bitcoin is a currency just like any other. The only differences are that normal currency derives its value from underlying factors such as the country’s economy while Bitcoin derives its value from the one that the users instill in it. As a decentralized and digital currency, the value of Bitcoin is not derived from underlying commodities.
This is partly why its value fluctuates so much.
On May 22nd, 2010, two pizzas were purchased for 10,000 Bitcoins. Today that would be worth $2.4 Million.
Genesis Mining.
As any other currency however Bitcoin can be exchanged at Bitcoin exchanges.
Different currencies have different values meaning that one can theoretically sell Bitcoin in one currency, exchange it to another currency and resell. This is called arbitrage and works just like a traditional stock exchange. The relative values of the different currencies give rise to an arbitrage opportunity in short.
A Bitcoin exchange serves as a platform to connect buyers and sellers. After setting up your account, you will then be instructed to verify it. Here they might require some form of identification. Usually it would be a simple ID picture as they avoid asking for sensitive information like your SSN number.
After this process, depending on what you want to do, you can then put up your bid/offer to buy/sell Bitcoin according to the order you set.
Bitcoin trading is not much different than normal trading which means that there is a possibility of getting a large profit and consequently one of losing a lot of money. Do your research well before choosing any of the methods discussed here.
Some of the more popular bitcoin exchange sites include Coinbase, Bitfinex, BTCChina and Kraken. This list is not exhaustive and here you can find a more detailed explanation of the different exchanges and the different options that each of them have.
Holding for Long Term Investment
I think that the future of currency is digital, and Bitcoin has a good shot at being the currency of the future.Adam Draper, founder and CEO of Boost VC
Another option that comes up when discussing on potential ways of generating income is by using Bitcoin as a financial instrument.
Traditional from the definition of the word investment, there are different ways in which someone can go about this.
You can either chose to invest in Bitcoin related companies (this is just like buying shares in any company with normal currency) or you could opt to instead buy bitcoin and hold it in the hopes that in the near future its value might rise and you could make some profits.
I will chose to focus on the latter, since it’s the more popular one and seems to have gathered quit the momentum in the last few years.
This form of investment is also known as “Hodling” and the term was coined back in 2009 from this forum.
As opposed to Bitcoin trading where you buy and sell Bitcoin over a short duration of time, hodling refers to buying Bitcoin at a relatively low price, holding it for some time (this could be years) and then selling it when you feel like the price has risen enough.
Just like any other trading market, this approach requires a lot of patience and practice. Before you decide that this is where you want to invest your capital you should do the research beforehand.
It’s an investment like any other so going in some of the things that you should consider are;
- Make sure that you are familiar with Bitcoin and all the other altcoins present in the market, make sure that you have a working knowledge on the different kinds of wallets used and the differences between them, and when you are comfortable with this knowledge then know what trends and patterns to look for before you commit yourself.
- As opposed to buying all your Bitcoins in one go, you can instead opt for cost averaging, whereby you spread out your buying patterns over a duration of time. This could be monthly, weekly or even daily. This cushions you from the varying periodic costs of buying Bitcoin.
- Finally, make sure that the exchange you opt to use is one that is reputable, this ensures that you are guaranteed that your transactions are secure and verified.
If you are not an accredited investor, you only have one option: to buy and hold bitcoin on your own. The process of acquiring bitcoin is risky and requires a lot of due diligence to navigate the landscape properly.Perianne Boring, founder of Digital Commerce
Other Things To Consider
The bitcoin scene is ever changing and despite all that we have talked about here today there are still a lot of other things to consider before venturing out on your own.
Some of the things that you should have in mind include;
- When trading or exchanging bitcoin, you should bear in mind that there are transaction fees to be considered, these are usually between 0.5% to 1% depending on the amount and the exchange you opt to use. There are also charges levied on changing from one currency to another, for example Coinbase charges 1% plus a $0.15 bank fee when changing from bitcoin to dollars and vice-versa.
- In addition to these extraneous costs, there are also tax costs to be considered when transacting with bitcoin. The internal revenue service (IRS) for example in 2017, revised their policy on bitcoin and its transactions. That means you have to report your profits and subsequently file your capital gains tax. Anything held for less than a year is considered as a short-term gain and is taxed as ordinary income.
- In the UK, Bitcoin is exempt from VAT tax. However, as it has been listed under “assets”, one has to still pay for income tax or capital gains depending on the circumstances. However this does not apply to all European countries;
In Germany for example, all cryptocurrencies are exempt from any form of taxation if their capital gains are not more than 600 Euros, and after selling bitcoin after holding for a year or more then the capital gains are totally tax exempt.
In Denmark on the other hand, both Bitcoin trades and capital gains are tax exempt. Other countries with this approach include New Zealand, Belarus and Slovenia.
In Singapore, companies that accept Bitcoin as a form of payment are subject to income tax. Profits obtained from trading in Bitcoin are taxed normally while capital gains from long term investments are not taxed.
All in all, the taxation policies on virtual currency vary from region to region, so before embarking on anything it is important to do some research on your country’s tax laws.
- Something else that you should be wary of is that there are also plenty of fraudsters and scammers looking to make a quick buck out of the Bitcoin rush. You can find a list of those scams that have already been uncovered here.
Bitcoin’s got its issues. But it is not competing with perfection.Dan Kaminsky, Security Researcher
An example of these scams include the $250 million scam that was uncovered at the end of 2017 involving Mining Max, a US based firm that defrauded investors of millions of dollars all over the globe.
Another includes Bitconnect, which guaranteed returns but was later revealed to be a giant ponzi scheme.
On a closing remark, before embarking on any venture involving Bitcoin, proceed with due diligence, put in the research time and effort because as much as there are those who want to exploit the cryptocurrency scheme, there are also those, like me who are in love with it and are optimistic about Bitcoin’s future.