What's the Best Way to Make Money with Cryptocurrency?

 What's the Best Way to Make Money with Cryptocurrency?

This feature originally ran in February 2018. It's been updated with prices, information, and new features.

In 2018, the big news in the cryptocurrency world has been bitcoin, and the two digital coins that created a boom in 2017, ethereum and ripple, have lagged behind this year. While bitcoin has popped into the $9,000 to $14,000 range and ethereum briefly jumped to $800, both currencies continue to lose value month after month.

We still know relatively little about cryptocurrencies, and we still don't know if they're worth anything.

What we do know is that they're taking on thousands of new users each month, and that all of those new users are looking for ways to buy or sell them. They need a way to buy some crypto with U.S. dollars, and without much guidance, a lot of people are getting burned. Here are some tips on how to make money with cryptocurrency.

How to Make Money with Cryptocurrency

To be clear: I'm not saying this is a guaranteed path to riches. I'm just sharing what has worked for me so far, and how you can use these steps to work toward similar goals.

A little background is important first: When bitcoin first came out, it sold for around $250, but the price quickly ballooned. What makes this notable was that there wasn't even much of a market for it yet—it was just an experiment by a couple of programmers. But just as it was gaining traction, the big traditional banks and financial institutions saw the potential for a massive new market, and so it soon became regulated and policed. This meant that there were a lot of smart people with large amounts of money in bitcoin.

Ethereum was also created by a single programmer, but like bitcoin, it has a large community of developers who can maintain and expand it. (Note: I'm not saying this is a bad thing—a lot of the development work for blockchain technology is done by individuals working on the side to learn about it and improve it. But some critics say these are simply regular developers who don't want to devote their full-time energy to cryptocurrency.)

While both bitcoin and ethereum are still considered decentralized cryptocurrencies, and technically aren't controlled by any one person or entity, the government's recent crackdown on cryptocurrency exchanges, like CoinMKT, and the increased regulation of banks and financial institutions has made trading them harder. This makes cryptocurrency more expensive to buy and sell, and leads to volatility in its value.

These technical challenges do not mean that there is no real value in the virtual currencies, but they do make them riskier and more expensive to transact with, and so they don't attract people who are looking to make big profits right now. Instead, people are betting their entire savings on bitcoin, hoping to make a quick $10,000 if they get in early, or a million if it takes off. And yes, a lot of those people are playing the long game and trying to build real, legitimate businesses on the blockchain. But there's also a lot of retail speculation going on right now, which brings us to the cryptocurrency millionaires.

Getting into Cryptocurrency Trading

To use the simplest terminology possible, cryptocurrency traders are trying to buy, store, and sell digital "tokens" (to coins), which are basically tiny pieces of the blockchains (or cryptocurrency codes that are stored on a separate computer network) of the coins themselves. While each bitcoin may be worth hundreds of thousands of dollars, and an ethereum is worth $1,000, the tokens you're buying are worth very little. So when the price of one coin rises, it doesn't mean that the tokens you've bought are suddenly worth hundreds of thousands more. The tokens aren't really worth anything until more people own them, and then those people decide that they're worth something.

You can also buy tokens for bitcoin or ethereum at the same time you buy the coins themselves, but it is a lot less common to do this, so you need to do your research. It's a bit like buying a share of Apple's stock in the early 2000s, and your own shares of a company worth billions.

The good news is that you can buy lots of tokens in order to get a lot of the coins you want. (If you've ever bought tokens on an exchange, like Gemini, this will feel familiar.) The bad news is that you need to spend time and a lot of money doing it. A lot of people buy a few thousand dollars worth of bitcoin or ethereum right now, and if they get lucky and the value continues to go up, they can make lots of money. But they're buying high, and they have to spend a lot to get there.

The other option for serious traders is to invest in tokens that are currently just for sale—you won't be able to use them for trading on the exchanges, but you'll be able to trade them in a cryptocurrency exchange. With many of these exchanges, you can trade your tokens for bitcoin or ethereum on the real-world currency markets. It's a riskier bet, but you can see some examples of people who have made a decent living doing this. They have to buy thousands and thousands of tokens, and then they're right to expect the value of the tokens they've been selling to fluctuate as the value of cryptocurrencies fluctuates. And if they're right, they can make a lot of money.

It's too early to tell how good or bad these investments will be, but the reality is that most people who buy and sell digital tokens don't get rich—and these highly speculative trading may not be for you. To be safe, here's the best way to invest in cryptocurrency.

The first step is to figure out which cryptocurrencies are worth investing in, and which coins aren't worth investing in yet. If you're a trader, you might start off by looking at an exchange that's focused on these types of cryptocurrencies. We've covered Binance and other exchanges in a guide, but we also really like Coinbase, which you can open an account with here.

To search for the best cryptocurrency you should actually invest in, it's best to first look at the number of real users on each cryptocurrency and how many people buy and sell the coin. Then, to figure out the market cap of the cryptocurrency, you can look at the total value of all the coins in existence—but this isn't easy, so we recommend that you do this with a cryptomarket intelligence platform like CoinMarketCap.com, as well as other websites like Coindesk.com. You can even use a bot like CryptoCompare to do the heavy lifting.

You can buy, hold, and sell cryptocurrency like bitcoin, ethereum, bitcoin cash, litecoin, dash, and zcash—but in each case, you'll probably need to convert it back to fiat currency first. This means either buying the cryptocurrency first, or trading it for dollars or another cryptocurrency. For bitcoin, ethereum, and other large cryptocurrencies, the conversion rate for buying or selling is set by the exchange you use, and this usually involves using a buy order, a sell order, and a target price.

So to buy bitcoin, for instance, you'll want to fill out a buy order for a price that you're willing to pay, which will likely be high, and then you'll want to submit that order to the exchange. Once you hit the minimum price of the desired cryptocurrency in the buy order, the exchange will trade for you. If you want a cheaper price, you can adjust your buy order, but in general, bitcoin is pretty cheap in terms of conversions back to dollars or other real world currencies.

To sell crypto, you'll usually want to fill out a sell order for a price that you're not willing to pay, but this may be set by the exchange, so you'll have to go to the platform and change it, usually using a target price. It's hard to predict when the market will buy or sell for cryptocurrency, so price targets are usually pretty broad, and there's a risk that the price you're targeting is too high or too low—for instance, when cryptos crashed in 2018, some of the price targets were set too high, and therefore weren't as useful as they could have been. But some prices aren't set by the exchange. Instead, you can adjust the exact coin price on your own, usually by setting the desired market cap or conversion rate, and then you submit a sell order for the desired amount.

Once the cryptocurrency price you've set is matched to the exchange rate you've specified, you can either withdraw that cryptocurrency to your exchange wallet or send it back to another exchange, which is the final step to convert it into cash. Cryptocurrencies can also be converted to cash directly through some exchanges, like Coinbase, but that requires a bit of technical knowledge, so it's probably best to stick with more mainstream platforms like Coinbase and Binance. But at the same time, Coinbase and Binance also work with a lot of smaller platforms like Melotic, Coinsquare, Circle, and Paxful, which might make it more convenient to buy and sell directly from your exchange than with smaller platforms.

Note that all these exchanges will charge a fee—sometimes quite a large one. To exchange for cash or vice versa, you'll have to pay either a small conversion fee or a commission—usually 2 to 5 percent of the exchange fee—so depending on the exchange you use, that could end up costing quite a bit.

Getting Cryptocurrency Back Into the Real World

So that's how you trade, buy, and sell cryptocurrency like bitcoin, ethereum, bitcoin cash, litecoin, dash, and zcash—but what about actually spending or using them in the real world?

To convert a cryptocurrency to another currency, most exchanges require you to have an account with a payment card that works in your country. Coinbase has a list of supported payment cards here, while Binance has its own in-house card, which requires that you're a business. You can also use bitcoin cash's Litecoin Reload card, and the zcash card is still waiting for approval by Mastercard.