It’s the year of cryptocurrency. Bitcoin, that is. And like any enterprising investor looking to build a diverse portfolio, you might be investigating how to make money with bitcoin.
And bitcoin is having one wild year — a boom skyrocketing the value of bitcoin by a stunning 860% since the start of 2017.
So how do you cash in on the bitcoin surge? Keep reading to find out.
What is Bitcoin?
First things first: what is bitcoin?
We’ve already mentioned that bitcoin is a cryptocurrency. That means it’s a digital currency. The term “cryptocurrency” comes from the amount of encryption involved in the coding that backs bitcoin.
How It Works
Basically, bitcoin is a digital token (with no physical counterpart) that can be sent electronically from one user to another. A single bitcoin can be divided out into eight decimal places.
This is the smallest part of a bitcoin — a penny, if you will — which is called a Satoshi.
But the sending part is where it gets interesting. The whole sending system isn’t based in a bank or a company. It’s run by a decentralized network of computers all over the world which track all bitcoin transactions.
This record system is called blockchain, the technology underlying bitcoin. It’s an enormous, decentralized digital ledger of a chain of transactions, each block linked to the one before it, timestamped, and coded in such a way that it cannot be copied, edited or deleted once added to the chain.
Bitcoin as an Alternative Investment
Before we dive into how you make money with bitcoin, we should talk about bitcoin as an alternative investment.
Here’s the truth about bitcoin: it isn’t correlated to any other assets like stocks or bonds. That means that for the savvy investor, your best option is to place only a small percentage of your portfolio.
This will make sure that your portfolio has a better chance of weathering market volatility. In other words, if stocks or bonds crash, the performance of bitcoin isn’t correlated to the market, so your portfolio has a built-in cushion.
How much is a small percentage of your portfolio? Firms like Morgan Stanley have recommended allocation models of around 20% for their clients.
Of course, everyone’s financial situation is different, so allocations will vary. But using bitcoin as an alternative investment is a good way to protect your portfolio.
How Do You Make Money with Bitcoin?
Now, the real question: how do you make money with bitcoin?
Well, that depends on how much time and effort you’re willing to invest in bitcoin. But first, a few things to keep in mind about bitcoin.
There are only a set number of bitcoins floating around out there. It might seem counterintuitive, given that there isn’t any need to keep up with printing physical money, but keep in mind that unlimited currency would make it worthless.
So there are only about 16,000,000 bitcoins in the world.
In addition, bitcoin has no set value. In the sense that you can’t look at one bitcoin and say what it equals in the same way that you can assign a value to a piece of paper printed to be a one dollar bill by the Treasury.
So basically, bitcoin is only as valuable as people say it is. So the more popular it is, the higher the value of an individual bitcoin.
Knowing this, you have three options for if you’re in the market to make money on bitcoin. You can mine, trade, or use bitcoin indirectly to generate passive income.
No, not as in digging a hole with a pickaxe.
Think of mining as the equivalent of the Treasury printing new bills — it’s how new bitcoins come into existence. The only way new bitcoins can enter circulation.
Bitcoin mining is when individuals compile recent transactions into blocks (in fact, all of the mining is a race to get new transactions on the chain). The winner gets a chunk of the new bitcoins that are created in the process — currently, about 12.5 of them.
But keep in mind that there’s only a limited number of bitcoins in circulation. The cap on the total number of bitcoins allowed in circulation is 21,000,000, a number we’re expected to reach by 2140.
But as moneymaking techniques go, mining isn’t necessarily the best use of your time — it’s a major time drain and the winner is usually the one with the fastest computers to aid their search.
The more realistic way to make money with bitcoin is to trade them on prominent exchanges like Coinbase.
Of course, with the surge in bitcoin in the past year, you’re going to need a bit of capital to be able to buy and trade bitcoin. The current bitcoin millionaires bought their bitcoins in 2011 when they were going for $10. They could sell them for about $1000 today — and, well, you can do that math for the profit.
If you decide to turn to trading, your best bet is the long game approach (rather like the early investors in bitcoin, in fact).
Generating Passive Income
The last way to make money on bitcoin is to make money on it indirectly — that is, by capitalizing on the other bitcoin market enthusiasts to create passive income.
The simplest way to create a passive income stream from bitcoin is to create an informational website about bitcoin, explaining the ABCs to new users while generating income from affiliate links and ads.
This one also takes a bit of investment, but in the long run (and given the current status of the bitcoin market) is probably the best choice for the enterprising bitcoin investor.
Discover More Interesting Life Facts
Bitcoin isn’t the only investment you’re going to make, and it’s not the only thing you might need help with, or want to find out about.
Check out our blog for interesting facts, helpful tips, productivity hacks and self-improvement tricks, like our post on 10 interesting facts about tattoos you probably didn’t know, or our post on the top 7 football betting hacks for beginners.