Cryptocurrencies are a great way to make money. All the people that have made millions from the market over the last few years would certainly agree. There are different ways of making decent profits in the crypto world, but the question is will trading, hodling, or yield farming give you the best returns. Understanding each method is ideal before selecting which one to go for.
It comes from the acronym HODL which means “hold on for dear life.” Imagine investing in a new frontier where you are not sure of the potential direction. The risk explains why one has to hold on, but the first decade of the crypto market proved that hodling can pay off. If you bought $100 worth of Bitcoin in 2013 when it was worth $3 per Bitcoin, you would have a little over $1 million if you sell at the current price of $34,000.
A lot of factors come into play when deciding whether to hodl. It is probably not a good idea to buy and hodl when the market is in an overextended bull run, thus the origin of the phrase “buy the dip.” Buying when prices are low is the best way to maximize your potential gains if you decide to hodl. It is probably best to buy a coin that has a low-med market cap, reasonable circulating supply, and solid use cases, or whose blockchain networks offer a lot of utility. Such cryptocurrencies have a higher probability of achieving maximum gains.
You can day trade cryptocurrencies just as you would day trade forex pairs or stocks. Interestingly, cryptocurrencies behave more like stocks, which means you can buy a cryptocurrency and have it in your account for as long as you like. It also helps that the market is extremely volatile. You can easily take advantage of small price movements by buying low and selling high or shorting in case you think the price will drop within a specific duration.
Note that cryptocurrency trading carries a significant amount of risk because of the volatility. One cannot accurately predict price direction, and so your money might be locked into the asset for longer than you expected before the price recovers or reaches the expected level. You can minimize the risk by trading based on technical and fundamental analysis, but market news and events are major price drivers and can flip the market extremely quickly.
What if you had your cake and could eat it too? Yield farmers are cryptocurrency holders who lend their cryptocurrency assets so that they can earn rewards that increase their crypto holdings. For example, you can stake on a DeFi lending platform and earn rewards through interest paid by borrowers. Alternatively, you could provide liquidity on a platform that distributes a percentage of transaction fees to users.
Yield farming allows cryptocurrency holders to use their cryptocurrencies to earn more money. It is an ideal approach for those that want to hodl but still put their cryptocurrencies to good use rather than letting it sit in their account. There are some risks involved such as impermanent loss and slashing risks. The latter is a mechanism deployed to punish nodes when they misbehave.
It depends on the type of cryptocurrencies that the user holds, and also their preference. Some cryptocurrencies use proof of stake consensus which allows for staking. Others like Bitcoin have a different consensus mechanism and cannot be staked. Of course, each approach requires users to have a deep understanding of what they are dealing with, as that would help them avoid mistakes and unnecessary risks.
Get the latest Crypto & Blockchain News in your inbox.