I think that a lot of people write themselves from not participating in the crypto space because they don't understand it and convince themselves that they never will.
Unpopular opinion: I don't think the best way to introduce someone to crypto for the first time is trying to explain the "foundation" terms of crypto: blockchain, distributed ledge, private key, hard vs soft forks, fungible, protocols, etc.
I also don't think the best way to introduce someone is by going down the DeFi rabbit hole.
When you dive into the details of what crypto is, how it works, why it works, etc. It can be a lot, especially for someone who doesn't have a technical background. It can cause people to shutdown and just label crypto as "that thing I don't understand".
While I do believe understanding the fundamentals and being able to understand the value different coins have, you don't need it to get started. (Using Coinbase to buy Bitcoin is actually easier than using Vanguard to buy a stock or EFT).
What I want to do in this guide is outline all of the ways you can make money with crypto. Along the way I'll try to explain some of the basic principles.
Buying Crypto in an Exchange
The easiest way to get involved in cryptocurrency is to signup for an account with an exchange, connect your fiat bank account or send an ACH transfer, choose which coins you want to purchase and then hold them.
For US-based citizens, our options are pretty limited to what exchanges we can use and we'll be required to go through a KYC process (Know Your Customer). This involves uploading your Driver's License and in some cases past utility bills to prove Proof of Address.
The best exchanges that I have used (in no particular order):
All of these exchanges have their own pros and cons. Coinbase + Gemini are probably the easiest and quickest platforms to get started with. It's an incredibly quick process. However, both of those exchanges seriously limit the number of coins available to trade. They're adding more but currently they really only focus on the coins with the largest market caps.
Biance.us is a good option if you're interested in "trading" vs "investing". Their platform includes all of the tools you need for technical analysis: candle sticks, indicators, fibonacci retracement, the ability to set stop-limits, etc. (If you don't know what a lot of this means or how you would use it, Binance.us isn't the best place for you to start.)
Biance will have some coins that Coinbase and Gemini don't. It may take up to 3-4 weeks just to get your account approved and get through the full KYC process that allows you to deposit fiat money and get started. (There are some states in the USA that don't allow Binance.US)
I think Crypto.com is a great middle-ground. It's easy to get set up and fund your account, their platform is easy to understand and they provide a large selection of coins that you can trade and invest in. Crypto.com also allows users to apply for a debit card. This debit card is currently the easiest way to actually use your crypto currency to buy things! You can use it anywhere that they accept cards! Depending on which card you get, you can also get fully refunded on certain purchases (Spotify, Netflix, Amazon Prime).
Things to consider when buying crypto from an exchange
Investing into a certain coin isn't too dissimilar from investing into an individual stock of a company.
The main difference is in the valuation of the assets. People will debate what makes up the valuation of a company forever, but generally, assuming a publicly traded company, it's related to available shares, sales, dividend %, P/E ratio, EPS, Quick ratio, traded volume etc.
The valuation of cryptocurrencies is much more speculative. When looking at prices, it's important to pay attention to not just the price/coin but also the market cap and the circulating supply of that coin.
For example, on April 25 '21, Bitcoin (BTC) is $49,827 per coin with a market cap of $927,375,922,783 and Binance Coin (BNB) is $505 with market cap of $2,706,398,880.
But there is only a max supply of 21,000,000 bitcoin vs a max supply of 170,500,000 BNB.
This might seem like a trivial point, but is important to keep in mind. Just because you see a coin that is many thousands of dollars vs one that is only a few cents, doesn't really give you a good idea about how "valuable" it is, how much it will increase in value, etc. It's always important to be aware of the supply of the coin.
The next thing you want to consider when looking at different coins you want to purchase is the purpose of the coin. For example, most people argue that Bitcoin is a store of value and a way to hedge against inflation.
However some coins have utility and can be used for certain things, this is what gives them value. Ethereum and Binance Coin are the two utility coins with the highest market cap. When these go up in value, it's both a factor of people really valuing the utility of those coins and the speculation that the value of that utility will be even higher in the future.
There are also coins that are governance tokens, these usually allow holders of those coins to vote on certain decisions for a particular organization, exchange, protocol, or community.
Closing thoughts on buying crypto on an exchange
This is the easiest way to get involved in crypto. It's as easy as buying a stock. Because it's so easy, I want to provide some caution. Investing into crypto doesn't mean you're guaranteed to make money. Volatility is very high and 20-50% drops in price in a single 24hr trading window aren't uncommon.
The best generalized advice I can give:
- Keep a large % of your crypto portfolio in blue-chip coins. It can be tempting to see coins like SHIB go up 5,000% in a few days, but those gains usually disappear and the value of "meme" coins almost always drops and drops hard. Your best bet is to keep a large % of your portfolio in Bitcoin and Ethereum. Both of these have a long history and have survived many bull and bear cycles.
- Do your own research. Before you buy a coin that a friend recommended, read about it! Try to understand what its use is and why it has value. Search for both bullish and bearish perspectives.
- Long-term invest, don't day trade. Look for coins and projects that you think will still be around for 20+ years. Look at big categories like DeFi or NFT and if you believe that will be important in the future, try to pick a few of the winners. This video is very helpful and does a good job suggesting the most efficient crypto portfolio you could use by using Modern Portfolio Theory.
- Buy the dips and hold. If you have a long-term approach to investing in crypto and believe in the future use-cases + value of the coins you hold, the high volatility of the markets shouldn't bother you. If big 30% drops in price make you worried, it's a good indication that you have too much invested or you're invested in projects you don't believe in long-term. Don't invest any amount you aren't willing to lose.
- Don't bother with meme coins. There are a lot of scams in crypto. It's very easy to launch your own coin, pay to promote it and promise 100x returns, get a bunch of suckers who are looking for short-term gains to invest in it, and then the creators dumps their founder supply, crashing the price of the coin. (This known as a "pump and dump" or "rug pull" and is not uncommon.) If you see a coin with a silly name (TacoCat, Pizza, MoonPirate, SafeUFO) it's probably better just to stay away.
- Dollar Cost Average into your desired invested amount. Let's say you want to invest $1,000 into Bitcoin. It can be risky for a new investor to invest that whole amount at one time. The safest thing you can do is to dollar cost average until you've invested your goal amount. DCA involves making small investments, spread out over time as a way to "average" your entry into a position. This strategy drastically reduces risk.
Earning Passively with Crypto
Once you've bought some crypto and feel comfortable using exchanges to buy and sell, there are other methods you can use to start earning money with your crypto holdings. Best of all most of these are passive, meaning you can set it and forget it, keeping tabs on it occasionally.
Within this side of crypto, there are a few different ways to earn passively:
This method is the oldest way of making passively income with crypto. In most cases, mining involves using computing power to solve math provides and verify transactions. These networks are called "Proof of Work" and provide miners with rewards for the work they complete. Bitcoin and Ethereum the biggest Proof-of-Work networks (though Ethereum while be moving to Proof-of-Stake in ~6months).
Getting started mining crypto isn't what I would recommend for a beginner. It's pretty capital intensive (ASIC miners cost $5-15k) and depending on your cost per kWh and the current value of the coin you're mining, you might actually lose money. VoskCoin and Red Panda Mining are two great YouTube channels to watch if you want to learn more about mining.
One option that is easy for beginners is to participate in the Helium network. Instead of Proof-of-Work Helium operates off of Proof-of-Coverage. If you're able to buy one of their miners (really just a radio hotspot) it's very easy to get set up and takes up minimum energy ($1-2/month).
Proof-of-stake has become a popular alternative for confirming transactions and generating cryptocurrency. Each has it's pros and cons. Proof-of-stake is a lot less capital intensive and does not require all of the expensive electricity that Proof-of-work does.
When you hold cryptocurrencies which operate on proof-of-stake, you have the option of staking your coins. When you stake your coins, you lend your coins to the network to help validate transactions. In exchange for lending your coins and helping with validation, you are rewarded with additional coins.
Getting involved with a staking pool can get pretty advanced very quickly. The easiest way for a beginner to do this would be to buy CRO on the Crypto.com mobile app, transfer it to your Crypto.com Defi Wallet, and stake your CRO. As I'm writing this, I'm currently earning 14.5% APY on my staked CRO. This rate varies based on how much CRO others in the network are staking. I've observed that it seems to average 12-16% APY.
When you're staking always remember that the value of your coin matters too! You could be earning 75% APY but since you're receiving your rewards in the same coin, if the value goes to 0, it doesn't matter how high your APY is. Because of this, I strongly recommend only staking coins that you think will increase in value in the long-run or at the very least, maintain their current value.
Lending crypto isn't too different than lending traditional cash loans. The borrower pays interest to the lender and the loan is secured by crypto assets in an amount that is higher than what is being borrowed.
Through these platforms you can provide crypto to be loaned out. You'll get paid interest in return. Platforms will change the APR that you can earn frequently and the rate will also depend on the coin that you deposit. On most platforms, once you deposit your crypto, there is a "lockup period" when you won't be able to withdraw. Because of these lockup periods and the highly volatile nature of crypto, I only recommend depositing stablecoins (coins that stay pegged to the US dollar). If you deposit USDC, you can usually expect to earn anywhere from 8-14% APR. Not bad considering the average interest rate traditional banks pay is currently 0.03%
Before diving into Defi, I always recommend people signup for an account on a centralized exchange. Put a little money in and see what happens.
When you have your own money at stake (even if its just a little), I think it gives people real incentives and learn about crypto, read the news, and get involved.
Every time I've suggested a friend get started on a centralized exchange, it spurred a period of curiosity and learning as they do their own research about why bitcoin is a good store of value or what a blockchain is, or researching what Ethereum actually does.
After this learning period takes hold and the friend has learned some of the basics and knows the function of some coins, then I usually recommend diving down the defi rabbit hole!
(When you're just getting started, I strongly recommend against following the advice of anyone on Twitter or YouTube who is claiming they know how to find the next 100x coin, or is claiming that they discovered low-market cap "gems".)
If and when you want to explore other methods of interest-earning with your crypto, the next thing you can do is explore DeFi apps (decentralized finance). These apps do the similar things that Blockfi, Nexo, etc do but they're decentralized. There's no 1 organization in charge, and everyone who contributes to provide funds for loans splits the rewards. Yearn Finance is a great protocol to explore. Yearn pools together trustworthy and tested DeFi protocols and automatically moves your money from app to app in order to maximize your return. Yearn Finance is currently given 14.5% APY on deposited USDC. This is a great article by Nat Eliason that explains why DeFi is cool and how to get started using Yearn.