Cryptocurrency to Cash
Outside of its function as a currency to buy and sell products and services within the online, digital peer-to-peer network, cryptocurrency can function as an investment tool to earn you a profit in fiat currency, like the US dollar (USD). We’ll review four of these ways. Remember, before using or investing in cryptocurrency, you’ll need to download a digital wallet onto your desktop or external hard drive, or as an app onto your smartphone.
Note: Before pursuing any of these investment actions, you should conduct thorough research beyond the basic outline and suggestions here, including on what kind of digital wallet is best for you.
You can buy into a new cryptocurrency at the ground level during an initial coin offering (ICO).
ICOs are a form of crowdfunding outside the traditional financial system to start fledgling cryptocurrency projects or businesses—think of it as a virtual version of an IPO (initial public offering), with some differences.
An ICO usually transpires over a week or more. Interested investors purchase the new altcoins at a discount—or a “token”—in exchange for already established and valued cryptocurrencies, like Bitcoin. If the new cryptocurrency grows in value, you will have made a profit on your investment. It’s important to note that, unlike traditional stocks sold at an IPO, tokens do not give you any ownership rights in the company or future dividends.
There are a few ways tokens can be assigned value. There can be a specific goal for project funding, which sets the token supply as static and means each token carries a pre-determined price that does not change. If there is a static supply but a changeable funding goal, then the more funds raised, the higher the token price will be. A third option combines features of both methods above: a changeable token supply that is determined by the number of funds received, which means the price for each token is set, but every time one Bitcoin (for example) is exchanged for the new altcoin, another altcoin is “released” to be sold for another Bitcoin. In this case, a limit of total funds raised or time elapsed can be set.
If you’re interested in participating in an ICO, check to make sure you can. The U.S. Securities and Exchange Commission (SEC) has rules and barriers that need to be considered. You’ll also want to make sure your digital wallet is compatible with the new altcoins, which you can find out on the new coin’s or project’s website.
You can visit an online, digital exchange to buy and sell various cryptocurrencies using fiat currencies or other altcoins. These platforms match buyers and sellers much like the traditional stock market. In order to make money, marketplace exchanges charge a range of transaction fees based on the volume or monetary total of the transactions. Some exchanges charge both sellers and buyers, while others only one or the other.
As always, take full consideration and care before using any digital marketplace as this is a point of exchange used by fraudsters and criminals to steal from investors.
On the more technologically advanced side, there is mining as a method to obtain more cryptocurrency outside of buying and selling in the digital marketplaces. Within cryptocurrency networks, a person can participate in the validation of a transaction by solving a very complex math problem; this makes them a “miner.” If a miner solves an equation, helping validate a transaction and adding to the coin’s block chain, they’re rewarded with payment in the cryptocurrency. This is the only way to introduce new currency into circulation after an ICO and simultaneously helps decrease the cost of transactions by creating an incentive to contribute to the process. To ensure the market isn’t flooded with new currency from miners, the math problems becoming increasingly harder and the rewards decrease. When the number of miners decreases, the math problems will become gradually easier again.
At this point, becoming a miner involves a large investment of money in computer processing power and equipment as well as an investment in computer programming knowledge. However, if you think you could make a profit from this system, there are miner pools, where individuals combine their resources to the crack the codes and then split the rewards based on each members’ contributions.
Arbitrage, in this context, is the buying and selling of cryptocurrencies in different exchanges to take advantage of differing prices. This requires an up-to-the-minute understanding of a cryptocurrency’s price across multiple exchanges, as well as the fees associated with each exchange. This can be a relatively easy way to make money simply by buying a cryptocurrency at a lower price in one place, and selling it for a higher place elsewhere, minus any fees.
In general, because of the time investment necessary to watch multiple exchanges, this method is only used to make a few hundred dollars. That profit can be reinvested into a cryptocurrency or taken out of the system and converted into a fiat currency, for a fee, of course.
As with any investment, you'll need to study and watch the digital altcoin market closely to increase your chances of making a profit. Because cryptocurrency isn’t backed by a physical resource or guaranteed by any larger authority, it’s subject to wide and sometimes wild fluctuations. Like any other risky investment, the reward can be high if the market moves in your favor. That being said, at the moment, initial investments in cryptocurrency for most people should only be done with money they are prepared to lose.