How to Make Money With Cryptocurrency

Cryptocurrency is part computer science and part finance, but don’t let that intimidate you. It’s simple to get started and you don’t have to be an expert.
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Cryptocurrency is part computer science and part finance, but don’t let that intimidate you. It’s simple to get started and you don’t have to be an expert.

With a little smart investing and a little luck you can make money online, even in 2022.

First, learn what cryptocurrency is and how it works

Cryptocurrencies are a decentralized form of payment you can use to buy goods online. There are thousands of different currencies from the popular Bitcoin, Ethereum and Litecoin to the meme currency Dogecoin.

Cryptocurrencies run on the blockchain, which is a digital ledger of the currency's transactions and ensures the same coin is not spent twice. Transactions are processed on the blockchain network of thousands of machines - and in exchange for those computers' hard work, owners have a chance at receiving a crypto coin.

The new coins are "mined" (meaning minted, or created) when computers solve complex mathematical problems to work out the legitimacy of transactions on the blockchain.

While many people do pay for their purchases with crypto, it's more widely discussed as a form of investment - spurring whole websites that track the value of a single Bitcoin.

Using exchanges or wallet apps like Coinbase, Crypto.com and BlockFi, users will convert dollars to cryptocurrency and count on their investment increasing in value, just like a stock.

Bit Digital, a sustainability-focused generator of digital assets and the largest bitcoin miner on the NASDAQ, recently launched a mining center in Buffalo, New York, and is working toward it using 100% sustainable power. The facility, located in an old coal factory, houses thousands of computers powered by hydroelectricity and is part of the larger trend of the crypto industry trying to go green.

Also like a stock, you don't pay taxes on crypto gains until you sell and cash out. The capital gains tax you would pay on Bitcoin or other crypto income will vary according to your income in that tax year - if you make under $40,000 per year, you would owe no tax on any crypto gains. They would be taxed at 15% if you earn up to $441,150 and 20% at any higher income, according to CNBC.

Many people invest in crypto because of the ease of buying, selling and trading on apps and websites, according to a CNBC survey.

A cryptocurrency could gain value if a major business announces they will accept it as a form of payment, when changes are made to the mining process, or when notable people like Elon Musk hype up a particular crypto asset. Additionally, value can go up if the demand increases while supply stays limited - for example, once there are 21 million Bitcoins in circulation, no more will be mined.

A cryptocurrency might lose value when a company no longer accepts it as payment, or when a lot of people try to sell at once.

Here are some scenarios to help understand dollars and crypto.

  • Holding crypto in a software wallet is like carrying cash in your real world wallet. It’s readily available to you and waiting to be spent.
  • Putting crypto in a savings protocol is like putting cash in a savings account. The savings protocol pays you interest for using their service – similar to how banks pay interest for some savings accounts.
  • Depositing crypto in a vault and borrowing from yourself is like putting cash in a retirement account and taking a loan from it.
  • Trading tokens on a crypto exchange is like trading stocks on a stock exchange. Tokens represent blockchains and protocols like stocks represent corporations.

Do your research on crypto lingo

It's good to know what a blockchain is and how it works – but it’s not a necessity. Think about what happens when you buy something online – do you know how an Automated Clearing House works? How well do you understand the system of banks and payment processors that make up traditional finance? Lacking this knowledge doesn’t prevent you from using dollars, and likewise won’t prevent you from using crypto.

That said, what you need to know is that a cryptocurrency relies on a blockchain, a special type of digital network. There are different blockchains – like Ethereum, Cardano and Stellar. They work similarly, but have different features.

What is Bitcoin?

Bitcoin [BTC] is the most popular and most valued cryptocurrency. BTC transactions are processed and verified by people called miners. When miners process enough transactions, using specialized computers, they’re rewarded with some BTC. Essentially, the act of verifying transactions is what creates more BTC. So as long as miners want more cryptocurrency, the blockchain will function.

What is crypto mining?

Cryptocurrencies are decentralized, meaning the records of transactions are not stored on one hub server — they're spread across the blockchain. Users' computing power helps solve problems to make sure everything is accurate.

People who devote their computing power to the blockchain can be rewarded with some cryptocurrency in return. These users are called "miners."

Cryptocurrencies like Bitcoin use massive amounts of power to keep systems running. Plus, there are massive "farms" full of computers mining for the coins. But some crypto companies are signing the Crypto Climate Accord, pledging to reduce their consumption and carbon emissions to a more sustainable level.

Some companies and other groups may run massive farms with lots of computing power to maximize their chances of "mining" a Bitcoin or other unit of cryptocurrency. Running this many computers and processors all at once uses massive amounts of energy, so there is a need for greener mining practices. NBCLX recently toured a New York crypto mining facility run on hydroelectricity thanks to Niagara Falls.

What is a savings protocol?

Blockchains use special apps, called protocols, that put your crypto to work. So in traditional finance you might have a savings account, but in crypto, you’d use a savings protocol. The language of crypto is rooted in computer science.

Beware of crypto scams

According to CNBC, regulators believe crypto scams are the top threat to investors and have urged caution in 2022.

The North American Securities Administrators Association told investors to be very careful and do plenty of research before buying into a crypto investment. The biggest red flag of a crypto scam is a guaranteed high return with no risk, the NASAA says.

It's also important to secure your crypto wallet so that scammers can't get in and send your money somewhere you're unable to recover it.

Get a crypto wallet for buying, trading and storing

You’ll need a place to store your crypto – a wallet. You can choose a software wallet – like an app, or a hardware wallet – an offline device sort of like a flash drive. 

  • Most software wallets can be recovered if you lose your phone 
  • Most hardware wallets can’t be recovered if you lose them

Since software wallets are online, they’re potential targets for hackers. Hardware wallets are offline and can’t be hacked, but they can be lost or stolen like a real wallet.

You can skip this step by downloading an exchange app like Coinbase, eToro, or Gemini, then connecting a debit card or bank account. This is the fastest way to start buying and trading crypto. Your assets will be stored in a wallet managed by the exchange, which adds some risk. 

Think about it, if you’re a hacker trying to steal millions, your time is better spent hacking large exchanges to access thousands of wallets. Hacking a single software wallet is probably a waste of time. To learn more about crypto wallets check out this resource from Benzinga.

Put your crypto earnings to work

If you only want to trade crypto, a wallet and exchange is all you need. But there are other ways to use crypto to make money.

Decentralized finance [DeFi] is a system of peer-to-peer finance tools that provide options like interest accounts, loans, and advanced trading for people with crypto. DeFi disrupts traditional finance by removing middlemen [bankers, lawyers, brokers] from finance processes. DeFi advocates say this makes finance faster, more affordable, more transparent, more democratic and eliminates in-person discrimination.

Getting started in DeFi takes more research. You can learn about different DeFi protocols on the web starting with The DeFi List. There, protocols are sorted by function, making it easy to understand what they do. Protocol developers share their mission statement by distributing a white paper. Here’s the white paper for Compound, a popular protocol, as an example.

To use DeFi protocols, you’ll need access to the decentralized web [dWeb]. To learn more about DeFi protocols, their history, and how they work, check out Finematics on YouTube.

Keep learning from cryptocurrency experts

There are a lot of experts on YouTube and Reddit. To get you going, here are some free online resources ranging from the basic to the meta.