How Does Bitcoin Make Money?
Bitcoin is a decentralized digital currency that was created in 2009. No government or central bank is in charge of issuing it. It is also not a business, so it doesn’t have any revenue or a balance sheet. Due to this, the price of Bitcoin can seem a little arbitrary. At a moment’s notice, the price of Bitcoin can spike or slump. So, who determines how much one Bitcoin is worth? And how does Bitcoin make money for investors? Let’s take a look at the answers to these questions and more.
How Does Bitcoin Make Money and What Makes it Go Up and Down?
The short answer is supply and demand. If more people are buying Bitcoin instead of selling then the price will trend upward. But if more people are selling instead of buying then the price will trend down. The stronger the buying pressure is, the faster the price will climb. Adversely, the stronger the selling pressure is, the faster the price will drop.
Supply: One of the most important factors of Bitcoin is that its supply is fixed. Bitcoin has a maximum supply of 21 million coins. Once this number is reached, no new coins will be created. This limited supply makes the existing Bitcoins more valuable. It’s a big difference from our existing financial system, which creates new money all the time.
Bitcoin’s limited supply is what gives it value as an investment. If an unlimited number of Bitcoins could be created then it would erode the value of each coin.
Demand: Bitcoin is an asset just like a stock, bond, or gold. As such, investor behavior can influence its price. For example, in 2020, China’s citizens may have used Bitcoin to dodge regulations from the government. Since it’s untraceable, Bitcoin gave Chinese investors a way to move money out of the country. This surge in buying led to a runup in Bitcoin’s price at the end of 2021.
On the other hand, let’s say that the U.S. was to enter into a war. Lots of investors would panic and rush to sell their investments. This surge of selling would likely hurt Bitcoin and cause it to fall in price.
At first glance, Bitcoin’s price may seem to move randomly. However, if you take a look at the global picture, it can be fairly simple to guess why Bitcoin is trending up or down.
Other Factors Behind Bitcoin’s Price
Supply and demand are the two biggest drivers of Bitcoin’s price. But there are a few other factors that also play a role:
- The cost to mine a Bitcoin. This determines the number of people mining new Bitcoins, which impacts supply.
- The rewards issued to miners for verifying transactions on the blockchain. This also impacts supply.
- The number of competing cryptocurrencies. Increased competition can give investors other places to store money.
- The state of the economy.
- Potential regulations on the cryptocurrency industry.
In general, cryptocurrencies have volatile prices. This means that their prices can rise and fall very quickly. But that doesn’t mean that you can’t still earn money. So, how does Bitcoin actually make money for investors?
How Can You Profit From Bitcoin?
There are two main ways that investors profit from Bitcoin. The first is to try and trade around the price swings. The second is to buy and hold for the long term.
Trading: Trading Bitcoin is a strategy where investors try to anticipate price movements. They constantly buy and sell Bitcoin in anticipation of where they think the price will move. For example, let’s say a trader buys one Bitcoin at $30,000. The price then surges 10% to $33,000. The investor might sell their Bitcoin and profit $3000. Then, they’ll wait for the price to dip again before buying more.
This strategy can be risky since the investor has no way of knowing which way the price will move. It requires a high-risk tolerance and good anticipation skills.
Buy and hold: Another way to profit from Bitcoin is simply to buy and hold. This strategy is much simpler. You simply buy Bitcoin and wait for its price to increase over time. The biggest difference is that you are probably comfortable holding Bitcoin for months, if not years.
You will still experience volatility in the short term. But Bitcoin has a great track record over the long term. Over the past five years, Bitcoin is up almost 4,000%.
But what about investors who want to use Bitcoin to create income? How does Bitcoin make money for these investors? Let’s take a look.
How Else Can Investors Make Money?
Mining is the process of approving transactions on the blockchain. Since Bitcoin is decentralized, it does not have a main regulating body. Instead, it requires workers to make sure each transaction is legitimate. These workers are called Bitcoin miners. For their efforts, they are rewarded in Bitcoin.
The mining process requires completing a complex math problem. If you are the first to solve the problem then you win the right to approve a transaction and get rewarded.
Getting started mining will give you a steady stream of Bitcoin. You can then sell this Bitcoin and convert it to dollars. Keep in mind that this process requires a mining rig and tons of computing power.
Crypto staking is the process of “locking up” your coins for a period of time. Doing this helps contribute to the security of the respective blockchain network. As a reward for staking your coins, you will receive an annual percentage yield. In this sense, it’s similar to keeping your money in a savings account.
Staking is generally only available for many newer coins. It’s usually not available for Bitcoin, since Bitcoin uses a proof-of-work system, not a proof-of-stake one. However, Crypto.com lets you stake Bitcoin. You can expect to earn at least 4-5% APY when you stake your coins. In some cases, you can earn as high as 15%. It all depends on the coin you want to stake and the length of time that it’s staked for.
Those are the two main strategies that answer the question: how does Bitcoin make money? But if you are to expand beyond Bitcoin then there are dozens of ways to make money using cryptocurrency in general.
There are tons of ways that you can earn money within the world of cryptocurrency. Most of them include starting a business of some sort. Here are just a few new industries that you can explore:
All of these ventures have the potential to be very lucrative. However, they are also very different from each other. The path that’s best for you will depend on your skillset and financial goals.
I hope that you’ve found this article valuable for learning how does Bitcoin make money? Please remember that I’m not a financial advisor and am just offering my own research and commentary. As usual, please base all investment decisions on your own due diligence.