The HODLer, the Gambler, the Miner, the Investor…

First Published 22 October 2023

So how do you ‘make’ money in crypto?

‘Trump, unvaccinated…crypto’ Are there any other words in the english language that can as quickly launch a derisive conversation? Even profiles on dating websites have taglines ‘DON’T TELL ME ABOUT BITCOIN!!!’

Bitcoin is nearing its fifteenth year of adoption and it is still largely misunderstood and heavily speculated asset class. It has a been described as a ‘store of value disguised as a get rich quick scheme’

If you’ve held bitcoin for any 5 year period then you would be in profit, substantial profit. However the speculative ecosystem derived from the creation of bitcoin is what has led to scams, hacks, thefts, rug pulls and pump and dump schemes.

Leading authorities, Jack Dorsey, Elon Musk, Steve Wozniak, Larry Fink, Bill Miller, have all asserted that not only is Bitcoin, and other cryptocurrencies, already part of our technological and financial future, but that banks need to provide on-roads for their customers. This is basically asking the bank to provide a service to their own customers that will replace the institution itself.

So with over a decade in circulation, and ads appearing in the NFL Super Bowl, how does one actually make money from Bitcoin and crypto? Here’s four strategies to consider:

The HODLER

‘HODL’ is a common term amongst bitcoiners, presumed to be a typo on a message board it has been adopted as ‘Hold ON for Dear Life’. A nod to the volatility that bitcoin undergoes during its cycles of massive upswings (up to 3,000%) followed by 90% corrections.

HODL essentially means hold your bitcoins during those 90% corrections and don’t sell. This is a simple assertion to make if someone buys bitcoin prior to a bull run. Yet as it is human sentiment that drives markets, most people will buy when the market is roaring,. This tends to mark the top of the market, and a reversal. There’s an adage that whenever ‘the tallest building’ in the world is announce for construction, it signified that the top of a market is in and due for a correction.

The Burj Khalifa was announced in 2004 and construction completed in 2009, right in the wake of the Global Financial Crisis. The Petronas Towers in Malaysia were announced in 1998, just in time for the dot.com crash. Construction on the Willis tower in Chicago commenced in 1973, the following year was the oil crash and a period of inflation.

Leading up to the 1929 stock market crash New York embarked on the construction of FOUR tallest structures in the world.

The problem with the hodler strategy is that they’re expecting to just hold onto their investment during a 90% correction. Amazon has had three 90% corrections in its history and only Geoff Bezos and his parents held their stock this entire time. Financial markets are the only market place that when there’s a sale on, everyone runs for the exits.

Hodling also means the only way you can cash in on your investment is by selling your bitcoins, which for the hodler goes against the grain as they are long term adopters. So they wouldn’t sell until they reached retirement or looking to purchase a home.

The Gambler

This strategy is the polar opposite to the hodler. This person is getting in and out of multiple positions on a daily (even hourly) basis, they’re trading bitcoin and cryptocurrencies on platforms that offer leverage as high as 200-1!

This is HIGH risk in a profession that already has a 90% plus failure rate. Failure rate meaning you lose more than you gain, even losing your entire balance. This is the equivalent of the pundit that attends the dog track every day, looking for that big win, and even if they get it comes back they very next day.

Exchanges and trading platforms are the ones that make money, and bitcoin, when trading because the majority of the people are giving it away to them through their failed trading activities.

The Miner

This is an area of bitcoin and blockchain garnering a lot more attention. Five years ago mining bitcoin was dominated by only a few companies (China’s Bitmain being the main one) but since we’ve seen it spread around the world. Mining companies are being more creative with their energy consumption and are even contributing a net-positive to energy grids.

Miners are the engines that make Bitcoin run. They validate transactions on the blockchain and make returns in two ways, through fees and in block rewards.

Fees are generated when a transaction takes place between two parties, they are small fees (less than 10cents to a few dollars) yet currently cryptocurrency mining is generating over $5million is fees per day, and as Bitcoin and crypto adoption grows, that will scale significantly.

The block rewards are how newly minted bitcoins are released. Originally 50 bitcoins were minted every block (approximately every 10 minutes), these are ‘rewarded’ to miners for validating the blocks. Every 200,000 blocks the reward is halved. This is referred to as the ‘halvening’ and at time of writing the bitcoin block reward is 6.25 bitcoins. It is expected that the last satoshi (1/10000000 of a bitcoin) will be released in the year 2140, at which point no new bitcoins will be created.

The pros for the miner is that they are receiving consistent satoshis on an hourly basis and potentially a lump sum of bitcoins through the block reward. However they are paying for it in power consumption. If what they are receiving in bitcoin is greater than their electricity bill, then they’re in profit. However in a bitcoin bear market they could be receiving less than their outlay. Miners have the stress of paying a premium for their satoshis; if mining becomes unprofitable they can turn their miners off, but then lose the opportunity to earn and accumulate bitcoin and crypto.

This same principle applies to gold miners, if the price of gold drops and it becomes unprofitable for them to mine, they don’t close the mines, they stockpile their gold expecting (hoping) that the price of gold recovers and they recoup their losses when it does.

In the last bear market, many a large crypto mining operation went bankrupt because they over-leveraged and couldn’t sustain themselves.

The Investor

Generating passive income from bitcoin has proven fruitless for many. It has led to the downfall of several large companies (BlockFi, Genesis, Celsius) and unfortunately their customers. Options have included such as staking your coins on exchanges and getting paid in return, but the risk is that your coins are on exchanges and susceptible to theft and hacks. Investing in a mining company has been one viable option. Running your own miner is loud and messy work, and did I mention it was LOUD!

There are two options of investing in a mining company. One is where the company purchases the miner for you, sets up in a country where they have negotiated cheap electricity rates, and then manages the hardware, software and repairs for you.

You would get rewarded just like any other miner minus the investment cost and operational fees paid to the company. The pro for this is that you were getting paid in bitcoins through fees, and have the (every so slight) opportunity of reaping from the block rewards. The disadvantage is that miners can go offline, they may need to be repaired and after as little as a year those miners can be replaced by miners with a higher hash-rate.

The other option is where a company purchases miners with your capital, mine bitcoin and other cryptocurrencies, pay you a fixed rate of return on your investment, and they pocket the difference.

“When the forest grows too wild, the purging fire is inevitable and natural.” Ras Al Ghul, Batman Begins. Warner Bros. 2005.

Either way you’re trusting your investment in a third party, which defeats the evolutionary displacement Bitcoin created.

STRATEGY HODLER

GAMBLER MINER INVESTOR

PROS
Not worried about short term-volatily.

If you are the (estimated) 6% that has a successful trading record, you can make returns

Your satoshis trickle on a daily basis, set and forget. They are non-kyc as well

Generate daily returns. Not exposed to market volatility.

CONS

Opportunity cost. If you bought at the top of a cycle may need to wait 2-3 years to break even

Lose your initial investment entirely.

A lot of planning. Need to know your break even points, ROI, throttle rates

Potentially missing out on block rewards. Trusting a third party.

SUITABILITY
Long term (10 year) investor

Short term professional traders that know how to manage their VAR.

Devotee who will make this their full- time calling

Short to long term investor with medium risk appetite.

Faris Mali is a Bitcoin advisor. Co-host of the BitcoinBasicsPodcast and author of Bitcoin Begins, a beginner’s guide to money, currency and Bitcoin.