Bitcoin was the first cryptocurrency, but it still has a relatively short history, as it was first created in 2009. Interest in Bitcoin and other cryptocurrencies reached a fever pitch in 2020 and 2021, as prices skyrocketed and crypto in general became a topic in the mainstream news. If you’re at all familiar with Bitcoin, you’ve likely heard stories of fortunes won and lost by those who own the cryptocurrency. But, how exactly do you make or lose money in Bitcoin?
Check out the chart below for an overview and keep reading for more details:
Ways To Make Money in Bitcoin
Although some Bitcoin holders use the crypto primarily for payment purposes, many others own Bitcoin to generate profits. There are three primary ways that you could earn money in Bitcoin.
Bitcoin, along with other cryptocurrencies, is one of the most volatile asset classes available. This makes it difficult for long-term holders to maintain their positions, as the crypto often makes double-digit percentage moves in a single day. For traders, however, this type of volatility is ideal. By quickly moving in and out of Bitcoin, you can rapidly book profits and jump out before the trend turns. If you’re an agile trader and can snag a gain of just 5% per week, that amounts to an annual return in excess of 250%.
Although it can be emotionally difficult to hold a position in Bitcoin over the long run, these are the types of investors who have posted the most impressive gains. For example, if you invested just $1 in 2010 when Bitcoin traded at about $0.0008, you could have bought about 1,250 Bitcoin. Over 10 years later, at Bitcoin’s July 10 price of about $33,374, your initial $1 investment would be worth about $41.7 million. If you had managed to sell out at Bitcoin’s all-time high of nearly $65,000, you could have pocketed about $81.25 million. While you shouldn’t expect these types of stratospheric gains, at least historically, Bitcoin has thus far provided long-term holders with spectacular gains.
Learn More: Where Does Cryptocurrency Come From?
If you’d rather work for your Bitcoin than invest in it or trade it, perhaps Bitcoin mining is for you. Although the details can get a bit complicated, the bottom line is that Bitcoin miners are the ones who produce additional Bitcoin by recording transactions in the blockchain ledger. Every time they solve the complex algorithm that unlocks blockchain ledger transactions, they’re paid with a specified amount of Bitcoin. Currently, that reward is 6.25 Bitcoin, although this number gets halved about every four years. Understand that successfully mining Bitcoin typically requires the use of massive computer server farms and enormous amounts of electricity, so it isn’t for everyone.
Ways To Lose Money in Bitcoin
Just as investors can make money in Bitcoin, they can also lose it. Here are some of the most common ways that you might lose money in Bitcoin.
Trading can lead to big gains in Bitcoin, but it’s not without risk. In fact, the movements in the price of Bitcoin are so great that it’s very easy for even experienced traders to get whipsawed and lose a lot of money. Trading Bitcoin poorly is therefore probably the easiest way to lose money in Bitcoin. If you decide to go this route, you might want to take some practice runs on websites that offer simulated trading, or begin with a small amount at first.
Financial scams are becoming more and more common, and cryptocurrency is a growing target. As more everyday investors begin to own crypto, scammers are targeting them with increasing ferocity. As of May 17, the Federal Trade Commission reported that since October 2020, consumers reported losing more than $80 million to cryptocurrency scams, a tenfold increase on a year-over-year basis. Just as you would with any digital asset, like your bank accounts, you’ll have to be extra-diligent with your security to protect your crypto going forward.
Hackers may be the greatest risk to Bitcoin holders, especially as the cryptocurrency gains widespread acceptance. When you own Bitcoin, you hold it in an electronic wallet that only you can access, at least theoretically. But hackers have shown the ability to tap into Bitcoin wallets, and they are only going to get more proficient as the years go by. Once a hacker has access to your Bitcoin wallet, he or she can drain you of all your cryptocurrency, just like someone who has your debit card can take all of your cash. However, if you lose your crypto to a hacker, no bank is going to replace it for you.
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Last updated: July 14, 2021
This article originally appeared on GOBankingRates.com: How To Make (or Lose) Money With Bitcoin, Explained in One Chart