In the modern day, alternative investing strategies are an excellent way to bolster the gains you could see in your portfolio.
One new unique avenue many investors have begun considering is cryptocurrency. Starting with the launch of Bitcoin in 2009, the global cryptocurrency has grown to USD 4.67 billion in 2022 and is projected to hit USD 5.15 billion by the end of 2023.
Whether you are planning on full on investing into cryptocurrency or just want to gain some interest off smaller holdings, learning everything there is to know about this investment can benefit your portfolio.
What is Cryptocurrency?
Cryptocurrency is a complicated topic in and of itself. In short, a cryptocurrency is an encrypted, digital medium of exchange that exists on a decentralized platform. This means that there is no government or banking central authority that regulates the currencies, as there is with common currencies such as the U.S. dollar.
Cryptocurrency networks exist on the blockchain, which is essentially an open ledger that solely records transactions. It’s best to picture this as a checkbook that all computer has access to view and add entries to, though these entries are anonymous. There are two primary methods by which crypto transactions are added to the blockchain: proof-of-work and proof-of-stake.
Proof-of-work releases cryptocurrencies into circulation every time a computer solves a complex mathematical equation. Every time one equation is solved, the subsequent equation is marginally more difficult. Over time, it takes longer and longer to mine coins. For perspective, it’s currently estimated that the final Bitcoin will not be mined until around 2140, as the process gets exponentially more difficult.
Proof-of-stake, on the other hand, allows owners of cryptocurrency to “stake” coins, essentially hold them as collateral, in return for potentially being chosen to validate new block transactions. To get involved with either of the above methods for logging transactions on the blockchain requires powerful processing equipment. The average individual instead invests their money in a specific crypto coin similar to the stock market.
Pros of Investing in Cryptocurrency
- An investor can diversify the assets in their portfolio beyond standard stocks and bonds
- There is projected industry growth expanding years into the future
- Easy and secure transactions allow for a level of anonymity
- Transaction costs are often far lower than those associated with other financial assets
Cons of Investing in Cryptocurrency
- Cryptocurrency prices can rise and fall on a whim and are not truly tied to the performance of anything as stocks are
- Investing in this asset takes both research and a fair sum of money
- There have been security issues with certain cryptocurrency exchanges
Overall, the pros for investing in cryptocurrency outweigh the cons for a number of people. To that end, more and more money is being flooded into the cryptocurrency market faster than ever before. Many investors are now seeking ways to gain interest on their cryptocurrency holdings, beyond just standard gains on investment.
3 Different Ways to Gain Interest on Cryptocurrency
For investors whose primary goal is earning interest using strategies such as by generating high yield with defi crypto platforms or putting money into a target high yield account, there are three primary ways to gain interest on crypto:
- Stake your funds against a network
One of the most popular ways to earn interest on your cryptocurrency is to simply stake your funds against a network. This simply means locking up some of your cryptocurrency inside a blockchain network and, in return, you receive interest.
Depending on the type of cryptocurrency you stake, it’s not unheard of to earn somewhere between 3-13% back on an annual basis. However, it’s worth noting that the interest you receive is in the cryptocurrency, not dollars.
- Look into DeFi or Yield Farming initiatives
Investors can choose to invest their cryptocurrency tokens in decentralized finance initiatives, which are financials services that a group of computers control, as opposed to a governmental authority. In return for investing in the project, these platforms offer interest.
Alternatively, an investor could put their funds into a yield farming project, which is essentially just the same as staking coins but on those DeFi platforms.
- Put your funds into a cryptocurrency savings account
A rather new way to earn interest on cryptocurrency is a cryptocurrency savings account. Offered by centralized companies, you can hold your cryptocurrency in their accounts, and they will pay you interest in either USD or the coins you have in the account. Just be sure that the platform you choose is accredited.
Considerations Before Investing in Cryptocurrency
While cryptocurrency can be an enticing opportunity for investors, there are numerous considerations to keep in mind before putting your money into the asset. Most importantly:
- Only put in what you can afford to lose
- Research any new cryptocurrency extensively to see what it is based on
- Don’t follow the hype of social media – it’s already too late by the time you heard about it
- Don’t invest in cryptocurrency just because a friend or family recommended the coin
- Always keep your cryptocurrency keys secure
How to Diversify When Earning Interest on Cryptocurrency
Cryptocurrency can be a fantastic addition to any portfolio, but they bring a lot of risk. Fortunately, there are a few strategies you can use to reduce this risk:
- Consider investing in cryptocurrency ETFs that spread your investment across numerous coins
- Diversify in coins that are based on different networks
- Buy cryptocurrencies that have different use cases
- Rebalance your crypto portfolio on a regular basis
While the above strategies won’t completely erase the risk your portfolio will face, they will certainly reduce it.
Start earning more interest today
There are more ways to earn with cryptocurrency than by stacking your portfolio full of coins. Keep in mind that there is an inherent risk with cryptocurrency that other investments just don’t have. This means that you should always have a higher degree of caution with cryptocurrency than with other assets in your portfolio. Diversify to reduce the risk of losses with this alternative investment.