Is cryptocurrency a good way to accumulate wealth? It is, if you understand how to invest in Bitcoin, stablecoins, and other cryptocurrencies. Let's go exploring.
How to start preserving wealth with crypto
Have you heard about the financial rewards that cryptocurrency bestows on hodlers and want to jump in to get your share of the big-time profits while beating burgeoning inflation, which your current saving venues are struggling with? Bitcoin (BTC), a decentralized cryptocurrency, has outpaced traditional investment vehicles such as stocks, gold, and real estate. If you're wondering if crypto is a good way to build wealth, the answer is yes.
The rate at which Bitcoin has grown is incredible. Bitcoin, created in 2009 by the pseudonymous developer Satoshi Nakamoto, has risen exponentially from $0.08 to more than $68,300 in 2021. In comparison, gold, the closest investable asset to digital coins, has increased in value by only 627 percent over a 100-year period, from $283 in January 1921 to $2,060 in August 2020.
Though Bitcoin began trading at $0.0008 in July 2010, it simply crawled in the early years, gradually rising to the $10 range before skyrocketing to $250 in April 2013 and then to $68,300 in 2021. However, Bitcoin's journey was not a straight line, with ups and downs.
Throughout its history, the cryptocurrency has experienced extreme volatility. Sharp falls have also occurred, as have steep hikes. Bitcoin fell 30% to near $30,000 in a wild session in May 2021. When compared to a record high of $64,829 in mid-April, the drop has been more than 50% since then. Because of the volatility, it is difficult for newcomers to make money with Bitcoin.
Except for stablecoins, which are price-stabilized digital currencies, all cryptocurrencies have been extremely volatile investments. Stablecoins are pegged to assets such as the US dollar or gold, making their value more stable than other cryptocurrencies. As a result, stablecoins are a distinct type of cryptocurrency that lacks the associated extreme volatility. Stablecoins are a credible answer to the question, "How to build wealth with cryptocurrency?"
This article will teach you how to use Bitcoin and stablecoins to protect your wealth. Let's start with Bitcoin, the most well-known cryptocurrency.
Bitcoin as a means of wealth preservation
Bitcoin can be used as a strong means of wealth preservation in two ways: as a viable money reserve and to help prevent inflation. You can use Bitcoin to protect your capital and funds because of its limited supply and decentralization.
Bitcoin has no geographical boundaries, allowing you to send and receive the cryptocurrency from anywhere in the world at any time. Financial barriers simply do not exist, giving you complete control over the funds. Bitcoin is an excellent backup plan in the event of a financial disaster.
Bitcoin can be a lifeline for someone living in a country experiencing a severe economic crisis. Consider Venezuela, where the annual inflation rate reached 80,000 percent at the end of 2018. The situation is so bad that it is estimated that over 2.7 million people have fled the country since 2015.
Unsurprisingly, Carlos Hernandez, a Venezuelan adolescent, has been using Bitcoin to combat inflation. Bitcoin has been a financial lifesaver for him in the midst of economic chaos. He has converted all of his assets to Bitcoin and withdraws small amounts on a regular basis to cover his expenses.
When it comes to preserving wealth or combating inflation, Bitcoin is frequently compared to gold. Despite the fact that both assets are in short supply, gold is a tangible metal that has been around for thousands of years and is widely regarded as a store of value.
Bitcoin, on the other hand, is a digital asset that will take more time to gain the trust of ordinary people. However, as Hernandez demonstrates, Bitcoin outperforms gold when it comes to beating inflation.
After a brief discussion of Bitcoin as a means of wealth preservation, let us turn our attention to stablecoins, another potential tool for profiting from crypto investments.
Investing in crypto: Understanding stablecoins
Extreme cryptocurrency volatility may provide advanced traders with an opportunity to profit during bull runs, but it is a sure killer of stability. Most people and businesses will not accept a payment that may depreciate in value within the next hour. As a result, stakeholders sought to create wealth through a stable cryptocurrency whose value remained relatively constant, eventually leading to the emergence of stablecoins.
Stablecoin market capitalization was around $180 billion in February 2022, up from around $38 billion the previous year. This was largely attributed to stablecoins' status as the primary driver of decentralized finance (DeFi).
Stablecoins, as a beginner learning how to invest in cryptocurrency would like to know, rolled in as a bridge between traditional finance and crypto markets, facilitating key financial activities such as lending, borrowing, derivatives, and more, while also providing a reliable base value to the DeFi ecosystem.
Stablecoins are classified into two types: those tied to fiat currencies such as USD or metal, and algorithmic coins. In the first case, a centrally stored reserve of fiat currencies or assets maintains the cryptocurrency's price stability. A stablecoin, for example, could hold a million US dollars and issue the same number of virtual coins. Tether (USDT) and USD Coin (USDC) are two well-known stablecoins.
The algorithmic approach, on the other hand, makes use of digital assets as collateral. Because they are stabilized through smart contracts, algorithmic coins use economic incentives to maintain the currency's peg. Two examples of algorithmic coins are Dai (DAI) and the US Dollar Index (USDX). Keep in mind that custodial stablecoins are more stable than algorithmic stablecoins. In your cryptocurrency portfolio, you may want to include both asset-backed and algorithmic stablecoins.
Stablecoins provide additional benefits in addition to a fixed value, such as efficiency in minting and managing the issuance of new coins, easy cross-border transactions, and interoperability with a variety of crypto projects. The introduction of stablecoins has reduced cryptocurrency volatility by eliminating the need for traders to exit exchanges and transfer fiat when hedging against price drops.
Investing in crypto: How to buy and store stablecoins
To purchase stablecoins, you must first open an account with a digital wallet or a cryptocurrency exchange. You can buy crypto with fiat on these platforms. However, centralized exchanges typically list only fiat-backed versions. If you have Bitcoin and want to exchange it for a stablecoin before investing in cryptocurrency, you must use a decentralized exchange (DEX).
You can keep your cryptocurrency in a centralized wallet or exchange. You do, however, share the access code with the platform. You can store your cryptocurrency in a hardware wallet, also known as a cold wallet, for added security. Security cannot be compromised because it is not always connected to the internet. When you connect the cold wallet to an internet-connected device, it works in tandem with the compatible software.
Cryptocurrency asset investing: Enhancing your wealth with stablecoins
The formula for accumulating wealth in Bitcoin is straightforward. Wait for a dip, which occurs frequently, and then take advantage of the opportunity to purchase Bitcoin. For all conventional cryptocurrencies, the formula remains the same. If you play the game for the long term, accumulating your investment whenever prices fall, you can be a winner. Finally, you will discover a wealth pool for yourself. However, don't be too hasty in trying to time lows and highs, as this is when most investors lose money.
Let's look at how a typical crypto investor can use stablecoins to increase their wealth.
Lending
Crypto lending is similar to traditional banking in that you deposit money with a bank and earn interest on it. Stablecoins perform admirably when it comes to earning passive interest due to their inherent stability. You could lend your stablecoins to DeFi platforms, where your crypto will be used for lending and you will earn extra coins for providing liquidity.
Staking
Several protocols use the proof-of-stake (PoS) consensus method, which requires miners to stake coins before they can verify transactions. When specific algorithms on nodes verify transactions, the stakers receive rewards from the pledged coins. Again, the staking methodology offers stablecoin holders a fun way to earn money steadily and grow their wealth.
Yield farming
Yield farming is a novel method of investing in crypto assets. It refers to the process of locking assets into a liquidity pool in order to help decentralized exchanges manage fund movement. It is a popular term for the pursuit of the highest possible returns.
Yield farmers deposit stablecoins in order to borrow another coin, sell it at a higher price on another platform, repay the borrowed amount with interest, and keep their profit. Yield farming was the biggest growth driver in 2020, the year of DeFi, pushing the market cap from $500 million to $10 billion. The majority of yield farmers work with stablecoins such as USDT, USDC, and DAI.
Liquidity mining
Liquidity mining is a critical activity in any DeFi project because it provides liquidity to the protocol. Holders contribute their digital coins to liquidity pool trading pairs such as Polkadot (DOT)/USDC for crypto trading, which is referred to as a smart contract (different from crypto lending and borrowing).
In exchange, the protocol gives the user a liquidity provider token. As long as users keep their tokens in the pool, they will receive native tokens or governance tokens along with the liquidity provider token.
Store-of-value
Stablecoins work well as value stores if you prefer to HODL your coins to avoid volatility. They work fantastically well if you want to keep your funds in reserve and away from the volatile world of crypto. They are designed to maintain a fixed value over time. Stablecoins are a good option if you don't want to ride the speculative wave and profit from fluctuating cryptocurrency prices.
Functional coin within crypto brokerage
Stablecoins can be used as a functional currency within a crypto brokerage because of the stability factor. A trader who has profited from Bitcoin may not convert their BTC into a stablecoin such as USDT in order to preserve their wealth and wait for another bull run.
Stablecoins can be a powerful tool in the hands of an experienced investor. Furthermore, unlike the banking system, which is only operational for a limited number of hours, you can conduct transactions with stablecoins whenever you want.
Functional coin within crypto brokerage
Stablecoins can be used as a functional currency within a crypto brokerage because of the stability factor. A trader who has profited from Bitcoin may not convert their BTC into a stablecoin such as USDT in order to preserve their wealth and wait for another bull run.
Stablecoins can be a powerful tool in the hands of an experienced investor. Furthermore, unlike the banking system, which is only operational for a limited number of hours, you can conduct transactions with stablecoins whenever you want.
Crypto asset investing: Risks in crypto trading
Crypto trading, like all investment venues, carries some risks:
- Yield farming is fraught with risks such as liquidation, composability, smart contracts, and impermanent loss.
- If the issuer company goes bankrupt, the value of stablecoins may fall.
- If the community loses faith in the company that holds the reserve asset, the value of stablecoin may fall.
- Some trading strategies, particularly those involving yield farming, can become quite complex.
Way to go
When used correctly, cryptocurrency can be a powerful tool for preserving and increasing your wealth. While BTC and other cryptos have been the vehicle to wealth for hordes of investors all over the world, they are extremely volatile. Recognizing the dip, riding the bullish phase, and investing for the long term are the keys to cryptocurrency investment success.
Because of their low volatility, stablecoins are a simpler and safer bet. To generate a consistent passive income, you can use your idle funds for staking and liquidity mining. And, once you've learned a little more about the crypto ecosystem, you might consider yield farming, which will get you a better deal almost immediately. It will not take long to identify the threads of investing with stablecoins.