Can you get rich by crypto trading? On paper, the answer seems to be yes. Naturally, it’s more complicated than that. But looking at the on-paper stats to answer the basic question, we can look at some simple numbers.
In September 2021, Motley Fool did a comparison of some well-known cryptocurrencies. If you paid $1,000 at the start of 2021 what would your investment look like in September of the same year?
For Bitcoin, the value went up some $600 in nine months. Ethereum did even better, the original one thousand dollar investment was worth more than four thousand just nine months later. And Dogecoin, the crypto that started off as a joke?
$1,000 of that currency was worth $53,000 nine months later. It certainly does appear you can get rich by crypto trading. Is there a catch?
The key to understanding how crypto trading and investing work? View it like established commodities like gold, silver, and copper. These commodities are riskier than stocks or bonds, and there is similar volatility in these investments.
Why compare the vastly different (in terms of product) crypto market to gold, silver, and copper? Because these are known quantities that have similar variables contributing to their volatility, and therefore the risk of investing in them.
What are those variables?
Like commodity investing, crypto has some vulnerabilities that make it riskier. The North American Securities Administration Association lists some of these factors for commodities that also apply to crypto. They include:
- Unpredictable variables. These can include global politics, inflation, disruptive technology, and even biased posts by social media influences. All of these factors and more can serve to drive fear, greed, and emotional investing which in turn affects the stability of the market for both crypto and traditional commodities.
- Speculation. Day trading and short-term commodities investing are full of speculators. These investors look for short-term windfalls from anticipating stock moves higher or lower depending on the whims of the market. Some believe this type of investing is an elevated form of gambling, but no matter what view you take, such speculation may also be present in crypto markets. This adds unpredictability to the marketplace.
- Elevated risk of fraud. Commodities trading involves high-pressure situations where decisions have to be made in a hurry. That kind of pressure can make investors more susceptible to fraud in crypto or commodities, you’ll want to know exactly where your funds are going and what they are paying for.
- A lack of detail. Sometimes there simply isn’t enough information for a specific crypto investment to make a fully informed decision and the trick for the investor in these cases? Whether to take the risk or not. You could get burned, you might not. Which way to go may depend on your experience level, confidence in the investment, and whether or not you give in to emotional investing.
The ancient old wheeze, “Buy low, sell high” is applicable to cryptocurrency. If you want to trade Ethereum like a commodity, this is the simplest way to think about that process. Knowing when to enter the market and when to leave is key.
That is why some speculators pick one coin or commodity to deal with in the earliest days–you want to get intimately acquainted with the investment, how it works, and what can go wrong for investors. Being a generalist investor may not serve you well in the crypto marketplace.
If you are serious about making money by crypto trading, the things you will need to understand as fully as possible before you begin include knowing how difficult it will be to sell your Bitcoin, Ethereum, Dogecoin or others once you decide to cash in.
Are you planning to try “day trading” crypto by investing over a short period of time and then cashing in when the value seems right to do so? If you don’t know how quickly your transaction may or may not go through, you are at a serious disadvantage.
Do you have to invest in crypto the way other speculators do? No, you don’t. Some choose a longer-term buy-and-hold strategy, which may work better with more stable coins. Bitcoin’s value fluctuates just enough that using that as your long-term strategy may not be as advisable unless you have chosen a diversified investment approach where crypto is a part of your portfolio but not the MAIN part of it.
Others may choose to invest in a different way–they stake crypto or lend it to others instead of trading it like a commodity. This can earn you rewards or even interest payments depending on the platform. Will this make you rich? That would depend on volume, crypto volatility, and other market variables.
Lending crypto carries its own set of risks–if the borrower fails to repay you, you’ve essentially lost your investment. If you lend coins valued at X today and that value changes tomorrow to Y, will your loan repayment plan suffer due to the change in value? Staking crypto may have similar challenges–if one party doesn’t live up to their end of the bargain, you risk losing your coins.
And with crypto, there is no central regulating authority to appeal to if that should happen.
What follows is not investing advice. It should be considered pre-investment research that can help you create a mental or actual checklist to help you avoid certain kinds of risks. In some cases it really does NOT matter whether you’re investing in gold, orange juice, Bored Apes, or CryptoPunks, the advice is the same.
A great example of that? Online reputation. As mentioned in the list above, that is an important factor to consider. Are you thinking about investing in a headline-making, up-and-coming project with big names (think Beeple, Pak, or Tyler Hobbs here) and a lot of attention? It will be easy to research the online reps of these people.
But should your red flags go up if you’re presented with a “golden opportunity” that you cannot find any other information to verify during your own online research?
That lack of information can be a warning sign to pay attention to. Especially if one or more names that you DO know are attached to a project who are already controversial. Other potential warning signs about investing in crypto include, but are not limited to, the following:
The opportunity sounds too good to be true. It’s the oldest confidence trick in the book, and the old adage about things that sound too good to be true definitely applies here.
The investment has had severe ups and downs for reasons that aren’t quite clear. If you can’t get a clear explanation of any investment’s unusual performance over a fixed period of time you might want to consider moving on.
There is significant pressure from people you don’t know to hurry up and act. Another very old confidence trick which is used in scams ranging from crypto to day trading.
There are random social media posts from surprising sources. Remember the scammer who pretended to be a Twitter IT rep? He convinced other Twitter employees to give him access to Twitter accounts owned by Barack Obama, Jeff Bezos, and other celebrities.
When Barack Obama’s Twitter account began posting glowing endorsements of a “Bitcoin giveaway”, those fooled into clicking on the link were brought to a scam website. How much did this con artist manage to scrape up using this approach? More than $111,000 in Bitcoin.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.