Have you heard about the financial rewards crypto showers on the hodlers and want to jump in the pool to get your share of the big-time profits and beat burgeoning inflation, something your current saving venues are struggling at? A decentralized cryptocurrency, Bitcoin (BTC) has outpaced traditional venues for putting your savings like stocks, gold or real estate. If you are asking: Is crypto a good way to build wealth, the answer is affirmative.
The sheer pace at which Bitcoin has grown is astounding. Released in 2009 by pseudonymous developer Satoshi Nakamoto, Bitcoin climbed exponentially from $0.08 to more than $68,300 in 2021. Compared with gold, the closest investable asset to digital coins, which has gained value by just 627% over a period of 100 years, from $283 in Jan 1921 to $2,060 in August 2020.
Though Bitcoin had begun trading at $0.0008 in July 2010, it simply crawled in the initial years, gradually climbing to the $10 range and then shooting up to $250 in April 2013 and then climbing to $68,300 in 2021. However, Bitcoin’s journey wasn’t outright spike, and there were ups and downs.
The cryptocurrency has weathered extreme volatility during its journey. There have been sharp falls as well, along with steep hikes. In a wild session in May 2021, Bitcoin tumbled 30% to near $30,000. If you compare the fall with reaching a record high of $64,829 in mid-April, the plunge was more than 50% since. Thanks to volatility, it isn’t easy for beginners to make money with Bitcoin.
Not only Bitcoin, all cryptocurrencies have been incredibly topsy-turvy investments, except for stablecoins, which are price-stabilized digital currencies. Stablecoins are pegged to assets like the United States dollar or gold, which makes their value more stable than normal cryptocurrencies. This makes stablecoins a special kind of cryptocurrency that are devoid of associated extreme volatility. Stablecoins are a credible answer to the query, How to build wealth with crypto.
This article will help you understand how to preserve wealth with Bitcoin and stablecoins. Let’s begin with Bitcoin, the most well-known of all cryptocurrencies.
Related: Cryptocurrency vs. Stocks: Key Differences Explained
Bitcoin as a means of wealth preservation
As a robust means of wealth preservation, Bitcoin can be used in two ways: as a viable money reserve and to help prevent inflation. Thanks to its limited supply and decentralization, you may use Bitcoin to preserve your capital and preserve your funds.
Bitcoin has no geographical boundaries, leaving you free to send and receive the cryptocurrency from any part of the globe at the time you choose. Financial barriers are simply not applicable, putting you in complete control over the funds. Bitcoin is a strong backup plan to have in case of a financial disaster.
For someone residing in a country facing an extreme economic crisis, Bitcoin can turn out to be a lifeline. Let us take the example of Venezuela, where the annual inflation rate reached 80,000% at the end of 2018. The situation is so dire that more than 2.7 million people are estimated to have left the country since 2015.
Not surprisingly, Carlos Hernandez, a Venezuelan youngster, has been using Bitcoin to beat inflation. Amid sheer economic chaos, Bitcoin has been serving him as a financial lifesaver. He has converted all his assets into Bitcoin and withdraws small amounts occasionally to meet his expenses.
When it comes to wealth preservation or beating inflation, Bitcoin is often compared with gold. Though both assets have a limited supply, gold is a tangible metal that has been around for thousands of years and is widely regarded as a store of value.
On the other hand, Bitcoin is a digital asset that will take more time to gain the trust of the regular people. However, as the example Hernandez establishes, Bitcoin works much better than gold when it comes to beating inflation.
With a brief on Bitcoin as a means of wealth preservation, let us move to stablecoins, another potential tool for making profits by investing in crypto.
Investing in crypto: Understanding stablecoins
Extreme cryptocurrency volatility might provide an opportunity to earn money to advanced traders in bull runs, but this characteristic is a sure killer of stability. Most individuals and businesses won’t be interested in accepting a kind of payment that might stumble in value in the next hour. This left stakeholders looking to create wealth through a stable cryptocurrency that would be more or less unchanged in value, eventually leading to the emergence of stablecoins.
In February 2022, the market capitalization of stablecoins stood around $180 billion, a sharp jump from roughly $38 billion a year ago. To a large extent, this was attributed to the status of stablecoins as the driver of decentralized finance (DeFi).
As a beginner learning how to invest in cryptocurrency would like to know, stablecoins rolled in as a bridge between traditional finance and crypto markets, facilitating key financial activities like lending, borrowing, derivatives and more, providing a reliable base value to the DeFi ecosystem.
Stablecoins are of two types: those pegged to fiat currencies like USD or metal, and algorithmic coins. In the first case, a centrally stored reserve of fiat currencies or assets keeps the price of the cryptocurrency stable. For instance, a stablecoin could hold a million US dollars and issue the same number of virtual coins. Tether (USDT) and USD Coin (USDC) are two popular examples of such stablecoins.
On the other hand, the algorithmic approach uses digital assets as collateral. Stabilized through smart contracts, algorithmic coins use economic incentives to retain the peg of the currency because they are stabilized through smart contracts. Dai (DAI) and U.S. Dollar Index (USDX) are two examples of algorithmic coins. Keep in mind that custodial stablecoins tend to be more stable than their algorithmic cousins. You might want to have both asset-backed and algorithmic stablecoins in your cryptocurrency portfolio.
Along with a fixed value, stablecoins bring in added benefits like efficiency in minting and managing the issuance of new coins, easy cross-border transactions, and interoperability with a range of crypto projects. The advent of stablecoins has helped slash cryptocurrency volatility, eliminating the need for traders to exit exchanges and transfer fiat when they are hedging against price slumps.
Investing in crypto: How to buy and store stablecoins
To buy stablecoins, you need to have an account with a digital wallet or a crypto exchange. On these platforms, you can buy crypto with fiat. Centralized exchanges tend to list only fiat-backed versions, though. If you have Bitcoin that you want to swap with a stablecoin before investing in cryptocurrency, you will need to use a decentralized exchange (DEX).
As for storing your crypto, you can leave it on your centralized wallet or exchange. However, you share the access code with the platform. For safer crypto, you can move it to a hardware wallet, also known as a cold wallet. Since it is not always connected to the internet, security cannot be compromised. When you attach the cold wallet to a device that connects to the internet, it works along with the compatible software.
Cryptocurrency asset investing: Enhancing your wealth with stablecoins
For Bitcoin, the formula to build wealth is simple. Wait for a dip, which happens very often, and use the opportunity to buy Bitcoin. The formula remains the same for all usual cryptocurrencies. You can be a winner if you play the game for the long term, accumulating your investment whenever prices take a plunge. In the end, you will find for yourself a pool of wealth. Don’t be shortsighted, though, and try to time lows and highs as this is when most investors end up losing funds.
Let us see how an average crypto investor can use stablecoins for improving wealth.
Lending
Crypto lending quite resembles conventional banking, where you deposit money with a bank and earn interest on it. Thanks to their inherent stability, stablecoins work impressively well when it comes to earning passive interest. You could lend your stablecoins to DeFi platforms where your crypto that has been passively lying with you will be used for lending and earn extra coins for providing liquidity.
Staking
The proof-of-stake (PoS) consensus method used in several protocols requires miners to stake coins before they can verify transactions. When specific algorithms on nodes verify transactions, the pledged coins generate rewards for the stakers. Again, the staking methodology provides holders of stablecoins a fun way to make money steadily and grow their wealth.
Yield farming
Yield farming is an innovative technique for crypto asset investing. It refers to the process of locking assets into a liquidity pool to assist decentralized exchanges in managing fund movement. It is a popular term for the endeavor to generate as high returns as possible.
Yield farmers deposit stablecoins to borrow another coin, sell it on another platform at a higher price, return the borrowed amount with an interest and keep their profit. In 2020, the year of DeFi, yield farming was the biggest growth driver, pushing the market cap from $500 million to $10 billion. Most yield farmers deal in stablecoins like USDT, USDC and DAI.
Liquidity mining
A key activity in any DeFi project, liquidity mining is about providing liquidity to the protocol. The holders provide their digital coins to trading pairs like Polkadot (DOT)/USDC in the liquidity pool, aka a smart contract, for crypto trading (different from crypto lending and borrowing).
In return, the protocol rewards the user with a liquidity provider token. As long as the users maintain their tokens in the pool, they get native tokens minted at each block or governance tokens along with the liquidity provider token.
Liquidity mining mechanism
Store-of-value
If you prefer HODLing coins to steer clear of volatility, stablecoins work quite efficiently as value stores. Designed to maintain a fixed value over time, they work wonderfully well if you want to keep your funds in reserve and away from the volatile world of crypto. So, if you have no interest in riding on speculation and making profits with the cryptocurrency prices moving up and down, stablecoins can be your pick.
Functional coin within crypto brokerage
The stability factor enables traders to use stablecoins as a functional currency within a crypto brokerage. A trader who has made their profits on Bitcoin might not convert their BTC into a stablecoin like USDT to preserve their wealth and wait for another bull run.
In the hands of an advanced investor, stablecoins work as quite a potent tool. Moreover, you can conduct transactions with stablecoins anytime you want, unlike the banking system, which only works for a certain number of hours.
Crypto asset investing: Risks in crypto trading
Like all investment venues, crypto trading has its share of risks as well:
- Yield farming carries its share of risks that include liquidation, composability, smart contract and impermanent loss risks.
- The value of stablecoins may fall if the issuer company goes bankrupt.
- If the community’s trust in the company that holds the reserve asset falls, it might reflect in the value of stablecoin.
- Some trading strategies, particularly related to yield farming, might go quite complex.
Way to go
When used efficiently, crypto serves as a potent tool to preserve and enhance your wealth. While BTC and several other cryptos have been the vehicle to wealth for hordes of investors around the world, they are volatile indeed. Recognizing the dip, riding the bullish phase and investing for the long term are keys to success in crypto investment.
Stablecoins are an easier and safer bet, thanks to negligible volatility. You can use your idle funds for staking and liquidity mining to make a steady passive income. And, once you know a bit more about the crypto ecosystem, you may opt for yield farming, which gives you a meatier deal almost immediately. It won’t take a lot of time picking the threads of investing with stablecoins and enhancing the wealth you possess