Three Ways to Make Money with Bitcoin

The first way to make money with Bitcoin is to be an excellent trader. I don’t mean a good trader; I mean a great trader. The difference between a talented baseball player and an outstanding baseball player is that an outstanding one hits the ball 2% more often.

A great trader knows and understands the market. He can read charts and notice trends. He spends his days aware of markets and can execute a trade before others notice the trend has changed. And most importantly, he understands he is not always right and can cut his losses.

Look at the recent chart in Bitcoin.

Bitcoin is highly volatile, single-day moves of five percent are common, and it can move fifty percent or more over a few months. Great traders can make vast sums of money in this type of market. They can also lose money. Great traders know how to manage risk, so it does not bankrupt them if they lose.

The second way is to be the middleman. During a gold rush, the best way to make money is to sell shovels and picks. You see, brokers rushing to provide ways for people to trade Bitcoin. They will make money not on Bitcoin but on people trading Bitcoin.

Some companies use Bitcoin as a marketing tool. They announce they will accept Bitcoin to get free media coverage. However, this is only a marketing ploy. Bitcoin, by design, can only handle 2500 transactions every ten minutes. To put this in perspective, Starbucks sells four million cups of coffee a day. Also, consider the transaction cost, which varies but is usually around $5 a transaction. The final point is that it sometimes takes hours to complete a transaction. Therefore, Bitcoin is impractical to transact commerce.

The third way is to be lucky. Some people have made a lot of money on Bitcoin. Maybe they are brilliant traders, but they also may just be lucky. But, unfortunately, many people have also lost a lot of money.

Bitcoin is a negative-sum game. For someone to make money, someone else must lose money. It’s negative because there is also transaction cost involved.

This is the difference between investing and speculating. When you invest, the money is used to generate income. You invest in Apple. They build products that get sold and generate profits; they share them with the investors. Speculators are not looking for profits; they hope that the price of the instrument they are purchasing goes up. There are cases where it can be both an investment and speculation.

There is nothing wrong with speculation. It serves a function in any healthy market. It provides liquidity and helps with price discovery. Many people have become wealthy through speculation. The key is to understand you are speculating and to understand the risk. It is also essential to consider how Bitcoin may fit into a diversified portfolio.

There has been a lot of discussion about Bitcoin’s asset class. It is clearly not a currency for the reasons stated above.

Some suggest it is a hedge against inflation, but no one has shown any correlation with rising consumer prices.

They have called it digital gold. It fails this test in the doomsday scenario. If the grid collapsed or became seriously compromised, gold would still exist. Bitcoin cannot survive without massive computing power.

It has been called a store of value, with no explanation of how it fits that category. Bitcoin can rise or fall fifty percent in a short period. A store of value should not be volatile and maintain its value.

The best category seems to be as a collectible. A Babe Ruth baseball card is reported to have sold for $6 million. It is worth that much because someone will pay that amount. Every day, they produce new baseball cards. They are worth only pennies. They create new cryptocurrencies daily. Some are worthless. Bitcoin is only worth what people will pay.

You may be a great trader; you may be lucky. You may make a fortune; you may lose everything.