How To Make Money from Bitcoin

How To Make Money from Bitcoin in 2015

Is It Too Late to Make Money from Bitcoin this Year?

Investing in Bitcoin, a new peer to peer, decentralized digital currency, made a lot of people a hell of a lot of money in 2013. The price of a the coins rocketed from $60 to over $1000 in just a few months, although it has now fallen back down into the $900-range. Some of the people in these overnight success-stories didn't even need to buy their Bitcoins, because the coins can be 'mined' using the processing power of their own computers.

The days of becoming a Bitcoin millionaire virtually overnight with little-to-no investment have certainly passed, but that doesn't mean there isn't still money to be made.

Investing in Bitcoin is a pretty risky business, so you should only use a relatively small amount of capital that you can afford to lose entirely if things go badly. But these high risks could also come with high rewards.

You can still make money from mining coins, from buying and holding them, or from trading them on the financial markets.

Challenges Facing Bitcoin Markets

• In 2014, Mt. Gox, the most popular Bitcoin exchange, filed for bankruptcy after being hacked, losing around 850,000 coins. Since then, the market has more or less recovered, but the future of Bitcoin will depend on ensuring investors' trust and security.
• Cryptocurrency is still largely unregulated. If governments or regulatory bodies change this, they could make a big dent in the current values. We've seen this happen before, when the price dropped overnight after the Chinese government introduced trading restrictions in 2013, and could easily happen again, multiple times or on a larger scale.
• Although it has been enthusiastically adopted by geeks and speculators, the general public is yet to buy into cryptocurrency on a large scale. The ecosystem of apps and services surrounding the currency will have to demonstrate some movement towards making it more user-friendly for the not-so-technically-adept to justify its valuation.
• There is now a wide range of alternative digital currencies that compete with Bitcoin. None have proved to be a major challenge so far, but it could be in the future.

• A lot of hackers are interested in Bitcoin. Wallet-stealing is already something of a threat for owners of the currency, and the possibility of something called a '51% attack' in which members of powerful mining pool successfully 'double-spend' their coins cannot be totally discounted. A major security breach or widespread virus targeting people's digital wallets would dent confidence and send the price tumbling.

Opporutunities and Potential in 2015

• In order to engage the general public and transition from niche interest to mass usage, there needs to be a killer app. A user-friendly means of trading coins would increase demand and send the price of the coins rocketing, potentially increasing their value even more dramatically than we saw in 2013.
• Mainstream investors have shown a lot of interest in Bitcoin, but most have held back due to the market's high volatility. Any stabilization of the price, if combined with continued incremental improvements in services, could trigger an increase in investors buying into the currency, driving up the price.
• If major Internet retailers were to start accepting the currency as payments, they would drive increased adoption and investor confidence. We could easily see some dramatic overnight price surges on the back of such retailer announcements. Overstock started accepting Bitcoin in 2014, and there was indeed a small surge as a result. Bigger retailers like eBay are now considering it as a payment option, which would have a much more dramatic effect.
• Emerging markets such as India, Turkey and others are feeling the pinch as the US cuts its stimulus measures, leading to capital outflows from emerging markets as banks have less to invest, especially as home markets are starting to look more profitable. One of the major risks to emerging economies as a result is inflation (currency devaluation). This is already happening, and if it continues, those countries' wealthy citizens will want to unload local currency. For them, the deflationary nature of Bitcoin may make it seem like an attractive alternative.

Bitcoin ATM, Brno, Czech Republic (CC BY-SA 4.0).

Source: DonPowered via Wikimedia Commons

Cloud Mining and Hashing

Although buying and running your own mining hardware for coins is both expensive and fraught with technical difficulties, it is still possible for ordinary people to make money by mining.

One easy way to mine is to hire space on a specialist mining computer—or a whole machine—in the same way that you would hire a server for website hosting. By doing this, you can estimate your profits using one of the many mining-profit calculators available online. Some firms claim, based on past results, that you can break even on your initial investment in three months using this method.

A slightly different take on the cloud mining concept is provided by CEX, which is basically a trading platform for miners and investors to buy and sell shares in mining hardware. In addition to generating income from the computing power that you control, you can also choose to offer your shares for sale at any time. This is a good option if you want to invest in Bitcoin mining but would like to retain the possibility of liquidating your assets whenever you like.

While there is a good chance you can make a profit over the cost of the hosting, success is not guaranteed. Your profits will depend on both the value of the coins themselves and on the changes in mining difficulty over time.

Algorithmic Trading

Like any currency, stock or other financial product, money can be made by judiciously buying and selling bitcoins. You can try doing this yourself, but you need to have incredible insight into the market to have any success. Just like those other financial products, however, some traders have created automated systems to buy and sell bitcoins based on a mathematical algorithm.

Buy and Hold Bitcoin

Many people who owned bitcoins made a large profit last year simply by holding coins in their wallets. This is still the easiest way to invest in the cryptocurrency phenomenon.

As I mentioned in the first section, there are many opportunities for growth and price surges in the coming year. This means that there's still a possibility that the coins will keep in increasing in value as fast as they have been up until now, if not faster. If that happens, then simply buying and holding would prove to be a very profitable investment opportunity. Of course, there is also a very real possibility that the price could crash and you could lose most of your money.

If you don't mind holding your money on an exchange rather than in a wallet on your own computer, then hold your coins in an account on a site such as Bter,which pays a small amount of interest on all deposits.

Bitcoin Exchanges and Arbitrage Funds

In my opinion, one of the most promising opportunities Bitcoin this year is arbitrage. The concept is simple. Arbitrage is when you take advantage of a disparity in prices between different markets to buy at one price and instantly sell at a profit in another market.

As Bitcoin's popularity grows, so to does the number of exchanges. Prior to February 2014, when it suspended trading following a possible hack and insolvency, Mt. Gox in Tokyo had a near-monopoly on Bitcoin exchange. The market has more or less recovered, and the new exchanges that emerged in Mt. Gox's wake have had to prioritize investor trust and security.

Some popular exchanges are:

• Bitstamp
• Bitfinex
• Coinbase
• Cryptsy
• BTC-e
• Kraken
• BTCChina
• Bitcoin Source

The divergence of prices between different exchanges means that you can get involved in arbitrage yourself just by having accounts on multiple platforms, with a balance in multiple currencies in each one. When the opportunity—a difference in prices—arises you can simple buy and sell immediately without having to transfer funds between accounts.

The risk in doing this, of course, is that the price will change between when you buy and when you sell. This makes arbitrage highly dependent on the speed at which you are able to make transactions. This type of trading also requires you to sit in front of a screen watching price feeds constantly, waiting for the right moment.

Short Selling

Most currency investments are made in the hope that the value will increase over time. However, if you are one of the substantial number of people who believe that Bitcoin is over-valued and pumped up by speculators, then you can try your hand at short selling Bitcoins. Short selling allows you to profit from drops in the value of a commodity in the same way that you would profit from rising prices if you bought it.

The mechanisms of short selling vary somewhat by marketplace and local regulations, but it's normally conducted the same way. Usually, the speculator borrows stock or currency from a broker and sells it on the market with the hope that the price will go down after he or she sells the borrowed shares. If the price does go down after a certain amount of time, the investor buys the amount of shares owed to the broker at the lower price and returns them. The investor's profit is the difference between the amount the borrowed shares sold for and the price of buying them at the diminished price point.

Some Bitcoin platforms allow short selling, usually by allowing you to "borrow" the currency from other clients on a peer-to-peer network or to borrow against the platform itself. These include:

• Bitfinex
• BTC-e
• Fxopen

Some traditional trading platforms, such as Plus500, have a short selling mechanism. If you own bitcoins then you can also use this platform to hedge against loss during times of particular risk.

Litecoin is a competitive alternative to Bitcoin (CC BY 2.0).

Source: BTC Keychain via Flickr

Bitcoin Trading

Bitcoin is ideally suited for the 'retail trader' trading on their own at home, rather than professionally for a major financial institution. A decentralized system does't bear an advantage for institutions who can use their money and influence to get closest to the center of power in a centralized system.

If you are clever then you can make money buying and selling Bitcoin depending on whether you think the price will rise or fall. You can also trade Bitcoin against other cryptocurrencies. Popular alternatives to Bitcoin include:

• Darkcoin
• Litecoin
• Dogecoin
• Peercoin
• Ripple
• Namecoin