CryptoCurrency : Passive investing in cryptocurrencies.
Hey Reddit. I’ve been lurking on r/CryptoCurrency and a few other subs for over 6 months now, reading and learning about various cryptocurrency related nuances. In order to expand my knowledge further and give something back to the community, I decided to pen down a few articles. The first one, as the headline suggests, deals with passive investing. Any feedback on, be it the quality of the article, writing style, etc would be appreciated. 🙂
Like any other tradable commodity, cryptocurrencies are driven by the laws of supply and demand. Smaller market size and fickle market sentiment makes cryptocurrencies extremely volatile as compared to the other older trading commodities. Nonetheless, the cryptocurrency market is stacked with boundless asymmetrical opportunities to take advantage of. With careful investment planning and research, assisted by tools within a broader strategy, the risk can be minimized.
Broadly classified, there are two types of investment strategy, active and passive. Active strategy is when investors have to adjust their positions on a daily basis whereas passive avoids frequent trading and it aims at steady growth in wealth over time.
**What is Passive Investing?**
Traditionally, a buy and hold strategy, passive investing is when investments are made keeping a long time frame in mind. It is not aimed at short term gains (time trading) but rather long term positive results with minimum involvement in trading. These investments avoid trading fees and performance fluctuations, contrast to active trading.
**Key features of Passive Investing are:**
1. Its performance is trackable, hence it is more reliable.
2. Low operating expenses.
3. Good for long term wealth creation.
### Ways to passively invest in crypto:
Staking or Proof of Stake ( PoS) is buying the coin and keeping in the wallet for a certain fixed period, like depositing money in a fixed deposit for a fixed period. It is a form of a consensus protocol, where people who own a coin will stake a certain amount on the network, This currency is set aside, and cannot be used in anyway.
When a block is created on the platform, wallets with staked coins are randomly chosen to validate the action. More coins the wallet holds, more chances it has to get chosen and receive the block rewards.
**With earnings upto 100%, staking creates an incentive for holders to invest in a platform and use it on a regular basis.** It is beneficial for both the network and the users, as they can earn back a percentage of their staked assets on a monthly or yearly basis.
Masternodes are servers or computers on a decentralized network, created for a set amount of collateral capital that is locked in a dedicated wallet. They anonymize the transfers by locking capital in the form of the cryptocurrency they are helping transact. Validation of transactions is much faster for cryptocurrencies supporting masternodes, compared to ones relying only on miners.
***Masternode as passive income source***
Everytime a block is mined, a masternode is randomly selected in a round-robin way to receive the reward for; validating transactions. Once the masternode is in set it can be a steady flow of cash in the form of a reward. In a deconstructed way, with minimal effort you can passively earn.
1. An interest as a reward, for Fixed deposit
2. Additional coins as a reward, for Proof of Stake
Mining is a stable way of generating passive income, where your computer does the maximum work. With a one time investment in the equipment cost (fixed assets) to mine currencies, you can keep earning every month. What to look out for is the cost of electricity to run the machines. With mining, your acquisition cost of a cryptocurrency will remain stable. You can always sell it in the market when the price is high to make profit.
**4.** **Crypto Index Funds**
Index is statistical measure of the changes in a portfolio of assets or cryptocurrencies and are designed to track the returns of a market index. The changes in an asset price is proportionate to its index value. Investment in index funds of multiple currencies, or a selected ones forming an index, investors can have portfolio with high return yet lower volatility.
**5.** **Crypto Sector Funds**
Just as index funds track the entire market, sector based funds or baskets as we call them track specific sectors. Investing passively in crypto sector funds can can give you good returns as some sectors will perform better than others. Sectors will also perform differently in different phases of the market — hence the strategy to diversify into Crypto sector based funds.
The official source for CryptoCurrency News, Discussion & Analysis.
Don’t forget to share the post if you love it !