Bitcoin is fascinating. The cryptocurrency has long since become more than just a means of payment. More and more investors are storing their assets in Bitcoin. The number of coins is limited to 21 million. This promises a certain preservation of value. Moreover, some earn money with Bitcoin every month. You can learn the 7 smartest ways to do this in the article.
A warning at the beginning: the value of Bitcoin fluctuates greatly. Theoretically, a total loss is also possible. Such a risky investment is not suitable as a sole retirement plan. However, Bitcoin can be interesting as a small part of a diversified ETF portfolio.
True Bitcoiners are – similar to ETF investors – long-term oriented. Their investment horizon is 10 or more years. That way, you can ride out short-term fluctuations just fine.
1st way: Profit from the price increase
In May 2010, the first Bitcoin transaction took place. At the time, student Jeremy Sturdivant paid 10,000 Bitcoins or the equivalent of $41 for 2 pizzas. At today’s rate (December 2021), the pizzas would be worth around $450 million.
Jeremy is reportedly not upset about his bad deal. He is proud to have written a piece of Bitcoin history. At least, that’s what he claims in interviews.
Even today, no one knows how Bitcoin will develop. But there is a lot to be said for further price increases. For example, it is the only truly decentralized blockchain.
Not even the second largest cryptocurrency Ether can claim that. It is a project of the well-known founder Vitalik Buterin, who changed his blockchain Ethereum after a successful hack attack under protest of the community.
The anonymous founder or Bitcoin, Satoshi Nakamoto, cannot reprogram the code without majority approval. Bitcoin is thus a true peer-to-peer network.
This independence from any one person or institution is unique and could increase in value. You’d just have to stick with it long enough.
2nd way: Earn money with Bitcoin mining
The second way to make money with Bitcoin is Bitcoin mining. New Bitcoins are mined by miners by solving cryptographic computational problems called “Proof of Work”.
“Proof of Work” is a computational process in which the miner must find a nonce (number that can only be used once) to a string of characters through trial and error. A hash is formed with the character string and the nonce. This hash must start with a certain number of zeros. Depending on how many zeros the hash starts with, the difficulty and thus also the duration of the calculation can be controlled.
The miner who finds the correct nonce determines the transactions of the new block and receives the associated transaction fees. In parallel, he receives a reward in the form of bitcoin.
Mining is almost as hopeless as finding a certain Lego piece in my son’s toy box.
For one thing, the “Difficulty” has increased exponentially. While it was about 1 at the beginning, it is now 25 trillion. It is adjusted approximately every 2 weeks.
In addition, miners receive less and less Bitcoin as a reward. In the past there were 50 Bitcoins waiting for the miner for a solved task, today only 6.25. Every 4 years the number is cut in half.
Don’t underestimate the cost of electricity! Your miner should be located in a country with low energy prices, such as Iceland, Russia or Norway. Germany is not a good idea.
There are numerous profitability calculators on the Internet, with which you can estimate in advance whether Bitcoin mining is worthwhile for you. Electricity price, hashing power of your hardware, power consumption and current Bitcoin price are part of the equation.
Small spoiler: as a private person, mining is no longer worthwhile.
3rd way: Earn money via Compass Mining
Bitcoin mining alone is unprofitable unless you live in Norway and use the miners to heat your cottage at the same time (this actually exists!). You’ll be more successful if you join forces with others. Compass Mining has something for that.
On Compass Mining you buy the necessary mining hardware and choose in which mining farm it should be located. After that, you search for the appropriate mining pool and receive Bitcoin directly to your wallet.
The well-known Bitcoin analyst Lyn Alden wrote a very good article about the opportunities and risks with Compass Mining.
Anyway, you should note: Bitcoin mining is an entrepreneurial activity. You can make a lot of money if the price goes up AND you are positioned to be profitable. As a long-term bitcoin investor, you always profit when the price goes up.
On top of that, earnings are taxed. In Germany, bitcoin price gains are tax-free after one year of holding.
If the Bitcoin price collapses, Compass Mining can no longer pay the expensive energy bills: The risk increases that you won’t get your invested money back.
One positive effect of Compass Mining is that it decentralizes Bitcoin. The more people participating in the mining process, the more robust the network.
Note Bitcoin mining in the cloud
You will always find offers on the net to mine via the cloud. This way, you supposedly save on expensive hardware and the necessary know-how. All you need is some startup capital. And a keen awareness of risk.
There are more scammers out there than Aga toads in Australia.
Therefore, I would refrain from doing this.
4th way: earn interest with Bitcoin Lending.
Even though “lending” and “staking” are often confused in connection with Bitcoin: Bitcoin’s blockchain protocol does not allow proof-of-stake, only proof-of-work. So you can’t “stake” Bitcoins, you can only “lend” them.
So what does Bitcoin lending mean?
“Bitcoin lending” replicates a classic financial product: lending! You lend your Bitcoin to third parties for interest through an online trading place like Bitvavo*.
Using the code DB327EB443 or the link above, the first 100 customers will be credited 15 EUR.
Similar to the time deposit account, here you make your Bitcoins work for you. Up to 2% interest per year is possible. The payout is weekly.
However, you are taking high risks. Usually there is no deposit insurance – only Bitvavo offers an account guarantee of 100,000 euros under certain conditions. Otherwise, if an online marketplace is hacked, your lent Bitcoins are gone. You can learn more about this in this article.
The safest way is to store them at your place, offline, in a cold wallet. You can find instructions on how to buy Bitcoin securely here.
5th way: betting on the bitcoin price with ETFs.
In October 2021, the first official bitcoin ETF launched in the US. This was the reason for many investors to invest in Bitcoin for the first time. The exchange rate has risen neatly.
There are no Bitcoin ETFs available in Germany. It contradicts the UCITS Directive of the EU that an ETF is based on only one asset.
As an aside, bitcoin ETFs from the US are futures, i.e. leveraged products. These do not track the price 1:1. But rather multiply the profits with a credit, but also the losses.
Such a similar financial product for Bitcoins is also available in Germany: CFDs (Contracts for Difference).
In doing so, you should really know what you are doing. CFDs are not for newbies. More than 70% of small investors lose money with them.
6th Way: Replicating the Bitcoin Price with ETNs.
German investors can invest in ETNs (Exchange Traded Notes) that replicate Bitcoin prices.
These are bearer bonds. So you take an issuer risk – unlike with conventional ETFs in Germany. Under certain circumstances, a total loss is possible. The costs for ETNs vary from 0.95% to 2% per year and are therefore quite expensive. On the other hand, this option is more convenient.
Scalable Capital* currently offers 7 different bitcoin ETNs. You could even short Bitcoins (that is, bet on falling prices). With some ETNs, it is possible to transfer the collateralized bitcoins to your cold wallet.
You should make sure that your Bitcoin ETN is 100% collateralized with Bitcoin. The fund institution must deposit the values 1 to 1. Specific examples include the 21Shares Bitcoin ETP (WKN A2T64E) or the VanEck Bitcoin ETN (WKN A28M8D).
Blockchain analytics firm “Glassnode” estimates the number of lost Bitcoin in independent custody to be around three million. That represents nearly 15% of the Bitcoin ever in circulation.
You know the saying, “Not your keys, not your coins”? For this reason, I still keep my Bitcoins in a cold wallet.
7th way: buy shares of companies that make money with Bitcoin
Another option is to buy stocks or themed ETFs of companies that make money with Bitcoin. Examples include stock-listed exchanges like Coinbase or chip producers like NVIDIA. You could invest in mining companies to leverage the bitcoin price if they perform well (as you can with gold mining stocks). Or you could bet on companies that hold some of their cash reserves in bitcoin, like Microstrategy or Tesla.
This goes against a broadly diversified ETF world portfolio. Moreover, the performance of a Bitcoin company is not only dependent on the Bitcoin price, but also on management or external effects.
However, a weak correlation of different assets is desirable for a balanced asset allocation.
Pay attention to taxes on bitcoin
For price gains and cryptolending income, the matter is clear: From a holding period of one year, you no longer have to pay tax on the gains in Germany. When selling for less than one year, personal income tax is payable from an exemption limit of 600 euros. Profits can be offset against losses in the same year. Here Bitcoin is taxed like a store of value, similar to gold.
It is best to keep receipts of your order to prove that you have held Bitcoins for more than one year.
A sale is not only the withdrawal, but also paying with Bitcoin or exchanging it for another cryptocurrency.
There are different tax rules for income via mining. Mining can be private asset management or commercial activity, depending on the individual case. It’s quite complex.
For bitcoin ETNs, capital gains tax applies. Profits above the annual tax-free amount of 801 euros are therefore taxed at 25%. If applicable, church tax and soli are added. You are thus at a tax disadvantage in Germany compared to a direct investment in Bitcoin.
The easiest way is to buy Bitcoin via an exchange and hold it for a long time. This way you can earn money in the long run and avoid taxes. It is best to store your Bitcoins safely in a cold wallet.
All other ways to earn money with Bitcoin are either riskier, more expensive or you need a basic technical understanding.
Also, filing taxes won’t be easier if you trade, mine, and lend Bitcoin frequently.