There are two ways to make money out of the rise of cryptocurrencies.

One way is to buy a store of digital currencies. Hold onto them in the same way that you'd hold onto a government bond. When you need the money, sell them and hope that between the purchase and the sale the price has risen--and has risen higher than an alternative asset might have done.

The other way is to trade. You watch the markets closely. You look for patterns in daily movements. You try to figure out where each coin's ceiling and floor lies, and you time your purchases and sales to take advantage of a coin's rises and falls.

I use the first way. In the language of a cryptocurrencies, I'm a hodler not a trader.

There are a couple of reasons for that.

The first is that trading is hard! You need to understand technical analysis and the different ways of tracking graphs. Some people love it. Day traders can make good livings drawing lines across charts and placing bets on the results. But many of them--people who know a lot more about trading than I do--also lose a lot of money.

I suspect I'd lose money trading in that way. I wouldn't enjoy it, and more importantly, I don't need to do it because I'm optimistic about the long term direction of cryptocurrencies. The second reason that I'm a hodler is that I believe that cryptocurrencies, and the blockchain that underpins them, have a future. I don't know what that future is. I don't know exactly how they're going to be used or for what purpose. But I'm confident that they will be. So I buy and I hold, and so far at least, I've been lucky enough to watch their values rise. (They've also fallen, but I'm still in a much better position than I was when I started.)

It's also important to note though that I'm a "crypto hodler" not just a Bitcoin hodler. I hold a basket of coins. Bitcoin currently dominates the cryptocurrency markets. It's still worth about half the total value of the cryptocurrency market. But who knows what's going to happen in the future? At one point Alta Vista dominated Web search until a couple of students at Stanford came up with a better option.

The same may happen to Bitcoin. So like any good investor, I hedge. I buy coins that I think have a good use and have been created by companies that appear to be solving real problems. I treat them like penny stocks, buying cheap and holding on in the hope that one day some of them may turn out to be big. Maybe one of them will even replace Bitcoin one day.

Of course, you don't have to do any of this. How you invest in cryptocurrencies--and whether you invest in cryptocurrencies--is entirely up to you. But I think there's a way to create wealth out of the rise of the blockchain and I'm putting money where my mouth is.

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Published on: Aug 21, 2018
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