Crypto Profits to Savings: A Strategic Approach

Since its inception over a decade ago, Bitcoin (BTC) has revolutionized the financial system and opened more investing opportunities. It also paved the way for the rise of other popular cryptocurrencies, such as Ethereum (ETH), Dogecoin (DOGE), and Binance (BNB). 

Today, the crypto market continues to expand despite questions and criticisms. With over 20,000 cryptocurrencies circulating, it has a market capitalization of $2.46T. 

As the market heats up amid a gradual economic recovery, crypto prices rebound and may set new all-time highs. Volatility remains evident, but an influx of people who wish to create fortune or use cryptocurrencies for business transactions support the uptrend. 

More interestingly, we see its increasing predictability relative to inflation and interest rates. This new observation may counter the initial view of cryptocurrencies as an inflation hedge. 

Given these, the banking industry also joins the market to expand its niche. This allows customers, particularly high-yield savings account owners, to do crypto transactions more efficiently. 

Even better, they can diversify their savings and investing portfolio to generate higher profits and save them. Hence, we will cover crypto viability and the role of savings accounts in diversifying risks and returns. 

The Allure and Risk of Crypto Investments 

Over the years, more and more traders have entered the crypto market in hopes of high returns. Prices have risen substantially over the years. However, these returns come hand-in-hand with the inherent volatility of prices. Here, we will evaluate both sides of cryptocurrencies and highlight their growth prospects and importance in risk management. 

Cryptocurrency trading to derive high returns 

In 2021, the price of a single Bitcoin exceeded $60,000 for the first time since its inception. This breakthrough captured the attention of many traders amid the peaking digital and fintech revolution. The same goes for other cryptocurrencies, as they enjoyed price rallies. 

For believers, cryptocurrencies became a digital stepping stone to achieving decentralization while building wealth. Somehow, they fulfilled their promise of anonymity and transparency. 

We can’t blame them, as their patronization led to skyrocketing prices. As of 2023, 88,000 people had already become millionaires just by trading cryptocurrencies. While chances remain slim, the potential for price upside remains high as its value increases with the increasing difficulty of mining. 

More interestingly, many investors and traders enjoy crypto profits even though being a millionaire is difficult. Recent statistics show that 57% of traders have generated earnings in the past year. The same study shows that 74% of traders saw cryptocurrencies as profitable investments; 19% had breakeven outcomes, while 7% incurred losses. 

Likewise, another study shows that adding crypto investments to your portfolio increases your chances of earning. Data from April 2019 to March 2024 revealed that a traditional 60/40 investment led to 33.3% returns. It should not be surprising that crypto prices have increased by 113x and 19x after the previous two bull markets. In the past year, crypto prices have more than doubled. 

Take the table below as an example. We can see how the leading cryptocurrencies have changed relative to stocks. 

From these numbers, we can see that cryptocurrencies have risen substantially since 2017. In seven years, the average cryptocurrency rose by 1,000%, about eight times as much as the increase in stock prices. Returns are much higher in cryptocurrencies, making them more viable than stocks. 

Also, cryptocurrencies rise twice as much as stocks every year. Take Bitcoin, for example. It rose by 25% compared to the NASDAQ and S&P 500, which rose by only 14% and 11%, respectively.

Cryptocurrency volatility is risky 

The extreme volatility of cryptocurrencies is often the subject of criticism toward the market. Referring to the table above, we can see the high standard deviation of each cryptocurrency, which is at least five times higher than in stocks. This makes them a high-risk investment, requiring caution before entering. 

Also, cryptocurrencies are no longer strangers to bubbles and bursts. In December 2017, the price of BTC soared to $19,783.06. But a few days later, the price fell by 45%. The downtrend persisted despite some rebounds and hit the bottom at $5,500 in November 2018. 

It happened again in 2021 when the price of cryptocurrencies soared. Bitcoin broke $60,000 for the first time until it reached its new all-time high in November. But after a few weeks, price drops started. By June 2022, it was already below $20,000. The value dropped by over $40,000 in less than a year, showing that volatility can offset gains quickly. 

Cryptocurrencies and their increasing predictability 

Cryptocurrencies are often viewed as potential inflation hedges since prices are driven mainly by market sentiments, circulating volume, value mined, and demand. However, the changes in 2021 and 2022 revealed an important idea. 

While the price drop in 2021 and 2022 appeared discouraging for some, price changes appeared to be consistent with inflation. We can confirm this as prices moved sideways in the second half of 2022 before rebounding in 2023. There were some pullbacks recently, but the uptrend remains evident. It bounced again in May and June as inflation continued to decelerate. 

As spending normalizes, we can expect inflation to stabilize. If it persists, the Fed may proceed with its expansionary monetary policy. This can support the further increase in crypto prices. 

Importance of Portfolio Diversification for Crypto Investors  

The cryptocurrency market provides many earning opportunities for investors due to its impressive returns. 

However, volatility poses high risks, which can deplete capital during economic disturbances. For example, if you bought Bitcoins in 2021, you would have lost a lot in 2022. Although long-term patterns have been attractive, price swings should never be discounted. 

Given this, it is essential to have a balanced portfolio to ensure financial stability and reduce risk. The table below shows the returns derived from NASDAQ and S&P 500 stocks. While they are lower than in cryptocurrencies, their price volatility is more manageable. 

If we compute their Sharpe Ratio, we will get the following values: 

 

Stocks, in general, are optimal choices. Their returns and standard deviation are decent and manageable. However, adding cryptocurrencies can increase your chances of deriving gains, although at a higher risk. 

To confirm this, we can make an actual investment allocation between cryptocurrencies and stocks. Suppose you plan to allocate your portfolio between Ethereum (ETH) and S&P 500 (SPX). 

 

 

Historical Prices taken from Yahoo Finance 

Computed by the Author 

Using the Sharpe Ratio, we can assess every percentage allocation to each investment. We can see that allocating 80% of your capital to stocks and 20% to ETH will optimize risk-return management. Given the Sharpe ratio, it has the most balanced returns and volatility. We can confirm this using the Capital Allocation Line, or the orange line in the graph. It is tangent to the third point, or the 80-20 allocation. 

High-Yield Savings Accounts: A Safe Haven for Crypto Profits 

After generating gains from your portfolio, you may want to transfer it directly to your savings account. Thankfully, opening online savings accounts is straightforward today, as many traditional and digital-only banks enable online applications. 

You may choose to open high-yield savings accounts for a higher APY. Traditional savings accounts have an APY of 0.58%. But you can earn at least 4% in a high-yield savings account. So if you put your crypto gains of $2,000 in a high-yield account, you can earn about $80 after a year. 

High-yield savings accounts can also be accessed online and can offer higher APYs. Take SoFi’s online savings account, which has an APY of 4.6%. It also has a sign-up bonus of up to $300. Your savings will increase to $2,392 after a year. In five years, it will be $2,804. 

Key Takeaways 

Cryptocurrencies are becoming more appealing today for their attractive returns. But their volatility must be accounted for before putting all your money in the market. Diversifying your portfolio by adding other investments maximizes returns and minimizes risks. Having a high-yield savings account can give extra earnings.