In the crypto market, there are opportunities to generate incredibly profitable returns. However, frequent price fluctuations present several risks that can lead to sizable losses. As a result, extensive research and a substantial investment in time are required before making a profitable trade or investment. However, like many other investments, cryptocurrency offers the chance to earn a return through active trading and investment and by putting your assets to work to generate crypto passive income.
Passive income refers to utilizing assets to generate income without active involvement. From lending to airdrops, there are several crypto passive income streams to explore for those looking to take a long-term approach to build wealth in the crypto market.
Understanding Crypto Passive Income
“HODLing” is a popular strategy investors use to make a return in crypto with little to no involvement. It refers to buying, holding, and storing crypto assets in a wallet for the long haul. However, buying and holding a crypto asset for a lengthy period does not ensure investors will profit. Additionally, this strategy merely entails holding onto the asset without using it to produce additional income. Therefore, solely “HODLing” crypto is not considered a passive income source.
The crypto industry is evolving and maturing at a rapid rate. This is demonstrated by institutional interest, user adoption, and the expansion of passive income applications in the cryptocurrency space. Cryptocurrency can be a valuable tool for generating passive income. The idea is comparable to compound interest, dividend reinvestment, or renting out investment properties in the traditional financial world.
Furthermore, Decentralized Finance (DeFi) has revolutionized avenues for passive income for crypto investors. Through smart contracts, DeFi platforms can automate complex financial transactions. They create a wide range of financial products and services that can generate passive income. Some of the most notable ways DeFi is revolutionizing passive income are through lending and borrowing platforms like MakerDAO, Compound, and Aave, yield farming platforms, and staking services. This article provides a useful starting point to learn more about DeFi as a revolutionary financial technology.
The Importance of Crypto Passive Income
During downturns, passive income returns can help offset losses from falling asset values. Crypto passive income can provide a source of returns that are not directly tied to the overall market performance. This is particularly useful during bear markets when asset prices are typically declining.
By diversifying the ways returns are generated, passive income is a way for investors to manage the risk of their crypto portfolio. Moreover, crypto passive income gives investors the chance to generate returns without having to sell their assets. This is especially helpful when the market is uncertain.
Additionally, taking advantage of passive income opportunities while the market is in a bearish phase positions investors for profitable returns once the market reverses course and enters a bullish phase. This strategy allows investors to protect their assets and capital while entering a bull market with a more extensive portfolio, thanks to the generated passive return. Read this guide for a more in-depth understanding of crypto bull and bear markets.
Methods to Earn Passive Income in Crypto
Staking is an excellent way to increase one’s crypto holdings with minimal effort. Crypto staking is comparable to a traditional interest-bearing savings account where an investor locks up their assets and, in exchange, earns rewards. Staking refers to holding and locking up a certain amount of a specific cryptocurrency in order to verify and validate transactions on a proof-of-stake (PoS) blockchain network. Ethereum (ETH), Solana (SOL), Cardano (ADA), and Cosmos (ATOM) are some examples of popular staking cryptocurrencies.
By participating in staking, cryptocurrency holders earn rewards for helping secure the network. The amount of reward is typically based on the amount of cryptocurrency staked and the network’s average staking rate. Accordingly, investors’ potential rewards increase as they stake more cryptocurrency on a network with a higher overall staking rate.
Staking contrasts with proof-of-work (PoW) networks like Bitcoin. PoW rewards are obtained through a process of mining that necessitates significant computational power and expensive hardware equipment. Apart from major centralized exchanges like Binance and Coinbase offering staking services, several DeFi platforms like Lido Finance and Ankr are lowering the entry barrier for investors looking to earn passive income through staking. DeFi staking platforms provide a trustless implementation for staking. In other words, users maintain complete custody and control over the assets they have staked rather than entrusting them to a third party.
Lending is the process by which investors lend their cryptocurrency to borrowers in return for interest. When one party needs more money than they have on hand, another party (typically a bank) lends it to them while charging interest. This is fundamentally how traditional lending operates.
However, in the crypto sector, loans are not handled by banks. Instead, investors can lend or borrow cryptocurrencies through DeFi platforms like Aave or Compound. Investors can also use centralized finance (CeFi) platforms like Nexo, Binance, and Coinbase.
The average interest rate on savings accounts in the United States is 0.22% annual percentage yield (APY), according to data from Bankrate. However, interest rates in cryptocurrency are much more profitable and typically range from 1% to 20% APY. The percentages vary depending on the crypto asset lent and whether a DeFi or CeFi platform is used.
- Centralized crypto lenders: Investors can lend their cryptocurrency assets to centralized lending platforms, which are private companies, in exchange for interest. Large centralized exchanges (CEXs) and other private businesses that specialize in crypto lending are examples of centralized lenders. Investors who use centralized lending rely on the lending infrastructure of a third-party platform. Interest rates and lock-up times are set in this scenario.
- Decentralized crypto lenders: Using lending services directly through the blockchain is known as decentralized lending or DeFi lending. DeFi lending does not use intermediaries, in contrast to centralized lending. Instead, programmable open-source smart contracts that automate interest rates and lending are used to interact between lenders and borrowers.
Risks associated with Lending
Although cryptocurrency lending provides lucrative interest on an asset that would otherwise be idle, there are some risks that investors need to be aware of. The recent high-profile bankruptcies of lending platforms like Celsius and BlockFi have highlighted the risks involved in keeping assets on centralized platforms.
Moreover, since they operate exclusively online, CeFi and DeFi lending services are prime targets for hacking and theft. The level of risk increases because cryptocurrency lending remains largely unregulated. This means a regulatory body is lacking to help recoup lost funds.
As a result, it is essential to thoroughly research the chosen platform before lending any cryptocurrency. This entails looking into the platform’s track record, experience in the cryptocurrency industry, the platform’s security measures, assessment of its liquidity, examination of its terms of service and lending agreements, and whether it has undergone an audit by a reputable third party.
3. Yield Farming
As of the time of this writing, DeFi has $45.22 billion in crypto assets locked up, according to DefiLlama. The rewarding passive income strategy known as yield farming or liquidity mining, exclusive to DeFi, has contributed to some of this industry’s exponential growth. However, this strategy of generating income necessitates a thorough knowledge of DeFi protocols. This yield-generating technique is therefore more complicated than the others on this list.
Yield farming is made possible by the distinctive operations of decentralized exchanges or DEXes. DEXes are trading platforms that are among the most widely used crypto protocols. DEXes rely on a combination of smart contracts and investors for liquidity to enable peer-to-peer trades, as opposed to centralized exchanges that depend on conventional order books of buyers and sellers to facilitate trades.
Users of DEXs interact with liquidity providers, also known as smart contract-based liquidity pools or collections of investor-deposited funds (LPs). These LPs, in turn, receive liquidity provider tokens from the DEX which correspond to their share of liquidity in the overall pool. LP tokens provide a return for investors as long as they hold them. This return is generated from the trading fees incurred from the pool. These LP tokens can then be staked on other DEXes for additional yield, creating two distinct streams of income from a single crypto deposit.
Therefore, this passive income strategy requires investors to assume the role of a liquidity provider in DEXes such as Uniswap or PancakeSwap. To qualify as an LP requires depositing a specified ratio of two or more crypto assets into a liquidity pool on the exchange. For example, investors must deposit both ETH and USDT into the pool to participate as an LP for an ETH/USDT pool.
12/ Passive income FROM crypto is vital. Yield farming during a bear market is optimal.
Farmers love down markets because they are:
• Accumulating more tokens at lower levels, thus
• When prices recover, they profit two-fold as they’re stacking tokens when prices are low.
— Miles Deutscher (@milesdeutscher) April 29, 2022
4. Cloud Mining
Unlike Proof of Stake mechanisms, blockchains like Bitcoin adopt a Proof of Work consensus mechanism. In this mechanism, validators (often referred to as miners) compete with one another to validate transactions by resolving extremely challenging mathematical puzzles. Crypto mining is a lucrative source of passive income. However, due to its competitiveness, a profitable crypto-mining operation necessitates technical expertise, expensive hardware, and high electricity costs to keep the hardware devices running.
Cloud mining offers an alternative and hands-off approach to the technical and capital-intensive approach of crypto mining. Cloud mining entails individuals participating in crypto mining without purchasing expensive hardware or maintaining its upkeep. This is done by investors paying a regular monthly or yearly fee to a third party or service provider for the opportunity to rent their mining equipment and resources. In exchange for the fee, the service provider uses the equipment the investors are renting to mine cryptocurrency and split the mining profits with them.
While cloud mining operations have advantages, potential risks must also be considered before investing. For instance, with its remote nature and as investors entrust a third-party company, the risk of fraud and scams in the cloud mining space has been controversial in the past. This was evidenced by the bitclub network Ponzi scheme.
Furthermore, the likelihood of profits is uncertain. Market turbulence has a significant impact on cloud mining profits. When a crypto value falls, mining that crypto can become less lucrative, and investors in cloud mining might see a decline in their payouts. Therefore, weighing the pros and cons while looking into reliable and profitable cloud mining service providers is crucial.
5. Airdrops and Forks
Earning passive income through airdrops and hard forks is unique to the crypto space. Both hard forks and airdrops aim to increase interest in a token and project recognition.
Airdrops involve the distribution of a project’s native crypto token or coin to its user community. It is essentially a crypto token giveaway. New projects use airdrops as a marketing tool to generate attention and interaction with the project. This is necessary due to immense competition in the crypto space.
Projects usually set specific criteria to be eligible for an airdrop, such as holding a particular cryptocurrency, participating in a social media campaign to garner engagement, or signing up for a mailing list. Airdrops are announced with the guidelines for participation on the project’s websites and social media platforms. Users rewarded with airdropped tokens can sell tokens for a potential profit or hold them with the possibility of a future price increase.
A hardfork is the creation of a new blockchain that coexists with the existing one. The 2017 Bitcoin hardfork that produced Bitcoin Cash is one notable hardfork. Hardforks are typically accompanied by the free distribution of the new blockchains’ tokens. Users of the original blockchain, upon which the fork was based, consequently receive the native tokens of the new chain. Usually, an equivalent amount of the newly forked cryptocurrency is credited to these users. Like airdrops, users can choose to hold these tokens with the prospect of a price appreciation in the future.
Future price appreciations are, however, not guaranteed. This passive income strategy is, therefore, not always dependable. Furthermore, phishing scams have previously targeted airdrops. Thus, due diligence on common cryptocurrency scams, researching a project’s fundamentals, and staying up to date on market sentiment surrounding it becomes imperative.
This article has alluded to a few ways to earn passive income in the crypto market. Investors should conduct their own research and risk management practices before investing because each opportunity has a unique set of risks and potential rewards. While some techniques, such as yield farming, are more complicated, passive income from more straightforward strategies, such as staking, serves as a gateway for newcomers to generate yield on their cryptocurrency assets.
As the use case of cryptocurrencies come to the fore and as the industry grows by leaps and bounds, the potential for creating generational wealth for early adopters and investors is plenty. Passive income ushered in by the revolutionary DeFi ecosystem further enhances wealth-generating possibilities.