Who doesn’t like the idea of making money while you sleep? That's exactly what passive income allows you to do. Earning a passive income is one of the keys to financial freedom and freedom of time. But passive income is becoming less and less easy to find. For a long time, you didn't have to look far to get it. All you had to do was open a savings account at your bank. However, banks are offering ridiculously low or sometimes even negative interest rates on savings accounts.
Have you thought about cryptocurrency? Crypto and blockchain offer the ability to earn high passive income returns through crypto exchanges, crypto wallets, decentralized apps, and platforms that have been built in this space. The yields in the crypto space are often between 4% and 20%, getting you that much closer to living off of passive income.
In this article, I’ll cover different ways in which you can start earning a passive income in the cryptocurrency world.
What is passive income?
Passive income is a cash stream that comes in regularly which requires minimal to no effort to maintain. Dividends from stocks and income from rental properties are the most common causes of passive income. On the other hand, active income involves labor and time. The income you receive from being an employee or a business owner would be qualified as active income.
In the cryptocurrency space, earning a passive income can take many forms and the earnings can far exceed those offered in the traditional finance system. Instead of putting money on a savings account and getting 0.5% APY (annual percentage yield), the crypto space can offer far more lucrative options to earn a passive income and additional revenue stream to your active income from your main job. The yields are often in the 5% to 20% APY. And once these earnings start to compound, they can quickly snowball and help pay the rent or mortgage.
How you can earn passive income with cryptocurrencies
The cryptocurrency industry is always evolving, and new methods to earn passive income streams keep popping up. I’ll give an overview of the best methods to make your crypto holdings work for you and earn those juicy interest rates.
Crypto staking is the process of locking up crypto holdings to obtain rewards or earn interest. Some blockchains
use proof-of-stake (POS) as a consensus algorithm to keep the blockchain secure, unlike Bitcoin
which uses proof-of-work (POW) and is extremely energy-consuming. To keep POS blockchains secure, users lock their holdings with the network which will be used to validate transactions. Therefore the POS consensus algorithm is less resource-intensive and a more environmentally friendly alternative to mining.
The staked coins incentivize the maintenance of the network’s security through ownership. The more coins you lock up, the more the network rewards you with the same coin. Staking is a simple way to earn passive income, as the market pays you for holding cryptocurrencies for a certain period.
Usually, it involves setting up a crypto wallet where you can stake your coins, or depositing them on an exchange that facilitates staking and receiving the staking rewards. It’s a great way to increase your holdings with minimal effort.
Another form of generating passive income using crypto is through lending. Lending cryptos is similar to a traditional savings account. In traditional finance you deposit your money in a bank, the bank lends it to borrowers and you receive interest on what you deposited. In crypto, you lend your holdings to an exchange or other people and also receive interest on it, often quite higher than depositing your money in a bank.
There are many centralized and decentralized exchanges and platforms where you can lend your crypto holdings, lock up your funds for some time and later collect the payouts. It is ideal for long-term holders who want to increase their holdings with little effort required.
Although lending has become highly popular due to its above-average APY, it is far from risk-free. In the DeFi (decentralized finance) space, protocols can have bugs in them and be exploited. And crypto exchanges can also be the target of hacks, although these are becoming rarer as they’ve invested a lot in increased security. It is always advisable to go with trusted platforms. Newer or untested lending platforms may be more vulnerable to bugs or hacks that can hurt your investment.
The best ways to get started with lending are to either deposit your holdings on a crypto exchange that offers to lend, setting up an account with lending platforms like BlockFi, Celsius, or Nexo, or use DeFi applications like Compound or Aave.
Bitcoin mining is the most well-known way to earn more coins and can be a great way to generate a passive income with crypto. Sure, it takes a lot of hardware and computing power, enormous amounts of electricity, and some serious technical know-how.
The way it works is the processing units called Application-Specific Integrated Circuits (ASICs) solve complex mathematical equations to ensure the network is secure, and the owners are then rewarded with Bitcoin. The process of mining is responsible for introducing new coins into the existing circulating supply and is one of the key elements that allow cryptocurrencies to work as a peer-to-peer decentralized network, without the need for a third-party central authority.
While in the early days of Bitcoin it was possible to profitably mine with your personal computer, as the financial interest in Bitcoin grew, more miners joined, which in turn increased the difficulty to solve those equations. Today, only ASICs are used to profitably mine Bitcoin, and once these machines arrive on the market, they are often outdated and would require years to recoup the initial investment.
As such, Bitcoin mining has mostly become a corporate business rather than a viable source of passive income for an average individual.
On the other hand, mining coins with lower difficulty can still be a profitable venture for some. On these networks, using Graphics Processing Units (GPUs) can still be viable. Mining lesser-known coins carry a higher potential reward but comes with higher risk.
One of the innovations in DeFi is decentralized exchanges like Uniswap. They are what is called an automated market maker (AMM). AMMs allow digital currencies to be traded without the need for third-party permission and automatically by using liquidity pools instead of a traditional market of buyers and sellers.
On AMM-based decentralized exchanges, the traditional order book is replaced by liquidity pools that are pre-funded on-chain for both assets of the trading pair. The liquidity is provided by other users who also earn passive income on their deposits through trading fees based on the percentage of the liquidity pool that they provide.
When providing liquidity to a trading pair, for example, Ethereum (ETH)
and Chainlink (LINK), you would need to provide the same value of each cryptocurrency, and in turn, you would receive a portion of the fees from all transactions executed. In essence, you become a market maker, providing liquidity for other traders. But before providing liquidity, I suggest reading into “impermanent loss”, the biggest risk for providing liquidity, but beyond the scope of this article.
Instead of holding stocks that pay dividends, you can hold cryptocurrencies that pay dividends. These are mostly exchange-issued tokens, which provide users with discounts on trading fees and, in some cases, entitles them to a share of the platform’s profits. The more tokens you hold, the more passive income you can earn with them.
Some exchange-issued tokens which pay dividends include KuCoin Shares (KCS), Ascendex (BTMX), and Bibox tokens (BIX).
Some blockchains use master nodes in addition to miners to secure the network. A kind of mix between a proof-of-work and a proof-of-stake blockchain. Dash (DASH) was the first cryptocurrency to implement the masternode model into its protocol.
Masternodes have some similarities to the proof-of-stake consensus mechanism in that they require a stake of a certain amount of currency within the network, which can be quite costly to acquire. This is because the networks require masternode holders to also stake a significant amount of currency before allowing them to establish a masternode.
While cheaper than mining, masternodes are difficult to set up, costly, and require a good deal of work. That said, a masternode can be a way of earning passive income, as a share of all transaction fees is distributed to master-node operators.
An airdrop is a marketing stunt that involves sending coins or tokens to crypto wallet addresses to promote awareness of a new cryptocurrency. Small amounts of the new cryptocurrency are sent to the wallets of active members of the blockchain community for free or in return for a small service, such as retweeting a post or creating memes to increase the hype for that cryptocurrency.
To qualify for the airdrop, a recipient may need to hold a minimum quantity of the crypto coins in their wallet. Alternatively, they may need to perform a certain task, such as posting about the currency on a social media forum, connecting with a particular member of the blockchain project, or writing a blog post.
Uniswap’s UNI is an example of a token that did an airdrop for everyone who had used the exchange in the past. The distribution was unprecedented and unexpected, with all past users receiving 400 UNI tokens. At its height, the UNI token peaked at over $40, providing users of the platform with thousands of dollars worth of free crypto, just for participating.
Where you can earn passive income
To earn a passive income, you could use centralized exchanges like Coinbase
, or lending platforms such as BlockFi
, and Celsius
. They are quite easier to use than decentralized alternatives.
Stablecoins and the most common cryptocurrencies like BTC and ETH are accepted and the APY ranges between 4% and 20%.
Decentralized alternatives require a bit more work and understanding to get going, but the range of cryptocurrencies offered is wider and so are the interest rates. They are based on smart contracts, so it’s smart to pick the more reputable platforms as the chance of the smart contract
having bugs is smaller.
Compound and Aave are the most famous lending protocols out there. When providing liquidity, decentralized exchanges Uniswap, SushiSwap, and Pancake Swap are the biggest and offer APY between 4% and 100% on the more risky trading pairs.
Crypto investors can also hold their cryptocurrencies in their crypto wallets
, and take an active part in staking their coins. Wallets like Ledger, Trust Wallet, Exodus, and Atomic Wallet offer the opportunity of still being in the possession of your coins while staking them and earning the rewards. It’s one of the less risky options for staking your coins.
Crypto investors can also hold their cryptocurrencies in their crypto wallets, and take an active part in staking their coins. Wallets like Ledger, Trust Wallet, Exodus and Atomic Wallet offer the opportunity of still being in the possession of your coins, while staking them and earning the rewards. It’s one of the less risky options for staking your coins.
Pros and cons
- High interest: One of the biggest advantages the crypto industry has over traditional finance is the potential to passively earn dozens of times more than putting your money in a savings account.
- Diversification: One of the most important characteristics of any investment portfolio is its diversity. Portfolio diversification helps offset exposure in any single position and helps investors protect themselves against volatility in different sectors. Adding crypto to your portfolio will add great diversification to it.
- Speed: Just like anything that happens over the blockchain, it is vastly faster than traditional finance. It can be a matter of just minutes to lend or stake your holdings and start earning interest.
- Transparency: On blockchains, personal details are concealed but transaction details are immutable and public. If you want to know which transactions took place, when, just look. Everything is available for inspection.
- Technological risks: These involve hacks, bugs, and exploits. Locking up your tokens in a staking wallet or a smart contract always carries the risk of bugs. Usually, there are multiple choices available with various degrees of quality. It is imperative to research these choices before committing to one.
- Lockup periods: Some lending or staking methods require you to lock up your funds for a set amount of time. This makes your holdings effectively illiquid for that time, leaving you vulnerable to any event that may negatively impact the price of your asset.
- Crypto fluctuations: While the volatility in the crypto space has considerably decreased, it still can be very volatile. While you’ll still receive the interest, and your holdings will increase, the value of those holdings can go down if the crypto market tanks.
The bottom line
Before you start using any of the strategies listed above to earn a passive income, it is important to mention that none of them are risk-free. Mining, staking, and lending all carry varying degrees of risk that need to be taken into consideration.
Having said that, the ways to generate passive income in the crypto industry are growing and gaining popularity. As the products are getting more reliable and secure, they are becoming a valid option for a steady source of income.
Disclaimer: At Joy Wallet, our purpose is to help you and other readers who browse our website attain more financial clarity. We believe that armed with the right information, advice, tools, and tips, the average person can establish a more clear picture of her finances.
To that end, we work tirelessly to provide you with the most up-to-date, fairly reviewed, and accurate information. And while we always aim to provide you with the most reliable data available to us, we can never guarantee the correctness of our information since many financial and economic factors can invariably change.
Core to our brand thesis is the spirit of transparency and being honest with our readers about how we monetize our website. The short answer is that our brand partners compensate us if you become a prospect or customer of theirs (either as a lead, purchase, app installation, or some other form of a valuable event to them).
We exercise a very selective process to curate our partnerships and work with only the best-in-class brands that we believe can make a positive impact in your life. In fact, we reject working with brand partners that we wouldn’t use in our own daily lives.
In addition to our strict brand selection process, we work to ensure that 100% of the recommendations and advice we give are free of commercial bias. The reviews we provide on-site are based on countless hours of analysis by our team of writers and cannot be monetarily influenced by our partners.