The value of cryptocurrencies fluctuates a lot.
This implies they are riskier for investors than other asset types like equities or mutual funds. Passive investing is one technique to make a steady income from your crypto assets with reduced risk exposure. This form of investment is ideal for long-term holders who want to increase their crypto earnings with minimal effort.
Ironically, most crypto enthusiasts do this by hodling with the expectation that the price would go up in the future. However, with hodling you are earning income on your principal, but merely hope to profit from its value.
The crypto industry is rapidly evolving, with a growing number of investment products designed to meet the interests of various investors. There are now a plethora of investment products that investors can use to generate passive income without taking on the risk of dramatic price swings.
Let's take a look at the various ways one can earn passive income from cryptocurrencies, apart from hodling.
Staking is a process that involves committing your crypto assets to support a blockchain network and confirm transactions.
It involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. The investor receives interest for locking his cryptocurrency in the blockchain network.
Cryptocurrency accounts that pay interest are another method to make money with your coins. Instead of leaving your digital assets in wallets, you can put them to work by depositing them in an interest-bearing account.
This is similar to putting money into a high-interest (bank) account, but in this case, it is exchanges and wallets that manage and maintain such accounts.
Furthermore, interests in savings in crypto accounts are substantially higher than what traditional banks offer, which makes them a viable passive investment choice. The interest your principal accrues depends on the duration of your savings (30, 60, or 90 days).
You can also lend your cryptocurrencies and earn interest for doing so. There are many crypto platforms that allow you to lock your funds for a period of interest payments.
There are various forms of lending such as Peer-to-peer (P2P) lending, centralized lending, Decentralized (DeFi) lending, and margin lending. P2P lending, centralized lending, and margin lending are done through intermediaries.
Here, rather than lend directly to another user, the investor lends to an exchange, which in turn lends the cryptocurrency to a borrower. As such, the exchange acts as a middle man.
DeFi lending on the other hand allows users to lend cryptocurrencies directly on the exchange. The interest rate can either be fixed (set by the platform) or set by you based on the current market rate.
Some exchanges share their profits by distributing dividends among token holders. All you need to do is hold the token, and you are automatically eligible to receive a certain percentage of the company’s revenue. Just like stocks, tokens with dividend features may or may not carry voting rights.
The number of tokens you own determines the amount of dividends that an investor receives. Examples of cryptocurrencies that have dividend meaning tokens are KuCoin Shares (KCS) and Bibox (BIX). Holders of these coins receive a daily share of transaction fees accrued by the exchange.
Dividend payouts are made periodically, for example weekly or monthly, and may be dependent on the level of token ownership - (e.g. large holders receive payments before smaller ones).
Yield farming is another decentralized, or DeFi, method of earning passive crypto income.
They do not trade against brokers or other traders. Rather, they trade against funds deposited by investors – known as liquidity providers – into special smart contracts known as liquidity pools.
Yield farming is akin to arbitrage, which is a form of trading that exploits the differences in price between identical assets in two or more markets. Investors try to make a profit by exploiting the differences in assets and investment vehicles.
The trader buys the asset in one market and sells it in the other market at the same time in order to pocket the difference between the two prices. For example, a trader may borrow a loan from the exchange at an hourly rate of 0.001667%, and sell at the P2P market at a higher percentage.
If you have the finances, and your local municipal, city, or state is supportive, then you can consider mining cryptocurrencies. Mining is the process by which transactions between users are verified and added to the blockchain public ledger based on a consensus algorithm called Proof of Work (PoW).
It 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. It is through mining that new coins are introduced into the existing circulating supply in the blockchain network.
If you have a larger social media following, you can leverage your outreach and earn money through affiliate programs.
There are a plethora of crypto platforms that reward people for getting more users onto their platform. This is done through affiliate links, referrals, or by offering discounts to new users that are introduced to the platform by you.
However, if you want to earn consistent income from this type of passive investment, you should be seen as a credible source. This entails avoiding low-quality projects. As such, before you introduce your audience to any service, make sure you conduct your research.
Forks and airdrops are another viable way to earn passively through cryptocurrencies.
Earning through forks merely requires holding the forked coins at the date of the hard fork (usually determined by block height). If there are two or more competing chains after the fork, the holder will have a token balance on each one.
Airdrops are similar to forks, in that they only require ownership of a wallet address at the time of the airdrop.
Some exchanges will do airdrops for their users. Note that receiving an airdrop will never require the sharing of private keys. If you receive such a request during an airdrop, this is a telltale sign of a scam.
Apart from hodling and waiting for the value to appreciate, there are other alternative ways to generate passive income from your cryptocurrencies.
These opportunities are not available at the inception of the crypto industry but have risen to meet the various needs of investors. This is an obvious sign that the industry is maturing. The returns on these passive investments are higher than traditional banks, which makes also them a viable option for bargain hunters.
However, a caveat must be added here. Before you commit to any investment, make sure the exchange or wallet which you want to carry out the investment is legitimate and reliable.
As exchanges and wallets get more reliable and secure, passive investments would soon become a valid option for a steady source of income for savvy investors.
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