Passive income is earned when a person is not actively engaged in business endeavors. Generally, all you need to do is invest your money or digital assets in a certain crypto investing strategy or platform and wait for it to produce a profit. Earnings are sometimes set and predictable. In others, a number of uncontrollable variables may come into play.
A common method for people to get a return in crypto with little to no participation is via purchasing and holding crypto — a practice dubbed “HODLing” in the industry. This indicates that an investor is willing to buy a digital asset with the expectation that its value will increase substantially in the future. These investors are willing to go the distance, since this long-term approach may require them to hold holdings for up to five years. An investor does not need to be proactive in the crypto market throughout the life of this investment. They need simply to purchase the digital asset and keep it in a safe wallet — ideally one that is not in their possession.
A wallet is a hardware or software device or application that stores a unique key (private key) that grants access to your coins. The non-custodial versions enable you to keep the private key on your own devices, such as a computer, mobile phone, or purpose-built wallet. This gives you full control of your private keys and, eventually, your digital assets. In contrast, a custodial wallet is one in which a third party manages your private keys.
However, merely purchasing and keeping a crypto asset for an extended period of time does not ensure success. Indeed, it is quite conceivable that you may lose money. As such, HODLing cryptocurrency solely cannot be called a truly passive income source.
Methods for generating passive cryptocurrency revenue
Staking through proof-of-stake (PoS)
Proof-of-stake is a kind of consensus mechanism for blockchains that enables dispersed network members to agree on fresh data entering the blockchain. Notably, blockchains allow open and decentralized networks in which members participate in governance and transaction validation procedures. This is important because a community-centered strategy obviates the necessity for central authorities such as banks. Typically, blockchains choose participants at random, raise them to the position of validators, and compensate them for their work.
The mechanisms used to choose validators differ per blockchain. Certain blockchain networks require users to deposit or commit funds to the network. The blockchain then chooses validators from a pool of users who have staked a certain amount of the blockchain’s native digital asset. Validators receive interest on their staked money in exchange for contributing to the network’s authenticity. This method of validation is referred to as proof-of-stake. It enables holders (those in it for the long term) to earn passive income.
Recognizing that transaction validation may be technically challenging, you may want to consider PoS blockchains, which enable you to delegate your stakes to other participants willing to take on the technical constraints of staking. As expected, validators get a somewhat larger payment than delegators. Several Proof-of-Stake blockchains to consider include the following:
- Cardano
- Ethereum version 2.0
- Polkadot
- Solana
Additionally, you may use one of the many staking services accessible today. You may deposit a portion of the digital assets needed by the blockchain using these services. For example, to become a validator on the Ethereum 2.0 network, you must typically deposit a minimum of 32 ETH. However, using a third-party Ethereum staking service, you may start earning interest with as low as 5 ETH.
Accounts for digital assets that earn interest
Holders may earn fixed income on their idle digital assets by using interest-bearing crypto accounts. Consider this like investing in an interest-bearing bank account. The main distinction is that this service exclusively accepts bitcoin deposits. Rather than storing digital assets in wallets, you may deposit them in these accounts and earn daily, weekly, monthly, or annual interest based on preset rates. Among the cryptocurrency service companies that provide such goods are the following:
- Celsius Nexo Network
- SwissBorg\sBlockFi\sLending
Lending has grown in popularity in both the centralized and decentralized sectors of the crypto economy. As an investor, you have the option of lending your digital assets to borrowers in exchange for the opportunity to earn income. There are four primary financing methods available to you:
Peer-to-peer lending
These lending platforms provide systems that allow users to establish their own conditions, choose the amount they want to lend, and the rate of interest they wish to earn on loans. Similar to how P2P (peer-to-peer) trade systems connect buyers and sellers, the platform connects lenders and borrowers. Such lending platforms provide consumers with some control over crypto loans. You must, however, first deposit your digital asset in the loan platform’s custodial wallet.
Centralized lending:
With this approach, you depend entirely on third-party lending infrastructure. Interest rates and lock-up periods are both fixed in this case. As with peer-to-peer lending, you must first send your cryptocurrency to the lending platform in order to receive income.
Decentralized or Defi lending:
This approach enables users to conduct direct lending transactions on the blockchain. Unlike P2P and centralized lending methods, Defi lending does not require any middlemen. Rather than that, lenders and borrowers engage via programmable and self-executing contracts (also known as smart contracts), which determine interest rates autonomously and on a periodic basis.
Finally, you might lend your crypto assets to traders seeking to trade using borrowed money. These traders use borrowed money to magnify their trading position and then return the loans with interest. In this scenario, cryptocurrency exchanges do the majority of the job for you. All that is required is that you make your digital asset accessible.
Cloud Mining
Unlike the proof-of-stake mechanism discussed previously, some blockchains, such as Bitcoin, employ a more computationally intensive approach in which users must demonstrate their eligibility to become validators (more commonly referred to as miners) by competing against one another to solve extremely complex mathematical puzzles. This is referred to as crypto mining. Miners must invest in powerful computers and pay high energy costs because to the competitive nature of this consensus process.
Without a doubt, this endeavor is time-consuming and complex. As a result, investors often opt for a different method known as cloud mining. This allows you to compensate other parties to handle the technical aspects of cryptocurrency mining on your behalf. In essence, you pay a platform that provides these services a flat amount in exchange for renting or purchasing mining equipment from their mining facility. Following this initial payment, you may be required to pay a daily maintenance charge to the cloud mining service provider in order for them to assist you in managing your mining rigs.
As thrilling as this may seem, it has many dangers. Since cloud mining became extensively used, it has been a source of contention. Due to the distant location of this mining operation, there have been numerous instances of fraud. As a result, you should exercise caution when selecting this choice.
Dividend-earning tokens
Certain tokens allow holders to participate in a portion of the income generated by the business that issued them. Simply holding the token entitles you to a set portion of the company’s income. The amount of tokens you possess affects your portion of income. KuCoin Shares (KCS) are an example of this since investors get a daily portion of the transaction fees collected by the KuCoin blockchain asset market. The sum received is proportionate to the number of KCS tokens staked by each holder.
Yield farming
Yield farming is another way of generating passive cryptocurrency income that is decentralized, or Defi. This is feasible by the dynamic operations of decentralized exchanges, which are essentially trading platforms where users depend on the liquidity provided by smart contracts (programmable and self-executing computer contracts) and investors to complete transactions. Users do not compete with brokers or other traders in this environment. Rather than that, they trade against money placed by investors – referred to as liquidity providers – in so-called liquidity pools. In exchange, liquidity providers get a proportionate share of the pool’s trading fees to:
- Generate passive income via this method, you must first become a liquidity provider (LP) on a Defi exchange such as Uniswap, Aave, or PancakeSwap.
- Begin earning these fees, you must fund a liquidity pool with a specific ratio of two or more digital assets.
- Offer liquidity to an ETH/USDT pool, for example, you must deposit both ETH and USDT tokens.
After you deposit liquidity, the decentralized exchange will distribute LP tokens reflecting your part of the liquidity pool’s total money. You may then earn extra interest by staking these LP tokens on compatible decentralized lending services. This method enables you to earn two different rates of interest on a single deposit.
The passive income possibilities for crypto mentioned in this article are only a sampling of the many ways you may earn from your idle digital assets. Bear in mind that none of these possibilities are without risk. As a result, it is prudent to do your own research, obtain professional advice from a competent financial adviser, and ascertain which investment vehicles best fit your investing objectives.
To learn more about cryptocurrency, Please visit our blog section specifically for crypto enthusiasts.