Passive income is an attractive prospect for most people. It is money that you earn with no effort (or very little effort at the most), typically after an upfront investment. The money continues to arrive after the setup work is finished, allowing the money to essentially work for you. It comes in many different forms, such as earning dividends from stocks, interest from savings accounts, or returns from bonds. If you own property and collect rent from tenants you’re also getting passive income, and if you sell e-books and online courses or are getting paid each month because of the royalties from a book you wrote, a song you recorded, or a photograph you licensed you’ll get a steady flow of money to your account too.
But what about cryptocurrencies? They’re known for their considerable fluctuations and shifts, with investors having to create strategies and look at metrics such as the fear and greed index before going ahead with a venture. Putting effort into seeing results is the standard in the crypto ecosystem, so is there any way that passive income could be earned from the coins?
Staking
You can earn passive income with cryptocurrencies but it isn’t an endeavor that is devoid of any risks. Instead of simply holding the coins and waiting for the prices to increase you’ll have to make your digital assets work for you instead. One of the ways to achieve this is through staking. This means that you’ll be locking up your assets on proof-of-stake blockchains and get them to verify transactions and keep the network secure. In return, you’ll get paid by the network on a regular basis. In a way, it is a similar mechanism to earning interest. You can do this through exchanges, crypto wallets, and staking pools.
Direct staking involves validator nodes and offers significant rewards but you’ll need to back it up with technical expertise and a lot of upfront capital. These characteristics make it unsuitable for a large number of investors. Delegated staking is another option that takes place through pooled validators, a much more accessible alternative. Liquid staking protocols are also issuing tradeable tokens to represent staked assets.
Running master nodes
When you’re running a master node you lock up a set amount of crypto as collateral in order to run a dedicated server that can support a network with tasks such as privacy, quick transactions, and voting. In return, you get passive income. The master nodes are specialized servers on a blockchain that perform additional jobs, being different from miners in that they neither create nor validate new blocks but they verify the transactions and keep an eye on things to maintain the proof-of-service.
They enable instant sends, private transactions, and network governance voting. The holders must be tech-savvy too, as they essentially become backbone operators for certain networks. Master node operators lock up significant amounts of cryptocurrencies and run strong servers to process the transactions. In return they receive continuous rewards from the network. Newer systems provide tiered entry points that require different collateral amounts as well.
All you need to do is purchase the coins, set up your wallet and sync it with the blockchain, configure the server through a VPS, and activate your wallet collateral transaction ID.
Yield Farming
Yield farming sees you depositing pairs of tokens into decentralized liquidity pools, helping people trade more smoothly while you get a portion of the trading fees. Advanced strategies integrate leverage as a means of boosting the returns but this takes very careful risk management as well as a robust understanding of the protocol mechanics involved. It is a DeFi strategy that is much more complex than staking. First of all, the latter is far more passive and associated with lower risks overall.
With yield farming you’ll be moving across several different protocols to get the highest fees or token incentives, meaning you’re taking on more moving parts. The risks include losses, since the price of the tokens you’re moving happens to shift dramatically compared to when you first added them you might end up with less total value than if you had just held them in your wallet. If there’s a flaw in the code of the protocol a hacker could exploit it, essentially wiping out the funds in one fell swoop. Some project creators could also abandon new platforms and disappear with all the liquidity.
However, for some investors who are not exactly risk-averse these potential hazards don’t sound all that frightening.
Crypto lending
Crypto lending allows you to deposit assets into a pool so that you can earn regular interest in the form of payments from the borrowers. The typical yields range from 4% to 8%. You start by depositing coins into a platform and the borrowers take out loans through locking their own cryptocurrencies as collateral. This protects them against defaults, but they also have to pay interest, a part of which is moved to your wallet.
Centralized finance companies like traditional crypto earn programs handle everything by offering simple interfaces and fixed rates but you must also trust them with the full custody of your coins. Decentralized finance solutions, on the other hand, make you the only custodian, with the rates being adjusted based on the live market demand. They utilize self-executing smart contracts on the blockchain to function.
The expected yields are often higher in the case of stablecoins due to the decreased volatility risks. However, major cryptocurrencies can bring you considerable returns as well, since you keep upside exposure should the price of the token go up. There are a few risks to keep in mind here too, such as the possibility of a CeFi going bankrupt or a DeFi getting hacked as both would result in your deposit being entirely lost.
Sudden and unexpected price crashes will devalue your collateral and the assets you hold, with some platforms freezing withdrawals during panics. Unlike regular savings accounts there’s no institution-backed insurance either.
In conclusion, earning passive income from cryptocurrencies is very much a doable thing, but you need to be knowledgeable about the market and the inherent systems powering crypto. If you’re not yet or believe that there’s plenty of room for improvement you can always start doing your research.
