There are two types of income that people can earn; active income and passive income. Every day, millions of people go to work to earn active income, effectively “exchanging” their time spent working for money. This is something most of us are most familiar with, and something that is difficult to increase, since to earn more, you need to spend more of your time. The opposite of this is generating passive income – where your income is not directly tied to the time or resources you spend. Establishing passive income is arguably the ultimate goal for those who want to achieve financial freedom and independence, or increase their monetary income without having to invest their time. The emergence of cryptocurrencies offers some interesting new opportunities for passive income.
Combining passive income with active income allows you to gain more free time and spend it with those who truly matter to you. Many people have already heard of the concept of passive income, but have not actually managed to establish a passive income stream for themselves. We hope this article will help you take the first step toward that goal and discover new opportunities for passive earnings in the world of cryptocurrencies.
The difference between passive and active income
Most career choices that come to people’s minds will depend on active income. Whether you generate active income as a doctor, farmer, firefighter, or teacher, every income is “active” in the sense that workers exchange their time for money. As the name suggests, this involves people actively moving or doing something in exchange for the financial benefit they receive at the end. Time is very valuable, and if you know how to use it wisely, it can also be your most beneficial asset on the path to financial freedom.
By comparison, most individuals who generate or have a high monetary income typically have multiple income streams. However, it must be understood that generating, for example, seven different active income streams is practically impossible. Instead, their method of increasing wealth and reducing working hours is achieved through passive income. Passive income is the opposite of active income, as people can earn money 24 hours a day without actively increasing their workload or having to actively work for it all that time.
Active income is therefore what you earn through your day-to-day work. Passive income, on the other hand, is something that can be built to generate additional income that does not require the same amount of time and energy as full-time work. Ideally, passive income can be cultivated over time so that it eventually generates a self-sustaining income on its own. There are hundreds of different ways to generate passive income. Traditionally, stocks or gold have been a fairly reliable source of passive income, as the value of these assets increases over time. More recently, the world of cryptocurrencies has also become lucrative and represents an accessible way to earn passive income. In this article, we will focus specifically on explaining the various ways to generate passive income with cryptocurrencies.
Trading
Although it may not seem like the most obvious method for generating passive income, with a strong understanding of markets and trends, trading cryptocurrencies can be a profitable (though risky) way to make your money work for you, rather than the other way around.
Trading depends on probability and market sentiment. The sentiment of market participants is reflected in the price of an individual asset, while the probability of a price change is what encourages many traders to press the “big green button”.
There are various options through which you can trade to generate passive income with cryptocurrencies. Most people associate trading with day trading, where people sit in front of screens all day monitoring the latest price movements. While the latter is not entirely inaccurate, there are other ways to learn how to generate passive income through trading in the world of cryptocurrencies. You might think that trading is not a form of passive income. However, there is a possibility that trading can work in your favor. Nevertheless, a solid understanding of both fundamental and technical analysis is crucial when trading cryptocurrencies.
Manual trading requires time-sensitive decision-making, responding to market fluctuations, and adapting to changing trends. This can be an excellent way to earn money for a disciplined investor with plenty of time. Those who do not want to spend many hours in front of screens every day may prefer to consider algorithmic trading instead.
Algorithmic trading (“algorithmic trading/’bot’ trading”) is a method by which you can automate your trading while you sleep or are at work – without being in front of a screen. By implementing an effective strategy, trading programs (“bots”) can be used to trade specific coins within a chosen time period. This may seem surprising if you are a newcomer to the industry, but you shouldn’t be intimidated by it.
Algorithmic trading programs (“trading bots”) are computer programs that analyze the exchange and automatically execute transactions without you being present. Algorithmic trading programs are a way to generate passive income with cryptocurrencies, as you can customize the program or algorithm and set your own parameters. You can decide when the program executes a buy or sell. You can program it according to your preferences, based on certain indicators, for specific exceptions – for example, if there is a sudden price drop or spike on the charts, when there is higher trading volume, etc.
There are some legitimate services available online that offer valid algorithmic programs for automated trading. Unfortunately, however, these are heavily outweighed by the large number of scams on the market offering fake algorithmic programs that promise, for example, to grow your investment from $500 to $350,000 in one week, or to increase your investment by several hundred percent in one month. However, that is not how it works. Algorithmic trading programs are programmed for the most probable outcome, and sometimes that outcome does not go in the anticipated direction. In these cases, you can lose money. The challenge is to gain more on average than you lose if you want to generate passive income this way. There is almost certainly no algorithmic program that can always guarantee winning outcomes.
Algorithmic trading is therefore trading where your desired sale or purchase of a currency is carried out by a program that trades according to your wishes/parameters that you have defined yourself. Algorithmic trading is the only income stream that requires a bit more initial effort and energy, but the returns can also be significantly greater.
Staking
Proof-of-stake (POS) has not only introduced a more efficient way of maintaining “consensus” in a decentralized system, but it also brings with it a new way for coin holders to earn a return – through staking.
Many exchanges offer staking on their platform. This allows users to earn passive income with cryptocurrencies without having to do much. Binance, for example, offers various types and methods of staking on their platform. Rates vary depending on the level of commitment the user wishes to take on. If you want to create a long-term savings account, you can lock up funds for a specific period in exchange for higher returns. Even if your coins are sitting idle on the exchange – meaning you are not trading with them – in some cases you may be able to earn a small amount of interest without any required lock-up period.
DeFi applications make it easy to generate passive income with cryptocurrencies. A huge number of cryptocurrencies now offer staking rewards, including Ethereum (via the Beacon Chain), Solana, Cardano, Avalanche, Terra, and the Polkadot network. However, some of them enforce a fixed minimum deposit and lock-up period, which can be a barrier for some users, especially beginners.
Nevertheless, once funds are staked (locked), returns are generated that are generally completely passive – requiring almost no monitoring or intervention. You may, however, want to regularly cash out your returns to protect yourself against price volatility, and possibly convert them into a stable cryptocurrency if that was not the currency in which you locked your funds. In that case, the earned funds will no longer represent any additional return.
How much can you earn? The return you receive typically depends on several factors: the amount of staked funds, any applicable fees, a variable rate of return, changes to the fixed rate of return due to market conditions, etc. In general, however, you can expect approximately 5–15% APY (Annual Percentage Yield).
What should you watch out for? Returns from staking are usually paid out daily in the same or a different coin from the one you stake (e.g., staked ETH can generate additional returns in ETH or in USDT). In some cases, depending on the provider’s protocols, you may also receive a combination of earned assets – in the same coin and in a different coin from the one staked. If the value of the coin you stake at the outset falls, there is a possibility that you will end up in a net negative balance in the equivalent fiat currency. The returns in this case do not cover the losses.
Digital asset interest accounts
Cryptocurrency holders can therefore take advantage of “interest-bearing” crypto accounts to earn fixed interest on their inactive digital assets. Think of it as depositing money into an interest-bearing bank account. The only difference is that this service supports cryptocurrencies only. Instead of keeping your digital assets in your wallets, you can deposit them into these accounts and receive daily, weekly, monthly, or annual earnings, depending on predetermined interest rates and conditions. Some centralized crypto service providers offering such products are:
- Binance (already mentioned);
- Nexo;
- Celsius network;
- SwissBorg;
- BlockFi;
- Yield app.
Holding (“hodling”)
“Hodl” is a term derived from a misspelling of the English word “hold” in the context of buying and holding a cryptocurrency for a long period. It is also one of the most overlooked ways to generate indirect passive income with cryptocurrencies, which we call holding or “hodl”. Although it sounds simple, few people manage to follow the straightforward strategy of buying at a low price and then waiting. However, over time, hodling has proven to be a profitable strategy for the vast majority of crypto investors.
Hodling is perhaps the simplest and most effective example of how to earn passive income with cryptocurrencies. However, while it seems straightforward, it can also be quite difficult from a psychological standpoint. Regularly and consistently buying the dips is a proven method for generating profit. In theory, it is quite simple – you buy when the value drops and sell when it rises. However, from a psychological perspective, it is difficult to buy when the market is falling, most often due to fear, and difficult to sell when the market is rising, most often due to greed. The crypto market can be very tempting due to its high returns. We must be aware that investing in cryptocurrencies is inherently risky, as losses can also be significant. It is always advisable to manage risks, conduct your own research, and invest only what you can afford to lose.
Lending
Lending has become one of the most popular crypto services in both the centralized and decentralized segments of the crypto industry. As an investor, you can lend your digital assets to borrowers for the opportunity to earn interest.
Investors can lend their crypto assets in several ways. In all cases, the idea is to lend crypto assets to someone else for a period of time in exchange for payment. The amount earned will depend on three factors:
• the total value of the loaned cryptocurrency;
• the duration of the loan;
• the interest rate.
Higher interest rates, longer loans, and larger loans can lead to greater interest income paid by borrowers. In some cases, those earning passive income this way can choose the terms of the loans they create. In others, a third party negotiates the terms in advance.
There are four main lending strategies you can choose from:
Peer-to-peer lending: Platforms offering such services provide systems that allow users to set their own terms, decide on the amount they wish to lend, and the interest they intend to generate from loans. The platform connects lenders with borrowers, similar to how peer-to-peer (P2P) trading platforms connect buyers and sellers. Such lending systems provide users with a degree of control when it comes to crypto lending. However, you must first deposit your digital asset into the lending platform’s custodial wallet.
Centralized lending: Centralized lending involves relying on lending infrastructure and terms set by a third party, usually a platform or centralized exchange. In this case, interest rates and lock-up periods will be predetermined. Users must deposit their cryptocurrencies onto the lending platform, lock up the funds, and then begin earning interest.
Decentralized or DeFi lending: This strategy allows users to perform lending services directly on the blockchain. Unlike P2P and centralized lending strategies, DeFi lending involves no intermediaries. Instead, lenders and borrowers interact with programmable, self-executing contracts (also known as smart contracts) that autonomously and periodically determine interest rates.
Margin lending: You can lend your crypto assets to traders who are interested in using those borrowed funds for trading. They also pay interest on the loans. These traders secure their trading position with the borrowed funds, with another currency that acts as collateral and is usually worth more than the borrowed amount. If the value of the borrowed currency falls and at some point is worth less than the collateral currency, they must at that point increase the collateral funds or return all borrowed funds at a loss.
Cloud mining
Mining cryptocurrencies with proof of work requires significant investment in computer hardware along with the necessary technical knowledge. Cloud mining contracts offer an alternative to this.
Instead of setting up a new mining device, people can simply “rent” hashing power from an established operation. In exchange for a certain sum of money, people can purchase cloud mining contracts that give them the right to a certain level of hash rate for a specific period of time. The contract owner receives new coins proportional to the size of the contract.
Warning: There are many cloud mining scams. For those interested in cloud mining, it is advisable to do as much research as possible and make sure that the company offering the contract is legitimate.
Dividend-earning tokens
Some tokens offer holders a share of the revenue of the company that issued them. All you need to do is hold the token, and you are automatically entitled to receive a certain percentage of the company’s revenue. The number of tokens you hold determines the share of revenue you receive. An example of this is KuCoin Shares (KCS), where holders receive a daily share of the transaction fees collected by the KuCoin blockchain asset exchange. The amount received is proportional to the quantity of KCS tokens staked by each holder.
Yield farming
The term “yield farming” became popular in 2020 and 2021 with the rise of decentralized exchanges that rely on smart contracts and liquidity provided by investors.
In yield farming, investors deposit tokens into a special smart contract called a liquidity pool. Those who provide liquidity in this way receive a share of the fees generated by traders who access the pool. Yield farming is one of the more complex options listed here and will require a great deal of additional research from those interested. However, it can also be one of the most profitable options for passive income from crypto assets.
Yield farming is therefore another decentralized, or DeFi, method of earning passive crypto income. It enables the dynamic operation of decentralized exchanges, which are essentially trading platforms where users rely on a combination of smart contracts (software-based, self-executing computer contracts) and investors for the liquidity needed to execute trades. Here, users do not trade against intermediaries or other traders. Instead, they trade against assets that investors – known as liquidity providers – have deposited into special smart contracts known as liquidity pools. Liquidity providers in turn receive a proportional amount of trading fees from the liquidity pool.
To start earning passive income through this system, you must first take on the role of a liquidity provider on a DeFi exchange such as Uniswap, Aave, or PancakeSwap. To start earning these fees, you must deposit a certain ratio of two or more digital assets into a liquidity pool. For example, if you want to provide liquidity for the ETH/USDT trading pair, you will need to deposit both ETH and USDT tokens. In certain cases, only one of the pair may be deposited to provide liquidity, depending on how the DeFi protocol operates.
Once you deposit liquidity assets, the decentralized exchange will transfer liquidity provider tokens representing your share of the total assets locked in the liquidity pool. These liquidity provider tokens can then be staked using supported decentralized lending platforms to earn additional interest. This strategy allows you to earn two separate interest rates from a single deposit.
Conclusion
Having read this article, you should have a better understanding of how you can earn passive income with cryptocurrencies. Only some of the many ways to generate additional profit from your idle digital assets have been presented here. Keep in mind that none of these opportunities are without risk. It is therefore advisable to conduct your own research and determine what best suits your investment goals.
If you are interested in learning more about cryptocurrencies, we invite you to read other articles on our website, which you can find in the Cryptocurrencies section. You can also join us at a free webinar where we will talk about how to earn with cryptocurrencies. You can register at this link: https://zannekrep.com/brezplacno20/.
We are not financial advisors. All information regarding cryptocurrencies is accepted at your own risk. Do your own research as well.
