Before we deal with the various ways of earning in the crypto world, we need to learn what cryptocurrencies actually are, how they work, and how they are created.
A cryptocurrency, or crypto for short, is a digital asset that can circulate without the need for a central monetary authority, such as a government or a bank. That is precisely why cryptocurrencies are decentralized. Instead, cryptocurrencies are created using cryptographic techniques that allow people to securely buy, sell, or trade them.
All cryptocurrencies (some of the most well-known: Bitcoin (BTC), Ethereum (ETH), XRP (XRP), Solana (SOL), Cardano (ADA) …) are supported by blockchain technology, which maintains a tamper-resistant record of transactions and tracks who owns a given amount of cryptocurrency. The creation of blockchains solved a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend them twice.
Individual units of cryptocurrency can be called coins or tokens, depending on how they are used. Some are intended as units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs, such as video games or financial products. To date, there are already more than 20,000 different cryptocurrencies, but we must be aware that a vast number of them were created as a quick profit scheme by various crypto scammers, who created them to collect money from people, after which the cryptocurrency was left with a value of zero.
One common way of creating cryptocurrencies is a process known as mining, which is used by various cryptocurrencies. Mining can be a highly energy-intensive process in which computers solve complex puzzles to verify the authenticity of transactions on the network. As a reward, the owners of these computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods for creating and distributing tokens, and many have a significantly smaller and more energy-efficient environmental impact.
For the vast majority of people, however, the easiest way to obtain cryptocurrency is to simply buy it on exchanges or crypto exchanges.
Cryptocurrencies can be staked and lent. These are two increasingly popular ways to earn passive income from your crypto assets, with yields of up to 20 percent APY (“Annual Percentage Yield,” or how many percent of profit you earn in one year) or even more. These percentages vary greatly depending on the current economic situation, crypto exchanges, cryptocurrencies, and so on. But every cryptocurrency and crypto exchange carries both risks and benefits. Which is better for earning depends on your risk tolerance and how quickly you want to make money.
The difference between staking and lending
Staking and lending both use cryptocurrencies to earn money, but they are two completely different methods of passive income. Staking cryptocurrency involves committing your assets to a blockchain, while lending cryptocurrency is a method where you lend your assets to borrowers and receive a certain percentage in return.
How cryptocurrency staking works
Staking is the process of depositing crypto assets and locking them up for a set period of time in exchange for returns. Staking crypto coins works similarly to investing money in a certificate of deposit (abbreviated as CD). But unlike a CD, staking rewards are paid out during the staking period, even though your assets are essentially untouchable until the staking period ends.
Staking periods can range from seven days to up to one year. Of course, once the period has elapsed, the process can be repeated. Centralized finance (CeFi) platforms offer yields of up to 20 percent APY or more, but they take custody of your crypto assets during the staking period.
Just for comparison, yields can reach up to 50 percent on decentralized finance (DeFi) platforms, which rely on smart contracts instead of a custodian. Of course, higher yields come with significantly greater risk.
Here are some general steps for staking on CeFi platforms such as BlockFi or Nexo:
Go to the desired crypto exchange that allows you to stake your cryptocurrencies, create an account, and then deposit fiat currency into your account.
Then, using your fiat currency in the account, purchase a proof of stake (PoS) coin you wish to invest in by evaluating its yields and other factors (popularity, current price, current global economic situation, etc.). The most popular PoS coins are BNB (Binance Coin), SOL (Solana), ADA (Cardano), AVAX (Avalanche), and DOT (Polkadot).
Then simply place the crypto coins in your wallet for the agreed time frame and earn a certain percentage in this way. At the end of the staking period, the crypto coins in your wallet are released and you can use them freely.
Each blockchain has different staking rules, but the rewards are fixed and paid out regularly. The biggest risk when staking cryptocurrencies is that they are untouchable during this period, which means that if the price of that cryptocurrency drops significantly in value, you can lose all the potential earnings you would have gained at a constant or rising price.
How to easily get started with cryptocurrency staking
Learn about cryptocurrencies that offer staking
If you want to start staking, you need to own a cryptocurrency with proof of stake. These are the only cryptocurrencies that can be staked. Fortunately, the proof of stake model is becoming increasingly popular, so we can expect more and more staking options in the future.
Choosing the right cryptocurrency is the most important part of the staking process. One of the biggest mistakes when choosing a cryptocurrency to stake is that people choose cryptocurrencies that offer the highest rewards. It is always tempting to buy when you see a cryptocurrency offering 100% or more APY, but many of these are extremely poor investments that can drop sharply in value.
Only buy cryptocurrencies if you are personally convinced that it is a good long-term investment and you have done your own research on it beforehand.
There are many proof of stake cryptocurrencies you can look into. Here are some of the most popular:
- Cardano (ADA),
- Solana (SOL),
- Polkadot (DOT),
- Terra (LUNA),
- Tezos (XTZ).
Ethereum (ETH) is also in the process of transitioning to the proof of stake model. It is not yet 100% complete, but it can be staked.
Purchase the proof of stake cryptocurrency of your choice
Now that you have done your research on your proof of stake cryptocurrency, it is time to buy it. This may seem like a fairly simple step, but you need to think about where you will make the purchase. One of the easiest and most popular options is to choose one of the exchanges that offer buying and selling of cryptocurrencies with a built-in staking feature.
The reason to take your time is that not every crypto exchange also offers cryptocurrency staking. Currently, most brokers and payment apps that sell cryptocurrencies do not offer staking. They also will not allow you to transfer the cryptocurrencies you purchase from their platforms.
So, let’s say you buy crypto on one of these platforms. You won’t be able to stake it on the platform or transfer it to another wallet or exchange where you can stake it. Therefore, you need to stick with exchanges that give you full control over your cryptocurrencies. Some of the best options include:
- Binance,
- Coinbase,
- Kraken.
Stake your cryptocurrencies
This part of the staking process depends on the cryptocurrencies you purchased and the crypto exchanges where you bought them.
If you used a crypto exchange that allows you to stake the cryptocurrency you purchased, you can do so from your digital wallet on that crypto exchange.
Another option with many cryptocurrencies is to use a staking pool. These pools consist of crypto funds that investors have pooled together in order to earn higher rewards. If you want to stake cryptocurrencies through a pool, you typically need to transfer your cryptocurrencies to a dedicated crypto wallet, from which you will later transfer your cryptocurrencies into the staking pool.
Staking cryptocurrencies is a fairly straightforward process, especially now that more exchanges offer it. Once you figure out what you want to buy, it is a good idea to research how staking works for that specific cryptocurrency. This will help you choose the staking method that suits you best and offers the most rewards.
How cryptocurrency lending works
Cryptocurrency lending typically involves three parties: the lender, the borrower, and a DeFi (decentralized finance) platform or crypto exchange. In most cases, the borrower must provide some collateral before they can borrow any cryptocurrencies. On most crypto exchanges, you can also use a flash loan without collateral. On the other side of the loan, you may have a smart contract that mints stablecoins or a platform that lends out other users’ funds. Lenders add their cryptocurrencies to a pool, which then manages the entire process and passes on a portion of the interest to them.
We know two types of loans:
- Flash loans: Flash loans allow you to borrow funds without any collateral requirements. As the name suggests, flash loans are loans that are issued and repaid in a single block. If the loan amount cannot be returned along with interest, the transaction is cancelled before it can be confirmed in a block. This essentially means that the loan was never executed, as it was not confirmed and thus added to the chain. Smart contracts oversee the entire process, so no human interaction is required. If any of these sub-transactions cannot be executed, the lender will cancel the loan before it is carried out. With this method, you can generate profit through flash loans without any risk to yourself.
- Secured loans: A secured loan gives the borrower more time to use their funds in exchange for providing collateral. MakerDAO is one example, as users can provide various cryptocurrencies to back their loans. Since cryptocurrency is volatile, you will likely have a low loan-to-value ratio (LTV), for example 50 percent. This figure means that your loan will only amount to half the value of your collateral. This difference allows for movement in the value of the collateral should it decrease. When your collateral falls below the value of the loan or some other value, the assets are sold or transferred to the lender. For example, a 50% LTV loan of $10,000 will require you to deposit $20,000 worth of Ethereum (ETH) as collateral. If the value drops below $20,000, you will need to add more funds. If it drops below $12,000, you will be liquidated and the lender will receive their funds back. When you take out a loan, you will mostly receive newly minted stablecoins (such as DAI) or cryptocurrencies that someone has lent. Lenders will deposit their funds into a smart contract, which can also lock their assets for a certain period of time. Once you have the funds, you can do whatever you want with them. However, you will need to top up your collateral as its price changes to ensure it is not liquidated. If your LTV ratio becomes too high, you may also have to pay penalties. The smart contract will manage the process, making it transparent and efficient. Upon repaying the loan and all interest owed, you will regain your collateral.
Advantages and disadvantages of crypto loans
Crypto loans have been widely used in the DeFi space for years. But despite their popularity, there are some drawbacks. Before you decide to experiment with lending or borrowing, learn about the advantages and disadvantages:
Advantages
1. Easily accessible capital. Crypto loans are available to anyone who can provide collateral or return funds in a flash loan. This quality makes them easier to obtain than a loan from a traditional financial institution, and no credit check is required.
2. Smart contracts manage the loans. A smart contract automates the entire process, making both lending and borrowing more efficient.
3. Easy passive income with little effort. HODLers (people who buy cryptocurrencies and hold them in their digital wallet for an extended period of time) can put their cryptocurrencies into a vault and start earning APY without having to manage the loan themselves.
Disadvantages
1. High liquidation risk relative to your collateral. Even with over-collateralized loans, cryptocurrency prices can suddenly drop and lead to liquidation.
2. Smart contracts can be vulnerable to attacks. Poorly written code and backdoor exploits can result in the loss of your loaned funds or collateral.
3. Borrowing and lending can increase your portfolio risk. Although diversifying your portfolio is a good idea, doing so through loans will add additional risks.
Don’t miss out!
If you are interested in learning more about cryptocurrencies themselves, we invite you to read other articles on our website, which can be found in the Cryptocurrencies section. You are also welcome to join us at a free webinar where we will discuss how to earn with cryptocurrencies. You can register at this link: https://zannekrep.com/brezplacno20/
