Passive income

Passive income with crypto currencies and digital asset

While everybody is familiar with bitcoin HODL strategy (holding bitcoin or other cryptocurrency for long periods of time) or trading, to date there were not too many ways to receive income with your cryptocurrency. It is starting to change now, as many exchanges and crypto services start providing ways to generate income with your cryptocurrency.

Below I am listing most popular ways of making “passive income” with digital assets. But please remember that digital assets are very new and as a result are not studied well, may lack transparency or liquidity and, as are result are extremely risky. You can lose all of your money if crypto assets become banned by regulators or due to change in technology or any other significant event.

Generally, there are four broad fundamental ways of making income with cryptocurrencies:

Providing cryptocurrency liquidity for trading

As exchanges are providing margin trading for its traders, they need to get liquidity somewhere. To get this liquidity, many exchanges give you a possibility to fund margin traders on their platform and earn passive income. You need to check terms and conditions and assess risks before engaging in these activities though. Decentralized exchanges on the other hand need cryptocurrency pairs to provide liquidity to traders and offer participants to deposit cryptocurrency with them in exchange of sharing exchange trading fees .

Lending your cryptocurrency against a collateral (usually another cryptocurrency)

Some exchanges, wallets and other services lend cryptocurrency to its users against cryptocurrency collateral. You can provide liquidity to these providers and earn interest.

Participating in crypto mining pools

Many cryptocurrencies (such as Bitcoin) use Proof-of-Work (PoW) mechanism (also known as mining) to verify transactions on a blockchain and create new blocks. Miners compete with each other by solving a complex mathematical puzzle for a right to put transactions on a new block and receive a reward for new block generation. As puzzles are getting more and more complex, miners are investing heavily in sophisticated hardware (ASICs) to solve this puzzle first. As competition is heating up, miners are joining their efforts and forming mining pools to increase their chances of being first to solve the puzzle and get paid.
Essentially, by providing your resources to a mining pool you get a chance to share the reward for new block creation. You can participate in a pool via your exchange or by joining a mining pool / mining service.

Providing your cryptocurrency for crypto staking projects

Some cryptocurrencies use Proof of Stake (PoS) instead of proof of work to verify transactions and add transactions to the blockchain. In order to participate in a Proof of Stake process, participants have to stake cryptocurrency. In this case random participant (from those staking their cryptocurrency) gets selected to create a new block and get a reward for it. Participants with higher stakes have a higher probability of being selected, so again it makes sense to pool resources to win more blocks and rewards.
Rewards for staking vary, so you need to read specification of a particular cryptocurrency to understand what you can earn with it by staking. Some exchanges, wallets and other crypto services provide access to staking.

So how can you get access to these opportunities? Generally, you’ll have can access these as a product provided by your exchange, wallet or through a Decentralized Finance (DeFi) apps.

Crypto savings

Passive income with crypto savings

Now there are many providers who want to take deposits from interested investors on an easy access or term basis to provide these funds for crypto lending, trading liquidity or staking. These are positioned as “savings” that can earn you some interest in a deposited cryptocurrency. As in this case fund recipients don’t explain how exactly they are going to use your funds, it’s important to understand what exactly is being done with your crypto currency, what are the risks involved and what sort of protection these providers offer?

It’s important to check provider reputation, how long this service was in the business and if it is using blockchain than how reliable it is. Again, many exchanges and wallets offer savings accounts, so it may be an easy way to invest in cryptocurrencies, but make sure that your counter party is reliable and has adequate security in place.

Decentralized Finance (DeFi) yield farming

DeFi Yield farming

Alternatively, you can put your cryptocurrency into Decentralized Finance (DeFi) projects for Yield Farming. As you can see, liquidity is needed in many parts of crypto finance, and new tools emerged to provide liquidity in more innovative way. One of these ways is by locking your cryptocurrency in a particular Decentralized Finance project.

What is a Decentralized Finance project? It’s any project that allows peer-to-peer interaction between users without central intermediary, so something that has “trust” built-in the blockchain platform in the same way as cryptocurrency works. DeFi project are built on smart-contracts, so there is a rule that is coded on a blockchain and this rule execution is guaranteed by the blockchain logic. Beware that if rule is not coded properly, smart contract may not work as described, so caution is advised when investing in these projects.

One of the most popular ways to lock your money is to provide liquidity via exchanges, DeFi projects by connecting your crypto wallet or sometimes access these projects from your crypto wallet (some wallets allow this). It’s important to understand what exactly you are funding and how exactly pay-outs will be made before investing any money.

To sum it up, there is an opportunity to generate passive income with your cryptocurrency by providing liquidity, lending it to others or staking your coins. You can also access numerous DeFi projects and provide liquidity directly to them. In any case you need to understand that these investments come with a risk of losing all of your crypto coins and you need to understand what exactly particular investment means (e.g. what is the payoff, what security measures were implemented to protect you from cyber theft, is logic tested and works as expected etc.)

Below I am providing links to some services that provide ways to lend or stake your crypto coins (note that below affiliate links are included, you can read affiliate disclosure at the bottom of this page)

Binance offers crypto savings, crypto staking and locking crypto with DeFi, so is worth exploring.

You can also invest directly from your wallet (such as TrustWallet), read about how to choose best crypto wallet here