passive income

Passive income with Bitcoin

Passive income with Bitcoin

You can read this post on general passive income with cryptocurrencies, but if you are interested specifically in making income from your bitcoin holdings, then read on.

Generally, as with other cryptocurrencies, main ways of making additional income with your bitcoin is to either participate in bitcoin mining pools, invest in bitcoin savings, provide liquidity to the exchange or participate in DeFi projects. Disclaimer – information in this post doesn’t represent any financial advise, please speak with a financial adviser before making any cryptocurrency investments. Links provided in this post are affiliate links, which – please see affiliate disclosure at the bottom of this page for more details.

Make income with Bitcoin mining

Mining is a process used by Bitcoin blockchain to verify transactions and add them to blocks to prove that transaction is legitimate. During this process miners are solving a mathematical puzzle, which gets more and more  complex over time and requires more and more computing power. First miner that solved the puzzle will get a Bitcoin reward for solving it and many people participate in bitcoin mining to earn additional money.

As these puzzles are getting more and more complex, miners decided to join mining pools to provide their resources in the pool and make it easier to receive this reward. Once the reward is received it is distributed across mining pool members in proportion to computing power provided by each miner.

While there are many mining pools available, some exchanges (like Binance) offer their users access to such a service. In order to get started you will need to acquire a mining machine, connect it to the mining pool and start earning your Bitcoins.

Alternatively, some services are offering mining contracts, where you just provide bitcoin or cash and these companies are providing mining resources directly to you. While this may look attractive and no hassle solution to participate in Bitcoin mining, you have a real risk of losing all invested money resource provider goes bust, so generally it’s safer to get your own mining resources and participate in the mining pool instead of giving your bitcoin to unknown companies.

Bitcoin savings

Bitcoin savings

Some exchanges may offer Bitcoin fixed-term or variable savings (Binance does) if you are looking for a savings product.

Another interesting product offered by Binance is dual-savings. Please note that it is a complex product with a complex pay-off, so may not be suitable for everyone.

Passive income from providing Bitcoin liquidity

Providing liquidity via on-chain staking means that tokens you are providing can be used by a smart-contract blockchain. Majority of established smart contract services run on Ethereum, so in order to participate in these you’ll have to either buy an ERC20 token (and bear a risk that it will depreciate against Bitcoin) or buy an ERC20 token that is pegged to Bitcoin e.g. WBTC (Wrapped Bitcoin). Please note that while WBTC is pegged to Bitcoin, it is not Bitcoin.

Providing liquidity via off-chain staking is another way to provide Bitcoin liquidity and earn interest. Off-chain here means that it is not supported by a smart contract and you trust the provider. Kraken offers off-chain Bitcoin staking and probably other exchanges and crypto services do this too.

Bitcoin projects

Participating in DeFi projects

DeFi stands for Decentralized finance and ways of earning with DeFi is limitless, as each service has its own use case.

Unfortunately, Bitcoin doesn’t have a native support for  smart contracts the same way as Ethereum has, so majority of DeFi apps are available for Ethereum and Ethereum-based tokens (ERC20).

One of the ways to get around it is to buy a WBTC (Wrapped Bitcoin), which is an ERC20 coin tethered to Bitcoin and then use it to access DeFi projects. You can read more about WBTC here.

If you still want to use use your Bitcoin in DeFi projects, you may search for Bitcoin DeFi apps, but while there are some developments in this space, I am not aware of any well established project in this space for now.

Again, you can participate in DeFi projects via your exchange or crypto wallet (like TrustWallet)

A word of caution

We have reviewed a number of ways how to make passive income with your bitcoin. Generally, there are two separate paths you can take: provide your bitcoins to a service and earn interest or exchange it to an ERC20 token and participate in DeFi projects.

If you directly provide Bitcoin (via savings or off-chain staking), you need to trust the counter party (exchange or crypto service) and be sure that you will get your Bitcoin and interest back. So it’s important to deal only with established organisations with good reputation – unfortunately there is no official list in the crypto space and you will have to decide for yourself if a particular service is reputable or not.

On another hand, smart contracts running on a distributed ledger offer sort of logical protection to your digital assets. However, you fully rely on algorithms / contract logic here, and of logic is untested or faulty you may also experience unexpected losses. Here it’s important to assess technical side of the smart contract, read review about a particular service and see how many users it is serving. The more users it serves the better, as user community will find flaws and drive its resolution.

Making income with your Bitcoin maybe lucrative, but also risky – so do your research before investing your hard-earned Bitcoins.

Posted by Crypto Novice in Crypto tokens
Passive income with crypto currencies and digital asset

Passive income with crypto currencies and digital asset

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

Posted by Crypto Novice in Crypto 101