The cryptocurrency industry has created a new digital economy that provides individuals with a range of entirely new ways to earn passive income online.
In this guide, you will discover ten ways to earn passive income with cryptocurrencies that you can start today.
Staking PoS Coins
Proof-of-Stake (PoS) cryptocurrencies secure their blockchains by having users stake coins (locking or holding your coins in a crypto wallet) as opposed to contributing computing power to the network (as is the case in Proof-of-Work chains like Bitcoin). In exchange for securing the network and processing transactions through staking, holders are rewarded with newly minted cryptocurrency.
Staking PoS coins has, therefore, become a popular way to earn interest on cryptoasset holdings. Long-term “HODLers” are particularly fond of staking their coins as it can add potential returns to their investment portfolios.
Staking cryptocurrencies is an excellent way to earn passive income, but it does require a certain amount of technical expertise. It is essential to familiarize yourself with the process of staking for the particular cryptocurrency project you want to get involved with before investing time and money into the passive income opportunity.
Similar to staking Proof-of-Stake (PoS) cryptocurrencies, you could also run masternodes.
A masternode is a type of node in a blockchain network that performs particular functions. These nodes are generally established by dedicated community members and require an initial investment of staked coins to set up, among other requirements.
The privacy-focused digital currency DASH launched the first masternode to facilitate its PrivateSend feature. To set up a DASH masternode, a user has to “lock-up” 1,000 DASH (currently worth around $230,000). In return, a DASH masternode operator receives a return on investment of 6.45 percent and has a say in the project’s governance decisions.
While running a DASH masternode is too expensive for the average cryptocurrency investors, there are a large number of other masternodes that can be set up. According to Masternodes. Online, there are over 250 masternode coins. Leading altcoins, such as PIVX, ZCoin, and Horizen, for example, enable users to operate a masternode with a respectable ROI without initial investment in the six figures.
To operate a PIVX masternode, only 10,000 PIVX are required (which currently cost around $15,000), and holders can expect an over 10 percent yield per annum.
Interest-Bearing Crypto Accounts
A new form of generating passive income using crypto that has only arisen in the last few years is interest-bearing cryptocurrency accounts.
BlockFi, for example, enables digital asset holders to earn an annual yield of 6.2 percent on their holdings by storing with them in a so-called BlockFi Interest Account (BIA). Accepted cryptocurrencies include bitcoin (BTC) and ether (ETH) and a minimum deposit of 1 BTC, or 25 ETH is required. BlockFi uses the deposited funds to lend to institutional and corporate borrowers on an overcollateralized basis to ensure loan performance.
Celsius Network, a decentralized finance (DeFi) platform, shares up to 80% of its revenues with the Celsius community in the form of weekly interest payments of up to 13.30% APY on coins deposited on its platform.
Cryptocurrency interest accounts enable you to receive passive income in the form of regular interest payments while you “HODL” your coins.
Peer-to-Peer Bitcoin Lending
If you prefer a more hands-on approach and the potential to earn higher levels of interest, you could also engage in crypto lending as a way to generate passive income.
On crypto-powered peer-to-peer lending platforms, you can lend cryptocurrency to crypto businesses or professional crypto traders who are in need of funding.
On BTCPop, for example, you can lend digital assets on a peer-to-peer basis to other marketplace participants and earn interest. Unlike traditional lenders, BTCPop uses a reputation system as opposed to a credit score.
Of course, lending cryptocurrency carries risk as the borrower could default on your loan. Hence, it is essential to diversify your crypto loan portfolio to a number of loans and look at each borrower in detail before handing over your coins.
If you are comfortable with the concept and the risk profile of peer-to-peer lending, platforms like BTCPop provide an excellent passive income opportunity for crypto holders.
Lending to Margin Traders
If peer-to-peer loans are a little too risky for your personal risk preference, you could also lend cryptocurrency to margin traders on leading digital asset exchanges such as Bitfinex and Poloniex.
On Bitfinex, for example, you can lend both fiat and cryptocurrency to margin traders who are borrowing to fund their leveraged trades. In exchange for lending to margin traders, you will earn daily interest. The average daily funding rate for BTC, for example, stood at 0.003537 percent at the time of writing. Accumulated over several weeks, this compounds to a substantial annualized yield for lenders.
Lending to margin lenders on exchanges is, therefore, an excellent way to earn passive income using cryptocurrency. However, it is important to note that there is a risk of storing crypto assets on exchanges as they are prime targets for hackers, which Bitfinex’s hack in 2016, for example, has taught us. Hence, lending to margin traders is by all means not risk-free.
Arguably, the most known and perhaps also the most controversial method of earning passive income with cryptocurrencies is through so-called “cloud mining.”
Cloud mining refers to the renting of digital currency mining hardware at specialized mining farms to enable individuals to receive regular cryptocurrency mining income without having to own and maintain mining hardware. In exchange for providing this service, cloud mining operators, such as Genesis Mining or HashNest, charge a daily maintenance fee on their cloud mining contracts.
While cloud mining may sound like the ultimate passive income solution for cryptocurrency users, it is essential to note that historically investors have been better off buying and holding digital assets than investing in cloud mining contracts. The payback period of cloud mining can take well over a year, and there is a risk that during that time, the value of the coin could drop below a point where it is no longer profitable to mine. At this point, the cloud mining contract is usually canceled by the operator.
While cloud mining provides a convenient passive income opportunity for cryptocurrency investors, it comes with a substantial amount of risk due to fluctuating crypto prices and mining difficulties.
Additionally, the cloud mining market has been plagued by a large number of scams. Hence, investors need to conduct thorough research on a cloud mining service provider before investing.
Running a Lightning Network Node
Another exciting way that you can earn passive income with crypto is by running a Lightning Network node.
The Lightning Network (LN) is a second-layer technology that has the ability to amplify the number of transactions while keeping the fees low. As an off-chain payments network, it means that transactions can be handled independently without having to be processed by the blockchain. Only the starting and ending balances are recorded on-chain.
Over the last few years, cryptocurrency adoption has been on the rise. And one of the most constantly asked questions is whether cryptocurrencies such as Bitcoin will be able to handle the millions of transactions done daily. The simple answer is yes, via second-layer solutions like the Lightning Network.
What’s more, LN users can earn crypto passive income by running a Lightning node. With a Lightning node, users can create Lightning payment channels that can be utilized by other users to process payments over the Lightning Network. This way, users can receive the transaction fees for the payments they process via their channels.
Running a Lightning node might be difficult for non-technical bitcoin holders. Moreover, one should not expect to become wealthy for running a Lightning Network Node as the rewards are dependent on its adoption.
Another relatively new form of generating passive income using crypto is through DeFi lending.
DeFi is an ecosystem of blockchain technology-based financial applications that function without a central administration or third-party intervention. Unlike on centralized peer-to-peer lending platforms, like BTCPop, DeFi lending occurs on an autonomous protocol powered by smart contracts.
Today, the Total Value Locked (TVL) in DeFi protocols stands at $45.01 billion, according to Defi Pulse.
Because DeFi is permissionless, transparent, and open-source, DeFi lending has become very popular. DeFi lending is where crypto lending platforms such as Compound or Aave provide crypto loans with zero intermediaries allowing users to list their crypto coins for lending purposes on the platform. This way, borrowers can directly take loans via the decentralized platform, and the lender is able to earn interest on their coins.
On Compound, for example, token holders have voting rights over things such as technical upgrades, protocol upgrades, and decisions to integrate new assets on the platform thanks to the COMP governance token. However, what’s perhaps more interesting to crypto investors is that depositing funds in a lending pool typically means earning a higher APY than in a traditional bank account or money market fund.
Although DeFi lending has become highly popular due to its above-average APY, it is far from risk-free. Protocol hacks on less established DeFi lending platforms have been an almost weekly occurrence during the DeFi boom of 2020.
Besides lending, yield farming is another way that users can earn passive income in the DeFi markets.
Yield farming is the process of depositing digital assets in a trading or lending pool and then staking the protocol’s token to earn additional returns.
For example, if you are yield farming on the popular Binance Smart Chain-powered yield farm, PancakeSwap, you have to deposit two tokens into a trading pool to receive income from trading fees, and a pool token, called LP token, that you can then stake to earn yield farming returns paid out in the protocol’s token, called CAKE.
Yield farming is a very risky venture and not something for investors with a low-risk tolerance. It is, therefore, essential to conduct a bit more research before starting to yield farm as a passive income-generating activity.
Holding Dividend-Paying Tokens
Finally, one of the best and easiest ways to earn passive income in the crypto markets is to buy and hold dividend-paying tokens. Currently, the main type of digital tokens that pay a dividend is exchange-issued tokens.
A number of digital asset exchanges have issued their own tokens, which provide users with discounts on trading fees and, in some cases, entitles them to a share of the platform’s profits.
Examples of profit-sharing exchange tokens include:
- KuCoin Token (KCS), which pay holders 50 percent of KuCoin’s trading fees as dividends.
- Bibox Tokens (BIX), which pay holders 45 percent of Bibox’s net trading fee profits.
To earn dividends on these types of tokens, holders are usually required to hold them on the issuing exchange or stake them using an external wallet. The more tokens you hold, the more passive income you can earn with them.
There Is No “Free Lunch” in Crypto
Before you jump onto any of the above-listed crypto-powered passive income-earning opportunities, it is essential to highlight that none of them are risk-free.
Mining, staking, and lending all carry varying degrees of risk that need to be taken into consideration. Moreover, for newcomers to the cryptocurrency world, it is vital to know how to manage your cryptoasset holdings, including your private keys, before testing out any of the mentioned passive income avenues.
Having said that, once you feel comfortable with the concepts of mining, staking, and/or lending your coins, you can start earning passive income today.