There are numerous ways to earn passive income with cryptocurrency, such as staking, lending, and even yield farming. Like many other investments, crypto presents the opportunity to not only earn a return through trading cryptocurrency, but also by putting your investment to work to earn passive income.
Earning passive income generally means utilizing your assets, without active involvement, to generate additional dollars, and it can be done in the crypto space. The concept is the same as compounding interest or reinvesting dividends in the traditional financial world or earning rent on investment properties. Continue reading to learn how to earn passive crypto income.
Can You Generate Passive Income with Cryptocurrency?
It is possible to earn passive income with crypto, but keep in mind that any returns will depend on the method chosen and the amount of crypto you have to start with. Also, given the crypto market’s volatility, there’s no guarantee that any crypto strategies will deliver returns at all.
Still, those holding large amounts of crypto have several potential avenues to make money with crypto. However, it’s up to you to weigh the risks of trying to earn a yield on your crypto, and its potential rewards, versus the risk/reward ratio of simply holding for potential long-term gains.
12 Ways You Can Earn Passive Income With Crypto
Many of the potential ways to earn passive income with crypto involve lending and borrowing. Other methods, including running a node, mining, or staking coins, are more technical.
Here are twelve ways to earn passive income with different types of crypto.
1. Proof-of-Stake (PoS) Staking
Proof-of-stake is a consensus method used in blockchain technology that serves as an alternative to Bitcoin’s proof-of-work. PoS networks agree on which transactions are valid through a process that involves nodes locking up, or “staking,” large amounts of tokens for a time. Crypto staking replaces the role of mining in a proof-of-stake system, and is, effectively, like sticking your assets in a locked savings account in order to earn interest.
Instead of “miners” receiving new block rewards, like in a PoW system, “validators” receive new block rewards in PoS. Validators do not need expensive computer hardware, but they do need to have sufficient tokens to have a chance at adding the next block to the chain. Many networks require an initial investment before allowing staking.
2. Interest-Bearing Digital Asset Accounts
A number of service providers allow users to deposit their crypto and earn a yield on it, as they might with depositing cash in a savings account. To do so, simply open an account and deposit your crypto or stablecoins. You can do an internet search to find companies that provide these types of accounts.
In exchange for the deposit, users earn interest on crypto. Stablecoins like U.S. Dollar Coin (USDC) and Dai (DAI) often have the best interest rates. Note that there might be a “lockup period” involved, where users can’t access their funds for a fixed amount of time. And there are risks associated with these types of accounts, as they aren’t offered the same government protections as standard bank accounts.
3. Lending
There are several ways that investors can lend out crypto. The main draw of lending is that you can charge interest to a borrower. The amount earned will depend on a few things, including:
• The total value of crypto being lent
• The duration of the loan
• The interest rate
Higher rates, longer loan terms, and larger loan quantities can lead to more income from the interest paid by borrowers. In some cases, those earning crypto passive income through lending get to choose the terms of the loans they create. In others, a third party negotiates the terms ahead of time. Here are some of the main forms of crypto lending:
Margin Lending
Margin lending is lending crypto to traders who want to use borrowed assets to increase their leverage through margin trading. This allows traders to amplify their positions with those assets and repay the loans with interest. Crypto exchanges handle most of the details on the lender’s behalf, in this case. Users only need to make their digital assets available.
💡 Recommended: Learn more about margin trading and how it works
Centralized Lending
Centralized lending involves relying on the lending infrastructure and terms set by a third party. In this case, the interest rates and lock up periods will be fixed ahead of time. Users must deposit their crypto to the lending platform before earning interest.
Decentralized Lending
Also known as DeFi lending, this option involves using lending services directly through the blockchain. There are no intermediaries, and lenders and borrowers interact through smart contracts that automate interest rates.
Peer-to-Peer Lending
Platforms that enable peer-to-peer lending make it possible for people to borrow directly from one another. Users first deposit their crypto into the lending platform’s custodial wallet. They can then set the interest rate, terms of the loan, and decide how much they’d like to lend. This gives users some control over the crypto lending process.
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4. Cloud Mining
Mining proof-of-work cryptocurrencies typically requires substantial investment in computing hardware, along with the necessary technical knowledge. Cloud mining contracts offer an alternative.
Instead of setting up a new mining rig, people can simply “rent” hashing power from an established operation through the internet. In exchange for a fixed fee, people can buy cloud mining contracts that entitle them to a certain hash rate for a certain period of time. The contract owner receives new coins in proportion to the size of their contract.
Be warned, however: Many cloud mining scams exist. Those interested in cloud mining would do well to do as much research as possible to try and make sure the company offering the contract is legitimate.
5. Dividend-Earning Tokens
Tokenized stocks are cryptocurrencies backed by shares of equity in a company. Sometimes, these tokens offer dividend payouts in the same manner that shareholders receive dividends. Dividends are usually paid on a quarterly basis.
Owning and holding some of these tokens could prove to be yet another way to earn passive income with crypto.
6. Yield Farming
Yield farming is one of the more complex options listed here and will require a lot of additional research for those interested. But it can also be one of the most lucrative options available to make passive income with crypto.
To yield farm, investors deposit tokens into a special smart contract called a liquidity pool. Those who provide liquidity in this way receive a portion of the fees generated through traders accessing the pool.
Yield farming often requires some Ethereum (ETH) along with a DeFi token of some kind like Uniswap (UNI) or Pancake Swap (CAKE) or possibly a stablecoin like Tether (USDT).
The term “yield farming” became popular in 2020 and 2021 with the rise of decentralized exchanges, which rely on smart contracts and liquidity provided by investors.
7. Run a Lightning Node
The Bitcoin Lightning network is a layer-2 scaling solution that allows for lightning-fast affordable micropayments at scale. Lightning nodes facilitate these transactions, and those who run nodes receive a small portion of each transaction fee that gets routed through their node.
Unfortunately, running a Lightning node usually generates very little income. Because fees tend to be low, those who run a node might only make a few dollars per month in Bitcoin, or less.
Most participants who do run Lightning nodes do so to support the use of Bitcoin as a medium of exchange. And as the Lightning network grows and more transactions get routed through it, the income for node operators could presumably rise as well.
8. Affiliate Programs
Affiliate programs exist for many different business models, one of them being crypto-related products and services. Some exchanges offer affiliate programs, which reward participants for getting others to sign up or open accounts.
In general, to participate, users simply have to:
• Sign up, submit an application, or share an affiliate link
• Introduce a platform or product to their friends, family, or social media followers
• Earn rewards when someone takes a certain action, like signing up for an account on a given exchange
As an example, an exchange may offer a small Bitcoin incentive to those who get a new user to sign up for an account through their affiliate link. Affiliate programs might not be the fastest way to generate passive income with crypto, but they could be one of the easiest. (Make sure to check the company’s terms of service before bulk sharing an affiliate link.)
9. Master Nodes
Some blockchain networks contain a specific type of node referred to as “master nodes.” Those who run these nodes can receive large payouts, as masternodes receive a portion of the block rewards each time a new block is mined.
The chance to run one of these nodes probably won’t be available to the average person, however, as running a master node often requires holding a significant amount of the network’s cryptocurrency.
10. Forks and Airdrops
Forks happen when an existing coin branches off into a new chain. Airdrops happen when new coins are created and “dropped” onto users as a type of reward.
Users don’t have any control as to when or if these events might occur. But being active in the crypto ecosystem increases the odds.
In 2017, for example, everyone who held Bitcoin (BTC) received an equivalent amount of Bitcoin Cash (BCH) when the network hard forked. Someone who had 1 BTC, for example, would have received 1 BCH.
Similarly, in 2021, users of the KeepKey hardware wallet (among other groups) received an airdrop of FOX tokens from the company that runs the ShapeShift platform. Those who had logged into ShapeShift during a certain time period automatically received the tokens in their crypto wallets.
11. Sun Exchange
Sun Exchange is a South Africa-based company that crowdsources funding for solar power projects. Investors can purchase solar cells used for community projects in South Africa and receive a regular payout once the projects begin producing solar power.
Customers can pay for solar cells in either fiat currency or Bitcoin, and can also receive their payouts in fiat or Bitcoin. This method of generating passive income with crypto differs from the others in that there’s a tangible investment. While the other options are financial products, Sun Exchange allows people to invest directly in renewable energy projects built in South Africa.
The returns from solar projects are typically small, paid out monthly, and spread out over many years. The projects involve 20-year leases, so buying in is a long-term commitment. (Currently, there is no secondary market for trading your solar cells.) But more than any potential profit, investors may be drawn to the clean energy tax incentives and the idea of providing affordable renewable energy to South Africa.
12. Crypto Games
As online gaming continues to grow in popularity and spills into the metaverse, the opportunities to earn passive income through crypto games should grow, too. There are many crypto games out there, and a lot of them reward players for participating with various types of crypto.
Some of the numerous games out there include Axie Infinity, The Sandbox, Gods Unchained, Ethermon, and Pegaxy.
Pros and Cons of Passive Income Generation With Crypto
Even when it comes to potential passive income generation, it’s wise to weigh the potential risks against the potential rewards.
Here are some of the pros and cons of learning making passive income with crypto.
| Pros | Cons |
|---|---|
| Some options can be rather simple. | Most options come with considerable risk. |
| Allows investors to put off capital gains. | Some options can be difficult to navigate for beginners. |
Pros
There are several benefits to generating passive income via crypto.
• Some options can be rather simple. Most interest-bearing digital asset accounts are straightforward. Users deposit stablecoins and start earning interest, in most cases. Centralized lending might involve little more than putting crypto assets into a custodial wallet and giving permission to an exchange to lend them out.
• Allows investors to put off capital gains. Instead of selling a large amount of crypto that has gone up in value since the time of purchase, investors might consider keeping those holdings in the crypto ecosystem and using it to generate a yield. The yield would still equate to taxable income, but would likely result in less of a tax burden than selling a large amount of crypto outright.
💡 Recommended: Crypto Taxes (2023): How to Pay Taxes on Cryptocurrency
Cons
There are also drawbacks that crypto traders must consider when contemplating passive income.
• Most options come with considerable risk. Losing all of your crypto assets is a real possibility in some cases. This can happen as a result of hacks, smart contract bugs, or because the lending platform goes bankrupt.
• Some options can be difficult to learn to navigate. Getting involved in DeFi requires setting up and using an Ethereum (ETH) wallet, then becoming familiar with one or more DeFi protocols. This could prove difficult for those who don’t yet hold any ETH and haven’t used crypto wallets before.
The Takeaway
Some of the numerous ways that crypto investors can generate passive income with their holdings are by staking, lending, and even participating in crypto games. Of course, some methods of earning passive crypto income are simpler than others, and for beginners, it can be as easy as depositing coins into an account and earning interest. Others could try their hand at running a node.
FAQ
Is staking crypto passive income?
Yes, staking crypto provides a type of passive income. However, it’s important to understand that when you stake crypto, you receive the income in the native token of a specific network. This creates an additional risk, and if the price of that token falls, losses could still be realized even if users earn a significant yield from staking.
What are the risks of trying to create passive income with crypto?
In many cases, users are assuming 100% risk when earning passive income with crypto. While it is possible to earn a high rate of return, total loss of principle is also a possibility. There’s also the risk of tokens losing value. If yields are earned in an altcoin, the rate of return relies on that token’s value. There is also a risk of protocols being hacked.
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