Like many investments, you can earn returns not only through buying and selling crypto, but also by using it to generate passive income.
When you earn passive income, you are able to earn money on your assets without active involvement on your part. The concept is the same as compounding interest or reinvesting dividends in the traditional financial world or earning rent on investment properties. In this article, you’ll learn how to earn passive crypto income.
How to Earn Passive Income with Cryptocurrency
It is possible to earn passive income with crypto, but returns will depend on the method chosen and the amount of crypto you have to start. Given it’s volatility, there’s no guarantee that any crypto strategies will deliver any returns.
Still, those holding large amounts of crypto have several avenues to potentially generate yield with crypto. It’s up to you to weigh the risks of trying to earn a yield on their crypto and its potential rewards versus the risk/reward ratio of simply holding for potential long-term gains, or cashing out some or all of your holdings.
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 eleven 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.
Instead of “miners” receiving new block rewards as in PoW, “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.
Some popular types of cryptocurrency available to stake on large exchanges include Cosmos (ATOM), Tezos (XTZ), and Cardano (ADA).
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 a savings account. This has become an attractive product for investors because traditional cash savings accounts yields have fallen so low in recent years.
To use such simply open an account and deposit their crypto or stablecoin. There might be a “lockup period” involved, where users can’t access their funds for a fixed amount of time.
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. BlockFi, Celsius, and Vauld are a few popular companies offering these types of accounts.
There are several ways that investors can lend out crypto. In all cases, the idea is to loan crypto to someone else for a time in exchange for a fee. The amount earned will depend on three things:
• The total value of crypto being lent
• The duration of the loan
• The interest rate
Higher rates, longer loans, and larger loans can lead to more income from the interest paid by borrowers. In some cases, those earning crypto passive income in this way get to choose the terms of the loans they create. In others, a third party negotiates the terms ahead of time.
Margin lending is lending crypto to traders who want to trade using leverage from borrowed funds. This allows traders to amplify their positions with those assets and repay the loans with interest. Crypto exchanges handle most of the details on your behalf in this case. Users only need to make their digital assets available.
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.
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.
Platforms that enable peer-to-peer lending make it possible for people to borrow from each other directly. Users have to first deposit their crypto into the lending platform’s custodial wallet. Then they can 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.
4. Cloud Mining
Mining proof-of-work cryptocurrencies 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. In exchange for a fixed sum of money, 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.
Warning: Many cloud mining scams exist. Those interested in cloud mining would do well to do as much research as possible 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.
6. Yield Farming
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.
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 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.
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).
7. Running a Lightning Node
The Bitcoin Lightning network is a layer-2 scaling solution that allows for lightning-fast affordable micropayments at scale. The nation of El Salvador, which has made Bitcoin legal tender, uses Lightning for its Bitcoin transactions, for example. Lightning nodes facilitate these transactions. Those who run nodes receive a small portion of each transaction fee that gets routed through their node.
Running a Lightning node generates very little income. Because fees are so low, those who run a node might only make a few dollars per month in Bitcoin, or less. Some users report earning as much as $25 in one month, though (this also depends on the price of BTC versus a user’s local fiat currency).
This method doesn’t generate that much Bitcoin passive income. Most participants do it 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 will 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, for example.
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
• Get paid each time someone takes a certain action, like signing up for an account on a given exchange
For example, at the time of publishing Coinbase offers 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.
9. Master Nodes
Some blockchain networks, like DASH, contain a specific type of node referred to as “master nodes.” Those who run these nodes can receive large payouts.
This won’t be available to the average person, however, as running a master node often requires holding a significant sum of the network’s cryptocurrency. To run a DASH masternode costs 1,000 DASH, or about $130,000 at today’s prices.
Masternodes receive a portion of the block rewards each time a new block is mined.
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 reward for one reason or another.
Users don’t have any control over when 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.
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. Customers 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. Over time, the returns could add up to much more than the initial investment.
Pros and Cons of Passive Income Generation With Crypto
As with any investment, 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.
|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 learn to navigate.|
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 that coin in the crypto ecosystem and using it to generate a yield. The yield would still be taxable income, but would likely result in less of a tax burden than selling a large amount of crypto outright.
There are also drawbacks that crypto traders must consider when contemplating passive income.
• Most options come with considerable risk. Losing 100% of principle 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 like MetaMask, 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.
There are many ways the crypto traders can use their holding to generate passive income. These range from straightforward deposit accounts to more involved activities, such as running a node.
You don’t have to use the strategies above to get involved with trading cryptocurrency. By opening an account on the SoFi Invest® investment app, you can start trading cryptocurrencies with as little as $10. You can use the app to trade a variety of cryptocurrencies, including Bitcoin, Ethereum, Dogecoin, Litecoin, and Cardano.
Is staking crypto passive income?
Most would agree that 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. If the price of that token falls, losses could still be realized even if users earn a significant yield from staking.
Can you generate passive income with cryptocurrencies?
Yes. There are multiple ways to do so. Some common methods include lending, using digital asset interest-bearing accounts, and staking proof-of-stake coins. Most of the available options require either a large sum of cryptocurrency or some in-depth technical knowledge of navigating DeFi protocols or running mining equipment.
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. One of the earliest crypto lending platforms went bankrupt, for example.
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. Note that stablecoins don’t have this same risk, assuming they maintain their currency peg at a stable 1-1 ratio.
With DeFi, there is also a risk of protocols being hacked. And with mining, there is a risk of rising electricity costs, equipment failure, or tokens losing market value.
Photo credit: iStock/Deklofenak
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