Key Takeaways
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Passive income crypto allows you to put your crypto to work instead of lying 'idle.'
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Staking, yield farming, cloud mining, crypto interest accounts, lending, dividend-earning tokens, forks & airdrops, and affiliate programs are some passive income generating strategies for cryptocurrencies.
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However, it's important to note that these crypto passive income strategies come with their fair challenges and risks, so weigh the risks of each strategy before investing your money.
As the crypto market is facing one of the most challenging bear markets in its history, generating passive income on your crypto holdings is a potential way to counterbalance losses during bear markets and crashes. It's also a more lucrative strategy for growing your portfolio than the traditional HODL (Hold Onto Dear Life) strategy.
Though HODLing high market cap coins and blue-chip tokens works perfectly well, there are other methods of generating passive income in the current crypto space by putting your holdings to work. This article will explore eight ways to create passive income with crypto. For every strategy, we'll look at how sustainable and risky it is and the technical expertise needed to apply it.
Disclaimer
Now, before we begin, we'd like to quickly point out that while you can earn passive income with cryptocurrency in the eight ways we'll discuss, it's not guaranteed to be a success. We all know how volatile cryptocurrencies are. Even without a volatile market, inflation and bearish markets can cause you to lose 100% of your investment. So, before investing in any strategy, you should always consider whether the risks involved are worthwhile.
Earn Passive Income with Crypto
You can consider several strategies when looking for ways to generate passive income with crypto. Each strategy provides unique opportunities and challenges; some have higher risks but potentially better returns than others, while others require some technical knowledge to use them. In no particular order, here are the eight ways to earn passive income with crypto:
1. Staking
Proof-of-Stake (PoS) is a consensus method that lets network participants have mutual agreement about new transactions being integrated into the blockchain. Often, staking is the typical way of generating passive income with crypto. It's an energy-efficient alternative to crypto mining and lets you generate sustainable passive income.
PoS blockchains, like Ethereum, allow their native token holders to participate in the validation process – specifically, confirming transactions. Essentially, token holders stake their coins as validators or delegate them to earn staking rewards. Unlike miners, validators don't need expensive mining rigs – they stake tokens to start earning rewards.
The amount you will earn from staking depends mainly on the asset itself. Besides, the value of the tokens you stake can appreciate or depreciate during the staking period. If the token value declines, so do your earnings, and vice versa. Ethereum (ETH), Cosmos Hub (ATOM), Tezos (XTZ), and Cardano (ADA) are some of the popular digital currencies you can consider staking. Apart from earning rewards, you will be contributing towards securing your favorite blockchain project.
2. Yield Farming
With the introduction of decentralized exchanges (DEXs), yield farming has emerged as a popular crypto passive income opportunity. Unlike centralized exchanges (CEXs) that rely on order books to provide liquidity, DEXs use liquidity pools to offer liquidity to traders. Yield farmers act as liquidity providers (LPs) by locking tokens in a protocol's pool. As an LP, you qualify for a percentage of the fees generated.
As the traders will enjoy the much-needed liquidity, you will earn rewards as an LP. Basically, the traders trade against the funds you have locked in a liquidity pool instead of being matched with other traders. The rewards you earn are part of traders' trading fees for using the pools. The rewards vary based on various factors, including the amount locked. Besides, the rewards can be higher for low-market cap tokens looking to have more liquidity.
But yield farming is a risky venture. For instance, you should consider price volatility, especially for low-market cap tokens, and rug pulls when farming yield. Besides, the risk of impermanent loss (when an asset fluctuates in price, making your investment in a liquidity pool less than the value you deposited) might make yield farming an uphill task for beginners. With that in mind, yield farming is a straightforward and sustainable passive income crypto strategy to consider.
3. Cloud Mining
In cryptocurrency mining, miners mint new coins, confirm existing transactions and add them to the blockchain. In return, they receive rewards for providing computational power. But as the number of miners increases, the mining difficulty becomes harder to crack. Besides, the process consumes more energy, and participants must regularly upgrade their mining rigs to keep up with the mining difficulty.
Cloud mining reduces the entry barriers to mining. Here, third-party service providers lend their computing power to miners. Through this model, miners can avoid incurring significant capital to acquire mining rigs. Besides, it eradicates the cost of regularly upgrading the rigs. The service providers lend their hash power to the miners, who share mining rewards with them. Every time a new block is mined, the transactions are confirmed, and rewards are sent to the miner's account.
In cloud mining, computations, data storage, server, and processing are conducted through the cloud or the internet. The cloud mining service providers charge according to the use of the process's computation power or technical expertise.
The standard type of cloud mining is hosted mining. It lets interested parties lease or buys mining hardware from a miner. The miner maintains the hardware and ensures it's functional. Furthermore, customers have direct access to their rewards in this system. Due to its scaling mechanism, mining farms minimize the key entry barriers to mining: power and storage.
4. Crypto Interest Accounts
Interest accounts are another popular way of generating passive income with crypto. You earn interest on your cryptocurrency deposits by creating a savings account. The account is similar to the financial products of traditional finance. This passive income strategy is ideal for investing assets you plan to hold for a long time.
Crypto interest accounts are a new crypto venture, and their return rates are often higher than traditional saving accounts to attract more users. Your Annual Percentage Yield (APY) will vary based on whether you have a fixed or flexible term. The yields are estimated using cryptocurrency. Since cryptocurrencies are highly volatile, the value of your savings may reduce or increase during the lock-up period, impacting your annual yield. As such, you can consider APYs based on stablecoin deposits like USDT and USDC.
The way crypto interest accounts work is self-explanatory. What you should pay keen attention to are the supported withdrawal options. Flexible and fixed terms are available for cashing out from interest accounts. Fixed terms require you to lock your funds to a specified period to earn a higher interest. On the contrary, flexible terms allow you to withdraw your savings and interest any time you want, but usually at a lower rate.
Due to their low technical difficulty and perception of low risk, crypto interest accounts offer beginners an easy gateway to investing in crypto. However, remember to bear in mind that institutions are not infallible, as seen in the case of Celsius and other centralized institutions.
5. Lending
Crypto lending has emerged as one of the most popular passive income activities in centralized and decentralized systems. You can lend your crypto to borrowers to generate yield. Currently, there are four major crypto lending strategies to consider:
5.1 Peer-to-Peer (P2P) Lending
Protocols that support P2P lending let lenders set their loan terms and choose the amount they are willing to lend and the interest they plan to charge. The protocols match lenders, and borrowers like P2P trading platforms match buyers and sellers. But you must transfer the funds to the protocol's smart contract vault beforehand.
5.2 Centralized Lending
In centralized lending, you depend exclusively on the lending system's intermediaries. Unlike P2P lending, the interest rates and lock-up periods in centralized lending are fixed. But you must move funds to the platform's account to begin generating passive income.
5.3 Decentralized/DeFi Lending
Unlike P2P and centralized lending methods, there are no custodians or third parties in decentralized lending. Instead, the participants interact with smart contracts, which are automated and self-executing.
5.4 Margin Lending
Margin lending involves lending assets to borrowers interested in amplifying their trading positions. After lending out your crypto, you will receive the amount you lent plus interest at the end of the specified period. Centralized exchanges mainly offer margin lending.
6. Dividend-Earning Tokens
A dividend is a certain percentage of the profits that businesses pay their shareholders. In other words, it's a reward for supporting the growth of a business. Businesses pay dividends in the form of cash or shares. Cryptocurrency projects work similarly—users support them by purchasing their native tokens. These tokens play multiple functions, including rewarding shareholders for their support.
Most crypto projects promise backers something similar to passive income. Backers support them by purchasing their tokens, mostly during their earlier stages. This gives the projects the much-needed funds for their business development. The backers benefit by waiting for the tokens to appreciate to sell them at a profit.
Some projects share a percentage of their revenue with their token holders. As an investor, you can hold the crypto and earn your portion of the revenue of the project based on the amount of tokens you own. As an example KuCoin Shares (KCS) give their holders a share of the daily KuCoin blockchain transaction fees. If the company's token is doing well, it's pretty sustainable with low technical knowledge required or risk.
7. Forks & Airdrops
The crypto space is full of projects looking for publicity. Some of these projects introduce themselves to the public by rewarding their early users, while others offer rewards through referral programs. These strategies and many others are great ways to generate crypto passive income. With forks, there isn't much you can do on your end other than staying put regarding crypto news. On the other hand, airdrops require more involvement as they require participants to meet certain criteria like re-tweeting a post, using a specific wallet, trading on a particular platform, or creating an account to receive newsletters and regular updates.
Crypto forks happen when a coin is branched into another blockchain. For example, the recent Ethereum fork resulted in Ethereum (ETH), EthereumPoW (ETHW), and EthereumFair (ETHF). The people who held Ethereum before The Merge received equivalent amounts of ETHW after the event. As such, the holders received free tokens for holding ETH.
8. Affiliate Programs
Affiliate programs remained essential elements of projects' marketing strategies for years and were significantly boosted by the digital economy. Currently, multiple projects leverage the affiliate marketing system. You receive crypto rewards whenever you refer a new user to these projects. Alternatively, you may be requested to share affiliate links with your contacts or followers to join the platform and, in return, receive rewards.
You can consider cryptocurrency affiliate programs to generate passive income if you own an active blog or have a huge social media following. While affiliate marketing programs often require a considerable following, they are one of the easiest, low-risk, and sustainable ways to generate passive income with crypto if you have an audience to sell to.
Conclusion
Cryptocurrencies offer multiple investment opportunities, the most apparent being holding to sell them at a profit. But your investment may have better uses than waiting for this to play out. We have discussed eight strategies to generate passive income with crypto. However, when choosing any of these strategies, carefully Do Your Own Research (DYOR) regarding the market and the platforms you will be interacting with.
Josiah is a tech evangelist passionate about helping the world understand Blockchain, Crypto, NFT, DeFi, Tokenization, Fintech, and Web3 concepts. His hobbies are listening to music and playing football. Follow the author on Twitter @TechWriting001
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