What is passive income from Crypto?
One way to make money in the blockchain industry is trading or investing in projects. However, this usually requires detailed research and a substantial investment of time – but it still doesn’t guarantee a reliable source of income.
Even the best investors can experience extended periods of loss and one way to survive them is to have alternative sources of income.
There are other methods besides trading or investing that can help you increase your cryptocurrency holdings. These can bring in a similar continuing income to interest, but only require a little effort to get installed and little to no effort to maintain.
This way, you can have multiple streams of income which, combined with each other, can add up to a significant amount.
This article describes some of the ways you can earn passive income with crypto.
Top 7 Best Ways / Guide to Earn Passive Income from Cryptocurrency
Mining basically means using computing power to secure a network in order to receive a reward. While this does not require you to have cryptocurrency holdings, it is the oldest method of earning passive income in the cryptocurrency space.
In the early days of Bitcoin, mining on a central processing unit (CPU) was a viable solution. As the network hash rate increased, most miners switched to using more powerful graphics processing units (GPUs). As competition increased, it became almost exclusively the playground for application-specific integrated circuits (ASICs) – electronic components that use custom-designed mining chips for this specific purpose.
The ASIC industry is very competitive and dominated by companies with significant resources to deploy in research and development. By the time these chips hit the retail market, they are likely already obsolete and would take a considerable mining time to break even.
As such, Bitcoin mining has primarily become a commercial enterprise rather than a viable source of passive income for the average individual.
On the other hand, mining proof of work coins with low hash rates can still be a profitable business for some. On these networks, using GPUs may still be viable. Mining lesser-known coins carries a higher potential reward, but carries a higher risk. Mined coins can become worthless overnight, carry little cash, encounter a bug, or be hampered by many other factors.
It should be noted that the installation and maintenance of mining equipment requires an initial investment and a certain technical expertise.
Lending is a completely passive way to earn interest on your cryptocurrency holdings. There are many peer-to-peer (P2P) lending platforms that allow you to lock in your funds for a period of time to collect interest payments later. The interest rate can be either fixed (set by the platform) or set by you based on the current market rate.
Some exchanges with margin trading have this feature implemented natively on their platform.
This method is ideal for long-term holders who want to increase their holdings with little effort. It should be noted that locking funds in a smart contract always carries a risk of bugs.
The Lightning Network is a second layer protocol that runs on top of a blockchain, such as Bitcoin. It is an off-chain micropayment network, which means it can be used for rapid transactions that are not immediately transferred to the underlying blockchain.
Typical transactions on the Bitcoin network are one-way, which means that if Alice sends a bitcoin to Bob, Bob cannot use the same payment channel to return that coin to Alice. However, Lightning Network uses two-way channels that require the two participants to agree on the terms of the transaction beforehand.
Lightning Nodes provide liquidity and increase the capacity of the Lightning Network by locking Bitcoin into payment channels. They then collect the fees for the payments that pass through their channels.
Running a Lightning Node can be a challenge for a non-technical bitcoin holder, and the rewards are highly dependent on overall Lightning Network adoption.
Staking is essentially a less resource-intensive alternative to mining. This usually involves keeping funds in a suitable wallet and performing various network functions (such as validating transactions) to receive wagering rewards. The stake (i.e. holding tokens) is an incentive to maintain network security through ownership.
Staking networks use proof of stake as a consensus algorithm. Other versions exist, such as delegated proof of stake or rented proof of stake.
Typically, staking is all about setting up a staking portfolio and just maintaining the coins. In some cases, the process involves adding or delegating funds to a staking pool. Some exchanges will do this for you. All you need to do is keep your tokens on the exchange and all technical requirements will be taken care of.
Staking can be a great way to increase your cryptocurrency holdings with minimal effort. However, some staking projects employ tactics that artificially inflate the expected staking rate of return. Studying token business models is essential as they can effectively mitigate promising staking reward projections.
Some crypto companies will reward you for attracting more users to their platform. These include affiliate links, referrals or other discount offered to new users that you introduced to the platform.
If you have more social media, affiliate programs can be a great way to earn extra income. However, to avoid spreading the word about shoddy projects, it’s always worth doing some service research first.
Forks and Airdrops
Profiting from a hard fork is a relatively straightforward tactic for investors. Just hold the forked parts to the date of the hard fork (usually determined by the height of the block). If there are two or more competing chains after the fork, the holder will have a nominal balance on each.
Airdrops are similar to forks, in that they only require possession of a wallet address at the time of the drop. Some exchanges will make airdrops for their users. Note that receiving an airdrop will never require sharing private keys – a condition that is a telltale sign of a scam.
Simply put, a masternode is similar to a server, but is one that runs in a decentralized network and has functionality that other nodes in the network do not.
Token projects tend to grant special privileges only to actors with a strong incentive to maintain network stability. Masternodes generally require a large initial investment and considerable technical expertise to set up.
For some masternodes, however, the token holding requirement can be so high that it effectively makes wagering illiquid. Projects with masternodes also tend to inflate projected return rates, so it’s always essential to do your own research (DYOR) before investing in one.
Risks of earning passive income with crypto?
- Buying a low-quality asset: Artificially inflated or misleading rates of return can lead investors to buy an asset that is otherwise of very little value. Some staking networks are adopting a multi-token system in which rewards are paid in a second token, which creates constant selling pressure for the reward token.
- User error: As the blockchain industry is still in its infancy, building and sustaining these revenue streams requires technical expertise and an investigative mind. For some incumbents, it may be better to wait until these services become more user-friendly or to use only those that require minimal technical skill.
- Blocking Periods: Some lending or staking methods require you to block your funds for a specified period of time. This effectively makes your holdings illiquid during this time, leaving you vulnerable to any event that could negatively impact the price of your asset.
- Bug Risk: Locking your tokens into a staking wallet or smart contract always carries a bug risk. Usually several choices are available with different degrees of quality. It is imperative to research these choices before committing to them. Open source software can be a good place to start, as these options are audited by the community at the very least.
Ways of generating passive income in the blockchain industry are developing and gaining popularity. Blockchain companies have adopted some of these methods as well, providing services commonly referred to as widespread mining.
As products become more reliable and secure, they may soon become a valid option for a stable source of income.