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5 Ways to Earn Passive Income from Cryptocurrency

Published on
June 22, 2022
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5 Ways to Earn Passive Income from Cryptocurrency

The majority of investors are unaware that cryptocurrencies can provide passive income. They buy Bitcoin, Ethereum, or a brand-new altcoin and wait years for the value of their investments to rise. They had the opportunity to quadruple their stack with no work, but they decided to do nothing. Why don't you use the money to your advantage?

There isn't any idle cash. People are forced to convert their money into an asset that increases in value due to inflation. Some people are willing to invest, while others fear it is too dangerous. Furthermore, you can only sell stocks. Some people invest in illiquid assets such as real estate to rent them out and earn a passive income

Making money by adding value to current assets is not part of the crypto culture, which is unfortunate because we have the best of both worlds: liquidity and decentralization. DeFi, on the other hand, altered the game by making passive income more accessible and profitable than ever before, pulling in more investors.

5 ways to make money from crypto-currencies

Although most strategies require you to learn many new things before getting started, you will only need to put in a minimal amount of effort to keep your revenue system running.

Crypto Lending

Long before DeFi, passive money was generated through centralized lending processes. Returns on lending range from 5% to 10%, and depending on the protocol, customers can withdraw their funds at any moment or have them locked for months. You can get yields via the protocol's token or the loaned asset.

You can borrow a wide range of assets, each with its APY rate. Because altcoins are more volatile, they pay out more, whereas assets like Bitcoin and Ethereum pay out the least. Lending protocols such as Celsius Network and Nexo are popular among investors, but exchanges like FTX and Bitfinex offer these services.

On Nexo, there are different APY rates for other crypto assets.

The issue with lending is that you can't touch your money until the lockup period is up. You can't sell and save money if the market goes down. Lending also precludes you from selling if the asset has problems and loses value (for example, a network shutdown or a security incident). Another issue is that you cannot change assets until the lockup period has expired.

For lending tactics, altcoins represent a high-risk, high-reward bet.

AXS, a Nexo asset with a 34 percent annual percentage yield, is seen above. AXS is too volatile to be a good investment, despite its excellent yield. Even if you're making hundreds of dollars per day, you're still putting half your money in danger. The benefits are insufficient to compensate for the risks. Although they do not accrue value over time, stablecoins safeguard against temporary loss.

For investors who don't like crypto volatility and don't like the interest rates offered by banks, crypto lending is an ideal solution. These investors can trade dollars for USD stablecoins and get the best of both worlds: the dollar's status as a worldwide reserve currency and the high yields of crypto.

Margin Lending

When it comes to leveraged trading, where does the margin originate? Other investors' money Lending is available on derivatives exchanges, including FTX, Binance, Bitfinex, and Kucoin, in exchange for a steady APR or APY yield.

It's important to note that APR and APY yields are not the same things. The annual percentage yield (APR) is the rate you'll get if you don't compound your money. Daily compounding is taken into account in the APY calculation. Because APR rates do not reflect the effects of auto compounding, they offer a superior final yield.

Check each asset's terms and conditions before lending. While some exchanges have lockup periods, others do not. Some levy withdrawal fees and others lack insurance policies to safeguard investors from liquidity problems.

Yield Farming

Yield farming is a type of lending that takes place in a decentralized manner. Yield farming is when a non-custodial wallet provides liquidity to a decentralized exchange. The last two qualities are unavailable on centralized exchanges, so DeFi attracted many crypto investors.

Providing liquidity to Binance necessitates a multi-tier KYC process and entrusting asset control to a centralized body. You can request a withdrawal, but you won't be able to perform it because you don't have complete control over your funds. You can lend, but the exchange's rules limit the assets you can choose from. Lending on CEXs is limited due to several additional constraints.

Don't be fooled by the word "decentralized." DeFi is too beset with difficulties to be the flawless utopia we want it to be, despite offering personal wealth management and interaction with autonomous smart contracts, giving investors a false sense of control. There are exploits, bugs, frauds, and rug pull every day. You have power and ownership, but you also face hazards.

The most complicated passive income strategy is yield farming. The chance of losing money due to temporary loss is substantially more significant due to the increased volatility. You must also consider risk management when deciding whether to farm lower yields on stable ecosystems (such as Ethereum) or higher yields on volatile ecosystems (such as Bitcoin) (AVAX, Solana, and BSC).

It's worth noting that yield farming liquidity pools necessitate a 50/50 asset split. You must additionally provide $1000 in USDT if you desire to farm $1000 worth of ETH in an ETH-USDT pool. A permissionless wallet like Metamask or Phantom is also required for yield farming.

A more in-depth explanation can be found on our yield farming page.

Staking

Blockchain networks have begun to move to a Proof of Stake consensus process to provide quicker transaction throughput. PoS blockchains rely on users who stake assets to safeguard the network, as miners no longer confirm transactions. According to the theory, the more assets a network protects, the less likely malevolent actors will launch a 51 percent attack.

Like DEXs reward traders who supply liquidity, the network pays investors who lock assets. However, they enforce a lockup time to guarantee that staked assets do not leave the network and disrupt its stability. Networks frequently offer custom lockup durations and more significant rewards to people who lock assets for extended periods.

Only by setting up a validator machine that interacts directly with the network is decentralized staking possible. However, the usual user prefers staking on a CEX since validator devices are too complex. However, using a permissionless staking system like Rocket Pool, you can skip the headache of creating a validator entirely.

Rebasing Protocols

The most current passive income strategy in crypto is rebasing protocols. Game theory underpins this trend, which Ohm Protocol initiated. According to the 3,3 model, all players will remain lucrative as long as they stake and develop the protocol's treasury. Everyone gains if everyone participates.

For example, Ohm, Time, and Sol Invictus re-invest their treasury collateral into new ventures and passive income sources. This additional revenue is re-invested in the protocol to reward users.

Rebasing protocols have the disadvantage of relying on momentum. When whales stop staking and selling their holdings, it disrupts the market for everyone else. Suddenly, everyone is out. The treasury, which draws the majority of its value from the native token, plummets, and the token's value falls with it.

Another serious issue is inflation. The greater the number of investors who put money into the token, the greater the token's supply. And the more supply there is, the more pressure there is to sell. Some argue that this limits the use of rebasing protocols to early adopters and converts new investors into exit liquidity.

Because they peak and fall, rebasing methods are compared to a speedrun of 2008. It would not be ethical to claim that developers aren't attempting to provide genuine value to their users. Hedge funds and revenue systems fuelled by yield farming and staking tactics are among the concepts tested in these initiatives.