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Passive income with cryptocurrencies
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At the dawn of the emergence of cryptocurrencies, mining, investing, and trading were the only sources of income. The only passive methods were long-term trading, and, partially, mining since it involves setting up and maintaining equipment for the extraction of coins. However, with the development of the crypto industry, fintech companies have expanded the functionality of services, providing users with a plethora of opportunities to earn a passive income with cryptocurrencies.
In this article, we won’t be talking about cloud and classic mining, as well as investing, even though these methods relate to passive income. Any method covered in the article by default involves investing in cryptocurrency and complements it. Cloud mining is unprofitable at the moment, and in the absence of significant rate growth, it is more likely to lead to losses, and classic crypto mining requires significant investments. We will focus on methods that allow one to start with as little as $100 and are available to almost all beginners.
Before we start, we would like to warn about the corresponding risks: investing in cryptocurrencies does not guarantee profit and may lead to loss of funds. Invest only the amount you are willing to lose. These methods are suitable for those already involved with cryptocurrencies or consider crypto investments as sources of income and seek their holdings to bring some profits instead of acting as dead weight. So, let’s find out how crypto investors can get an additional passive income.
Types of passive income with crypto
The crypto industry suggests many income-generating options, and fintech companies offer various services to attract new customers. Passive earnings with cryptocurrencies can be divided into two major categories: the one with a fixed rate and the one with a variable rate. The advantage of passive income is low risks compared to trading, mining, and other popular methods of cryptocurrency earnings.
P2P Lending & Crypto Loans
Lending is widely used by traders to leverage their positions. Previously brokers used to credit clients, but crypto exchanges introduced another solution. Now traders can borrow your cryptocurrency, and you receive interest in return. At the same time, crypto exchanges do not bear the risks caused by the volatility of the crypto assets, and the income comes from fees. We have covered this method in one of our previous articles; therefore, we will not dive into details of this subject but will only briefly describe this process.
Crypto exchanges set a fixed interest rate, which varies on average from 2% to 4% per annum. The main benefit of the method is that interest is accrued on a daily or weekly basis. Therefore, the actual return will be higher due to the compounding returns.
Crypto loans operate similarly to lending except for one factor: lending is available on crypto exchanges and is only intended for trading, while crypto loans are open to a wide range of users. Another difference is profitability. Crypto loans allow one to receive up to 8% – 12% per annum.
Popular cryptocurrency exchanges providing P2P lending:
Crypto loans services:
DeFi lending is a new type of credit provided by DeFi platforms. Such operations are called flash loans. Interest rates are significantly lower due to the absence of risks and intermediaries and range between 0% and 0.55%. All transactions are performed by the atomic protocol and are fully automated. DeFi-platforms where one can issue flash loans:
Lifehack: the difference in interest rates opens up arbitrage opportunities. For example, one can borrow ETH at the Aave platform at 0.55% and lend it on NEXO at 8%, or open a deposit on the Binance exchange at 4% or in the Crypto.com wallet at 6% per annum.
There is no major difference between lending and deposits, except that with the latter, users lend crypto to the platform, not to other traders. The process is similar to banking: platforms accept deposits and offer loans to other users at a higher interest rate. On average, platforms offer between 4% and 12% per annum, depending on the service and the selected cryptocurrency.
Exchanges that offer interest on cryptocurrency deposit:
The last two services are cryptocurrency platforms that allow you to earn free coins after a certain time. Freebitco.in offers 4.08% per annum with a minimum deposit amount of 0.0003 BTC, and Cointiply offers 5% with a minimum deposit amount of 0.00035 BTC.
Yobit is a popular cryptocurrency exchange from the CIS that provides an attractive service called “Investbox.” Users can deposit coins and receive profits starting from 0.1% per day. The exchange guarantees that this method is neither hype nor a financial pyramid. All payments are generated from a special pool, replenished at the expense of fees and DICE profits. If the pool is depleted, users are able to withdraw their coins with accrued interest at any time. The minimum profit is 36.5% per annum and may reach 44% if compound interest is taken into account. The maximum profit may exceed 10% per day.
The only drawback of the Yobit InvestBox is that popular cryptocurrencies such as BTC, ETH, DOGE, or WAVES are not often found there. At the same time, many coins that can be added to an InvestBox offering a higher interest rate have low liquidity, so the profits may not always cover losses from a drop in their value. Investment boxes are periodically replenished with Bitcoin and top altcoins as part of promotions to attract customers and increase trading activity.
Trading bots and social trading
Such services have been practiced in the stock and foreign exchange markets for a long time. Using the crypto-exchange API, trading bots or traders to get access to the trading account of a client who has subscribed to signals or activated the auto-follow (copying signals) function. For this, the trader/bot either charges a percentage of profit or a subscription fee. Free bots also exist, but they are less effective and often happen to lose funds, yet there are a few profitable ones.
Withdrawal of your deposit is not available to such traders and bots; they can only trade using your position. However, it is vital to choose a reliable service, since bots can use the API to benefit from selling your assets on the exchange at a low price. Therefore, there are certain risks associated with the use of automated bots. Besides, you should analyze the statistics of bots and examine the graphs. If you find a linear increase in the deposit and abrupt deep “drawdowns,” it means that the trader uses the Martingale strategy. Such an approach can bring more than 100% – 200%, but it will lead to a loss of the deposit in the long run. It is recommended to choose accounts that display natural growth and corrections. Profitability will be lower, but risks will decrease accordingly.
3commas is one of the most popular auto trading services. The service provides a free trial period so the users can test the effectiveness of strategies even with a small deposit amount.
PoS-mining and DPoS have replaced the outdated and inefficient PoW-mining, known for its high electricity and mining equipment expenses. To start staking, you need to set up a node, reserve tokens, and launch the software. It may take several thousand dollars to set up your own node. However, some platforms have launched their nodes (pools), and offer to stake your coins for you in exchange for certain profits. This way, you may receive benefits while investing a minimal amount. The platforms will charge a fee for services, usually up to 10%. With staking, you can passively earn from 1% to 20% per annum in cryptocurrency.
Cryptocurrencies that work on the PoS and DPoS consensus algorithms:
- ONT, and many others.
Ethereum developers have recently launched the Ethereum 2.0 testnet, which is already available for testing. After the successful implementation of the new network, Ethereum will switch to the PoS concept. Therefore, ETH will soon be added to the list of coins that support staking.
So, to participate in staking, you need to choose a platform and replenish the pool with tokens. Here are the ways to stake coins and earn passive income:
Through staking providers (validators)
They can be found using the block explorers of the selected coin. To do so, it is required to install a cryptocurrency wallet, replenish it and vote for the chosen validator, i.e., delegate your coins. Supported wallets can be found on the project’s official website. Usually, one can get their coins back no earlier than a few days after delegation. The freezing period can be anywhere between 3 and 30 days, depending on the staked cryptocurrency.
Through crypto wallets
There are crypto wallets that support staking. All you need to do is deposit cryptocurrency and activate the service. Coins will be reserved for the duration of the procedure. Here are some wallets that support PoS:
- Hardware wallets by Ledger;
- Trust Wallet (by Binance).
Through crypto exchanges
Many cryptocurrency exchanges support this service. When you make a deposit or buy tokens on the exchange, they are stored on exchange wallets at all times. Exchanges profit from staking and pay the bulk of the revenue to users, transferring interest to their balance. Unlike previous methods, coins can be withdrawn at any time.
The modern crypto space is rich in passive income opportunities. Some involve large initial investments, while others allow you to receive passive income from the start. It is also worth considering that for passive earnings in DeFi, one requires basic knowledge of how these tools operate.