Imagine: you go to bed, dream about your favorite cryptocurrencies for eight hours, and when you wake up, you have more cryptocurrencies in your account than the day before.
Do you think this is just a dream? Nope. This is the reality of crypto investors who have figured out how to earn passive income from their crypto holdings.
Initially, Bitcoin was the only cryptocurrency in existence, and the only way to earn more Bitcoin was through mining. But today, investors can do more than just mine, buy, and store their cryptocurrencies. And while cryptocurrencies are still a speculative asset with a huge risk of loss, in most cases, the return can potentially be higher than on standard investment accounts.
These are my favorite ways to earn passive income with cryptocurrencies. For each strategy, I have included my assessment of how much experience and effort it requires, the risk it entails, its potential ROI, and the fees that can be associated with it.
Cryptocurrency Interest Accounts
The easiest way to earn crypto passive income is to use a crypto interest account. These accounts regularly pay interest for simply depositing cryptocurrencies into the platform. There are several crypto exchanges and crypto lending platforms that pay interest on crypto assets, with some of them automatically paying interest for holding certain cryptocurrencies in your account.
Complexity: Easy (no prior knowledge of cryptography required).
Risks: Credit accounts can freeze users’ assets. Interest rates may change over time.
How “passive” is it really?: It’s as passive as it gets. Just deposit (or buy) cryptocurrency and start earning.
Potential ROI: 15% per annum or more, depending on the asset
Fees: The platform may charge a fee for withdrawals.
Coinbase is a great place to get started with cryptocurrency interest-bearing accounts as it offers interest on multiple cryptocurrencies without having to jump through any hoops. You can simply purchase a crypto asset and start earning daily interest that is regularly added to your account balance.
Gemini is another popular exchange that offers cryptocurrency accounts through Gemini Earn. There are no minimum deposit amounts or lockup periods and you can transfer your cryptocurrency (plus interest) back to Twins trading account at any time.
Read more: Coinbase vs Gemini
Proof-of-Stake (PoS) Staking
While the bitcoin blockchain requires running a powerful computer to mine additional bitcoins (known as Proof-of-Work), newer blockchains now allow users to earn cryptographic rewards by “staking” or blocking large amounts of crypto in order to be able to validate transactions (known as Proof-of-Work). like Proof-of-Stake). This requires much less computing power than crypto mining and rewards users who invest in validators.
Staking rewards are easy to earn for most users as crypto platforms allow users to deposit crypto into the platform and process staking details in the background. The rates are similar to locking funds in a Certificate of Deposit (CD) account as terms and interest payments can be set depending on how long your funds are locked up.
Some crypto exchanges allow you to participate in Proof-of-Stake (PoS) rewards with a simple interface that allows you to deposit crypto, choose the length of time, and earn interest that is deposited on a regular schedule. PoS cryptocurrencies include Ethereum 2.0 (ETH), Tezos (XTZ), Cosmos (ATOM), and Cardano (ADA).
Complexity: Easy for advanced. It is easy to exchange cryptocurrency, but it is difficult to become a validator.
Risks: Staking can require a large initial investment if you use your own validator node.
How “passive” is it really?: Contributing cryptocurrency to exchange staking rewards is very passive, but becoming a validator requires a lot more work to set up and keep it running.
Potential ROI: Stakes can pay out at 10% or more, depending on the crypto asset.
Fees: The platform may charge fees for withdrawals; network fees for deposits may also apply.
DeFi Yield Farming
Decentralized Finance (DeFi) is a peer-to-peer blockchain technology that allows users to transact between partners, merchants, and businesses. DeFi uses smart contracts that allow users to automatically conduct financial transactions without the need for an intermediary such as a banking network.
DeFi yield farming is the process of using a DeFi application (DApp) to deposit cryptocurrency and earn interest. The deposited cryptocurrency is then lent to borrowers, used for staking, or used as liquidity on a decentralized exchange. Deposits and payments are processed automatically using a smart contract, and many DApps have built-in protection against non-payers (such as liquidation).
Farming DeFi Yield is a bit more complex than other crypto passive income methods and requires a certain level of knowledge about interacting with DApps using a digital wallet. There is also the risk of smart contract hacking, fraud and volatility issues leading to additional losses when growing crops.
Stablecoins (like Tether or USDC) typically pay higher rates than other cryptocurrencies to grow crops. Some of the most popular DeFi revenue farming platforms include Aave, Curve Finance, and Uniswap.
Complexity: Intermediate to advanced. Some knowledge of cryptography and blockchain technology is required.
Risks: Smart contracts can be hacked, some crop growing apps can be fraudulent, and market volatility can lead to additional losses.
How “passive” is it really?: This can be a truly passive return, although users will need to put in some effort to deposit crypto through their personal digital wallet in order to participate.
Potential ROI: 20% per annum or more, depending on the asset
Fees: Blockchain network fees will apply to deposits and withdrawals from DApps.
Crypto node launch
While becoming a bitcoin miner can be a lucrative business, the competition has become so fierce that simply buying bitcoin mining equipment can cost tens of thousands of dollars (or more). On the contrary, running a node for a crypto network is an easier way to maintain the network and receive a reward or a share of the commissions collected.
A cryptonode is a computer on a blockchain network that processes and validates transactions to keep the network secure. On many blockchains, node operators are paid crypto rewards, which provides an incentive to continue participating in the network.
To run a cryptonode, you just need to install the blockchain software on your computer and connect it to the internet. This software can be simple or complex to install and configure, depending on the cryptocurrency project you are involved in. Once the node is up and running, you will be rewarded depending on the specific specifications of the crypto project and the token reward program.
Complexity: Advanced. Deep knowledge of cryptography and blockchain technology is required.
Risks: An upfront investment in cryptocurrencies may be required, and the node may not generate much income.
How “passive” is it really?: It takes a lot of upfront work to get started, and may also require monitoring and maintenance, so it’s not the most passive at first. Once a node is up and running, this can be mostly a passive effort.
Potential ROI: Depends on the asset
Fees: Operational fees may apply to run required hardware (on-premises or cloud).
Crypto lending
Over the past few years, crypto lending has become popular, with many crypto lending platforms raising billions of dollars in assets and generating serious income for lenders. Unfortunately, the mismanagement of user funds has led to the insolvency of several of the most prominent crypto-lending companies, the freezing of user assets, and huge losses in the value of their native tokens. Both Celsius and Voyager Digital are currently facing solvency issues and have locked user crypto accounts, effectively preventing users from withdrawing their crypto from the platform.
However, there are still several reputable lending platforms that offer high interest rates on deposited cryptocurrencies with decent protection.
To participate in crypto lending, you can find a crypto exchange or lending platform, select the terms and conditions, and deposit funds to the platform. You will earn interest on a regular basis (hint: look for platforms that pay daily interest) and most bills add up over time. Funds are usually locked for a certain period of time, although some platforms allow you to withdraw them at any time.
Complexity: Light
Risks: Accounts can be frozen (see Celsius and Voyager Digital). Interest rates may change over time.
How “passive” is it really?: It’s as passive as it gets. Invest cryptocurrency, get interest.
Potential income (ROI): 20% per annum or more, depending on the asset
Fees: The platform may charge a fee for withdrawals.
Read more: Crypto Lending Explained
cloud mining
Although cryptocurrency mining is still popular, it usually requires a lot of technical know-how and expensive equipment to become profitable. In light of increased competition for bitcoin mining and the high cost of installing personal mining rigs, several cloud mining companies have been launched to offer a cheaper (and easier) way to mine cryptocurrency.
Cloud mining companies are online platforms that allow you to sign a mining contract, rent equipment and electricity, and mine cryptocurrency using company assets. Many of these companies offer handy profitability calculators to quickly figure out how much equipment and power you need to pay to become profitable, but there are also a lot of scams.
Cloud mining companies may have hidden fees that reduce profitability, and some require a significant upfront investment to secure a contract. And price volatility can drastically reduce the profitability of mining.
That being said, if you are interested in mining cryptocurrencies with proof of work, but don’t have the knowledge or time to set up your own mining rig, a reputable cloud mining platform can help. Just be sure to do your research before you sign a contract.
Complexity: Light. No prior knowledge of cryptography is required.
Risks: Some companies have hidden fees and require a large upfront payment.
How “passive” is it really?: This is a very passive investment as the cloud mining company takes care of all the details.
Potential ROI: Depends on the asset
Fees: The platform may charge a contract fee, a withdrawal fee, and a mining fee.
Summary
Yes, you can earn crypto passively, but remember that your crypto earnings are only as good as the underlying asset. Cryptocurrency is meant to offer an alternative to traditional finance, but because the asset class is still in its infancy, there are many risks, including the risk of total capital loss.
Crypto exchanges and lending platforms have made it easy to use your crypto, but as always, carefully consider any investment before putting your hard-earned crypto into anyone’s hands. And the promise of high interest rates always requires a deeper understanding of how these returns are possible.