Article
May 18, 2022

How to Earn Crypto Passive Income

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Start making passive crypto income alongside your day job with these four tried and tested methods.

There are those who dedicate their lives to trading cryptocurrency full time, but you don’t need to dedicate every second of your time to earn passive income with crypto. Through staking, yield farming, lending, and nodes you can make a passive income without needing to be at your device at all times.

So, what are these methods and how can they help you earn a passive income?

Staking cryptocurrency

Staking is the most common way to make passive income with crypto. Traders can earn rewards for holding certain tokens. For example, if you hold ETH, you can stake your holdings and earn a percentage-rate reward over a set amount of time. You can do this via a staking pool, which works in a similar way as an interest-bearing savings account (in fiat terms, of course).

The main benefit of staking crypto is that you can earn more crypto by doing so, and interest rates can be generous. However, not all cryptocurrencies can be staked, for example Bitcoin. You’ll need to check with an exchange to see if your holdings are eligible.

Yield farming

Yield farming skyrocketed in popularity in 2020 when it helped the DeFi sector increase its market cap from $500 million to $10 billion in a short space of time. There are several elements to yield farming crypto, such as a liquidity provider, staking, lending, and borrowing:

Liquidity provider (LP). This is where you deposit coins to a decentralized exchange to provide trading liquidity. To swap tokens, exchanges charge a small fee. This can vary between platforms and a proportion of the fees are paid to liquidity providers. With some tokens, the fee is paid into a new liquidity pool token. Staking. This type of staking includes staking liquidity pool tokens. As you are paid for supplying liquidity in LP tokens, you can stake those tokens to earn more yield. Lending. Using smart contracts, you can lend crypto to borrowers and earn yield from the interest paid on the loan. Borrowing. This is where you use one token as collateral and receive a loan for another token. You can then farm yield with the borrowed coins. In addition to earning yield, you’ll keep your initial holding.

Yield farming is complex and it often includes complicated strategies. Additionally, you’ll typically need to put down a large initial sum to produce attractive returns. That said, yield farming can potentially provide a relatively low-risk way to generate extra returns through minimal effort once you have set up your strategy. To see if yield farming is for you, do your research around the topic and make sure you fully understand the risks and potential rewards.

Lending crypto

The concept of lending centers on loaning crypto to another trader for a set period of time in exchange for a fee. The amount you can earn largely depends on the value of the crypto being lent, the duration of the loan, and the interest rate. Higher rates, longer, and larger loans can lead to more income.

There are three types of lending approaches you can take to earn a passive income with crypto. These are margin, centralized, decentralized, and peer-to-peer lending:

Margin lending crypto. This is where you lend crypto to traders who want to trade using leverage from borrowed funds. Traders can amplify their positions with these assets and repay the loans with interest. Exchanges handle most of these details, and users only need to make their crypto available to lend on margin. Centralized lending. This type of lending involves a third party, which means that interest rates and lock-up periods will be pre-agreed and fixed. You must deposit your crypto to the lending platform before you can earn any interest. Defi lending. With Defi lending there’s no third party involved and you trade directly through the blockchain. This is thanks to lenders and borrowers interacting through smart contracts that also automate interest rates. P2P crypto lending. There are platforms that allow P2P lending as well. First, you’ll need to deposit your crypto onto the platform’s custodial wallet. Then, you can largely control the crypto lending process and you’ll be able to set the terms of the loan, interest rate, and the amount.

The main benefit of lending crypto is that transactions are usually speedy, and it offers flexibility and a simple way to earn a passive income with minimal work after setup. It’s important to know that most, if not all, crypto lending platforms aren’t insured, at least not in the same way traditional fiat loans are. What’s more, always make sure you’re using a platform that you trust and has a good reputation to minimize the risks of fraud and cyber attacks.

Nodes

A node is a computer that’s constantly connected to a cryptocurrency network and supports the network through validating and relaying transactions. There are a few different types of nodes, however, in this article, we will be focusing on lightning and master nodes as they can benefit you in making a passive crypto income.

Lightning nodes

The concept of making money with lightning nodes is fairly straightforward. The Lightning Network allows Bitcoin users to make small transactions without incurring hefty fees and long confirmation times. It’s a decentralized network that uses smart contract functionality within the Bitcoin blockchain to enable instant payments across a network of users.

Running a lightning node won't make you rich overnight. You’ll more than likely make a few dollars per month in the form of Bitcoin. This can be dependent largely on the price of BTC against your local fiat currency (if you’re transferring your crypto to fiat, of course).

A lot of traders who run lightning nodes do it to support the use of Bitcoin as a medium of exchange. There is potential for the lightning network to grow and for nodes to gain more transactions routed through it (and for the income for node operators to rise too). Remember, this is not a quick way to make an income: it’s a slow and gradual process.

Masternode coins

A masternode is a server with a unique status within a crypto network and you can potentially receive a larger passive crypto income through running masternodes. Each time a new block is made, masternodes receive a portion of the block rewards. They also provide exclusive services, take part in network governance, and validate instant transactions. The masternode gains rewards in the form of fees, and this process is similar to a commission incentive structure.

In order to run a masternode you’ll need to hold a significant sum of the network’s cryptocurrency. For example, if you run a DASH masternode it will cost 1,000 DASH, which is roughly around USD106,054.

Things to consider before you begin to earn passive income with crypto

There are risks involved with trying to make passive income with crypto. Some of the options mentioned above are simple whereas some are more complex and require careful research first. Most, if not all, of the ways to make a passive income listed here need an Ethereum wallet like MetaMask to get started.

The first thing to do to earn passive income with crypto is do your research and decide which method (or methods) is right for you. Then, when you have identified a method, like yield farming for example, carefully research and learn all about the available platforms and tokens available to help decide which one is right for your needs. Finally, before you invest on a platform, you’ll need to first consider fees, the network speed, token availability, and trader anonymity.

Remember: crypto markets are volatile which can make trading and potential returns unpredictable. Only invest in what you’re willing to lose.

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