Earning passive income is extremely important to wealth creation and preservation across all asset classes. Passive income creates more stability, security, freedom and predictability in an investment. And what makes passive income so great is that once an investment is cash flowing passively, no extra work is required.
Up until recently, cryptocurrencies were classified as non productive assets. This was because there wasn’t a way to generate value with them. Instead, investors could only hope that someone else would buy a cryptocurrency off of them for more than they bought it for. However, with the latest advancements in the crypto industry, we’re now able to produce passive income from almost every digital asset. This is significant because it allows investors to generate a yield on an investment that would otherwise just be sitting idle. Now, investors can doubly benefit from the potential for extreme capital appreciation and earning predictable interest on their crypto.
So in today’s article, we’re going to explore why you should and how you can earn passive income on your cryptocurrency holdings.
Why you should earn passive income
Earning passive income is one of the most important factors when it comes to building and preserving wealth. You can think of passive income as planting seeds and letting them grow. Once you’ve planted the seed, little work is required. Instead, you let the seed get to work and provide a bit of maintenance here and there.
In the crypto industry, the ability to earn passive income is a fairly new phenomenon. It allows investors to earn a predictable income from their investments. This means that investors benefit from both capital gains and interest.
What’s more, most passive income strategies compound, which means that the potential for future gains is massive. This means that crypto investors benefit from capital appreciation and compound interest, which also has the potential to appreciate over time.
Ways to earn passive income on crypto
1. Centralised Crypto Lending Platforms
Lending is a completely passive way to earn interest on your cryptocurrency holdings. Centralised Crypto Lending Platforms are basically businesses that offer lending and borrowing services on a centralised platform. Those who deposit onto the platform earn interest on their funds. It’s pretty similar to how earning interest in a bank account works, except the interest is much higher and typically ranges from 6-12% APY. Most lending platforms also pay interest daily and do not require users to lock up their holdings, allowing them to withdraw at any point. It’s worth pointing out though that this is highly regulated and users must go through KYC verification.
One thing to note is that because these platforms are centralised and control your cryptocurrency private keys, you technically don’t own that cryptocurrency once it's on the platform. Instead, you’re trusting that the platform will look after it for you and return it when you want to withdraw. This means that you must make sure that the platform that you are using is totally legit and secure.
Three of the biggest centralised lending platforms are BlockFi, Celsius and Nexo.
2. DeFi Lending Platforms
DeFi lending platforms are very similar to Centralised Crypto Lending Platforms, except that everything is powered by smart contracts rather than a centralised intermediary. Because everything in DeFi is decentralized, the users remain in full control of their crypto at all times. This makes DeFi lending platforms much more secure and transparent than their centralised counterparts.
With DeFi lending platforms, KYC is not necessary and the entire system is permissionless - which means that anyone is able to participate as long as they have an internet connection and a web3 wallet.
It’s important to note that with DeFi platforms, if anything goes wrong, there is no regulator or agency to turn to. And it's also very likely that users will incur fees like network gas fees, which depending on which network you’re using and current network congestion, can be quite expensive. These platforms are best suited for more tech savvy people who value the principle of decentralization.
The two most frequently used DeFi lending platforms are Aave and Compound.
3. Liquidity Providing / Yield Farming
Besides lending, yield farming is another way that users can earn passive income on their crypto holdings. Yield farming is the process of depositing digital assets into a trading or lending pool and then staking the protocol’s token to earn additional rewards.
Essentially, yield farming protocols incentivize liquidity providers to stake or lock up their crypto assets in a smart contract-based liquidity pool. These incentives can be a percentage of transaction fees, interest from lenders or a governance token. These returns are expressed as an annual percentage yield. As more investors add funds to the related liquidity pool, the value of the issued returns decrease accordingly.
Yield farming is a very risky venture and it is not something for newcomers to the crypto industry or those with a low tolerance for risk.
Staking is essentially a less resource intensive alternative to mining. It involves storing certain cryptocurrencies in certain wallets and delegating them to the validation of network transactions. Staking networks use Proof of Stake as their consensus algorithm. Staking is relatively straightforward and it usually consists of setting up a staking wallet, picking a stake pool and simply holding the coins. It’s an excellent way to earn passive income with minimal effort.
The benefit of staking is that not only are you able to help secure the network, but you’re also able to earn decent financial returns in exchange for your efforts in kind of the token that you’re staking.
Important things you have to consider when attempting to stake a cryptocurrency.
- Wallet support
- Staking complexity
- Pay out terms
- Lockup periods
- Staking rewards
It’s also worth pointing out that you can even stake certain cryptocurrencies while they’re being stored in hardware wallets. This enables investors to earn interest while storing their crypto in the safest and most secure way possible.