7 mins

Ways of earning passive income from crypto

Akshay Subramanian
April 6, 2022

Leverage the high-risk high-reward crypto markets

The ever-increasing popularity of crypto markets makes it very tempting to invest in crypto ourselves. However, the volatile prices don’t make it easy for someone with very little time to keep track of their investments and generate good returns.

Though long-term investments may seem like an invest-and-forget situation, it is not always so easy with crypto investments. The prices of the cryptocurrency you invest in may suddenly drop and if you have a stop-loss instruction in place, your cryptocurrency will be automatically sold. If not, you may have to invest additional funds to avoid liquidation. Trading cryptocurrency in the hopes of selling it at a price higher than what you purchase it for is also called “HODLing” in crypto lingo. 

A typical way many try to make a return in crypto with little to no involvement is through buying and holding crypto – also known in the industry as “HODLing.” However, there are other ways in which crypto investments can generate passive income. There is still a considerable amount of risk involved even with these 5 ways of earning passive income from crypto. But, they will be great for maintaining a diversified crypto portfolio while generating returns from trading alternatives.

Five ways of earning passive income from crypto

  1. Staking

How does Staking help with earning passive income?

A popular way of earning interest from crypto is by using the proof-of-stake consensus method that some cryptocurrency blockchains use. In this method, the need for ‘mining’ crypto is entirely eliminated and it is said to much more energy-saving. Instead, proof-of-stake uses validators with a certain number of cryptocurrencies to validate the nodes. These nodes are then used to fulfil transactions by adding blocks. In exchange for being a validator, crypto investors earn interest and even get rewards as part of the transaction fee given to the node operators.

Blockchains that use Proof-of-Stake:

  1. Solana
  2. Polkadot
  3. Ethereum 2,0

Risks involved with Staking

Investors need to have a certain amount of currency if they want to participate. They can also stake the crypto for a certain amount of time. Staking can happen through crypto exchanges or even wallets however using crypto wallets for staking involves certains risks like hacking. Some networks also have stringent rules against validators who might lose crypto if they don’t follow them. Before staking your crypto, be sure to read all of the terms involved.

  1. Interest-bearing digital asset accounts

How to earn interest from idle-digital assets?

Similar to money in an savings bank account, crypto assets can be deposited in certain financial instruments and accumulate interest regularly. This is a good option if your crpyptocurrencies are just lying in your wallet. The tenure of earning interest could range from daily, weekly, monthly or even yearly. These deposits generate better interest than tradionatonal banking.

Products that offer interest of deopsits:

  1. Nexo
  2. Celsius Network
  3. SwissBorg

Risks involved with Deposits

There is often a “lock up period” for the deposits during which the investors cannot access their funds. During this fixed tenure, the price of the cryptocurrency may fall massively and yet the investor will not be able to sell it off to cut losses.

  1. Lending

Crypto lending is an extremely popular form of generating passive income from crypto. Just like a traditional loan, the total value of crypto lent and the duration will impact the amount of interest earned. Someone will borrow your crypto and use it for the duration in exchange of a fee which is the returns on lending or interest. Usually the borrower also deposits a collateral before availing the loan.

Crypto lending is popular because the amount of documentation and approval needed to borrow is much lesser than traditional banking. There is no concept of a credit score and anyone who can offer collateral can take the loan bound by a smart contract.

There are four primary concepts that crypto lending is set up around:

Margin Lending

Borrowers are traders who will use a larger volume of cryptocurrencies to amplify the returns from the trade. Most crypto exchanges manage margin lending while the investors can simply deposit their currencuries and earn interest on the loans.

Centralized Lending

When a third-party sets the terms for the lending contract, it is termed as centralised lending. You will know the interest rate and lock-up period tenure before making offering your crypto as loan. 

Decentralized Lending

Without a centralised exchange, this lending option involves direct lending through the blockchain. Smart contracts automate interest rates and protect the lenders and borrowers through the terms mutually agreed upon. No intermediary is involved.

Peer-to-Peer Lending

Peer-to-peer lending facilitates direct borrowing through dedicated platforms. You can deposit some amount into the wallet and then decide amount of loan, the interest rates, terms of loan on which you would like to earn interest. This gives you control of the lending process and how much interest you wish to earn.

  1. Dividend-Earning Tokens

Dividends are a portion of the profits that the company makes. In the crypto world, you can purchased tokenized stocks. A company’s equity back crpyotcurrencies which are nothing but the tokenized stocks. By holding these stocks, you will be entitled to a dividend which is a portion of the revenue distributed to all token holders regularly (mostly quarterly).

If you purchase KuCoin Shares (KCS) , you will receive a share of the transaction fees that the KuCoin Blockchain collects.

  1. Liquidity pools and yield farming

How to earn passive income from liquidity pools and yield farming?

Decentralised exchanges function with the help of liquidity pools where investors make the crpyotcurrency available for trading. This eliminates the need for a central exchange. However, without the liquidity pool, the demand and supply will not match and the decentralised exchange will not function.

In exchange for providing this liquidity, investors earn interest. The returns are usually extremely high but comes with a fair share of risk.

Risks involved with Liquidity Pools and Yield Farming

Liquidity pools and yield farming can be quite complication at first glance. It’s important to understand its risks before investing. One of the biggest risks is impermanent loss. The value of the tokens traded on a decentralised exchange could be different from the value outside the liquidity pool. If your cryptocurrency is being traded for a lesser value in the liquidity pool, you could potentially make a significant loss. 

As an investor, you will also have to look at the underlying smart contracts and what it contains with respect to the terms and conditions. There could be a lot of scams or rug pulls wherein the smart contract’s fine print contains an option for the owners to run away with the investors money. Even though the project is heavily promoted, one must always practice caution with such investments.

Key Takeaways

As blockchain technology is continuously adapting to the challenges it encounters, investors are finding more and more avenues for generating stellar returns. DeFi is also developing safer, unique financial instruments for investors to leverage. While you expand your portfolio with these passive income generating tools, don’t forget to factor in the tax implications that the government has placed on all forms of crypto income and income from other virtual digital assets. Head over to Kuber tax for a seamless calculation of your crypto taxes. 

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