Beginner’s Guide To Earning Passive Income In Crypto

The goal of investing is to maximize our returns, and one way to do so is by diversifying your portfolio across different investment products and types. The ultimate goal is to earn money even while we’re sleeping. We have to make our money work for us for that to happen, and thus, our portfolio needs to be designed to generate passive income.

The cryptocurrency market is notoriously volatile. When a market experiences such wild swings frequently, it’s essential to set up an income-generating source that can be banked upon. This is where passive income comes in.

This article will talk about what passive income is and how you can make your money work to earn passive income in crypto.

Let’s dive in!

What Is Passive Income?

Passive income is the income generated by your investments without your active involvement after the initial stage. Simply put, any investment held by you that generates income on its own is passive income.

The cryptocurrency market can be very volatile, and even the most experienced investors can suffer losses for a prolonged period. In a volatile market, where returns are never guaranteed, it’s important to set up alternative sources of income that help you earn irrespective of the market conditions.

This can be done by finding streams of income that generate passive income. These investments would help you earn a regular income, similar to earning interest with the bank, and would only require minimum effort initially to set up and no effort to maintain.

Having multiple such streams of income can help you diversify your portfolio. Moreover, regularly investing in such investment products will help you reap the benefits of compounding over time, and slowly, you can build your crypto portfolio to a significant amount.

Ways To Earn Passive Income In Crypto

Let’s take a look at some of the ways an investor can earn passive income in the crypto market:

1. Mining 

Mining is the process of receiving a reward for verifying transactions to secure the network by using computing power to solve complex mathematical problems. It is the OG way of earning passive income in crypto and does not even require you to hold any cryptocurrencies. 

In cryptocurrency mining, cryptographic experts use high-powered computers to solve complex algorithms and mathematical problems and share back “proof of work” to demonstrate the solution. As a reward for their work, the miner who solves the mathematical problem the fastest is given the crypto or token of the blockchain helping secure.

While mining is a good way to earn passive income in crypto, setting up and maintaining mining equipment can be very costly. In the initial stages, it requires a substantial investment and some technical expertise to become a miner.

These days, Bitcoin mining has become a corporate business. However, individual miners can still participate by joining one of the larger mining pools and getting their share of the rewards. Moreover, individual miners can also mine coins that have a lower hash rate than Bitcoin. This would mean that they don’t require as much computational power, and thus, it could still be profitable to mine individually. However, mining lower hash rate coins come with its own risks as these are mostly lesser-known coins that carry little liquidity and can also become worthless overnight. Thus, it’s important to do your own research and make an informed decision.

2. Staking Tokens

Since mining requires a high initial investment and expensive electricity costs, it’s difficult for individual miners to set up a profitable mining operation. As a result, for individuals, staking tokens has become a more popular way of earning passive income in crypto.

Many Proofs of Stake (PoS) cryptocurrencies like Cardano (ADA) allow people who hold their coins or tokens to stake their holding. In such networks, an individual can become a miner without having to layout the initial cost of buying expensive equipment like mining PoW cryptocurrencies. 

In PoS mining, the more crypto a person holds, the more mining power they have. For example, to become a validator on Ethereum, one requires a minimum of 32 ETH to create a staking pool. One can choose to stake more than 32 ETH and have more mining power. Moreover, it’s also possible for individuals with small holdings to pool their ETH and create a staking pool.

3. Lending

Lending in crypto works similarly to lending in TradFi – the borrower pays interest to the lender. In addition, many lending platforms like BlockFi, Gemini, Celsius, etc., allow users to lock up their funds on their platform for a specific period and collect interest payments on the same.

In crypto lending, the loan is secured by always having more crypto assets than what is being borrowed. The borrower provides the crypto as collateral, which ensures that the lender is compensated even if there is a problem. 

Lenders also have the option of choosing between DeFi and CeFi service providers. CeFi service providers include platforms like Celsius, whereas DeFi options include platforms like AAVE and Compound.

For long-term holders who plan on HODLing their crypto, lending is perhaps the best method to earn passive income.

4. Yield Farming

Yield farming is a way to earn more crypto with your crypto. It is a method of earning crypto that leverages the financial products offered by DeFi protocols and enables investors to maximize their returns.

It’s a high-risk, high-return investment opportunity where investors are rewarded for locking up their crypto on different DeFi platforms.

5. Dividends

A classic way to earn passive income on investment, dividends work similarly in crypto as in traditional financial markets. 

Some dividend-paying cryptos include:

• Tezos (XTZ)
• Cosmos (ATOM)
• VeChain (VET)
• NEO (NEO)

6. Special Events

There are many special events in crypto that are unique to the space. They represent a good opportunity for investors to maximize their returns. The special events include:

• Airdrops – Used primarily to gain attention and new followers, airdrops are events where free tokens are distributed to numerous wallet addresses. One of the biggest airdrops in crypto was the one done by Uniswap back in 2020, where each address that had interacted with Uniswap v1 or v2 contracts received 400 UNI tokens each.
• Forks – These are cases where a new cryptocurrency is formed as a result of an update to the original blockchain. For example, Bitcoin Cash (BCH) and Bitcoin Satoshi Vision (BSV) are forks of Bitcoin (BTC).
• Burns – These are events where a crypto company sends some of their native tokens to an unusable wallet and ‘burns’ them by making them obsolete. This event results in increased scarcity and value of the token. For example, crypto exchanges like Binance regularly burn a part of their profits.
• Buybacks –  These are events where a crypto company buys back its own token from the public. Such an event results in decreased supply and increased value of the token. For example, the BNB token has a token buyback and burn program. Also, MakerDAO’s burn works similarly to a stock buyback.
• Rewards – This is where users can earn crypto while interacting with the ecosystem in general. For example, Coinbase gives rewards to its users for learning about different cryptocurrencies through its Coinbase Earn initiative.

 In Conclusion…

• As investors, we love passive income. Who doesn’t like making money while sleeping, right? Over the years, the ways to earn passive income in crypto have increased. Initially, there was only the mining method, but now, there are more economically friendly ways for individual investors to earn passive income. 

If you want to get started, our guide will help you learn more about different ways of making your crypto work for you.

So, have you explored earning passive income in crypto yet? What’s your preferred way to do so?

Comment down below and let us know more!

If you would like to read more articles like this, follow DeFi Planet on Twitter and LinkedIn.