09 January 2023 • 11 min read
In many respects, passive income is the gift that keeps on giving. Not only does it lead to financial stability, it can result in increased financial freedom, fasttrack your financial goals, and build wealth without having to actively expend any energy. What’s not to like?
Of course, it’s not a plug-and-play solution to wealth creation. There are risks involved, particularly when it comes to earning passive income in crypto and particularly during a bear market. But the benefits often outweigh the risks, which is one of the reasons why so many crypto traders make their crypto investments work for them in order to optimize the potential earnings of their portfolios.
Whether you’re interested in high returns, a more diversified portfolio, convenience, or something as mundane as being in on the ground floor of DeFi and Web3, consider the following a handy primer on the many options available to crypto investors for earning passive income.
There are a number of cryptocurrencies, particularly ones using a proof-of-stake (PoS) consensus mechanism such as Ethereum, that offer the chance to earn passive income through “staking” coins. When people refer to “staking,” they are describing a process whereby individuals commit their coins to a particular blockchain in order to validate transactions and secure the network itself.
Generally speaking, in order to participate in staking, a person needs to have a certain amount of coins and run a staking node. By communicating with the network, the investor’s staking node helps to validate transactions and create new blocks. As a “thank you” for the contribution to the network, the investor earns a share of the block rewards.
Since we mentioned Ethereum, let’s take a closer look at how staking works on one of the top blockchains. As Ethereum describes on its website, staking is considered “a public good for the Ethereum ecosystem” and anyone with “any amount of ETH can help secure the network and earn rewards in the process.”
In order to act as a validator on Ethereum’s network, you’ll need a dedicated computer running the validator software 24/7 along with a deposit of 32 ETH, which will grant you full participation rewards as well as the satisfaction of knowing that you’re improving the decentralization of the network. More importantly, you’ll never have to trust anyone with your funds.
But what if you don’t have 32 ETH? Thankfully, you’re in luck, as there are other ways to earn passive income. For example, you can participate in pooled staking or “liquid staking,” in which case an ERC-20 liquidity token represents your staked ETH. You can stake any amount and exit the staking whenever you want through a simple token swap. Note, however, that pooled staking isn’t native to Ethereum, but requires third parties, and your assets are locked in for a certain period of time.
Another, albeit riskier, option is staking through a centralized crypto exchange. For inexperienced users who aren’t entirely confident holding ETH in their own wallet, centralized exchanges such as Binance offer staking options through which users can easily earn some yield on their tokens with little effort or input. However, given the fact that centralized exchanges often have large pools, you should be aware of the extent to which these pools are vulnerable to attacks. Unfortunately, the larger the target, the more attractive it is to unsavory characters in the crypto space.
In sum, staking requirements along with the distribution of rewards varies according to the cryptocurrency. Some cryptocurrencies, such as Ethereum, have minimum staking amounts, while others can have seemingly complex reward structures, which take into consideration different factors (e.g., the length of time staking tokens and even the robustness of the network itself).
Masternodes—they might sound nefarious, but they’re an important component of a blockchain network. So what exactly are they?
Cryptocurrency masternodes are essentially servers that run a full copy of a crypto's blockchain in real-time. They also perform certain network-related tasks, such as validating transactions, participating in governance and voting, and enabling advanced features (e.g., instant and/or anonymous transactions). For these reasons, they play an important role in terms of improving a network’s scalability, decentralization, and privacy.
You stand to earn passive income via running a masternode, depending on the cryptocurrency. In order to do so, you typically need to hold a specific number of tokens as collateral and meet certain technical requirements, such as having a high-speed internet connection and a dedicated IP address (although these specifications can and do vary based on the chain).
In order to run a DASH masternode, for example, you’ll need to have 1000 DASH units, which might sound reasonable enough until you consider the fact that DASH is currently trading around $46 (i.e., $46,000 might be too high an entry price for many traders). That number increases to 10,000 if you want to run a PIVX masternode, but PIVX is only trading at $0.19, making it the more affordable option (~$1,900) of the two.
As compensation for performing the above-mentioned tasks, thereby helping to secure the network, individuals running a masternode will typically receive a share of the crypto's block rewards. If you decide to run a masternode on DASH, for example, you can expect annual returns of 10% or more. Naturally, this can be a nice way to earn some passive income (although it takes money to make money in this case). But you should keep in mind that there is nevertheless some risk involved, as the value of the collateral can (and surely will) fluctuate. And since you’re running a masternode, you bear a significant responsibility to the network.
Copy trading is a feature offered by many online trading platforms, allowing users to automatically copy the trades of other successful traders. By using copy trading, you can earn passive income by following the trades of experienced traders without having to actively manage your own investments.
To use copy trading, you’ll need to open an account with a trading platform that offers the feature. You can then browse the platform's directory of traders and select the ones they want to follow. The platform's software will automatically copy the trades of your selected traders into your account.
Unlike the vast majority of other trading platforms, Trality’s Marketplace is a one-of-a-kind space that brings together crypto trading bot creators and investors for mutually beneficial purposes. While most platforms rely exclusively on anonymous bot makers and unproven bots, Trality’s Marketplace is a carefully curated space with hand-picked creators and the best bots available, enabling both creators and investors to earn solid passive income returns.
Investors can rent profitable bots tailored to specific risk tolerances (low, medium, and high) and individual investment goals. A full suite of metrics is available, allowing investors to decide on a bot based on clear, quantifiable data. Bot Creators can monetize their bots and earn passive income from investors around the world by having their bots listed on Trality’s Marketplace.
If you’re familiar with crypto, then you’re well aware of the debacles surrounding Celsius, Gemini, and Genesis. Crypto lending has been in the news lately, but for all the wrong reasons, unfortunately.
Take the following opening sentence from a recent Bloomberg article, for example: “These days, it’s difficult to finish typing up a hot take on the latest disaster in the crypto-lending space before a new disaster comes along to shift the focus and render it a lukewarm take.” The article goes on to describe the crypto lending space as “a dumpster fire.” Damn.
Leaving aside the bad press (and bad actors who have led to the bad press), what is crypto lending and how does it work? (The short answer: it’s quite similar to any other type of lending.)
Cryptocurrency lending is a process by which an individual or organization lends out their crypto to another party in exchange for interest, with several lending options available, such as centralized lending platforms, decentralized lending protocols, and peer-to-peer (P2P) lending.
In the case of a centralized lending platform (CeFi), the individual lending their crypto deposits their cryptocurrency with the platform, which then loans it out to borrowers. It’s standard practice for the platform to handle the loan process, including any necessary credit checks and documentation as well as the collection of loan payments. As the world’s largest crypto exchange, Binance has developed its own comprehensive ecosystem, which includes crypto lending and borrowing.
If you prefer the decentralized route (DeFi), then you can choose a decentralized lending protocol—effectively, a smart contract-based platform that operates on a particular blockchain. Unlike a centralized lending platform, decentralized lending protocols allow borrowers and lenders to interact directly without the need for a central authority.
The lender deposits their crypto into a smart contract, which is then used to issue a loan to the borrower. The smart contract handles the terms of the loan, including the interest rate and the repayment schedule. One of the most popular DeFi lending protocols is AAVE, with some 5.9 billion in liquidity locked in 5 networks across 11 markets.
And, finally, peer-to-peer (P2P) lending is yet another option for cryptocurrency lending. In this case, the lender and borrower agree to the terms of the loan directly, without the need for a central authority or platform. P2P lending can be done informally, such as through a chat app or social media, or through a specialized P2P lending platform. Nexo, for example, is one such P2P platform, offering users the ability to lend their crypto to borrowers and earn passive income in the form of interest.
But as we noted at the beginning of this section, there are clear risks when it comes to crypto lending. When selecting a crypto lending platform, you’ll want to consider various factors such as interest rates, loan duration, collateral amount, minimum deposit limit, and the platform risks.
If you’re familiar with stocks, then you’re familiar with dividends, which are paid to stockholders in either cash, additional fractional shares of stock, or both. The obvious benefit is that you have regular income from dividend payments as well as capital appreciation of the stock price.
While the dynamics of crypto are demonstrably different, the principle of profit sharing still applies with some crypto projects, which pay dividends to token holders. Thus, it is in fact possible to earn crypto dividends. Cryptocurrency dividends are payments made to the holders of a cryptocurrency in the form of additional units of the cryptocurrency.
Dividends are typically paid out by cryptocurrency projects that have a profit-sharing model, where a portion of the project's earnings are distributed to the holders of the cryptocurrency. Let’s take a look at one example in particular to illustrate how crypto dividends work.
Founded in 2015, VeChain (VET) is an enterprise-grade L1 smart contract platform. Coinmarketcap summarizes the project in the following way:
“VeChain aims to use distributed governance and Internet of Things (IoT) technologies to create an ecosystem which solves major data hurdles for multiple global industries from medical to energy, food & beverage to sustainability and SDG goals. By leveraging the power of trustless data, VeChain is building the digital backbone that will underpin the fourth industrial revolution, which demands real-time and trustless data sharing between many participants.”
Its native token, VET, is an ERC20 token, and wallet holders are rewarded with VTHOR, an additional native token within the VeChain ecosystem. By using Atomic Wallet, a non-custodial, decentralized wallet, VET holders receive dividends, amounting to an approximate ROI of 2.2%.
Remember what we said about stocks? Crypto dividends aren’t technically “dividends.” Think of them instead as rewards, albeit ones that function in a similar fashion to traditional stock dividends.
Just like manna from the sky, cryptocurrency airdrops can provide (financial) sustenance during fallow periods (such as the ongoing crypto winter) or passive income in any type of market.
An airdrop is a way to distribute tokens to a large number of wallet addresses at once. There are often a variety of reasons for doing so, such as to promote a new crypto, to reward users for their loyalty or for completing certain tasks, or to spread awareness about a project. Some crypto projects will even distribute free tokens to holders of certain other cryptocurrencies as a way of promoting their project, and these airdropped tokens can then be sold or held for potential future appreciation.
To receive an airdrop, you typically need to meet certain criteria, such as holding a specific cryptocurrency, participating in a social media campaign, or signing up for a mailing list. The airdrop may be announced in advance and the instructions for participating may be provided on the cryptocurrency's website or through social media channels.
Another way to earn passive income from crypto is through hard forks. When a hard fork happens, the new forked chain is created and a new crypto is introduced. If you hold the original cryptocurrency in a wallet that supports the fork, you will typically be credited with an equivalent amount of the new forked cryptocurrency.
Notable hard forks include BTC (2017) and Ethereum (2016). For example, if you held 1 bitcoin (BTC) in a wallet that supports the Bitcoin Cash (BCH) fork, you would have received an additional 1 BCH after the fork. You could then hold onto these forked coins and potentially sell them for a profit in the future, earning passive income as a result.
Yield farming is a way for cryptocurrency users to earn rewards by providing liquidity to a decentralized finance (DeFi) platform. These rewards can take a number of forms, such as interest, fees, or tokens.
In order to take part in yield farming, you need to deposit your crypto into a DeFi platform, e.g., as a decentralized exchange (DEX) or a lending protocol. Your crypto will then be used to provide liquidity to the platform, meaning that it can be used to trades and/or loans for others. As a “thank you,” you’ll earn a share of the fees or interest generated by the platform.
Yield farming and liquidity mining are often used interchangeably to refer to the above-mentioned process of earning rewards by providing liquidity to a decentralized finance (DeFi) platform. However, some people use the term "yield farming" to refer specifically to the process of earning rewards through complex strategies that involve borrowing, lending, and trading on multiple platforms.
Conversely, liquidity mining is a more general term that refers to the process of earning rewards by providing liquidity to a DeFi platform, regardless of the specific strategy used.
Generating income with little-to-no effort on your part is a great way to create wealth, and there are various income streams available to crypto investors.
However, there are quite a number of variables to consider, least of all the type of passive income stream that you want to pursue. While some offer higher interest rates, there are surely downsides to consider, particularly in light of the high costs of entry (e.g., running a DASH masternode), to say nothing of recent bankruptcies and data breaches in the space.
Overall, one of the safest ways for both investors and creators to earn passive income is through a well-vetted marketplace with transparent metrics. The obvious benefit is that both sides are incentivized: if a creator offers market-beating bots, then investors will rent them.
It’s a win-win for everyone involved.