Cryptocurrencies, like any financial investment can generate positive returns. But buying and selling is not the only way to do it. Earning passive income with cryptocurrencies is another alternative that makes this investment product more attractive.

What is Passive Income?

Passive income is the income generated from assets that you own, without having an active participation. It is a concept that is also used in the traditional financial world when talking, for example, earning income from real estate investments.

In the crypto universe, what you have to do is to invest your cryptocurrencies or digital assets in a platform or projects and wait for them to generate profits.

How to generate passive income with cryptocurrencies?

There are several alternatives. Your choice depends on factors such as the investment amount, the risk appetite and the market knowledge.

(1) Proof-of-stake (PoS) staking

Proof-of-stake, as it is also known, is a type of consensus mechanism that exists on the blockchain as an alternative to Bitcoin’s well-known proof-of-work system. Through this mechanism, network participants reach an agreement on the entry of new data into the blockchain. Here, staking replaces the role of the mint. So, instead of miners, there are validators, who receive the rewards for their work. The systems used to elect them vary from blockchain to blockchain. Some networks require users to deposit or pledge their financial resources.

Here, the blockchain selects validators from a pool who have pledged a specific sum of their native digital token. In return, the validators earn interest on the funds earmarked to contribute to the validity of the network. This is only possible due to the open and decentralized nature of the blockchain, where participants decide on the governance of the network and validate transactions.

What is Staking

Just as blockchains that use the proof-of-work system require a mint to aggregate blocks of data, proof-of-stake requires validators that do staking to fulfill the same objective.

Basically, staking consists of keeping your cryptocurrencies in a digital wallet, to back up the security of the operations carried out in that network. In other words, it is the guarantee that exists, since there is no central entity that watches over like a bank. And by having a blocked deposit as collateral, you receive rewards i.e. generate passive income.

(2) Traditional buy and hold

If you’re not looking for a short-term gain, this may be the option for you. In traditional buy and hold, you buy a cryptocurrency or digital asset when its prices are low, with the idea that its price will increase in the future and you will have a significant return.

This is a long-term strategy that requires you to stay with the investment for at least six months, but can be as long as 5 years. In a volatile market, it is difficult to guarantee a fixed return. But in a buy and hold, there is a risk of losing even the initial investment as seen in Bitcoin and Ethereum, which in the last year alone have had significant ups and downs. The key here is to do your research before investing.

(3) Crypto lending

This is one of the most popular options in the centralized and decentralized segments of the crypto industry. Its concept is quite simple and similar to traditional lending. The idea is to lend cryptocurrencies to another person for a set amount of time in exchange for a fee.

The value of passive income with cryptocurrencies will depend on three things:

1. The total value of the cryptocurrencies being lent
2. The duration of the loan
3. The interest rate

Loans with higher rates, longer times or larger amounts are the ones that can generate better returns. In some cases the lender defines the terms of the agreement. In others, it is a third party that negotiates them. This depends on the modality chosen to make the loan.

There are currently four main strategies used in the crypto world:

1. Peer-to-peer lending: Here it is those involved who define the amount to lend and the interest they expect to earn on the loan. The platform on which the negotiation is made only connects the interested parties, like one that connects buyers with sellers.
2. Centralized lending: As in centralized systems, this is an infrastructure created and managed by third parties. Interest rates are fixed, as are loan terms.
3. Decentralized lending or DeFi: These transactions are done directly on the blockchain and have no intermediaries. Lenders and borrowers interact with programmable and self-executing contracts (smart contracts), which set the terms of the loan.
4. Margin loans: This is cryptocurrency that is lent to traders to increase their trading capacity. In this way they can close a deal with borrowed funds, and still repay the loan with interest. These transactions are made through cryptocurrency exchange platforms.

(4) Cloud Mining

The mint of cryptocurrencies through the proof-of-work system requires a significant investment in computer equipments and a high level of technical knowledge. Cloud mining, on the other hand, is a simpler and less cumbersome alternative to earn passive income with cryptocurrency.

How?

This was developed as a strategy to create cryptocurrencies by renting all the computing power but through the cloud. This way there is no need to install any hardware or run any software. This means that people can rent power from an established operation. And by buying these contracts, they are entitled to a certain hash rate for a certain period of time. The owner of the contract receives cryptocurrencies in proportion to the size of their contract. This has allowed more people in the world to participate in the production of cryptocurrencies remotely and at a lower cost. But this option of generating passive income with cryptocurrencies is full of scams. So before renting or buying any contract, you should verify that the company offering this service is legitimate.

(5) Binance Earn

Binance, one of the largest exchange platforms on the market, offers several services to produce passive income with cryptocurrencies. Binance Earn is one of the most popular because of its simple mechanics.

It is a savings program where the user can choose between two financial products to accumulate returns. These are flexible savings and blocked savings. The former, as its name indicates, has flexibility when it comes to depositing and withdrawing the money. In other words, each person decides when to put money in and how long he or she wants it to generate returns. The average annual return (AAR) uses the average daily interest rate of the last 7 days, multiplied by 365.

Blocked savings on the other hand has set time periods (7, 14, 30 and 90 days) for the inflow and outflow of the fixed principal. The interest rate is variable depending on the number of days the funds remain locked in the exchange market.

(6) Token Airdrops

Airdrops can occur when a project distributes free tokens to existing cryptocurrency holders. These airdrops can be based on various criteria, such as the amount of the original cryptocurrency held or participation in a particular event or community.

(7) Crypto Savings Accounts

Certain cryptocurrency exchanges and platforms offer savings accounts where you can deposit your cryptocurrencies and earn interest on your holdings. Similar to traditional bank accounts, these platforms may pay interest on your deposits.

(8) Dividend Payments

Some cryptocurrencies distribute dividends to token holders. These dividends are typically paid out based on the company’s profits or revenue. Owning such dividend-paying cryptocurrencies can generate passive income in the form of regular dividend payments.

(9) Yield Farming

Yield farming involves providing liquidity to decentralized finance (DeFi) protocols in return for earning rewards. By lending or staking your cryptocurrencies on DeFi platforms, you can earn interest, fees, or platform-specific tokens.

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Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].