HOLDing is not the only way to earn money from crypto without having to work for it. There are many other ways that investors (as opposed to the ever-stressed day traders) can earn interest on their cryptocurrency assets, almost like earning interest on bank savings.
However, many of these opportunities have been taken over by scammers. You could just as easily lose your crypto as you could earn on it.
Despite the bliss that comes with passive income, there’s no free lunch when it comes to crypto. While some are as simple as playing games to win crypto, most require you to do your homework evaluating risk, potential earnings, and more.
This detailed guide will cover eight of the most common ways to earn passive income with your crypto assets, so you can be the judge as to where you want to put your hard-earned crypto.
Crypto Lending
Cryptocurrency lending is the easiest way to earn interest on your crypto assets. Borrowers use your crypto for trading, investing, or for personal reasons, and you get to earn daily, weekly, monthly, or yearly interest.
There are different types of crypto lending, all with varying levels of risk and interest rates.
Centralised Crypto Lending Platforms
The “safest” way to lend your cryptocurrency is on centralised, regulated exchanges. Here, the exchange acts as a go-between and ensures that you get your money back plus interest.
In many of these exchanges, the money goes to margin traders who borrow funds to fund leveraged trades. You can earn a daily interest rate of about 0.003537% on BTC on many exchanges. While it sounds small, this interest rate can compound to significant earnings over time.
Being central authorities, exchanges can set limits such as lock-up periods (you can’t withdraw your money before), and fixed interest rates. You also have to provide substantial KYC information, which many people aren’t comfortable with.
Always make sure of the security and legality of the exchange, and you can earn 8-12% interest on your crypto.
DeFi Lending
If the thought of centralised lending puts a bad taste in your mouth, DeFi platforms such as Aave and Compound are the perfect solution. With no intermediaries involved, DeFi lending makes use of smart contracts to execute lending rules such as interest and repayment.
This makes DeFi (Decentralised Finance) lending completely trustless, permissionless, open-source and (mostly) secure. There is still the risk of hackers who take advantage of loopholes in smart contracts to steal funds, which calls to mind the Poly Network hack in early 2021.
Over US$105.89 billion is locked up in DeFi protocols at the time of writing, which makes the industry robust and fluid.
DeFi lending is becoming very popular because there are no rules on when you can withdraw your funds, interest rates are typically higher, and you don’t have to contend with KYC protocols.
You can buy Compound tokens on CoinSpot today, which gives you voting rights on technical and protocol upgrades, among other important decisions. You can read our detailed CoinSpot review to know how to buy cryptocurrencies on this exchange.
Peer-to-Peer Lending
Unlike centralised and DeFi lending where established platforms do all the heavy lifting, P2P lending allows you to take a more hands-on approach. You set your own interest rates, which means higher earnings but higher risks.
Peer-to-peer lending works through the use of platforms such as BTCPop that connect lenders with borrowers. Based on a reputation system, it allows lenders to choose the people to whom they want to lend their crypto assets (mostly in BTC).
The responsibility of evaluating each borrower falls to the lender. Even then, they have to assume the full risk of defaulting borrowers and the loss of their crypto funds.
Interest-Bearing Account
Much like depositing fiat currency in a conventional interest-bearing account, there are platforms that allow you to earn interest on stored crypto assets.
One of the most popular of such services is Hodlnaut. It offers interest rates of up to 12.73% paid daily, which is earned from lending your funds to crypto traders on margin. Based in Singapore, Hodlnaut is still in the process of getting licensed and fully regulated.
Some popular crypto exchanges also allow crypto holders to earn an annual yield when they store assets in a special interest-earning account. Interest rates of about 6%p.a are common, and crypto is lent either to individual or institutional borrowers on interest.
Proof of Staking (PoS)
PoS is a consensus mechanism that allows network participants (nodes) to vote on transactions and activities within that network. As opposed to Proof of Work (PoW), Proof of Stake works by letting validators stake a certain amount of cryptocurrency as security and proof of their validity.
If the validator fails to carry out network activities (such as verifying new transactions) with integrity, their stake can be forfeited.
The validators earn interest on these staked funds as a reward for maintaining the network and performing the various network activities. In the long term, Proof of Staking can allow validators to earn attractive interest on their held crypto assets.
If you are not up to the technically demanding work of validating, you can choose to stake your crypto assets as a third-party to validators who do the actual work. You get slightly lower rewards, but you don’t have to stake as much and can distribute your assets over several staking services.
Some of the most popular staking services are available here on Defiprime where you can stake ETH 2.0, Cardano, Polkadot, Solana, Marlin, ICON, Loom, Cosmos, and many other coins.
Earn Dividends on Tokens
Probably one of the best and most straightforward ways to earn passive income on crypto is through holding tokens that pay dividends. Much like having shares in a company, these tokens are issued by crypto platforms such as exchanges and DeFi institutions.
Users who buy and hold these tokens will earn dividends on them, and you earn more dividends when you hold more tokens.
KuCoin Shares (KCS) are one of the best examples of dividend-earning tokens. KCS tokens allow you to earn dividends on the major crypto exchange KuCoin. The KCS tokens also grow in value as the exchange grows, very similar to a cryptocurrency appreciating in price.
The Celsius Network DeFi platform is another example of another crypto platform that pays back 80% of its profits as dividends. A third example is Bibox Tokens (BIX), which pay back 45% of Bibox’s net trading fee profits to its “shareholders.”
Cloud Mining
Just like third-party proof-of-staking, cloud mining allows you to mine crypto without actually owning and operating a crypto mining rig.
While somewhat controversial and risky, cloud mining lets crypto holders rent mining hardware at special mining farms and earn mining fees on them. In exchange, the mining operators charge a daily maintenance fee.
It might sound like a good deal, but cloud mining is a very risky prospect. Mining already has very low margins to begin with, and some cloud mining operators take as much as a year to pay out earned funds.
In that time, the crypto asset being mined could depreciate in price and become unprofitable to mine. In such cases, the mining operator simply cancels the contract.
Cloud mining is also full of scams, leading to heavy losses for people looking to make a quick buck. Due to the remote and almost completely unregulated nature of the venture, a lot of due diligence is required before investing in it.
Some popular cloud mining operators are Genesis Mining and HashNest.
Yield Farming or Liquidity Harvesting
Yield farming is another method of growing crypto assets that involves lending your crypto to DeFi lending platforms. By supplying your funds to grow the liquidity pools on these platforms, you can earn fees and tokens in return, based on your share of the liquidity pool.
All you need to do is provide a certain (usually substantial) amount of cryptocurrency to a DeFi platform such as Uniswap or Aave. You deposit crypto in a specified ratio of crypto pairs (such as ETH/USD to a special liquidity pool.
The funds will be locked in the liquidity pool, and you receive LP (Liquidity Provider) tokens representing your share of the total funds in the pool, which earn you interest over time. You can then stake these tokens on DeFi platforms to earn extra interest rates on your crypto.
Sound’s complicated? Yield farming is much easier in practice, but very risky. Your locked crypto assets could be stolen (scammed), hacked, depreciate in price (impermanent loss), or simply earn very little interest as the liquidity pool becomes popular.
Running a Lightning Network Node
The second-layer Bitcoin protocol called the Lightning Network (LN) relies on off-chain payment networks to amplify the number of transactions on the network. It requires nodes to form direct, peer-to-peer connections through which transactions can be carried out.
Running a Lightning Network node can let you earn transaction fees when you process payments on your own LN channel.
For a non-technical crypto enthusiast, running an LN node could be too much of an endeavour. However, once started, such a channel requires almost no maintenance or active participation and could be an attractive way to earn extra crypto.
Running a Masternode
Running master nodes are very similar to Proof of Staking. A master node is a special node in a blockchain network that has special functions in governing the network. They perform special activities that ordinary nodes can’t perform such as validating direct and private transactions.
Setting up a master node requires a significant investment. For example, a Dash master node operator needs to stake 1,000 DASH, the equivalent of about US$230,000. The DASH is locked up, but the operator then earns a return of 6.45% and can vote on the project’s governance.
There are many other coins running master nodes that aren’t as expensive. You can find a complete list on masternodes.online.
Conclusion: Don’t Be Scammed!
Many of these passive income ventures are legitimate and lucrative, but there are also many scams and criminals in the space. Some are easy to spot, mostly because they promise unrealistic returns:
- Those who promise to trade on your behalf, earning you constant returns (e.g, Mirror Trading International, AMFEIX)
- Cloud miners who promise to pay interest if you invest in their mining operations or buy a certain amount of hashpower in a mining facility (e.g, Bitclub Network)
- Crypto lending ponzi schemes.
Sometimes it can be difficult to put your finger on what is legitimate and what is not. As in most things crypto, you earn the most rewards when you invest early in a project.
Always remember to do your due diligence, and be willing to forego lucrative earnings if it means keeping your precious cryptocurrency assets safe.
