How to earn passive income with crypto
Cryptocurrency is a unique financial instrument that enables anyone with an Internet connection to participate in a distributed economy—including opportunities to earn passive income. There are unique risks associated with investing and earning with cryptocurrency, even though it may seem like a bank account or social lending platform.
Here’s a closer look at a few ways to earn passive income using crypto.
Key Takeways
- Cryptocurrency can be used to earn interest through a distributed financial economy.
- Anyone in the world can participate with the right accounts or technical knowledge.
- Cryptocurrency lending and earning platforms are characterized by unique risks and are not insured or backed by any government agency.
- All methods have the risk of losing significant capital through price fluctuations, theft, scams, fakes and more.
Yield-Farming
Some decentralized finance (DeFi) platforms and decentralized exchanges (DEXs) allow users to make money like a bank by directly participating in the lending process. Production farming techniques allow users to combine their cryptocurrency wallets and send coins and tokens to a lending pool with others.
This pool is then used to lend to others for interest and fees. Consumers are sometimes paid to participate in the lending process or given interest on the money they deposit or hold in their account. The amount of money you get from lending crypto depends on three factors: the loan term, the loan amount, and the interest rate. The top lending platforms in 2023 were UniSwap, Crew and Balancer.
Many DEXs also provide liquidity pools, where users invest their cryptocurrency into the pool. These pools allow other users to make faster transactions so they can take advantage of fluctuating prices. Liquidity providers typically earn a percentage of the cryptocurrency they have locked into the pool.
Some exchanges that you can get form by providing liquidity are Uniswap, Pancakeswap, and Sushiswap.
Mining
The backbone of cryptocurrency is the blockchain, and it requires many computers working in parallel to create a secure, working chain. Behind many popular currencies, including Bitcoin and Litecoin, is a process called Proof of Work (PoW). Proof of Work is basically a race where miners compete against each other to find an encrypted solution to a block. The winner gets a prize of cryptocurrency.
If you have a spare computer at home, you can turn it into a miner and join a mining pool. This usually requires a dedicated graphics processing unit (GPU) and some computer and programming skills. Some pools provide executable programs that guide you through the setup process.
Fast Fact
To have a chance to earn any cryptocurrency, you need to join a pool and take advantage of its shared processing power.
Many viable cryptocurrencies have periodic events where the block reward decreases. Bitcoin’s reward is halved roughly every four years. Litecoin is on a similar schedule but reduces its reward to 20%. This means that as time goes by, mining becomes less profitable as operating costs stay the same (or increase) while fewer coins are available.
Staking
Proof-of-work isn’t the only way to get new coins. Proof-of-stake (PoS) blockchains exist, where cryptocurrency owners “stake” their coins to participate in the network’s validation and consensus process. Stickers receive a fee for work done in return.
You don’t need the same tech know-how to stake crypto as you do for other methods. Some exchanges allow you to stake and receive rewards if you hold an eligible currency in your account. For other currencies, you only need to hold the crypto in a compatible software or hardware wallet to receive staking rewards.
On some blockchains, such as Ethereum, you can give your ether to a validator node, which earns rewards and pays those who have assigned their ether. You can also join staking pools, which pay according to the rules of the pool. These functions are not built into the blockchain but are provided by other parties who have developed these capabilities.
Play-to-Earn Games
You can also earn passive income by playing online games. There are many play-to-earn crypto games available today, and each one is unique. Some of the more popular ones are Axie Infinity and Decentraland.
The games became so popular in the Philippines during the pandemic that they became a source of income for those who lost their jobs.
Crypto Passive Income Risks
As with all investment opportunities, using cryptocurrency to generate passive income involves risks.
Security
Digital currencies are a favorite target for hackers and thieves because they are new and valuable, and the technology that supports them is still in development. Exchanges are constantly under attack from hackers and thieves.
Attacks can happen on an exchange, but not always. For example, in July 2022, a liquidity provider on the Uniswap platform fell victim to a phishing scam and provided approval for transactions on fraudulent positions.
Volatility
It’s no secret that cryptocurrency prices are volatile and subject to the same risks as traditional high-risk investments. Prices sometimes change by thousands of dollars per day, affecting your invested capital or profits.
Crypto markets have responded wildly to news and regulatory developments in the past — press releases have resulted in massive price spikes due to excitement and fear.
Losses
Cryptocurrency may not give you the returns you expect, so you may need to invest more to make the returns worthwhile. If you invest enough in crypto to get that decent yield, you could lose a lot of money if prices suddenly drop and don’t recover.
Associated costs
Competitive mining equipment is expensive, as are the energy costs associated with operating it. Even if you are trying to mine Bitcoin or other minable cryptocurrencies you can never break even because huge mining farms surround the mining networks. Pool payouts are usually per share of work done, so unless you have a powerful miner contributing a lot of work to the pool, your shares will be minimal.
fake
Many DEXs offer yield farming opportunities, but it is difficult to tell if the tokens are real because they and the exchange are not regulated. You’ll need to do your research to make sure you’re investing in something genuine, and even then, you could be fooled.
With websites, white papers, chain explorers, metrics, and seemingly active development communities, some of these fakes are very convincing.
How do you turn crypto into passive income?
There are several ways to generate passive income with cryptocurrency, including production through lending or providing liquidity on defi platforms.
Is Crypto Passive Income Safe?
There is a greater risk of loss if price, volume, total value closed, or several other factors change. Cryptocurrency remains a volatile opportunity, so it’s best to only invest what you can afford to lose and try to generate passive income using cryptocurrency.
Can you earn $100 a day with crypto?
Making $100 a day is possible, but there is no guarantee or specific technique you can use to ensure it. Cryptocurrency trading, lending, staking, and investing all come with significant risks because it is a volatile and unpredictable asset.
The bottom line
You can earn passive income by using crypto to diversify your investments and income. With high rates that far exceed what you’d get from a bank, you can be drawn to the excitement of the cryptocurrency world. If you time it right and your crypto investment increases in value, you’re doubling up with interest and investment gains.
However, there is also a significant risk of losses, and many investors have felt the pain of the bankruptcy of a cryptocurrency platform and the devaluation of their overall crypto portfolio. Everyone’s risk tolerance and investment goals are unique, so it’s up to you, and perhaps a trusted financial professional, to decide the right balance of crypto income investments—if any—that suits you. Makes the most sense for a portfolio.
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