Passive Income Options in Cryptocurrency
According to Statista, more than 10,000 cryptocurrencies have been created over the past 13 years. Due to high volatility and the huge number of coins, passive income is a more practical and less risky way to earn money than exchange trading or long-term investments.
Staking
Staking involves cryptocurrency owners “freezing” their assets in a certain way, receiving a reward in return. This process is similar to depositing money in a bank and receiving interest on the deposit. However, when it comes to cryptocurrencies, locked coins allow for specific operations, such as maintaining a blockchain network based on the Proof-of-Stake consensus algorithm. Participating in staking can be carried out with tokens built on a particular PoS blockchain.
Nowadays, staking pools on cryptocurrency exchanges are quite popular. The advantage of pools is that the more coins are blocked in them, the higher the reward that participants receive. Fees for pooling assets depend on the current market demand for a particular cryptocurrency.
For example, on Binance, as of April 22, 2022, the highest rate of locked staking for 90 days was 106.57% per annum, which is being offered by OM token staking. One of the risks with this option is a drop in the token’s value as the token cannot be sold during the staking period. An alternative is stablecoin staking; for instance, the yield from USDC staking is about 25% per annum, however, it eliminates the risks of coin deflation. A common disadvantage of staking in pools is low security compared to cold wallets.
Cold staking is one of the safest forms of staking as the assets are stored in a hardware wallet. The wallet is not connected to the Internet, so there is no risk of cyberattack. Yet, such staking offers a lower interest rate; for example, freezing USDC stablecoin on a Ledger hardware wallet would yield an annual return of 7.07%.
Learn more about staking here: https://coinspaidmedia.com/academy/what-is-staking/
Lending
Lending can be briefly described as the leasing of digital assets. The scheme is similar to bank lending when “frozen” funds are lent at interest. Lending is performed on crypto exchanges and related platforms. The lending mechanism requires the users to lease assets to the exchange, for which they receive a commission. The exchange, in turn, lends those assets to margin traders at a higher interest rate. On other platforms, coin owners lend to margin traders directly, with the platform itself acting as a guarantor of repayment.
For example, the cryptocurrency exchange FTX offers a lending rate from 0.88% to 4% per annum. The Bitfinex platform provides up to 9.65% per annum for lending ETH. One of the main risks of lending is a poor choice of platform. The market is full of tempting offers promising up to 350% per annum, so it is possible to fall into the trap of scammers and lose assets. Therefore, be careful when choosing a lending site. You should pay attention to the reviews about the site, the reputation of its organizers, statistics, duration of work, and other factors.
Cloud Mining
Cloud mining is another option for passive income in cryptocurrency when the user rents processing power in cloud services and profits from the creation of new blocks by that farm. Besides, the investor may be physically located on another continent. There are several advantages of cloud mining over standard mining:
- no need to build a farm and buy equipment;
- the cloud service specialists control the entire calculation process and the state of the equipment;
- the equipment offers the possibility to mine several coins simultaneously, it is also possible to choose from several types of contracts;
- the chance to participate in mining from a country where it is prohibited, as the process is carried out in the country where mining is legal.
Learn more about mining here: https://coinspaidmedia.com/bitcoin/bitcoin-mining/
Some of the most popular cloud mining services are Shamining, Genesis Mining, and Ecos. The minimum fee to participate in Shamining’s cloud mining service is $250, and the average return is x1.43 per month. This kind of passive income also involves risks that must be considered before investing your money:
- there is usually no detailed information about the farm and no access to complete accounting reports;
- many projects on the market offer high returns and are fraudulent;
- if the value of the coins being mined drops, the expected income will decline or turn into a loss;
- the investor cannot control the use of the rented equipment because it is at the disposal of the service specialists;
- the mining service could stop operating due to the increasing complexity of block mining.
Liquidity Pools
Unlike centralized services with order books, trading on decentralized platforms is done through a peer-to-peer (P2P) system, that is, without intermediaries. Liquidity pools were developed to enable traders to buy cryptocurrency in this way.
A liquidity pool is a smart contract where liquidity providers lock a token trading pair. The liquidity providers are investors who provide the trading pair in the pool and receive a commission from traders for buying and selling coins. This system also involves market makers who balance the amount of both tokens in the pair.
Uniswap is one of the very first decentralized services with liquidity pools. The service offers commissions from 0.01% to 1% depending on the trading pair.
The significant risk of the liquidity pool is the volatile loss effect, which creates the illusion of earning due to the growth of one of the coins of the pair. In addition, liquidity pools are fully decentralized smart contacts. So, in case of system errors or hacker attacks, funds can be lost.
NFT Minting
NFT mining is the process of creating a non-fungible token, which involves automatically locking a copyright into the blockchain network. The most popular network for NFT minting today is Ethereum. One of the leading platforms for trading non-fungible tokens is OpenSea, offering royalties up to 10% of the token’s value.
The downside of this kind of passive income is the probability of investing in a failed project as not all tokens are in demand, and the asset’s price can fall below the amount spent on its creation. Moreover, cyber-attacks on NFT platforms and wallets are becoming more frequent every day.
Overall, as the cryptocurrency industry evolves, there are more opportunities for passive income through digital assets. Compared to traditional financial instruments, passive income in blockchain projects offers higher returns and more investment options.
Any investment involves certain risks and blockchain projects are subject to more risks than classic investment instruments. At the same time, the industry is developing, so, there is every reason to believe that investments in crypto projects will become safer and more reliable over time. Although they may also become less profitable.
Attention! This article is not a recommendation for action; it is only informational material created to give everyone an opportunity to get informed about the options of passive income existing in the cryptocurrency industry.
