Can you earn passive income with crypto?
The crypto space is fast-paced. Investors can record sharp rises and falls in their portfolios in just a few hours. Staying on top of these market movements can often be a full-time job involving many active trading and investment decisions. This usually involves in-depth research covering technical and fundamental analysis, which is time-consuming and may not guarantee a profitable outcome.
However, there is another way of earning a decent income in the crypto space without the torturous rigour outlined above. It’s called passive income. Generally speaking, passive income is income that requires minimal interaction or time-consuming activity. It is the opposite of active trading and cryptocurrency investment methods.
Passive income-earning opportunities in the crypto market
There are several ways to earn passive income with cryptocurrency.
Let’s discuss these approaches in greater detail.
Mining: This is perhaps the oldest form of earning passive income in the crypto space. Mining is the process of creating new crypto tokens by solving computational problems. It started with Bitcoin and has since been adopted by other proof-of-work coins. Miners set up specialised equipment requiring a constant power supply to run nodes. This action helps secure the cryptocurrency network, and in exchange, miners earn coins for their proof-of-work in the network. Bitcoin is a representative example. Early miners used their laptops or computers to mine the cryptocurrency. This is usually now not the case as bitcoin mining is now practised on an industrial scale by giant corporations that set up large mining farms.
Staking: In staking, a cryptocurrency user/investor locks their funds in a wallet to help maintain a proof-of-stake (PoS)-based blockchain system. As you stake your coins for some time, they are used to validate transactions on a block. For your stake, you receive a percentage of the staked tokens as a reward.
Airdrops: New or existing cryptocurrency projects sometimes reward their loyal community by sharing tokens in the form of airdrops. As part of their marketing efforts or task-reward system, projects distribute their native tokens, some of which could be worth a fortune later. For instance, the decentralised exchange (DEX) Uniswap distributed some UNI tokens to its community of beta testers and exchange users in September 2020, worth at least $1,200.
Lending: Like the traditional lending approach, where an investor lends funds and is paid an interest rate for those funds, a crypto investor or trader can also earn passive income by lending their crypto assets. There are different means to do this, which include peer-to-peer or exchange-based lending.
Several DeFi protocols offer peer-to-peer lending where users lock up their funds for a period to collect interest payments later. The interest rates are either calculated by the protocol’s algorithm or set by the borrower mimicking the current market rate. Additionally, most centralised exchanges that allow margin trading also offer a lending feature on their platforms.
The DeFi Summer of 2020 ushered in countless projects offering users the opportunity to farm yields. Specifically, when DeFi projects offer their smart contract protocol users a portion of their native (governance) token in return, this is called liquidity mining. This usually occurs during a project’s launch phase and is adopted to attract massive liquidity into their projects.
However, it’s not only DeFi projects that offer yield farming opportunities. SwissBorg, a hybrid of CeFi and DeFi, also provides its users with the option to earn yields in its app with SwissBorg Earn . SwissBorg app users who activate this feature earn passive income from their idle wallet balance. And Premium account users earn a boost on top of the standard yield!
Perhaps what makes SwissBorg Earn an even more attractive passive income opportunity is that it compounds earnings. Your yield is paid out daily, which means not only are you earning a return on your Earn balance - you’re earning a profit on your yield!
Benefits of the crypto passive income investment approach
Each of the above methods of earning passive income with crypto has clear advantages.
- Mining Bitcoin represents a legit way of making Bitcoins without buying them from exchanges or other “hodlers”. Many of the early adopters of the largest and most popular cryptocurrency were those who mined Bitcoins early. Many have made a fortune simply by mining with their home computer.
- Staking your crypto as a way of securing a PoS-based blockchain is not only a form of hodl-ing, but it also earns you a premium for your good deed. Additionally, it enables you to transfer your risk to the staking platform. Hackers are always on the lookout for crypto wallet holders and how to steal their assets. The act of staking your crypto means you’re not selling off as it’s still your possession, but you’ve locked it away in perhaps a more secured system. Most platforms tend to compensate stakers should hackers breach the security of the staking platform.
- Airdrops are basically free money. Although some cryptocurrency projects might require that their community perform minor marketing or technical tasks, the airdrops the community gets in return don’t require spending any money. Bounty hunters in the crypto space relentlessly search for these kinds of opportunities hoping their holdings could be worth a fortune someday. The most straightforward example that comes to mind is UNI, which airdropped to Uniswap’s community in September. Each person who received the airdrop got at least 400 UNI token. UNI traded around $3 per token on the day Uniswap airdropped it to its community. As of writing this, 400 UNI is worth approximately $14,000. This is how lucrative an airdrop opportunity can be, but, of course, only valuable crypto projects exhibit this kind of potential.
- Yield farming completely revolutionised the crypto space. The DeFi sector brought in a lot of steam that elevated the space out of a prolonged bear season. There are times when farming yields among top DeFi protocols could rake in unbelievable gains - anywhere from 50-80% p.a.! The Annual Percentage Yields (APY) most DeFi protocols offer lenders/liquidity providers are miles apart from traditional finance investors. Why hold your crypto in your solo wallet when you could just become an LP and earn massive interest or farm extra tokens that could be worth a fortune in the future? Yield farming remains a juicy opportunity for earning passive income in crypto.
Some risks to consider
As a wise investor, you must not just consider the pros of any investment opportunity; you should weigh the risks involved as well. With the surging interest in cryptocurrencies, these are some of the accompanying risks to consider while exploring passive income opportunities:
- Smart contract failure: If you’re exploring yield farming opportunities, you must understand that even smart contracts are not immune to exploitation or malfunctions. Numerous examples exist of how DeFi protocols’ smart contracts were either hacked or their codes failed to perform specific actions correctly. Compound Protocol suffered from a pricing oracle attack last year, causing the platform to suffer $49 million in losses. bZx, a DeFi lending protocol, has also experienced at least three hack attacks losing $1 million in the first two attacks and $8 million in the third. YAM, another DeFi project that launched and grew tremendously fast during the summer, suffered a rebase failure, causing the protocol to mint an uncountable amount of its token, which eventually tanked its token price. It never recovered from that smart contract malfunction.
- Chasing after empty project tokens: A lot of dubious projects exist within the cryptocurrency space. A particular project may promise or even airdrop its tokens, but this is no guarantee that it will be the next Uniswap. Evaluating projects to ensure they pass the viability test using thorough research is required before chasing after airdrops. Even more crucial is recognising that some of these projects are trojan horses trying to trick users into releasing sensitive details about themselves, one of which could be private keys to their wallets.
- Exchange hacks: As I discussed earlier, centralised exchanges offer lending and staking opportunities for crypto holders. These exchanges are a constant target of hackers who constantly seek to overwhelm their security systems to steal user assets. Hackers have successfully breached Binance, the world’s largest cryptocurrency exchange by daily trade volume. The business lost $40 million in 2019 when it experienced the hack. KuCoin has equally been a victim of a brutal hack , losing around $280 million. The fact that you have to park your digital assets in a centralised exchange to take advantage of some of these passive income-earning opportunities means you’re equally exposed to the risks these exchanges may suffer.
While these risks cannot be fully eliminated, you can still shield yourself from some of them with adequate due diligence.
Take smart contract failure as an example. To reduce the likelihood of this risk, remember to check the team’s pedigree behind the DeFi project. Many charlatans floated projects during the DeFi summer peak only to disappear after users staked their funds in the projects’ smart contracts. The term “Rug Pull” is synonymous with anonymous devs behind flashy DeFi projects carting away community funds. Most of these DeFi projects roll out with unaudited smart contracts. One tip to avoid this risk is to look out for projects with audited smart contracts.
Also, be wary of parking your coins or tokens on exchanges. Remember the saying - “not your keys, not your coins”? A lot of people have lost their fortunes when the exchanges housing their assets were hacked. If you must leave your assets on exchanges to take advantage of certain passive income opportunities, remember to choose only reputable exchanges to minimise your risk.
Passive income in the crypto market is income that requires minimal interaction or time-consuming activity. It is the opposite of active trading. Anyone seeking passive income in crypto can explore mining, staking, airdrops, lending or yield farming.
Are you ready to start earning a passive income on your cryptos? SwissBorg Earn can help. Available on over 20 cryptos, SwissBorg Earn empowers you to make smart investment decisions by not only sharing your potential yield, but also the potential level of risk in any strategy. This means you can invest according to your risk profile, along with managing your overall risk by investing different portions of your assets into strategies with different risk levels.
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