7 Ways to Generate Passive Income With Crypto
Last updated
Last updated
If you’re like many cryptocurrency holders, then you’ve probably found that cryptocurrency trading and investments can be both incredibly profitable, but also extremely time-consuming and oftentimes stressful — due to the constant need to keep track of your portfolio, capitalize on opportunities, and manage your positions.
But what if you’d just like to earn passive income without all the typical headache that comes with staying on top of the market 24/7? Fortunately, there are now dozens of ways to do just that, by leveraging your cryptocurrencies to generate returns in the background, freeing up your time for more important matters — like reading our 2021 Bitcoin wrap-up.
Here, we take a look at seven ways you can put your cryptocurrencies to work, helping you generate a potentially attractive passive income with little to no input or management required.
Much like regular currencies can earn interest while being held in a savings account, cryptocurrencies can also be deposited to various platforms to earn a yield.
Some of these are centralized cryptocurrency savings accounts, like those offered by Nexo, BlockFi, and Crypto.com — these generally use your funds to provide overcollateralized loans to institutional borrowers. Likewise, many exchanges, including both Binance and Huobi allow users to earn a yield on their cryptocurrency deposits.
Others are decentralized savings platforms, like Orion Money and Anchor, which allow you to earn interest on your stablecoin deposits. As well as Yearn Finance and Autofarm, which automatically move your funds between a range of DeFi products to maximize the yield you earn.
These are arguably the simplest and most straightforward ways to earn a passive yield on your cryptocurrency deposits since they require little to no in-depth knowledge to get started.
How much can you earn? Depending on the asset you stake and the platform you choose, it’s usually possible to earn ~5-20% APY.What to watch out for? Be wary of platforms offering suspiciously high yields, these could turn out to be Ponzi schemes.
Decentralized exchanges revolutionized the way that traders access and capitalize on opportunities in the market by providing a permissionless source of liquidity for a wide variety of cryptocurrencies.But a specific type of DEX, known as an automated market maker, also unlocked an entirely new way for cryptocurrency holders to generate a yield on their assets — by becoming liquidity providers.
These platforms offer decentralized liquidity pools that allow users to trade while simultaneously facilitating efficient price discovery by simply using the weighting of the two or more assets held in a pool to determine each of their values, such that a pool containing 100 ETH and 400,000 USDC would price each ETH at $4,000 and each USDC at 0.00025 ETH.
Liquidity is generally contributed by the community, who always maintain their proportionate share of the pool regardless of how much liquidity is added. This liquidity is then used to serve traders executing swaps using this pool.
But here’s where it gets interesting. When a trader sources liquidity from the pool, they pay a trading fee — usually around 0.2-0.3% of the trade size. This is split between all liquidity providers, including you.
A huge number of AMMs now exist and most major smart contract platforms now have one or more suitable options. Some of the most popular currently include Uniswap (for Ethereum), PancakeSwap (for Binance Smart Chain), Pangolin (for Avalanche), WagyuSwap (for Velas), and SushiSwap (multi-chain).
How much can you earn? The amount you will earn can vary considerably between pools and platforms. Generally, the higher your fraction of the overall liquidity and the more trading volume your pools see, the more you will earn. Yields can range from almost nothing to potentially well over 100% APY.What to watch out for? If you’re providing liquidity for volatile assets, then you will absolutely need to understand impermanent losses.
If you’re already providing liquidity, then yield farms provide a way to earn an additional yield on your assets.
As their name suggests, yield farms are platforms that allow you to “farm” for yields in one or more ways. Most commonly, you will need to stake your pre-existing liquidity provider (LP) tokens to a specific farm to earn a fraction of its reward pool.
By staking your tokens to the yield pool, you will receive a proportionate fraction of the rewards it pays out each day (week/month, etc.) such that if you contribute 1% of the pool, you will generally receive 1% of the rewards it offers.
Many AMMs, including PancakeSwap, TraderJoe, and SushiSwap, have built-in yield farms, while some are standalone products — such as Venus.
These yield farms generally allow you to earn your yields in a newly released cryptocurrency or the yield farm’s native utility/governance token, e.g. you can farm CAKE on PancakeSwap or WAG on WagyuSwap. Most of these platforms will display an expected APY based on the current value of the reward token and the size of your stake, but this can fluctuate over time.
How much can you earn? Yield farms generally pay in volatile cryptocurrencies. If this cryptocurrency collapses in value then the average APY can be relatively low, whereas if it appreciates in value then it can be relatively high. In general, expect around 5-20% APY if you liquidate your yields frequently.What to watch out for? Many yield farms initially offer incredibly high yields, but this quickly drops when the total value staked (see: TVL) increases and if the reward token crashes in value. Be sure to check your estimated yields regularly to stay on top of this.
Proof-of-Stake (POS) not only introduced a more efficient way to maintain consensus in a decentralized system but also brings with it a new way for coin holders to earn a yield — through staking.Depending on the cryptocurrency and whether it uses simple POS, Nominated-Proof-of-Stake (NPoS), Delegated Proof-of-Stake (DPoS), or some other variant, staking could require setting up a validator node and locking up a fixed minimum number of coins to participate in securing or powering the network or delegating your coins to a selected nominator or validator.
In either case, stakers earn a yield that is usually derived from the inflation of the staked cryptocurrency and/or the transaction fees generated by the network.
A huge number of cryptocurrencies now offer staking rewards, including the likes of Ethereum (via the Beacon Chain), Solana, Cardano, Avalanche, Terra, and Polkadot. Some of these enforce a fixed minimum stake and a lock-up period, which can pose as barriers to some users.
Nonetheless, once staked, the yields generated are generally completely passive — requiring little to no oversight or intervention. Nonetheless, you may want to liquidate your yield regularly to buffer against price volatility or hold your coins long-term if you believe they will appreciate in value.
How much can you earn? The yield you will get usually depends on a few things, including the proportion of the supply that is staked and any commissions you might lose (for DPoS and NPoS). In general, you can expect around 5-15% APY.What to watch out for? Staking yields are paid out in the same coin that you stake, e.g. staked DOT yields more DOT. If the value of the coin you stake falls, there is a chance that you could end up net negative in fiat terms if the staking rewards do not cover the losses.
If you’ve jumped on the recent hype surrounding play-to-earn games, then you may have found that playing these games and making use of your in-game assets and NFTs can be a time-consuming process.
After all, you actually need to play these games in order to benefit from the earning part of the equation. But thanks to the advent of guilds, this doesn’t necessarily need to be the case.
These are platforms that allow play-to-earn investors and players to work together for their mutual benefit. Generally, investors supply the funds and assets, while players securely leverage these assets to generate a yield. This yield is then split between investors and players, and often between other intermediaries, such as managers — who create documentation and training materials for players (generally known as scholars).
Some of these platforms allow NFT holders to pool their assets together as part of the guild, whereas others allow direct peer-to-peer NFT lending between NFT holders and borrowers in return for an agreed fee.A wide variety of guilds are now operating, including Yield Guild Games (YGG), Good Games Guild (GGG), and Merit Circle. Each of these differs in the way they work and the amount of manual input required, but often makes earning a yield far more efficient than manually playing supported games.How much can you earn? The amount you can earn varies based on your guild, the specific play-to-earn games it supports, and the skills of the players. However, you can expect to earn around 20-40% of what you could earn playing the game yourself — albeit without actually doing so.What to watch out for? Not all blockchain gaming guilds are created equal. Be sure to do your due diligence before handing over your funds or assets to any guild.
As you’ve probably noticed by now, most passive income streams will require some initial labor and periodic maintenance, whether that be depositing your assets to a liquidity pool, operating a validator node, or participating in a guild.
Crypto funds are an exception since they are truly passive. Much like traditional hedge funds can be used to put your fiat capital to work, crypto funds allow you to generate revenue using your digital assets (and oftentimes fiat currency too).
These can be relatively simple funds, like Grayscale’s single-asset investment products — such as its Bitcoin trust or Decentraland trust. These allow fiat investors to gain exposure to the price action of a single cryptocurrency.
Other funds, like Pantera Capital, offer more complex investment products, such as the Pantera Blockchain Fund — which provides exposure to a wide range of crypto markets, including venture equity, liquid tokens, and more.
That said, these funds generally have a few barriers to entry, which can include a large minimum investment amount (e.g. $100,000 to $1M+) and accredited status. Likewise, they can vary considerably in the fees they charge — ranging from very reasonable to almost ludicrous.
How much can you earn? Each crypto fund will generally provide a detailed overview of their past performance and quote specific metrics like their internal rate of return (IRR) which can be used to estimate your returns.What to watch out for? Not all funds perform well and others have unusual terms and conditions. We recommend scrutinizing any documentation before handing over any money, paying particular attention to the notice period for redemptions (which can be lengthy).
Last, but by no means least, are dividend-yielding or yield-bearing tokens. As their name suggests, these are tokens that entitle holders to a share of the profits generated by the underlying issuer — similar to the way that stocks often entitle holders to dividends.
A wide variety of dividend-yielding tokens now exist and each operates in a slightly different way. Some of the most popular dividend-yielding tokens include Kucoin Shares (KCS) and AscendEx (BTMX), both of which pay a fraction of their trading fee revenue to token holders, as well as Nexo (NEXO) which entitles the holder to a fraction of its profits.
In some cases, simply holding these tokens is enough to qualify for dividends, which are then distributed periodically to each holder’s wallet as an airdrop. Whereas in other cases, you may need to sign up to the issuing platform and complete KYC verification to claim your yields.
The returns these tokens provide are strongly related to the performance of the underlying platforms, which means your yields can vary over time.
How much can you earn? Yields can differ considerably between yield-bearing tokens, but in general, you can expect around 5-10% APY from some of the more popular options.What to watch out for? The amount you earn can increase or decrease based on the profits of the token issuer. Likewise, dividend-yielding tokens are often volatile. We recommend keeping track of your entry price and dividend payments to keep tabs on your overall APY.
