Cryptocurrency is a unique financial instrument that allows anyone with an Internet connection to participate in a distributed economy. This includes opportunities to earn passive income. There are risks associated with investing and earning with cryptocurrency, although it may look like a bank account or a social lending platform.
Here is an overview of how to earn passive income using crypto.
- Cryptocurrency is useful for earning interest through the distributed financial economy.
- Anyone in the world with the right accounts or technical knowledge can participate.
- Cryptocurrency lending and earning platforms have unique risks and are not insured or backed by any government agency.
Earn like a savings account
With a range of crypto accounts, you can earn interest by holding your cryptocurrency on an exchange. Crypto exchanges and account providers like the Gemini offer interestincluding for some currencies that do not use a proof-of-stake (PoS) system. These companies are willing to pay to attract users and keep funds on the platform. This allows for a range of business purposes, including lending your currency to earn additional interest.
Earn like a banker
The decentralized finance (DeFi) platforms give you the power to earn money like a bank by directly participating in a loan process. Here, users connect their cryptocurrency wallets and pledge coins and tokens in a pool with others. This pool is then used to lend to others against interest and fees. Users derive income from the lending process, with the facilitator often taking a portion as a fee. The amount earned from crypto loan depends on three factors: the term of the loan, the amount of the loan and the interest rate.
Cryptocurrency mining with proof of work (PoW)
The backbone of cryptocurrency is block chain, and it takes many computers working in parallel to create a secure and functional cryptocurrency. Behind many of the most popular currencies including Bitcoin and Litecoinis an algorithm called proof of work (PoW). Under proof of work, computers around the world called miners compete to solve complex equations. The winner can check the next block of transactions and wins a reward.
If you have a spare computer at home, you can turn it into a miner. It requires a special hardware device, technical skills and knowledge. You just need time to download, install and configure your mining software. These days, most solo miners struggle to earn a reward as they compete against huge networks of computers and professional mining operations. However, if you win the race and win the block reward, it could be worth thousands of dollars.
Staking a Currency
Proof of work isn’t the only way to create new coins. A big competitor is proof of stake (PoS). Here, users are rewarded for holding currency in a wallet for a period of time, similar to bank interest. Cryptocurrency owners can vote on who can act as a miner, which makes the system much more centralized. This is good because it reduces network power consumption and can speed up transactions, but it comes with slightly higher security risks in some scenarios.
You don’t need the same technological know-how to implement crypto. Some exchanges automatically enable staking if you hold an eligible currency in your account. For other currencies, you will need to hold the crypto in a compatible software or hardware wallet to earn staking rewards.
Games Play to Win
You can also earn passive income by playing online games. There are many play-to-earn cryptocurrency games today, and each one is unique. Some of the most popular are Axie Infinity and Decentraland. In the Philippines, these games have become so popular during the pandemic that they have become a source of income for those who have lost their jobs.
Who pays interest for cryptocurrency investments?
Every cryptocurrency investment and account is a little different. The funds usually come from cryptocurrency network fees or the interest that borrowers pay for passive income investments.
Is cryptocurrency income taxable?
How much of my wallet should be in cryptocurrency?
Each has unique investment objectives and risk tolerance. Cryptocurrency is not for everyone, and there is no right or wrong answer to the percentage of your wallet which belongs to crypto. If you’re unsure how to do this, it may be best to work with a financial advisor who better understands the nuances of investing.
Passive income via crypto is easy to earn and an exciting opportunity to to diversify your investments and income. With high rates that far exceed what you get from the bank, you might be drawn into the excitement of the cryptocurrency world. If you choose the right time and your crypto investment increases in value, you accrue interest and investment gains.
However, there is also a great risk of losses, and many investors have felt the pain of a cryptocurrency platform failing and the value of their overall crypto portfolio declining. Everybody risk tolerance and investment objectives are unique, so it is up to you, and perhaps a trusted financial professional, to decide what balance of crypto income investments, if any, is best for you to your wallet.