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Cryptocurrency is a unique financial instrument that enables anyone with an internet connection to participate in a distributed economy. That includes 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 earning passive income through crypto.
Key Takeways
- Cryptocurrency is useful for earning interest through the distributed finance economy.
- Anyone in the world with the right accounts or technical knowledge can participate.
- Cryptocurrency lending and earning platforms feature unique risks and are not insured or backed by any government agency.
Earning Like a Savings Account
With a range of crypto accounts, you can earn interest by keeping your cryptocurrency on an exchange. Crypto exchanges and account providers like Gemini offer interest, including for some currencies that don’t use a proof-of-stake (PoS) system. These companies are willing to pay to draw in users and keep funds on the platform. This enables a range of business purposes, including lending your currency to earn additional interest.
Earning Like a Banker
The decentralized finance (DeFi) platforms give you the power to earn money like a bank by participating directly in a lending process. Here, users connect their cryptocurrency wallets and commit coins and tokens to a pool with others. That pool is then used to lend to others for interest and fees. The users earn income from the lending process, with the facilitator often taking a portion as a fee. The amount earned from lending crypto depends on three factors: the duration of the loan, the amount of the loan, and the interest rate.
Proof-of-Work (PoW) Crypto Mining
The backbone of cryptocurrency is blockchain, and it takes many computers working in parallel to create a secure, working cryptocurrency. Behind many of the most popular currencies, including Bitcoin and Litecoin, is an algorithm called proof of work (PoW). Under proof of work, computers around the world called miners compete against each other to solve complex equations. The winner can verify the next block of transactions and earns a reward.
If you have a spare computer at home, you can turn it into a miner. This requires a special hardware device, technical skills, and knowledge. You just need some 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 earn the block reward, it could be worth thousands of dollars.
Staking a Currency
Proof of work isn’t the only way of creating new coins. A large 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. Staking cryptocurrency owners can vote on who can act as miners, making the system much more centralized. This is good because it lowers network energy use and can speed up transactions, but it incurs slightly larger security risks in certain scenarios.
You don’t need nearly the same tech know-how to stake crypto. Some exchanges enable staking automatically 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.
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. In the Philippines, these games became so popular during the pandemic that they became a source of income for those who lost their jobs.
Who pays interest for cryptocurrency investments?
Every cryptocurrency investment and account is a little different. Funds generally come from cryptocurrency network fees or interest that borrowers pay for passive income investments.
Is cryptocurrency income taxable?
What portion of my portfolio should be in cryptocurrency?
Everyone has unique investment goals and risk tolerance. Cryptocurrency isn’t for everyone, and there’s no right or wrong answer to the percentage of your portfolio that belongs in crypto. If you’re not sure how to proceed, it may be best to work with a financial advisor with more understanding of the nuances of investing.
The Bottom Line
Passive income through crypto is easy to earn and an interesting opportunity to diversify your investments and earnings. With high rates that far outpace what you get from the bank, you may be drawn to the excitement of the cryptocurrency world. If you time it right and your crypto investment increases in value, you are double-dipping with interest and investment gains.
However, there’s also a big risk of losses, and many investors have felt the pain of a cryptocurrency platform bankruptcy and the decline in value 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 makes the most sense for your portfolio.