There’s no secret that investing in cryptocurrencies can be quite a profitable venture. Only this year, many coins have more than doubled in value, allowing investors to grow their portfolios considerably.
There are many active ways to earn money with crypto such as spot trading, margin trading, or options trading like on Bitlevex. However, this method requires good knowledge of technical and fundamental analysis. Becoming a successful crypto trader is complicated, risky, and time-consuming.
Luckily, cryptocurrencies also offer something everyone should thrive toward – passive income. In addition to their volatility, this characteristic has made them very popular among investors. In this article, we take a look at some of the best ways to earn passive income through crypto.
Crypto mining is the process of validating transactions on proof-of-work blockchain by solving increasingly complicated mathematical puzzles. This is done with purpose-designed computers called mining rigs that require a lot of electricity to function.
In a nutshell, miners spend an expensive resource – electricity, to receive rewards for their effort in the form of newly minted cryptocurrencies.
While profitable, there are two disadvantages to mining:
- Large upfront investment – mining rigs are fairly expensive machines and usually require at least 2 years of mining before the effort investment pays off.
- Environmentally unfriendly – because of the large amounts of electricity it requires, mining is often considered ecologically inefficient.
Cryptocurrency staking is an alternative way of validating blocks on blockchains that use the proof-of-stake consensus mechanism. In PoS, instead of miners, there are validators. Comparatively, while validators need powerful hardware, it’s just a fraction of the power of a miner.
The users on the network can lock up their holdings and will receive a portion of the transaction fees for their effort. This ensures the network is secured, as a large number of locked-in coins prevents the network from being hacked.
The rewards are proportional to the number of coins staked, making it a more democratic reward mechanism than mining, where only the fastest miners get rewards. Moreover, staking is considered a more energy-efficient way of gaining rewards and validating transactions.
For instance, it is believed that Ethereum will consume 90% less electricity once it shifts from PoW to PoS.
And finally, staking doesn’t require investing in expensive hardware. Instead, investors need to simply purchase the cryptocurrency and lock it in their wallets.
Cryptocurrency lending is usually done through centralized lending platforms, similar to banks. The user sends their funds to an online custodial wallet for the lending platform to use as they see fit.
Then, the company lends these funds to other uses and charges them interest for the service provided. A portion of these interests is sent to the lenders, are compounded to their holding, providing increased yields at every payout.
Yield farming is the process of gaining rewards for providing liquidity to liquidity pools in decentralized finance protocols.
In DeFi, both lending platforms and exchanges require liquidity to function. Users can provide liquidity by locking their funds into a smart contract. When other users make use of DeFi financial products such as lending and decentralized exchanges, this produces fees. These fees are then used to compensate the liquidity providers.
Worth noting is that DeFi protocols can reward the liquidity providers with different tokens than those deposited, opening even more opportunities to provide liquidity elsewhere.
Building wealth begins with one important step – multiple streams of passive income. Cryptocurrencies continuously open up new ways to start earning passively. With more and more cryptos adopting a PoS model and Defi growing exponentially, we are bound to see even more opportunities for passive income rise up in this industry.