There are many attractive features to the cryptocurrency market for investors, one of these features to the world of crypto is the ability to earn a passive income.
Investors have the ability to earn rewards on their crypto holdings, which can be done in several ways. Each way will have it’s own levels of risk and technical knowledge. This is why it is important that you do your own research and choose the right passive income option for your crypto investment.
Below we have listed three of the most common ways to earn a passive crypto income. Have a read and see which one could work best for you.
1. Earn A Passive Crypto Income By Staking
Crypto staking is a favourite way to earn interest on cryptocurrencies for many crypto investors. This is because it carries less risk than other passive income options. Many investors also find it relatively easy to do as well. If the crypto exchange you use offers crypto staking, then you can activate this option with the click of a button. However, the crypto exchange may request that you commit to stake your crypto coins for a set period.
If you are unable to stake your crypto coins with the crypto exchange that you are using, you may want to consider moving your crypto assets to a crypto wallet or platform where this option is available.
Staking can pay rewards of around 15% APY, or even more in some cases. It is all dependent on various factors including the crypto platform and the cryptocurrency you hold. You can expect to earn an average of 10% APY on most of your crypto assets that you can stake.
However, you cannot stake every cryptocurrency. Below we explain how staking works and why you will not be able to stake every cryptocurrency.
• How Crypto Staking Works
– Proof Of Stake: Some cryptocurrencies will use a proof of stake system. This is also known as a POS system. It is used to keep the network secure. You will find that proof of stake is a very popular and sustainable model. You will need a Proof of Stake (POS) crypto so you can stake your crypto coins.
– Validating Transactions: Validators can earn rewards for checking that new crypto transactions are legitimate. Through the Proof of Stake (POS) model, validators will need to own a certain amount of crypto to participate as validators.
– Earning Rewards: When you stake your crypto coins you will often be contributing to validator node. This will mean that you will earn a percentage of the rewards from that validator.
• The Risks Of Staking Crypto
As with all investments, there will be risks and rewards. There are risks involved with crypto staking. For example, if you choose to stake your crypto assets from a centralised exchange instead of a crypto wallet, then there is likely to be an increased risk of your crypto coins being hacked. There are some crypto networks that chose to punish validators that break the rules. If you were to choose an unscrupulous validator that break the rules, although this is unlikely, it could impact you and your crypto stake.
Unlike many aspects of decentralised finance, also known as DeFi, and crypto interest earning, when you stake your crypto coins, you can see exactly how the rewards are generated. This gives crypto investors the confidence that nothing unusual, untoward or dodgy is going on within their crypto coins.
If you would like to know more about how you can earn a passive income by crypto staking, call our staking specialists. They will happily answer any questions that you have and talk through the benefits of crypto staking for you, your crypto assets and your potential passive income.
2. Earn A Passive Income Through Crypto Savings Accounts and Crypto Lending
There is a selection of various crypto savings accounts that will pay interest on your saved crypto coins. You will find that the interest rates are often much higher than the interest rates you will find with a traditional saving account. However, it is worth noting that these high interest rates will come with correspondingly high risks too.
You will find that a lot of the crypto platforms that offer interest-bearing crypto saving accounts will do so by lending out your crypto assets to others. This is what gives you some of the interest that is paid on the loan.
The level of risk of earning a passive income in this way is really dependent on the crypto platform, who they lend the money to and the collateral that they require. For example, a low-risk loan to a large financial institution will present a very different risk when compared to an uncollateralised loan to an individual that may not be able to pay it back.
Lend-earn crypto savings accounts will usually pay higher rates on stable coins that ordinary cryptocurrencies. By stable coins we mean crypto coins that are pegged to traditional assets, like the US dollar for example.
Decentralised finance (also known as DeFi) apps also offer other types of crypto lending. That said, it is worth looking out for and double checking the fees on these apps. For example, we have seen some crypto platforms that charge fees of more that $50 per transaction. With a fee like this, it is likely to wipe out any extra interest that you could have earnt on your crypto coins.
• The Risks Of Lend-Earn Products and Crypto Savings Accounts
The biggest risk faced by many crypto investors with lots of crypto lending products are that the savings are not actually covered by the FDIC insurance. They are also not covered by other consumer protections. The great thing about FDIC insurance is that your cash is covered for up to $250,000 in the event of a bank failure. This reassurance and peace of mind is not available with many crypto lending products and savings accounts.
Would you like to know more about earning a passive income through crypto savings accounts and crypto lending? Give our crypto trading experts a call. They will happily talk through the benefits with you. You can then decide if earning a passive income through crypto savings accounts and crypto lending is right for you and your crypto investment.
3. Earn A Passive Income Through Liquidity Pools and Yield Farming
If you are an experienced investor, then this may be the preferred way to earn a passive income. We feel that yield farming and adding liquidity to trading pairs on crypto exchanges are a much better option and better suited to experienced investors.
Liquidity pools and yield farming are common options on decentralised exchanges. They essentially involve contributing your crypto tokens into a trading pool. You will often need an external crypto wallet to participate in liquidity pools in this way. Again, we would recommend that you keep a close eye on the fees charged on different decentralised exchanges for earning a passive income in this way.
As an investor, when you put a pair of tokens into a pool, it will generate liquidity tokens. These can then be farmed to earn more rewards. The rewards available will often be paid in the utility token of the platform you are using. It is possible to find rewards of over 100% APY on certain crypto projects. This is more common on new crypto projects.
However, while the rate of interest may sound extremely tempting, there are a lot of risks. We have listed the risks below so you can see why we recommend earning a passive income through liquidity pools and yield faring is best suited to the more experienced crypto investor.
• The Risks of Liquidity Pools and Yield Farming.
The first risk you will learn about when gaining an understanding of liquidity, is impermanent loss. This stems from the way that liquidity pools calculate the price of your crypto assets. It is possible to reach a situation where the value of the crypto tokens in the liquidity pool is actually different to the value of the crypto tokens outside of the liquidity pools. If this happens, it could mean that you lose money when you trade your crypto tokens.
Another significant risk of liquidity pools and yield farming is scams. There have been scams in this area recently where the developers of the crypto project drained over $3 million in funds from the liquidity pool. This left the investors with nothing to show for their crypto assets that they had invested.
It is also important to note that DeFi (decentralised finance) can devalue quickly. For example, you could earn a 100% APY that is paid in the form of the utility token of that cryptocurrency platform. However, if that crypto platform is creating unlimited numbers of these tokens to cover the cost of the high interest rates offered, then the tokens that you have earned may lose value. In some cases, these utility tokens can lose value as quickly as you are earning them.
Think that earning a passive crypto income through liquidity pools and yield farming could work for your investment? If you are an experienced crypto investor, you could be right. However, if you have any questions, call our team. We can talk through the process of earning a passive crypto income through liquidity pools and yield farming and if it is the right option for you.
Overview Of Earning A Passive Crypto Income
Generating a passive income on your crypto assets can be extremely rewarding. However, as with many things within the world of crypto, there are pros and cons. It is important that you take the time to do your own research to make sure you are making the right decision for your investment. Ensure you are aware of the risks before you jump in.
Don’t forget, if you have any questions – just call our team or send us an email.