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Passive Income in Crypto - 5 Ways To Make A Passive Income With Crypto

Written By Ivan on Tech

Nov 18, 2020

It doesn’t take a master’s degree in economics to see that there are issues with the traditional financial system. What’s more, “active income” is by its very definition labor intensive and hard to scale - after all, there are only so many hours in the day. As such, people from all walks of life are looking for that side hustle that will give them the financial freedom to do the things they want to do in life, on their own terms - and set up a so-called “passive income”. What’s more, there are naturally ways to have a passive income in crypto too. This is why we’ve provided you with 5 ways to make a passive income with crypto, so that you can gain an insight into how people make their money work for them, in a blockchain setting.

In this article, we’re going to take a look at some of the most common methods of making money passively with cryptocurrency. Whether you're looking to start a new business, make a bit on the side of your existing job, or trying to find a new career path, it’s important to get a good understanding of how to make a passive income in crypto and both the benefits and pitfalls of the various methods used to do so.

Setting up passive income streams is often cited as being the holy grail of financial advice, as it can allow you to make money without working. Nevertheless, anyone looking to get on top of their economy should make sure to seek out any and all other financial tips and tricks. For example, the Ivan on Tech Academy course “The History of Money and Bitcoin” provides a comprehensive look at the monetary history with a crypto angle. Don’t miss the Academy’s countless blockchain courses!  

What is Passive Income?

The money you earn when you go to work for an employer, or if you’re self-employed offering a service or selling goods, is an income stream known as “active income”. Put simply, active income is the money you earn when you actively go out and exchange your time and energy in one form or another, for payment.  

Passive income, on the other hand, is one of the not-so-secret strategies for building and maintaining wealth. The average millionaire has at least seven different income streams; at least half of which are passive, meaning that the high-net-worth individual isn’t actively trading their time for money. Instead, they are getting their money to work for them. 

Passive income is an income stream that, once set up correctly, will require minimal interaction or any time-consuming activity to make a profit. With the traditional financial infrastructure on its knees, the crypto industry can offer far more lucrative opportunities than the legacy system for people with a sum of cash to make their money work for them and earn a passive income alongside their active income.

Mining Bitcoin

Bitcoin mining is the most well-known way to “produce” cryptocurrency, and can be a great way to generate a passive income with crypto. The proof-of-work (PoW) consensus algorithm, combined with e.g. the Bitcoin Core software, a wallet, and a working computer, are important tools for Bitcoin creation, and set a precedent for cryptocurrency mining while also inspiring several alternative consensus algorithms to meet the needs of the evolving cryptocurrency ecosystem. 

Early miners were afforded the luxury of low initial costs, but as the Bitcoin network grew, so too did the computing power required to mine BTC, and so operational costs increased. The larger the size of the network and the longer the blockchain gets, the more power is required to validate transactions to receive a miner’s reward. Unless the price of electricity goes down, mining Bitcoin is going to become increasingly expensive over time, so there’s a lot of competition.

With each halving event, the mining reward for Bitcoin is effectively cut by 50%. Beyond volatility and speculation, this has some key effects on Bitcoin mining: some miners are forced to capitulate as the block reward no longer covers their operational costs. Some miners are forced to sell the BTC they have earned to cover the costs of new mining equipment, while some struggle through with inferior equipment giving them a lower chance of processing the computation required to validate a transaction, thus, making Bitcoin mining less profitable. This is something to keep an eye on, as it can render a stream of passive income in crypto less profitable, or not at all. 

Second-Hand Mining Rigs

Bitcoin mining is a huge industry, with a high percentage of hash power concentrated across only a small group. Bitcoin mining is expensive, competitive, and requires supercomputers that can cost a fortune. Often these supercomputers quickly become outdated, and your initial investment is devalued while your chances of validating transactions are reduced.  

That being said, there is a huge market for second-hand cryptocurrency mining rigs, which can often be repurposed to mine other cryptocurrencies more efficiently and with higher returns

Beyond Bitcoin, however, there are several innovative ways to mine cryptocurrency. The PoW consensus algorithm is only effective if the network is large enough, as we have experienced recently with multiple hacks on the Ethereum Classic network.

Staking

Proof-of-stake only works if a network is large enough to prevent a hack. In the case of Bitcoin, hacking the network to force a double-spend is virtually impossible, as practically there is no way to justify the cost of attempting it. Smaller blockchains, such as Ethereum Classic, are more vulnerable to such attacks.

Today, however, Proof of Stake (PoS) looks to be the way forward to secure a blockchain. PoS requires node operators to commit their funds to secure the network, validate transactions, and receive passive income - block rewards. By requiring miners or node operators to commit funds, bad actors are deterred not only by losing a block reward, but by putting their stake at risk.

The long-awaited Ethereum 2.0 upgrade is finally beginning to roll out, with the deposit contract going live last week. Though many newer blockchains are already using cryptocurrency staking successfully, this is a huge transition for Ethereum and will be scrutinized at each step of the process. If it is successful though, it will likely encourage PoS dramatically. PoS has become the preferred consensus algorithm for newer blockchains as those running on PoW are becoming increasingly easy to attack.

The introduction of mining pools such as Rocket Pool is making it easier for smaller investors to participate in staking by allowing capital to be pooled in order to meet the minimum requirements for staking.

Staking on a platform like Ethereum could eventually be one of the safest ways to stake if all goes well in this upgrade, but staking is not limited to just mining. Many different platforms and exchanges offer “soft” staking rewards for simply holding a coin. Some exchanges enact a form of fractional reserve banking by lending out your staked coins to borrowers, which is where liquidity provision comes in.

Liquidity Provider

The rise of automated money markets and decentralized borrowing and lending platforms kickstarted the past DeFi summer. The innovation in the DeFi space has been incredible over the last few months, with hundreds of DeFi platforms emerging offering various financial instruments.

Uniswap, the most popular decentralized cryptocurrency exchange is a prime example of how liquidity provision works in DeFi: users with capital can earn passive income in the form of interest fees and other rewards, for providing liquidity to borrowing and lending platforms by depositing equal USD amounts of a trading pair to a smart contract. When liquidity providers (LPs) provide liquidity to a platform, they receive transaction fees as a reward. The risk though is nuanced. 

Impermanent loss is when the value of your assets is provided as liquidity reduces in price, resulting in your initial liquidity being lower in value than when you started. You could also end up coming up with disproportionate amounts of liquidity in the pairs provided to the pool. Another issue is technical risk. Though most reputable DeFi platforms have pristine reputations and have carried out extensive auditing, auditing is not bulletproof, and smart contracts can fail. Hackers can drain funds, whales can pull the rug, and yield farmers can be liquidated in an instant.

Despite these risks, the blockchain industry has come a long way in a very short space of time, and a big part of that is thanks to DeFi and those willing to risk experimenting with new financial instruments to innovate. We’re now in a place where, with a good understanding of how these protocols work and a sensible risk management strategy, providing liquidity to a decentralized exchange or pool could be a consideration for those with idle funds, wondering how to make a passive income with crypto. 

Airdrops

Uniswap famously released the platform’s native ERC-20 UNI token as an airdrop. The distribution was unprecedented, with all liquidity providers to the platform receiving 400 UNI tokens. At its height, the UNI token peaked at over $7, providing users of the platform with thousands of dollars worth of free crypto, just for participating. The distribution was even, regardless of how much liquidity users had provided to the platform. This was an unprecedented token launch, providing a unique spin on an otherwise ambiguous governance token.

The Uniswap airdrop was great, but most aren’t. In fact, most are scams. If you receive a Discord message inviting you to participate in the next big thing by being an early investor, or that recruiting investors to the platform will earn you referral bonuses, are sadly rife in crypto.

Always do your own research before accepting airdrops, if you are part of a legitimate project’s community, you may well get the opportunity to participate in an airdrop. It’s not uncommon, but there are so many scams out there you can never be too careful. If someone asks you to send them money and promises to give you more back at a later date, it’s probably a scam.

The maxim “Do Your Own Research”, or DYOR, is important whatever industry you are active in. A great way to do your own research is by enrolling in Ivan on Tech Academy. The Academy offers world-class cryptocurrency courses, with a collection of in-depth content and knowledge not available anywhere else. Right now, you can join the over 30,000 students already enrolled in Ivan on Tech Academy for a 20% discount, when using the exclusive code BLOG20.

Trading

For those who are perhaps a little less-patient and less risk-averse, cryptocurrency trading can provide a lucrative form of passive income when done so correctly. Trading is risky, and using leverage without caution is more often than not a one-way ticket to Rekt City. Trading requires a strong understanding of both fundamental analysis and technical analysis, along with the ability to act without emotion and execute a strategy with a high probability of success.

Trading bots have made this much easier. Algorithmic trading allows users to program bots to perform trades under certain conditions or at specific times. Though trading bots can be used in many different ways, a solid strategy that is backtested and frequently reviewed can provide the savvy trader with a relatively constant revenue stream when done correctly.

Ivan on Tech Academy has a dedicated course for Algorithmic Trading and Technical Analysis where you can learn to build your own trading bots and gain the knowledge and understanding needed to execute successful trading strategies automatically.

Trading should only be done with caution, but if you understand the markets, trading a small percentage of your portfolio in altcoins during times of Bitcoin stagnation can be a great way of stacking sats and generating an extra income. Nevertheless, always be mindful of the risks potentially associated with trading.

Hodling

Many of you might be wondering why hodling is on this list, especially if you were unlucky enough to get burned by holding the bags of Bitcoin that you bought at the price peak in 2017. That being said, at the time of writing, 98% of all Bitcoin UTXOs are in profit, and Bitcoin has only closed a daily candle above its most recent high only 12 times in history. 

Bitcoin and other cryptocurrencies have become a viable asset class, outperforming every other major class throughout 2020 despite extreme economic and socio-political unrest. The value proposition of crypto is finally being realized. The trajectory on the charts is up, and to the right. Sure, there will be massive volatility on the way but as most will tell you, buying low, hodling, and selling high is the most successful strategy for the vast majority of crypto investors.

Timing the market perfectly every time is almost impossible, but with the correct fundamental analysis and entry point, buying low and hodling cryptocurrencies with genuine utility and a promising future can pay dividends when done correctly with a successful exit strategy.

Bitcoin was worth pennies only a few years ago. Now, it is one of the most valuable and scarce assets available. Just like those who invested in Google, Amazon, and Tesla early on, there is always risk involved. But if that risk meets your personal tolerance and is minimized by comprehensive research, investing in cryptocurrencies early or at a low price can be extremely profitable for savvy hodlers.

Making a Passive Income With Crypto - Conclusion

If you want to compete with the big boys for mining Bitcoin and Ethereum, you’ll need some serious capital, expertise, equipment, and infrastructure.

However, there are several avenues to explore to find out how to make a passive income in crypto. If you have the resources, a basement mining rig could be a viable option. There is a thriving market for old Bitcoin mining rigs that are capable of mining other cryptocurrencies with a higher return.

Centralized crypto exchanges such as Binance and Blockfi now offer a host of options to earn interest on your crypto simply by holding it in their custody. There is risk involved with both centralized platforms and decentralized platforms, but many of the same services are available through both, each offering a different selection of tools and applications. Now that people know how to make a passive income in crypto, the traditional financial sector needs to keep up, or else it risks becoming redundant. With the increase in crypto regulation over the last few months, the infrastructure is becoming more robust, appealing to once-skeptics and previous neigh-sayers. As the world of crypto continues to expand, we can expect to see more opportunities to put your money to work with the use of DeFi and other blockchain-based services.

If you want to learn more about how cryptocurrency mining works and how other people are developing innovative solutions to show people how to make a passive income with crypto, be sure to check out Ivan on Tech Academy. We can teach you all you need to know about cryptocurrency, blockchain technology, and how it is shaping the future of finance, as well as in-depth blockchain blogs daily!






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