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Ways to Earn Passive Income from Cryptocurrency in 2021

by Leon Helg (Contributor) Sep 29 2021

Cryptocurrency has become the talk of the town. With more and more people investing and creating a cryptocurrency portfolio, the market is full of opportunities for those who have the nerve to do something extraordinary.

We have all heard of people who jumped in early, HODL-ed their crypto, and accumulated hundreds and thousands of dollars just by investing a small amount. But most of the investors out there missed the bandwagon as the market was very uncertain and only understood by few. Even if you missed out on the early investment, it’s still not too late to make money in this market.

This article will help you understand different methods you can utilize to earn passive income from cryptocurrencies. 

What is Passive Income?

Passive income is money that you earn without working or getting involved in the market yourself. Passive income includes money you get from your rental property, dividends from stock investments, or any other income stream where your involvement is not necessary.

There are ways to earn passive income from cryptocurrency other than investing and trading. It can earn you money in a similar way to earning interests and often only requires a little effort to set up and almost no effort to maintain.

In essence, any investment you hold that generates income on its own is passive income. If you work smart you can create several passive income streams that can add up to be a stable source of income. Here are the most popular ways of creating a passive income through cryptocurrency.

 

1. Staking

Staking crypto is one of the most popular income streams that generates passive income and needs little involvement on your side. It is the easiest and simplest way to earn passive money because the market pays you for holding your crypto for a certain amount of time. 

Staking is the process of freezing your funds in a wallet and performing several functions like authorizing the transactions in order to get staking rewards. Through ownership, the stake (i.e., token holding) incentivizes the network’s security to be maintained. When users stake their coins, they are basically lending them to the network and locking them up in order to validate transactions. Hence, by helping in the process of validating, the network rewards users with extra coins. The additional rewarded coins are then deposited into a special staking pool.

Staking networks use Proof of Stake as their algorithm; it has similar versions such as Delegated Proof of Stake or Leased Proof of Stake. Proof of Stake systems use transaction fees as rewards. Staking your coins provides you with a noticeable amount of money without really having to do the heavy lifting. You won’t even need any mining equipment as e-wallets fulfill the function. Coins that utilize PoS and that you can actively stake to earn passive rewards are. Links to tutorials and the current rewards are also included.

2. Lending and Borrowing

Lending and borrowing is another possible way to earn passive income from cryptocurrency. Various peer-to-peer (P2P) lending platforms help you in storing funds for a certain period and then, later on, allow you to collect interest payments. You can even set an interest rate depending on the current market rate. Most of the exchanges have the feature of lending and borrowing implemented natively on the platform.

Lending crypto is much like the traditional cash loans where the borrower pays interest to the lender. A higher amount of money than the borrowed one is secured by crypto assets. For example, you can borrow fiat currencies such as Euros or US Dollars against your Bitcoins. Some exchanges and platforms pay interest rates to crypto lenders and then lend the assets to borrowers who can pay interests with higher returns. They will lend your crypto to others and, in return, pay you with a handsome amount of interest.

This process of lending and borrowing crypto assets is an easy, hassle-free process that ensures a passive income. Several factors such as market volatility and instability do not play a role in this process, making it even more attractive to investors. This process is ideal for long-term holders who can earn with minimal effort. Established decentralized lending protocols like Compound Finance and Aave make this process easy, and let you earn up to 4% APY.

3. Mining

This is the original way of earning passive income that has been used since the start of cryptocurrencies. Mining is the process of using computational powers to solve different complex mathematical problems and authorize transactions. It requires the miner to provide “proof of work.” The miner who solves the problems quicker than anyone else is rewarded with crypto coins and tokens.

At the start of the crypto era, mining was done using a Central Processing Unit (CPU). As mining became more competitive, the limited processing speed and high power consumption made CPU mining inefficient. Today, most large scale mining operations are using ASICs (Application-Specific Integrated Circuits). These machines are built specifically for the purpose of mining and are therefore much more effective and reliable. 

As the crypto ecosystem has progressed and the prices of cryptocurrencies have surged, mining has turned into an extremely profitable passive income stream. However, mining is very costly and resource-intensive. Nowadays, it is performed on large computers and farms using hundreds of ASIC chips and uses a huge amount of electricity. The barrier to entry is very high for most individuals because of its high capital requirements.

 

4. Liquidity Mining

When you want to change one currency to another, you go to an exchange. In a centralized exchange (CEX) the central entity (e.g. a bank) has huge piles of both currencies. They take that liquidity and use it for the trades. They charge a small fee for each transaction.

In a decentralized exchange (DEX) the transactions are done by a smart contract – an algorithm that is run on the blockchain. But where does the liquidity for these trades come from? From Liquidity Providers (LPs)

Liquidity Providers do Liquidity Mining; they give their liquidity to a liquidity pool(e.g. ETH-ADA) so the smart contracts can use it to perform the trades between those currencies. Instead of the bank, the transaction fees go to the Liquidity Providers. This means that Liquidity Mining enables everyone to earn money like a bank does. Providing Liquidity to a market where it’s needed and earning great returns because of the transaction fees.

The biggest risk is impermanent loss EXPLAIN HERE. However, this can be circumvented by investing in a pool where the value of the two assets are closely coupled to one another. For example a stable coin pair where both currencies are representing exactly one USD.

In comparison, liquidity mining is considered safer than crypto staking.

Users can earn additional tokens besides the regular yield for putting assets in a liquidity pool through Liquidity mining. Liquidity mining is yield farming, where the revenue is generated from transaction fees when end-users make transactions.

This new type of mining rewards the investors who provide liquidity to platforms, such as Decentralized Exchanges (DEXs). Decentralized exchanges reward the users who bring capital to their platforms. There are usually a fixed amount of token rewards for miners. Liquidity mining is considered safer than crypto staking.

 

Conclusion:

There are several ways of generating legit money from passive income streams, which are gaining popularity day by day. However, you should be approaching these investments carefully and must have proper knowledge in order to start. Keep in mind that the crypto ecosystem is still volatile, but it can be very profitable for the investor if invested in with proper research. These ways of creating a passive income possess very less risk factor and offer the investor with maximum profit.

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