Passive income includes earnings from ventures in which you’re not actively involved. There are numerous such opportunities outside of the crypto world, such as collecting rent, generating money through a business in which you don’t actively participate or getting paid stock dividends, but in this blog we will solely focus best passive income opportunities that can be used to complement your trading strategy or even as the only cash flow you have in the crypto sphere.
The majority of crypto investors try to make a profit by simply buying and holding digital assets. This strategy is also known in the industry as ‘hodling’, since investors buy coins with the mindset that their price will eventually rise some day in the future. While on the one hand ‘hodlers’ don’t actively participate in the market through the duration of their investment, on the other hand this speculative strategy doesn’t guarantee you a profit since the price may never reach higher levels again. As a consequence this strategy can’t truly be considered a passive income generator.
Are you tired of continually keeping up with the market to manage your positions? Let’s look at five ways to generate passive income with crypto!
Proof of stake consensus mechanism brought about not only a more efficient way for processing transactions, but also a new way for coin holders to earn yield. Staking requires locking up a certain amount of coins to participate in validation of transactions in and creating new blocks in a blockchain. In most cases, blockchains randomly pick participants, elevate them to the status of validators and reward them for their efforts.
In general the amount of cryptocurrency you stake determines your chances of being chosen to forge the next block in the chain, but other factors, such as token age, may be taken into account to ensure that the same big holders aren’t selected every time.
There are cryptocurrencies that offer staking rewards for people willing to lock their tokens, simply to minimize the selling pressure and help building a sustainable growth structure, which further benefits investors and community. We offer our own staking program to reward users that hold NWC tokens as well. This is the best way to maximize your holdings that would otherwise be sitting in your wallet, as you can earn up to 25% annually or even get a free professional subscription.
Providing Liquidity on DEXes
DEXes or Decentralized exchanges revolutionized the way that traders access and capitalize on opportunities in the market by providing a permissionless source of liquidity for a wide variety of cryptocurrencies. But a specific type of DEX, known as an automated market maker, has also given an entirely new way for investors to generate a yield on their assets, as they can get rewarded for providing liquidity. Liquidity providers basically stake their cryptocurrency tokens on DEXs to earn transaction fees.
These platforms offer decentralized liquidity pools, which allow users to trade while simultaneously facilitating efficient price discovery by simply using the weighting of the two or more assets held in a pool to determine each of their values.
Liquidity pools use smart contracts to provide liquidity for DEXes. Liquidity providers (you) then send tokens into a liquidity pool, where their funds are aggregated for liquidity. Once you deposit liquidity, the decentralized exchange will transfer LP tokens representing your share of the total funds locked in the liquidity pool.
When a trader sources liquidity from the pool, they pay a trading fee (Uniswap charges a flat 0.3% transaction fee), which is split among all liquidity providers. Obviously, the higher your fraction of the overall liquidity pool and the higher the trading volume, the higher the return on your investment. Yields range from 2% up to 100% APY from liquidity provider fees.
If you’re already providing liquidity, then yield farms provide a way to earn an additional yield on your assets. You basically stake your pre-existing liquidity provider LP tokens to earn two separate interest rates from a single deposit.
By staking your tokens to the yield pool, you will receive a proportionate part of the rewards it pays out each day. For example, if you contribute 1% of the pool, you will usually receive 1% of the rewards it pays.
There are now also protocols that automatically move your funds around to maximise your earnings. The best example is probably Yearn Finance, where the community votes on strategies that are then associated with a specific asset in a vault to really boost your returns.
Lending has become one of the most popular crypto services in both the centralized and decentralized segments of the crypto industry. Since the recipient, to whom you land your digital assets, has to pay not the principal amount borrowed, but also the interest, lending is arguably the simplest and most straightforward way that can earn you some passive income.
The first option are centralized cryptocurrency savings accounts (such as Crypto.com), which usually use your funds to provide loans to borrowers. In this strategy, you completely rely on the lending infrastructure of the third party (exchange), which determines the interest rates for different lock-up periods.
The second option are decentralized savings platforms that allow users to execute landing services directly on the blockchain, since there are no intermediaries involved in DeFi lending. In this strategy lenders and borrowers interact via smart contracts, which autonomously and periodically set interest rates.
Last, but by no means least, are dividend-yielding or yield-bearing tokens, which are tokens that entitle holders to a share of the profits generated by the underlying issuer. This is a crypto-equivalent of owning a share of a publicly-traded company, which entitles holders to dividends.
There is a wide variety of dividend-yielding tokens and each operates in a somewhat different way. An example of dividend-yielding tokens include Kucoin Shares (KCS), which pays a fraction of their trading fee revenue to token holders or Nexo (NEXO) that entitles the holder to a fraction of its profits.
In some instances, solely holding tokens is enough to qualify for ‘dividends’, which are then distributed periodically to each holder’s wallet as an airdrop, while in other cases, you may need to sign up to the issuing platform and complete KYC verification to claim an airdrop.
Since the returns of these tokens are strongly related to the performance of the underlying project, your yields can vary quite a lot depending on how sound it is and over different time periods.