Introduction
Cryptocurrency has opened up new avenues for earning passive income beyond traditional investments like stocks and real estate. With the rise of decentralized finance (DeFi) and innovative crypto projects, there are now many opportunities to put your crypto holdings to work and generate steady streams of income with little to no effort required. In this post, we'll explore various strategies to help you earn passive crypto income.
Staking
The term 'staking' encompasses various forms, including traditional staking, liquid staking (such as stETH or wstETH), and is often used as a broad term to describe the act of depositing cryptocurrencies to generate interest or rewards. Traditional staking involves committing your crypto assets to participate in maintaining the security of a proof-of-stake blockchain network. By locking up or "staking" your tokens, you become a validator that processes and verifies transactions. In return for your stake and the computing resources you provide, you earn staking rewards in the form of newly minted coins.
There are a few different ways to stake crypto:
Run your own validator node which requires technical knowledge and a minimum stake (e.g. Ethereum validator nodes require 32 ETH)
Delegate or pool your stake through a non-custodial wallet to a staking provider
Use a centralized exchange's staking service (exchanges hold your crypto)
Staking rewards vary but can reach upwards of 20% APY for some newer PoS coins. More established networks like Ethereum offer around 5-7% staking yields currently. The rewards are paid in-kind which means you get paid in the token that you stake.
Top PoS Tokens for Staking: Ethereum, Solana, Cardano, Avalanche
Learn more: https://www.archlending.com/blog/usdc-staking
Crypto Lending
Crypto lending platforms allow crypto holders to use their digital assets like Bitcoin or Ethereum to receive a loan.
Crypto loans are typically over-collateralized, meaning borrowers must put down more collateral than they take out to reduce risk of default. Interest rates fluctuate based on supply and demand for particular assets. As a lender, you can deposit your crypto to fund loans and earn interest on the assets you supply.
Leading Lending Platforms: Aave, Compound
Liquidity Provision
Decentralized Exchanges (DEXs) rely on liquidity pools to facilitate trading between different cryptocurrencies. Users can earn passive income by supplying liquidity to these pools and earning a percentage of the trading fees.
To become a liquidity provider (LP), you'll need to deposit an equal value of each cryptocurrency traded in that pool (e.g. ETH and USDC). You'll then receive LP tokens representing your share of that pool. As the pool is used for trading, you earn rewards proportional to your share of the total liquidity supplied.
Many DEXs also reward LPs with their native token emissions on top of the trading fee rewards. However, there is a risk of impermanent loss if the relative prices of the pooled assets change significantly.
Top DEXs to Provide Liquidity: Uniswap, Curve Finance, Pancake Swap
Crypto Interest Accounts
Crypto interest accounts, also known as crypto savings accounts, are typically offered by centralized crypto platforms and work similarly to a traditional high-yield savings account. You deposit your crypto assets, and the platform uses the funds to generate interest by lending the funds out, depositing them into treasuries, or other methods. A portion of the revenue generated is then paid out to you.
Many of these accounts offer much higher interest rates than traditional bank accounts, some reaching up to 5% APY on stablecoins like USDC. However, rates fluctuate over time based on various factors like supply & demand and interest rates.
To open an interest account, you'll need to transfer your crypto assets to the platform and enable the interest-earning feature. Your assets will then start accruing interest over time, paid out at regular intervals like weekly or monthly.
Leading Interest Account Providers: Coinbase
Yield Farming
Yield farming takes advantage of the composability and interconnectivity of DeFi protocols to maximize returns by lending, staking, and providing liquidity across multiple platforms.
For example, you could:
Stake crypto on a DeFi protocol to earn rewards
Take those reward tokens and provide liquidity on a DEX to earn trading fees
Then stake your liquidity provider (LP) tokens on another yield optimizer to compound earnings
There are many ways people have combined yield streams across different DeFi protocols and applications. However, it requires an advanced understanding of smart contracts and DeFi to avoid risks like impermanent loss.
Top Yield Farming Platforms: Convex Finance, Yearn Finance
Crypto Mining
Mining involves using specialized computing hardware (ASIC miners, GPUs, etc.) to solve complex mathematical problems in order to validate transactions on proof-of-work blockchain networks like Bitcoin. Miners are rewarded with newly minted cryptocurrency for each block they successfully validate.
Most individuals join mining pools to combine their hashpower and increase chances of earning block rewards. Profits depend on factors like your hardware's hashrate, electricity costs, and the cryptocurrency being mined.
While very competitive, mining can provide passive income if done efficiently, though it requires an upfront investment in hardware.
Top Mineable Cryptocurrencies: Bitcoin, Litecoin, Dogecoin
Dividend-Earning Tokens
Similar to how public companies pay dividends to shareholders, some cryptocurrencies distribute rewards or a "dividend" to token holders as passive income. These are typically funded by fees, revenue, or a portion of the project's profits.
Dividend yields and payment schedules vary across projects. Some like KuCoin Shares pay out daily or weekly dividends to holders.
Leading Dividend Tokens: KuCoin Shares (KCS), AscendEX (ASD)
Potential Risks to Consider
While generating passive income with cryptocurrencies offers exciting opportunities, it's crucial to be aware of the associated risks. As with any investment, exercising caution and conducting thorough research is essential to mitigate potential pitfalls.
Security Vulnerabilities: The decentralized nature of cryptocurrencies and the evolving technology behind them can make them attractive targets for hackers. Exchanges and platforms may be susceptible to hacking attempts, phishing scams, or other security breaches, potentially compromising users' funds.
Market Volatility: Cryptocurrency markets are notoriously volatile, with prices often experiencing substantial swings in response to news, regulatory developments, or market sentiment. This volatility can significantly impact the value of your invested capital and potential returns, necessitating a well-diversified portfolio and a long-term investment horizon.
Platform Reliability: When engaging with third-party platforms or services for passive income generation, there is a risk of platform failure, bankruptcy, or mismanagement, which could result in the loss of your invested assets. Thoroughly researching and selecting reputable platforms with robust security measures and insurance coverage is crucial.
Counterparty Risk: Certain passive income strategies, such as lending or staking, involve entrusting your assets to a counterparty. There is a risk that the counterparty may fail to fulfill their obligations, potentially resulting in the loss of your invested funds.
Opportunity Cost: While generating passive income with cryptocurrencies can be lucrative, it's important to consider the opportunity cost of tying up your assets in a particular strategy. Diversification and regularly reassessing your investment strategies are crucial to maximizing returns.
By understanding and mitigating these potential risks, you can approach cryptocurrency passive income generation with a well-informed and strategic mindset, increasing your chances of success in this exciting and rapidly evolving space.
Crypto Passive Income Tax Implications
It's important to understand that passive income generated from cryptocurrencies is generally considered taxable. While specific guidance from tax authorities may vary, the following principles typically apply:
Earning New Tokens (e.g., Staking): Receiving new tokens as a reword for staking or similar activities are generally subject to taxation in two phases: first, as ordinary income upon receipt and acquisition of the tokens, and subsequently, as capital gains when those tokens are eventually disposed of or sold.
Trading Tokens (e.g., Liquidity Provision, Lending, Yield Farming): When you trade tokens through activities like liquidity provision, lending, or yield farming, any realized gains from these trades are typically treated as capital gains and subject to capital gains tax.
It's essential to keep records of your transactions, including the acquisition dates, costs, and fair market values at the time of receipt or disposal. Consulting with a qualified tax professional and/or using crypto tax software is highly recommended to ensure compliance with the applicable tax laws and regulations in your jurisdiction.
Learn More About Best Crypto Tax Platforms: https://www.archlending.com/blog/7-best-crypto-tax-software-solutions-in-2023
Conclusion
Earning passive income from crypto is a powerful way to grow your digital asset holdings without the need for constant active trading or monitoring. By diversifying across various strategies like staking, lending, liquidity provision, and more, you can create multiple streams of passive crypto income while mitigating risks. Remember to conduct thorough research, understand the risks involved, and only invest what you can afford to lose. With the right approach, earning passive income from crypto can be a valuable addition to your investment portfolio.
About Arch
Arch is building a next-gen wealth management platform for individuals holding Alternative Assets. Our flagship product is the crypto-backed loan, which allows you to securely and affordably borrow against your crypto. We also offer access to bank-grade custody, trading and staking services, powered by BitGo.