What is passive
income?
Trading or investing in projects is one way to make money in
the blockchain industry. However, that typically requires detailed research and
a substantial investment of time – but it still won’t guarantee a reliable
source of income.
Even the best investors can experience prolonged periods of
loss, and one of the ways to survive them is to have alternative sources of
income.
There are other methods than trading or investing that can
help you increase your cryptocurrency holdings. These can pay ongoing income
similar to earning interest, but only require some effort to set up and little
or no effort to maintain.
This way, you can have several streams of income that, in
combination with each other, can add up to a significant amount.
This article will go through some of the ways that you can
earn a passive income with crypto.
What are the ways you can
earn passive income with crypto?
Mining
Mining essentially means using
computing power to secure a network to receive a reward. Although it does not
require you to have cryptocurrency holdings, it is the oldest method of earning
passive income in the cryptocurrency space.
In the early days of Bitcoin, mining on an everyday Central Processing Unit (CPU) was
a viable solution. As the network hash rate increased, most of the miners shifted to
using more powerful Graphics Processing Units (GPUs). As the competition
increased even more, it has almost exclusively become the playing field of Application-Specific Integrated Circuits
(ASICs) - electronics that use mining chips tailor-made for
this specific purpose.
The ASIC industry is very competitive and dominated by
corporations with significant resources available to deploy on research and
development. By the time these chips arrive on the retail market, they are
likely already outdated and would take a considerable amount of mining time to break-even.
As such, Bitcoin mining has mostly become a corporate
business rather than a viable source of passive income for an average
individual.
On the other hand, mining lower hash rate Proof of Work coins can still
be a profitable venture for some. On these networks, using GPUs can still be
viable. Mining lesser-known coins carries a higher potential reward, but comes
with higher risk. The mined coins might become worthless overnight, carry
little liquidity, experience a bug, or see
themselves hindered by many other factors.
It is worth noting that setting up and maintaining mining
equipment requires an initial investment and some technical expertise.
Staking
Staking is essentially a less resource-intensive alternative to mining. It usually
involves keeping funds in a suitable wallet and performing various network
functions (such as validating transactions) to receive staking rewards. The
stake (meaning the token holding) incentivizes the maintenance of the network’s
security through ownership.
Staking networks use Proof of Stake as their consensus algorithm. Other versions
of it exist, such as Delegated Proof of Stake or Leased Proof of Stake.
Typically, staking involves setting up a staking wallet and
simply holding the coins. In some cases, the process involves adding or
delegating funds to a staking pool. Some exchanges will do this for you. All
you have to do is keep your tokens on the exchange and all the technical
requirements will be taken care of.
Staking can be an excellent way to increase your
cryptocurrency holdings with minimal effort. However, some staking projects
employ tactics that artificially inflate the projected staking returns rate. It
is essential to investigate token economics models as they can effectively
mitigate promising staking reward projections.
Binance Staking supports a wide variety of coins
that will earn you staking rewards. Simply deposit the coins on Binance and
follow the guide to get started.
Lending
Lending is a completely passive way to earn interest on your
cryptocurrency holdings. There are many peer-to-peer (P2P) lending
platforms that allow you to lock up your funds for a period of time to later
collect interest payments. The interest rate can either be fixed (set by the
platform) or set by you based on the current market rate.
Some exchanges with margin trading have this feature
implemented natively on their platform.
This method is ideal for long-term holders who want to
increase their holdings with little effort required. It is worth noting that
locking funds in a smart contract always carries the risk of bugs.
Binance Lending offers a variety of options that
let you earn interest on your holdings.
Running a Lightning node
The Lightning Network is a
second-layer protocol that runs on top of a blockchain, such as Bitcoin. It is
an off-chain micropayment network, which means that it can be used for fast
transactions that aren’t immediately transferred to the underlying blockchain.
Typical transactions on the Bitcoin network are
one-directional, meaning that if Alice sends a bitcoin to Bob, Bob cannot use
the same payment channel to send that coin back to Alice. The Lightning
Network, however, uses bidirectional channels that require the two participants
to agree on the terms of the transaction beforehand.
Lightning nodes provide liquidity and increase the capacity
of the Lightning Network by locking up bitcoin into payment channels. They then
collect the fees of the payments running through their channels.
Running a Lightning node can be a challenge for a
non-technical bitcoin holder, and the rewards heavily depend on the overall
adoption of the Lightning Network.
Affiliate programs
Some crypto businesses will reward you for getting more users
onto their platform. These include affiliate links, referrals, or some other
discount offered to new users that are introduced to the platform by you.
If you have a larger social media following, affiliate
programs can be an excellent way to earn some side income. However, to avoid spreading
the word on low-quality projects, it is always worth doing some research on the
services beforehand.
If you are interested in earning passive income with Binance,
join the Binance Affiliate Program and
get rewarded when you introduce the world to Binance!
Masternodes
In simple terms, a masternode is similar to a server but is one that
runs in a decentralized network and has functionality that other nodes on the
network do not.
Token projects tend to give out special privileges only to
actors who have a high incentive in maintaining network stability. Masternodes
typically require a sizable upfront investment and a considerable amount of
technical expertise to set up.
For some masternodes, however, the requirement of token
holding can be so high that it effectively makes the stake illiquid. Projects
with masternodes also tend to inflate the projected return rates, so it is
always essential to Do Your Own Research (DYOR) before investing in one.
Forks and airdrops
Taking advantage of a hard fork is a relatively
straightforward tactic for investors. It merely requires holding the forked
coins at the date of the hard fork (usually determined by block height). If there are two or more competing
chains after the fork, the holder will have a token balance on each one.
Airdrops are similar to forks,
in that they only require ownership of a wallet address at the time of the
airdrop. Some exchanges will do airdrops for their users. Note that receiving
an airdrop will never require the sharing of private keys - a condition
that is a telltale sign of a scam.
Blockchain-based
content creation platforms
The advent of distributed ledger technologies has enabled
many new types of content platforms. These allow content creators to monetize
their content in several unique ways and without the inclusion of intrusive
ads.
In such a system, content creators maintain ownership of
their creations and usually monetize attention in some way. This can require a
lot of work initially but can provide a steady source of income once a more
substantial backlog of content is ready.
What are the risks of
earning passive income with crypto?
·
Buying a low-quality asset: Artificially inflated or misleading return rates can
lure investors into purchasing an asset that otherwise holds very little value.
Some staking networks adopt a multi-token system where the rewards are paid in
a second token, which creates constant sell pressure for the reward token.
·
User error: As the blockchain industry is still in its infancy,
setting up and maintaining these sources of income requires technical expertise
and an investigative mindset. For some holders, it might be best to wait until these services
become more user-friendly, or only use ones that require minimal technical
competence.
·
Lockup periods: Some lending or staking methods require you to lock up
your funds for a set amount of time. This makes your holdings effectively
illiquid for that time, leaving you vulnerable for any event that may
negatively impact the price of your asset.
·
Risk of bugs: Locking up your tokens in a staking wallet or a smart contract always carries
the risk of bugs. Usually, there are multiple choices available with various
degrees of quality. It is imperative to research these choices before
committing to one. Open-source software might be a good starting point, as
those options are at the very least audited by the community.
Closing thoughts
Ways to generate passive income in the blockchain industry
are growing and gaining popularity. Blockchain businesses have also been
adopting some of these methods, providing services commonly referred to as
generalized mining.
As the products are getting more reliable and secure, they
might soon become a valid option for a steady source of income.
