Work smart, not hard: how to generate passive income with cryptocurrency
Cryptocurrency is an innovative technology that has opened up new possibilities in finance. One of the opportunities people are taking advantage of is generating income without any active effort.
This “passive income” is equivalent to earning money while you sleep, which may seem too good to be true. However, cryptocurrency has indeed made it possible to make fortunes in ways that have never existed before. Those that are joining crypto trading early are making profits.
What should you choose: trading or passive investing?
Trading cryptocurrencies day-to-day can be extremely profitable. There are many people that make their living this way, earning anywhere from hundreds to thousands of dollars on a successful day.
But it’s also extremely risky and requires a huge amount of time to invest in cryptocurrency markets. Day traders spend hours every day scouring the markets in search of profitable trades to make. They also frequently lose money if their skills and trading systems can’t keep up with the markets.
Passive income takes a completely different approach. The ideal passive income requires almost no time investment. Simply check in once per week or month to see how your earnings are faring. This type of investment is better for people who have limited time or don’t want to spend much of their day keeping tabs on the markets.
There are fewer opportunities for quick cash using passive income than trading. But, with the right investment, regular people are earning thousands of dollars of passive income with cryptocurrency.
Types of passive earnings
There are a few unique ways of earning a passive income with cryptocurrency. Here’s an explanation of the main earning categories and the people who might consider using each one.
Buy and hold is also referred to in the Bitcoin world as HODLing. It’s a simple strategy of buying cryptocurrency and holding it long-term. No matter what the market does, and no matter what the media is saying about crypto – just hold.
The basic logic behind this strategy is that Bitcoin and cryptocurrency are indispensable and unstoppable technological rises. The only question is how long it will take for the technology to mature enough to become worth many trillions of dollars. There will be ups and downs, but the underlying trend will head upwards.
This strategy has worked extremely well for many in the crypto industry. A quick look at the bitcoin price graph shows that it works so far, even if you only buy at the price peaks. If you bought $1,000 worth of bitcoin in June 2016 and held it, you would have earned a good $60,000+ in passive income by June 2021.
Mining is a type of passive income that is unique to cryptocurrency. It’s quite technical, but here’s a quick overview of how it works. Cryptocurrencies rely on clever cryptographic techniques to secure their decentralised networks. They are essentially a way to prove that transactions on the network are authentic.
However, these cryptography techniques take an extreme amount of computing power to run. For example, it’s estimated that Bitcoin uses approximately 0.55% of all electricity production in the world to secure its network in this way. This is about the same as Sweden consumes in a year.
The people that do this computing work are called miners. They use their computing power to run the algorithms of the crypto network and get paid to do so. About $50m is paid to miners around the world every day. This is passive income. It’s not quite as easy as it sounds. You need specialised mining hardware and access to cheap electricity. However, some people are making fortunes this way.
Masternodes are another way cryptocurrencies pay people to help in the operation of the network. They are part of the consensus mechanism on crypto networks like Dash.
To be a masternode, you must hold a certain amount of cryptocurrency as collateral and have your node running the masternode software 24 hours per day. If you set this up properly, you can get paid hundreds of dollars per week per masternode.
Staking is a similar technique that can be used to earn passive income with Ethereum (which you can get here) and other similar networks. It involves locking away a certain amount of Ethereum for a defined amount of time. Doing this helps secure the network and Ethereum considers it a public good that earns you rewards. You will need at least 32 ETH to become a full validator, although you can start staking with less.
Cryptocurrency has created many opportunities for lending. The decentralised finance movement is opening up global peer-to-peer lending and borrowing of cryptocurrencies. That means you can buy a cryptocurrency and lend it out to earn interest. That is on top of the interest you earn from buying and holding. The combination of these strategies can be very profitable.
Risks of passive income in cryptocurrency
Of course, every passive income strategy outlined here comes with its own risk profile. Buy and hold doesn’t pay off if the price goes down instead of up. Many people learned that the hard way with many crypto coins that have failed in the past.
Masternodes and staking have a low risk of you losing your tokens. But, there’s also the risk that the crypto price will go down and you’ll lose more than you gain. Crypto lending is a high-risk activity.
It comes with the price risk inherent in all cryptocurrencies. But, it also has the risk that you won’t get paid back from your borrower. You need to think carefully about all of these risks before you take them.
Cryptocurrency is a fantastic opportunity to earn passive income. Some techniques are easy (HODL), while others require a bit of technical know-how (e.g. masternodes and staking).
But, people using them are earning their share of the millions of dollars paid out daily from the deep pockets of the crypto industry. You can get your slice of the pie, too, as long as you stay aware of the risks.