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Writer's pictureAlgoBlocks
Feb 14, 20223 min read

Not a trader? Ways to earn passive income in cryptocurrencies



Trading seems too risky for those who still can’t handle the extreme ups and downs of cryptocurrencies. Although most low-risk cryptocurrency investments are low-yield, these methods sound like a good option as a passive income. They generate rewards without the cryptocurrency holder’s active involvement in the process.

Check out all the ways you can start your cryptocurrency journey if you’re not into trading:


Staking

Staking shares the same purpose with mining — to secure the blockchain.


In staking, you as an investor will support the security of the network by locking in your cryptocurrency. By doing so, a new transaction is written and validated into a new block. Thus, fulfilling your part as a participant in the network’s consensus mechanism.


Simply put, your only role is to hold onto your crypto. The least complicated way to do this is through a cryptocurrency exchange.


There are cryptocurrency exchanges that have their own staking features. Check their list of cryptos available for staking. Buy the coin and then lock it in.

  • Benefit: The exchange indicates the annual percentage yield (APY) you will earn depending on your lock-up period. The longer your crypto stays in the staking wallet, the higher the returns are.

  • Risk: Most exchanges are strict in implementing lock-in periods. If you decide to withdraw your funds earlier, you may not be eligible to claim the accumulated interest.

Yield Farming

Yield farming allows investors to generate income by lending the latter’s crypto assets to support Decentralized Finance (DeFi) platform.


By lending your crypto assets, you are also providing liquidity in the DeFi platform’s liquidity pool. It becomes faster for users to borrow, lend, and trade coins in the exchange.

  • Benefit: Liquidity providers (LPs) earn incentives from the service fee charged by the DeFi exchange for every transaction. The fees are distributed to the LPs based on the funds each LP provided in the pool.

  • Risk: The transactions in a liquidity pool rely on smart contracts. Hackers may find their way to the pool’s funds if the smart contracts aren’t secured or well-constructed.

Mining

Mining is the process of securing a network by solving complex algorithms using a high-powered computer. Miners receive rewards for successfully verifying transactions on the blockchain.


As Bitcoin and other cryptos gained popularity and competition became more intense, miners shifted from using standard central processing units (CPUs) to more powerful application-specific integrated circuits (ASICs).


The requirements became too costly and too laborious.


This is where cloud mining services came into play. Today, investors who want to harvest the profits of cryptocurrency mining can now do so without worrying about the technical requirements.


You can now sign up for an account in a cloud mining provider, which serves as a third party to do the work on your behalf. Your payment adds to the funds used to buy and maintain a mining rig.

  • Benefit: The rewards will depend on the mining contract you agreed to. Some cloud mining providers, for example, give higher daily returns for a month-long contract compared to a seven-day contract.

  • Risk: One of the risks you should know is an investor’s lack of control in the process. There’s no assurance that the cloud mining provider owns the hardware.

Lending

This method needs no lengthy explanation. Lending in cryptocurrency works the way it does in traditional cash loans — borrowers return the fund and pay the interest to the investor.


There are four ways you can lend your cryptocurrency:

  1. Peer-to-peer lending. As an investor, you can dictate how much you want to lend and how much should the borrower pay as an interest.

  2. Centralized lending. Lock-up your crypto in a lending platform to earn a fixed interest.

  3. DeFi lending. Borrowers and lenders use smart contracts to set interest rates and payment schedules.

  4. Margin lending. Lend you crypto to traders who want to amplify their trading positions. The exchange facilitates the transaction between the two parties to guard the funds and the collaterals.

  • Reward: You are usually in charge of your lending terms. There are also crypto exchanges that pay the Annual Percentage Rate (APR) daily, which allows for compound interest on your coins.

  • Risk: Because some crypto exchanges do not have an insurance fund, lenders may not be paid in full once things go south.

Closing thoughts:

The idea behind each passive income strategy in cryptocurrency may be too technical. Cryptocurrency exchanges and other platforms made it less technical, thus less overwhelming, for beginners. Knowing the risks and finding the right platform will help you choose where to put your assets and make them work for you.



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