Cryptocurrencies have become increasingly popular over the past decade. Crypto assets such as Bitcoin, Ethereum, and other altcoins, have gained widespread adoption and recognition. However, the crypto market is known for being highly volatile. With that being said, trading isn't the only ways you can earn income in the world of crypto. Now, market participants are able to earn passive income with relatively little effort.
This guide will explain what passive income is and explore 13 methods you can use to start earning passive income within the crypto space.
What is passive income?
Passive income is by no means a new concept. The financial industry has been offering different methods of earning passive income for a long time. For example, using a savings account, users simply deposit funds into their account and earn interest. Within the crypto market, there are several tools that allow participants to earn passive income in a similar manner. It’s a tactic that generates a return with little involvement from the individual, and sometimes it can be as easy as locking your crypto up on an exchange for a specific period of time.
This approach eliminates the need to have to trade and constantly monitor the market. You simply allocate a certain amount of money to generate passive income. This can be done in a number of different ways, as we explain below.
Earning passive income still comes with its risks, however, but overall it is considered a relatively safe and simple strategy. Here are 13 methods you can use to generate passive income within the crypto market.
1. Running lightning crypto nodes
The first method to earn passive income would be to run crypto nodes. More specifically, to run a lightning node on the Bitcoin network. This can potentially generate passive income for node operators who earn fees for routing transactions through their nodes. This occurs on Bitcoin’s Lightning Network (LN) — an L2 scaling solution allowing faster and cheaper transactions.
However, keep in mind that running the LN requires technical expertise, hardware, software, and a strong internet connection. If you have the skills and resources to run a node, then this is an effective way to earn passive income.
Staking is a process that occurs on a Proof-of-Stake (PoS) blockchain network. It’s one of the most popular methods of earning passive income. It requires little effort, all you need to do is lock your crypto up for a certain period of time. In return, you receive rewards in the network’s native cryptocurrency.
Depending on the network, this can come in the form of new tokens or transaction fees. Staking is a low-risk method of earning passive income, especially for long-term crypto traders.
3. Liquidity mining
Moving on, liquidity mining is another popular way to earn passive income from cryptocurrency. This has become popular due to the rise of decentralized exchanges (DEXes) and swap pools. Essentially, DEXes require liquidity pools that are used to facilitate transactions of a certain token. These tokens come from community members, called liquidity providers. They deposit their tokens into a liquidity pool, which is just a smart contract for the DEX. In exchange, users receive passive income for contributing to running the DEX.
4. Yield farming
Another common method used to earn passive income comes in the form of yield farming. This is a practice of depositing cryptos into yield-generating pools on DeFi platforms. This is a popular way of generating passive income but requires research due to the variety of DeFi protocols out there. Yield farming demands slightly more attention compared to the other methods we’ve discussed so far. This is due to the fact that returns tend to fluctuate.
5. Decentralized crypto lending
Crypto lending is one of the most popular ways of earning passive income in the entire industry. Similar to liquidity mining, with this method, all you have to do is deposit your crypto into a lending pool. Once again, users must conduct thorough research when it comes to selecting the best crypto lending service.
The interest comes from borrowers who borrow the coins that you deposited. They are expected to return the funds in the agreed amount of time and pay interest rates. The entire process is all facilitated but the use of smart contracts. Lenders must also provide some sort of collateral, this safeguards the lender.
6. Cloud mining
Coins such as Bitcoin are highly popular and very difficult to mine. However, mining Bitcoin is still very rewarding, which is why people are so interested in the process. One option that they have is to turn to cloud mining. Cloud mining is a service offered by cloud mining companies that let you borrow their computational power. All they need is for you to commit a small portion of funds.
Essentially, you purchase a mining plan in order to rent their computational power. In exchange, they allow you to use their mining gear, and you receive a portion of the gains. That way, you can mine coins that are difficult to mine individually without buying mining gear yourself.
7. Crypto games
Halfway down the list, we have one of the most enjoyable ways to earn passive income in crypto. That is to play crypto games. Most crypto games today adopt the Play-To-Earn (P2E) model, meaning you can earn while playing. Different games offer different deals. Some of PvP games reward you for winning matches against other players. Other games let you mine or collect valuable resources and earn them by selling them.
Some games allow you to win NFTs and then sell them for profit on a third-party marketplace. The terms of earning in P2E games differ from game to game. But, the fact that you can earn while playing games is quite a revolutionary change in gaming as a whole.
Another popular way of earning cryptocurrencies passively is participating in airdrops. Airdrops are performed by crypto projects or sometimes crypto exchanges. What this means is that they’ll send free cryptocurrencies to users who fulfill certain requirements. Airdrops are often performed by new crypto projects that seek to distribute their assets. Often, such projects may be supported by exchanges or other larger projects.
9. Crypto savings accounts
An additional method of earning passive income within the crypto space is by using crypto savings accounts. These are similar accounts to the ones offered by traditional banks. However, these ones are available on crypto exchanges — centralized exchanges, to be precise. Apart from exchanges, there may also be other specialized platforms that offer such services.
Crypto savings accounts are simply interest-bearing accounts for cryptocurrencies. The platforms allow you to deposit your money into an account, and in return you’ll earn interest based on the amount you deposited. Meanwhile, they use your money for various purposes. The platform might act as a liquidity pool, a lending platform, or something similar. For traders, it is important that their funds are safe and that they will grow in time.
10. Dividend-earning tokens
In tenth spot, we have dividend-earning tokens. As the name suggests, these are crypto tokens that have some regular dividend rewards for their holders. Although this isn’t common, certain tokens have this mechanism built into their code. One example is VeChain (VET); you earn Thor (VTHO) by holding it. Alternatively, you can get KuCoin Shares (KCS), which will grant you a share of KuCoin’s transaction fees.
This does not differ much from earning dividends from stocks, the only difference here is that you’re dealing with cryptocurrencies.
11. Master nodes
We spoke earlier about operating crypto nodes when we mentioned the Lightning network and its nodes. However, you can also find a blockchain network like DASH that has something called a Master Node. These master nodes are crypto nodes that can receive rather large payouts. They don’t earn transaction fees but a portion of blockchain rewards.
The likelihood of an average person running a master node is somewhat low, due to their scarcity. However, if you ever get a chance to run a master node, this can be a very profitable way of interacting with crypto.
Of course, traditional crypto mining is also a very common way of earning passive income. You only need to select a blockchain network that runs a Proof-of-Work consensus mechanism. Bitcoin is a prime example but is also a difficult and expensive coin to mine. Other options include Dogecoin, Litecoin, and many other cryptos with similar blockchain technology.
During the mining process, you provide your computational power and electricity to the project’s algorithm. The algorithm uses these resources to verify transactions and pack them into blocks. Once the blocks have been created, you receive a reward in the form of the network’s native cryptocurrency. Remember that mining can be expensive, so it matters which coin you mine.
13. Affiliate programs
Lastly, we have participation in affiliate programs. A lot of projects and exchanges like to use their community members to gain new members. This is a common practice in the retail industry, so by no means is it unique to crypto.
Similar to the retail industry, you get your own affiliate link which you can share anywhere.
If people come to the platform and register via your link, you get paid. You can use this method if you have your own website or if you write a blog. This has also been very popular among social media influencers. They even offer discounts to those who use their specific link or code.
Is passive income the best way to earn from crypto?
Whether passive income is the best way to earn from crypto is something that depends on the individual. Your financial goals are what decide that, along with your risk tolerance and personal preferences. Within the crypto industry you can earn passive income in a variety of ways, including running crypto nodes and other methods mentioned above. All of them have the potential to provide steady returns over time. Furthermore, all of them require less involvement than trading.
Passive income can be particularly rewarding for long-term holders, who plan to retain crypto for a long time either way. Any of the methods described above can help them earn additional cash while they wait for the prices to surge. However, all of these strategies also come with risks. Market volatility, regulatory changes, impermanent loss, are only some examples. This is why every crypto user needs to be familiar with what they are doing and what the risks are.
Are crypto nodes passive income?
Yes, running crypto nodes is one of the methods of earning passive income from crypto. This depends on the network, but nodes are typically rewarded for validating transactions.
Can you make money from crypto nodes?
Yes, earning money by running crypto nodes and validating transactions is possible. Note that the exact situation depends on the network and its token. However, typically, crypto nodes do allow you to earn passive income.
What crypto generates passive income?
Many cryptocurrencies offer passive income in one way or another. The entire DeFi sector is dedicated to this, and DeFi can be found on any blockchain with smart contracts. Ethereum is likely the top example, but other similar networks are just as valid.
Is crypto good for passive income?
It all depends on how much money you can afford to enter with, which method you choose, and alike. You can go from earning mere cents per day to earning some sizable amounts. For example, validating transactions and running crypto nodes on Bitcoin can be very rewarding.
Are crypto nodes taxable?
Any profits made from the crypto industry is subject to taxation. Nodes themselves are not taxable, but you will earn crypto by validating transactions. This crypto might be subject to taxation, or you might only have to pay when you convert them. This can also depend strongly on your country’s laws.
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