No one is going to argue the fact that cryptocurrencies are among the most profit-bearing assets on the contemporary financial market while also being designed to be easily accessible even to retail investors with minuscule capital. Since its inception in 2011, Bitcoin (BTC) has shown higher annualized returns than gold, the universally accepted safe-haven asset - 230% to 1.5%; US Nasdaq 100 with its 20% return, and even high yield bonds that produced only 5.4% over the past decade.
Given these figures, it's no wonder that people keep flocking to this particular market, especially in the light of the recent economic and inflation crisis. The crisis at hand was caused primarily by the coronavirus pandemic and the subsequent massive injection of newly-printed money in the US economy (nearly 25% of all USD in circulation had been issued in 2021 alone, an unprecedented case in the history of the global economy). Subsequently, the US Dollar Index (DXY), which showcases the value of the global reserve currency against the basket of other high-performing fiat currencies, plunged from 103 points to the current 90 points in a span of a year, forcing many investors of different caliber to defect to cryptocurrencies, seeking for ways to hedge their saving against the ravaging inflation and diminishing interest rates.
There are many different ways to safeguard the money against the threats of the real-world economy and raise your personal net worth through cryptocurrencies, with active trading, investment, and holding (HODL-ing in the crypto slang) being the most popular. All these methods have their pros and cons: trading and active investment require a great deal of knowledge of the underlying blockchain technology as well as technical analysis and market timing. Obviously, not everyone has enough time on their hands, as well as mental capacity, to learn all the intricacies of trading, the theoretical, practical, and psychological complexity of which goes beyond comparison with some nine-to-five office job, and then devote countless hours to monitoring the markets and picking the right entry and exit points. Besides, there is a heated debate about the profitability of cryptocurrency trading in comparison to the buy-and-hold strategy.
Several studies have shown that "hodling" could be more profitable for inexperienced investors than trading: before Bitcoin's recent correction to $30,000, all investors who bought the first cryptocurrency in the period between November 2017 and November 2020 were in substantial profits. Needless to say that there are numerous self-taught traders who got totally rekt over the same time span. Therefore, if you feel that you don't have the competence or psychological fortitude to trade such a highly volatile asset, better stick to holding it in the safety of a cold wallet, which is a form of passive income with crypto in itself. Given that the cryptocurrency market still has the chance to overcome the current crisis and continue its bull run, such an investment strategy could bear much juiciest fruits than hectic trading.
However, if you want to squeeze even more out of your cryptocurrency portfolio and earn a larger passive income while not being entrapped into the day-to-day turmoils on the cryptocurrency market, you would have to employ the additional instruments that we are going to be described in detail in this article. It's as Robert Kiyosaki said, "Don't work for money, let the money work for you." We are here to tell you how to make your precious cryptocurrencies work more efficiently. Here we will dive deep into the nuances of staking coins and earning interest from lending crypto on various platforms - all to help you gradually increase the size of the crypto stack.
A few more words about the holding strategy
There is no need to teach how to become a cryptocurrency holder and make some (or a lot) of money by simply storing Bitcoin, Ethereum, or numerous other coins in a digital wallet of your choice (cold wallets are preferable). This strategy is simple and provenly effective. However, as with any long-term investment, the problem comes with the proper timing for entry and exit. In other words, most crypto enthusiasts tend to buy into that unique emotion called the fear of missing out (FOMO) when supplementing their portfolios, which results in buying at the top of a price swing and then having to sit through some hefty 30% - 60% price corrections that happen on the cryptocurrency market fairly regularly. For example, if one bought BTC at the dawn of 2018, right before the commencement of the infamous crypto winter, he or she had to sit through the prolonged bear market that had run its course only at the close of 2020 for the investment to become profitable. Needless to say that not anyone had the required psychological stamina to see the value of their portfolio increase 3-to-10 fold during the recent bull run.
For that reason, the best way to approach holding crypto with the purpose of making a relatively stable passive income is to average into the position over an extended period of time, possibly even months or years. And if possible, always wait for those lucrative opportunities that come during deep corrections that occur every two to three months.
In essence, a holder has to buy a similar amount of crypto at regular intervals and avoid entering the market when it appears overheated.
But the real trick regarding holding isn't when to buy a certain amount of crypto, especially in the bull market, but figure out when that stream of passive income is about to dry out and start selling a part of your position, thus averaging out of it. Many holders tend to forget that the cryptocurrency market goes through different phases and then end up holding the bags instead of thinking of ways to spend the profits. Therefore, if you really want to transform your holding experience into a source of passive income, you would have to develop an exit plan where you liquidate from 20% to 70% of your crypto portfolio once the price on the underlying asset reaches certain levels, and then averaging back into the position once the bears start reigning over the market again. It would be even better if you learn the basics of technical analysis in order to be able to comprehend what's happening on the market and time the exits more precisely. For instance, it was clear that the bull run of Bitcoin had exhausted itself at $60,000 since technical analysts pointed to numerous points of resistance present in that area, whereas before that, BTC had smashed through various ATH levels like a locomotive going through carton boxes. At that point, the holder should have offloaded at least 40% of the portfolio and stayed in cash until the situation got resolved. And we all saw how brutally it got resolved, so always remember to take the profits when such an opportunity presents itself.
Staking - the best way to earn money with crypto without having to lift a finger
But if you are a smart investor who devotes only the amount of money into crypto that won't be detrimental to your personal financial wellbeing if it gets melted down to a fraction of the initial investment, you can try other methods of making passive income with cryptocurrencies that don't involve holding, averaging in and out, or even the need to check the price charts. The following method is dubbed staking, and it's very similar to having a savings account at your national bank, in terms that you would have to deposit a certain amount of crypto to a blockchain project and get rewarded by earning a certain percentage of transaction or block fees that occur on a given blockchain.
By locking up your fund on a blockchain in order to maintain its functionality, you become a staker, also known as a validator, on that network and become eligible for the said rewards. If you are familiar with the basics of how blockchain operates, you'd know that every transaction there needs to be verified (validated) through the so-called consensus mechanisms either by a computing device like ASIC in the Proof-of-Work (PoS) networks or by validator nodes in the Proof-of-Stake ones.
And while mining is also considered a form of passive income from cryptocurrencies, it requires a lot of investment in expensive hardware to make arbitrary computation that gets dated quickly, as well as vast sums of money that would be spent on electricity bills, not to mention the competence required to run this whole sophisticated operation. At the same time, the PoS doesn't require its validators to have any equipment or knowledge in mining whatsoever - only a certain amount of money converted to a corresponding coin and the patience needed to see the returns accumulate over time.
In the PoS networks, new blocks are being produced and validated by those who hold a stake locked up in digital wallets that support the corresponding network or special smart contracts that are called masternodes. To confirm the transaction, the system chooses the validator randomly but gives preference to those with larger staking power, which makes it a bit like the "rich get richer" scheme but also incentivizes the participant to devote more funds to the network, thus boosting its resilience and efficiency.
When it comes to rewards, each blockchain network has its own approach and adjusts the payout on a block-to-block basis, though the factors that are taken into account are similar throughout the industry. As already mentioned, the main principle here is that those validators with large stacks of coins devoted to the network get the lion's share of rewards, but even if you can afford to lock only a few hundred dollars worth of crypto to a certain network, the rewards are guaranteed and would rarely depend on the market condition but rather on validator's ability to perform his duty.
Another factor is the duration of the period over which the coins are stake on the network. Logically, the longer one holds the coins there, the larger passive income he can generate from such an endeavor. It should be mentioned that the PoS blockchain systems have means for detecting the maleficent validators and removing them from the flock to protect the integrity of the network. These methods usually involve the blockage of funds, so make sure to get acquainted with the requirements carefully prior to staking the funds because some systems could freeze them indefinitely for something like not being able to validate a transaction in a timely fashion.
Also, if you have a relatively small amount of capital to invest but would like to increase the chances of getting rewarded, you can participate in staking pools, which is the name for a group of currency holders who are willing to combine their resources to boost the probability of validating the block and acquiring the reward. In staking pools, the rewards are shared proportionally to the participants' contribution in the form of coins, which makes it a fair system, though some blockchain systems like that of Cardano (ADA) are designed to decrease the amount of staking rewards if the pool gets bloated, thus providing the incentive to create new pools and avoid the emergence of some form of staking monopoly, which is something of an issue in the business of cryptocurrency mining.
Resorting to staking pools to earn passive income instead of doing it solo would be a better solution for fledgling investors with small capital because this particular method has a very low entry barrier, offers an increased chance of being rewarded, and provides extra flexibility in terms of the locking period and reward distribution. But you must know that staking coins in the pool usually requires the investor to transfer and store the funds on centralized platforms, which means that he wouldn't have full control over the funds for the duration of the staking period.
Once again, becoming a part of the pool is a viable option if you are relatively new to this industry and don't invest a lot of money. But in case your main priority is the security of funds rather than the size of passive income, we would recommend resorting to cold staking, which implies that the stake is kept on a physical hardware wallet like Trust Wallet or Trezor that is connected to the Internet only when there's a need to carry out a transaction. However, keep in mind that in order for the stake to be valid, it needs to stay immovable in the wallet for the entire duration of the staking period; otherwise, the wallet wouldn't be considered eligible for rewards. The most notable blockchain projects that offer cold staking option are the following:
- Stratis, a blockchain project that is focused on resolving the issues of blockchain scalability and accessibility. You can count on getting 1.5% - 2% in passive income from the total stake made on that platform under the condition that there are no interruptions during the staking period. The rewards are usually paid in STRAX tokens that are currently valued at $1.48 a pop, while the coin itself is ranked 171st on Coinmarketcap.
- Callisto Network that pays out in coins with the ticker CLO (517th in global ranks) is the blockchain project that claims to be focused solely on cold staking. Its main advantage lies in the unique consensus mechanism that relieves the cold stakers from the need to run the nodes or confirming blocks on the network or even having their wallets connected to the Internet around the clock, which is something that Stratis does. Instead, the stakers are required to lock the funds for no longer than 27 days, during which the system itself collects up to 40% of mining rewards and distributes them among the participants in direct proportion to their holdings. Callisto offers a relatively high annualized return on investment (ROI) that amounts to 6.5%. Right now, nearly 60% of the entire circulating supply of CLO is locked in cold staking, which is a sign of a healthy token economy. You can engage in cold staking with Callisto using such crypto wallets as Coinomi, Trust Wallet, and Guarda.
- PVIX is the last cold wallet staking project under review, and it also has some considerable perks. For instance, the lowest staking barrier here is just 1 PIV, the project's proprietary coin that is valued at $0.81 at the time of writing. Obviously, you can't count on getting super-rich with that amount of money locked, but if you can commit over 10,000 PIV, you would be granted the right to run the masternode. In that case, you can count on getting a high annual reward of 8.54% while keeping peace of mind about the security of funds.
The finest top-rated coins for staking
The blockchain projects listed above are not well known among the nascent cryptocurrency investors, which might serve as a bit of a turnoff, though as you can see, they offer very lucrative staking conditions. On the other hands, getting engaged in earning passive income with top cryptocurrencies that have a respectable market capitalization that also holds the promise of increasing in value dramatically over an extended period of time, which makes them suitable for holding purposes, might be a better choice when it comes to the overall performance of your cryptocurrency portfolio.
Polygon (MATIC)
MATIC has been making waves on the cryptocurrency market recently as it has proven itself as one of the hardest gainers around, along with Dogecoin (DOGE) and a bunch of DeFi tokens. Over the past twelve months, the value of MATIC has increased by the stunning 7300%, while the coin has proven its superior resilience in times of crisis as it managed to bounce back by over 100% in a couple of days after the recent flash crash that caused its price to plummet from the ATH at $2.63 to $0.75.
Some of you might know this project by the name Matic Network - it changed the name to Polygon after recent rebranding. By far, it represents the most efficient layer-2 solution for the Ethereum blockchain and the ecosystem that hosts a number of popular decentralized applications for cryptocurrency lending and gaming, such as Decentraland (MANA) and Aave (AAVE). The rewards that you can earn by staking the coins on that network range from 520% per year to 5.2% per year, depending on the size of the stake.
On average, the staker gets around 19% in passive income, the top figures across the industry. The staking is carried out through the proprietary Matic Network Web Wallet that allows you to act either as a validator or a delegator. As with PVIX, the minimum staking amount is just 1 MATIC, while the unlocking period (the time after which you can withdraw the funds along with allocated rewards) is only nine days. However, becoming a validator isn't something that we would recommend because the MATIC network has only 100 masternodes/validators, which significantly reduces the likelihood of being chosen as a validator and receiving the reward. It would be better if you opt for delegating your stake to the existing validator, but pay close attention to fees charged by each of the available validators as they can vary considerably.
Ethereum (ETH)
If you are at least vaguely familiar with the crypto market, you know that ETH is the top asset that has a huge intrinsic value, so holding a substantial amount of ETH alone can generate some handsome passive income. The staking option had become available on that network fairly recently when the project had finally launched the initial phase of transition to Ethereum 2.0, which would see it shifting from a Proof-of-Work consensus mechanism to a Proof-of-Stake consensus. Right now, there is more than $15 billion staked on the Ethereum network, with the number of validators surpassing the 130,000 mark. The peculiar thing is that the upgraded Ethereum network is still largely in the development phase, so these numbers speak for themselves.
The percentage of annual rewards for staking on the Ethereum 2.0 network goes from 21% to 5%. The annual percentage rate (APR) here is around 7.5%, which would constitute a respectable addition to your regular income. But if you have more than 32 ETH (around $90,000) to spare, you can become a validator on that blockchain. In that case, you can get a slightly higher APR.
The problem with staking on the Ethereum network is that the lock-up period here is quite extensive - your funds could be frozen for a year or more, which is a big issue if you plan on trading your coins at some point during the ongoing bull market. However, you can circumvent that steep locking period by using services like Anchor (ANKR). It provides the web application and generates synthetic ETH called aETH in exchange for staked coins. You can subsequently trade aETH of decentralized exchanges like Uniswap, and then redeem ETH later on.
Binance Coin (BNB)
Like Ethereum, Binance Coin (BNB) has become an integral part of the entire cryptocurrency market over this bull run, while the project's ecosystem has expanded dramatically over the past couple of years to become one of the most robust across the entire industry. This was in large part due to the introduction of Binance Smart Chain (BSC), which comes as a centralized clone of the Ethereum network with significantly lower gas fees that explains its popularity among dApp developers. For your information, this network utilizes the unique Proof-of-Authority consensus mechanism that was created by Gavin Wood, the co-founder of Ethereum.
The staking rewards on this particular blockchain are higher than those of its peers and could amount to 30% APR, though it must be noted that these reward numbers tend to fluctuate because they are derived solely from transaction fees. However, becoming a validator on BSC isn't something that can be attained by any retail investor since the minimum stake there amounts to around $12 to $16 million.
On the other hand, BSC offers a very short unstacking period of only a week, as well as the delegation option. Another perk of staking and earning passive income on Binance Smart Chain is that the slashing (punishment) for misbehavior on the network, like double-signing a transaction, is imposed only on the validator's stake and doesn't affect those that belong to delegators.
Earning passive income on centralized lending platforms - get better interest rates than at the bank
This is surely the easiest method for effortlessly earning additional income if you are a registered user of centralized cryptocurrency lending platforms (CeFi) like BlockFi, Nexo, Holdnaut, and Celcius Network. Basically, it's the same as opening a savings account in your local bank: these services accept your coins in exchange for the rewards calculated via interest rates and then lend these funds out to other platform users, thus making a profit and sharing it with the initial lender. The primary difference between crypto and bank loans is that the former is heavily collateralized, meaning that the borrower would have to provide more crypto as collateral than he would lend from the platform. But the advantage here is that central lending platforms allow users to withdraw the funds at any time, while the banks impose a relatively long lock-up period.
The best passive income earning option with regard to centralized lending platforms would be to provide stablecoins like USDT or USDC and expect an interest rate that is significantly more attractive than that offered by traditional banks. The Nexo lending service is focused primarily on cryptocurrency holders based in Europe and offers interest starting from 5.9% APR, which is way higher than any European bank could offer under current economic conditions, along with automated loan approvals and the absence of credit history checks. The service allows you to loan out anywhere from $50 to $2 million while offering the insurance of around $400 million on all custodial assets. On average, you could earn up to 8% interest on crypto and around 12% on stablecoins, which is a pretty good deal, considering that the rewards are distributed on a daily basis.
BlockFi is a centralized lending service that is tailor-made for cryptocurrency holders from the United States. The interest rate here amounts to 8.6%, but you can easily bump it up to 9.3% when supplying stablecoin like USDC that is popular among American users.
Celsius Network also offers good interest rates that could be turned into a stream of passive income. For instance, one can get a 6.2% annual percentage yield (APY) for lending Bitcoin, 5.05% on Ethereum, and 4.86% for lending the platform's native token CEL. The interest rate on stablecoins is much higher, though, and can go up to 10.5% APY.
Remember that due to their centralized nature, these services take full custody of your funds, so you don't have total control over your private keys, therefore stand the risk of losing the funds if one of these platforms gets hacked, as happened to BlockFi a few months ago. Besides, all these services require you to pass the KYC procedure that significantly hinders the privacy of your financial operations.
DeFi - a great way to earn passive income but with its own risks
Decentralized finance (DeFi) has become a buzzword across the cryptocurrency industry over the past year and a half since it offered a revolutionary solution in the form of trustless and permissionless peer-to-peer lending and borrowing. The primary difference between DeFi and CeFi platforms is that here the process of matching lenders and borrowers is conducted not by a single service but a set of smart contracts that actively adapt the interest rates on the basis of supply and demand rate for the coins featured on the platform.
The main advantage of making passive interest on DeFi platforms is that you hold full control over the coins at all times, and your identity and transaction history could never be disclosed to a third party.
In order to start earning interest on DeFi platforms like Maker, Compound, Aave, C.R.E.A.M. Finance, or Reflexer, all you'd have to do is to install a Web 3.0 wallet like Metamask, WalletConnect, or Fortmatic. The decentralized lending platforms also have no lock-up period, while interest rates here are in line with those offered on centralized services. For example, you can earn 8.49% APR using the Aave protocol if you devote USDC and 6.27% if the lending is made in the DAI stablecoin. The decentralized lending platform like Fulcrum offers a massive 52% APR on Wrapped Bitcoin (WBTC) and 11.14% on USDT.
However, making passive income on DeFi platforms is associated with certain risks since there is virtually no authority that would guarantee at least a partial compensation in case of a hack, a glitch in a smart contract, or some other incident. Also, remember that gas fees on the Ethereum network are still sky-high, so it could be quite costly to move the ERC-20 tokens around the Ethereum-based lending platforms, which are basically all existing platforms with the exception of Binance Smart Chain.
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