Passive income is one of the strategies for building and maintaining wealth. The average millionaire has at least seven different income streams with at least half of them being passive. This means that high-net-worth individuals (HNIs) aren’t actively trading their time for money. Instead, they are getting their money to work for them.
Passive income is an income stream that requires minimal interactions or any time-consuming activity to make a profit. With the traditional financial infrastructure on its knees, the ridiculously low-interest rates plaguing the bond and treasury bill market and the interest on a savings account as low as 1.15%, the crypto industry can offer far more lucrative opportunities than the traditional system for people with some cash, to make their money work for them and earn a passive income alongside their active income.
This article will cover ways in which investors can earn passive income in the cryptocurrency world.
Mining
Mining is based on a consensus algorithm called Proof of Work (PoW). Cryptocurrency mining is the process by which transactions between users are verified and added to the blockchain public ledger. The process of mining is also responsible for introducing new coins into the existing circulating supply and is one of the key elements that allow cryptocurrencies to work as a peer-to-peer decentralized network, without the need for a third-party central authority.
Mining is the most well-known way to generate a passive income with cryptocurrency. Bitcoin is the most popular and well-established example of a mineable cryptocurrency, but it is worth noting that not all cryptocurrencies are mineable.
Staking
Staking is based on a consensus algorithm called Proof of Stake (PoS). Staking requires buying certain cryptocurrencies that run on the PoS.
How To Earn Passive Income With Cryptocurrencies
Those who hold coins can lend coins to the network which will be used to validate transactions. The more coins you lend, the more the network rewards you. Staking is a simple way to earn passive income, as the market pays you for holding cryptocurrencies for a certain period. It offers an investor a potential return on investment that is more predictable than others and no investment in hardware is required as is the case with mining.
Liquidity Provider (LP)
Being a liquidity provider allows investors with capital to earn passive income in the form of interest fees and other rewards, for providing liquidity to borrowing and lending platforms by depositing equal USD amounts of a trading pair to a smart contract. When liquidity providers provide liquidity to a platform, they receive transaction fees as a reward. Uniswap, the most popular decentralized cryptocurrency exchange is a platform that allows for liquidity provision in DeFi (Decentralized Finance).
Airdrops
An airdrop is a marketing stunt that involves sending coins or tokens to wallet addresses to promote awareness of a new virtual currency. Small amounts of the new virtual currency are sent to the wallets of active members of the blockchain community for free or in return for a small service, such as retweeting a post sent by the company issuing the currency.
To qualify for the airdrop, a recipient may need to hold a minimum quantity of the crypto coins in their wallet. Alternatively, they may need to perform a certain task, such as posting about the currency on a social media forum, connecting with a particular member of the blockchain project, or writing a blog post.
Uniswap’s UNI is an example of a token that did an airdrop. The distribution was unprecedented, with all liquidity providers to the platform receiving 400 UNI tokens. At its height, the UNI token peaked at over $40, providing users of the platform with thousands of dollars worth of free crypto, just for participating.
Dividend-Paying Tokens
Another way to earn passive income in the cryptocurrency market is to buy and hold dividend-paying tokens. Although they are not common, the major categories of digital tokens that pay a dividend are exchange-issued tokens. Several digital asset exchanges have issued their tokens, which provide users with discounts on trading fees and, in some cases, entitles them to a share of the platform’s profits.
To earn dividends on these types of tokens, holders are usually required to hold them on the issuing exchange or stake them using an external wallet. The more tokens you hold, the more passive income you can earn with them. Examples of exchange tokens that pay a dividend are KuCoin (KCS) and Bibox (BIX).