Passive Income Ideas You Can Use To Build Wealth In Crypto
Passive Income Ideas You Can Use To Build Wealth In Crypto
Diversification is the best way to survive in this market
I have noted that people, especially those who are new to crypto, get bored really fast whenever Bitcoin’s price action gets sketchy.
I get it. No one likes trading in a range bound market because it’s not easy to turn profit.
However, other than trading and holding, there are passive income streams that can help you increase your earnings in crypto and accelerate your financial goals in tremendous ways.
Cryptocurrency is one huge ecosystem
With the right knowledge, you can easily get creative and start making money while you sleep. In simple terms, these ideas can give you a reliable source of income without having to worry much about prices shooting up and down on a daily basis.
As a trader, passive income is a great way to diversify your portfolio, together with real estate and stocks.
We will cover different passive income options in Centralized Finance (CeFi) and Decentralized Finance (DeFi).
Centralized Finance (CeFi)
These are interest paying custodied services offered by cryptocurrency exchanges like Binance. As such, these services have an added level of risk and imply a middle-man (the exchange) is taking margin on your spread.
So as to earn interest through centralized platforms, you have to stake or lend your crypto to an exchange. By doing so, you assume the role of a liquidity provider.
A good example where you can start staking is Binance Earn which I personally use.
To use Binance Earn, you need to register an account on Binance if you haven’t done so already. If you have a Binance account, log in and start staking on Binance Earn here.
Binance Earn is more like a bank account. You deposit or stake your crypto and you get a percentage return in interest doing so. In this case, users get over 45% on select cryptocurrencies.
If it’s on an exchange the keys are not yours
In Binance, I do locked staking for 30, 60 or 90 days. They have some pretty amazing APY (Annual Percentage Yield) and I’ve never had trouble withdrawing or getting paid. To top it off, Binance has its own insurance fund. I don’t have to worry, my funds are SAFU.
Please note, there are other reputable interest paying service providers out there but I won’t talk about them in detail since I have never used them. Honorable mentions include BlockFi, Nexo, Celcius etc.
Diversify your risk
Interest paying custodied services are not insured like a traditional bank. If they get hacked or go bankrupt, you could lose your crypto. Always consider “not your keys, not your coins”.
Is this some kind of Ponzi? Where does the money come from?
I also had the same questions the first time. But you can rest assured it’s not a ponzi scheme. Oh, they are not investing the money you deposit like hedge funds do.
What Binance Earn and other interest paying service providers actually do is loan out your coins and pay you a high interest.
But who is taking out these loans? Businesses? Individuals?
A lot of crypto traders with high account values take out loans in order to avoid selling their Bitcoin and other large caps altcoins such as Ethereum. This is the same way you’d take a loan against a property that you own.
Say you own a house, you can take out a loan against its value, thus avoiding selling the house. Same thing here but with crypto.
The upside is that you get to keep holding your crypto assets and also get capital to trade. Also some jurisdictions like the US require people to pay capital gains tax once they sell their crypto. So, by borrowing against your crypto, you will reduce your tax bill, legally.
Decentralized Finance (DeFi)
You’ve probably heard the hype around DeFi. This is revolutionary tech that has simply removed middlemen between parties in financial transactions and, as a result, made saving worthwhile for us ordinary folk, again.
It’s also known as programmable money since without middle men, you’re squarely entrusting your money on the code.This definitely gives you more control of your coins.
Also, you can make better money on DeFi than on centralized platforms, but at a much higher risk.
DeFi was originally domiciled on Ethereum open-source technology but it has now moved to other platforms.
Still, Ethereum maintains by far the biggest DeFi ecosystem despite charging hefty fees.
My personal favourite is Binance Smart Chain as the fees are 1/100th and has very good apps for yield farming, like beefy.finance, venus.io, autofarm.network, etc.
To get started with passive income platforms in DeFi, you need a crypto wallet. To be specific, this should be a non-custodial wallet, like Metamask, which will give you full control over your coins.
I use the browser extension version of MetaMask which is extremely convenient. Here is a comprehensive guide on how to set up your Metamask wallet.
Exploring staking for the first time
Staking is the best way to earn passive income as a beginner. After setting up your wallet, head over to a decentralized protocol like Harvest.finance or use DeFipulse.com to check which projects have the most assets secured. Look up each pair. Avoid anything outside the top 30 for now and do your own research on which one you want to stake.
But it’s not a walk in the park. There are more attributes you must look out for in every protocol you plan to invest in.
For starters, true passive income must come from usage, usually fees from actual users. Coins being minted and distributed to people who already have them might look like income, but in reality it’s just the total market cap being multiplied. Every coin minted is probably going to drag down the price of your holding in the long run.
Remember to look for coins with high volume. Preferably those with a lot of decentralized apps (dapps) and active teams (developers).
When you feel satisfied with your research, go to the platform you want to get rewards from and acquire tokens.
For example, 1 inch tokens come from the 1 inch exchange, CRV:HBTC is offered by Curve protocol and ETH-DAI is from Sushiswap.
Lastly, deposit and stake your tokens.
How to, for noobs in yield farming
The easiest way to dabble in yield farming would be at Pancakeswap which is built on the Binance smart chain.This has low barriers to entry. Fees are 10 cents per transaction and it will offer the latitude you need to learn ideas for staking, yield farms, and impermanent loss. You can even throw $10 in CAKE-BNB just to learn.
Yield Farming
Yield farming is the practice of staking or lending crypto assets in order to generate high returns or rewards in the form of additional cryptocurrency. This innovative yet risky and volatile application of decentralized finance has skyrocketed in popularity recently thanks to further innovations like liquidity mining. Yield farming is currently the biggest growth driver of the still-nascent DeFi sector, helping it to balloon from a market cap of $10 billion in 2020 to $100 billion in 2021.
The user base is around a million currently. Most people prefer DeFi mainly because it’s trustless and has a high risk/reward ratio.
Advanced staking strategy
Depending on your appetite for risk and the crypto you want exposure to, you have different possibilities.
You can use Compound, Aave, Yearn, Curve, Cream and Harvest platforms depending on your needs.
A quick example of something anyone can do is:
Deposit crypto collateral on Compound.finance.
Borrow DAI at 3–8% interest.
Deposit DAI to a Curve.fi pool.
Deposit the redeemed Curve token to a Yearn.finance vault at 8–12%.
So for me it’s interesting, because I keep exposure to the crypto I deposited in collateral (as I didn’t sell it), meanwhile I get a relatively high interest on a stablecoin.
This is just one way to look at it, but depending on what you hodl and what you’re looking for other things are possible. For instance, for people looking for a simple passive income on ETH, I suggest trying Cream.finance, currently giving 3.20% APY on ETH deposit.
Before you implement any of these ideas, do your own extensive research on these platforms (read the audits, check the team, see how much is locked from when, hack history, etc) as it will help you to make rational decisions and build clever strategies.
Risk management
The issue with DeFi is that even though the returns can be great, risk is also high. You have impermanent loss, hacks and rug pulls you have to worry about. If you don’t know what you’re doing, you can lose money in the end.
Basic liquidity pools have different factors that affect their ROI (Return On Investment), ranging from impermanent loss from the change in token ratio, trading volume, pool size, swap fees and gas fees (Uniswap in particular has high fees) to enter and exit liquidity pools.
Some Uniswap clones, like Sushi or 1inch, offer platform tokens (SUSHI and 1Inch, respectively). Staking these tokens will generate fees plus governance tokens that have their own value. Sometimes, such features go a long way in hedging against risk.
Along the same tier, there is Bancor or Curve.Fi which have added features like some protection against impermanent loss.
Next, you have Yield Farming Aggregators such as Harvest.Finance and Yearn.Finance, which basically sit on top of the aforementioned tiers and automate your original investment to periodically re-adjust to whatever has the most returns.
So for example, if you invest in USDC, the YF aggregator might put it into Bancor and then Curve.Fi, depending on which has the best returns at any given time.
Follow this link to learn more about Impermanent Loss.
Staking coins directly
As you may have noticed, staking comes with different meanings. But yeah, this type of staking is hassle free since the coins remain in your wallet. Also you do not need to invest hefty sums.
There are coins you can stake for up to 5% a year. Keep in mind price fluctuations and volatility and it’s basically just HODL with an extra layer of HODL. But it’s still worth a look at if you are really interested in the passive aspect of it.
Projects like VeChain, Neo, and Ontology generate child coins, which is technically known as gas, as you hold them. You don’t have to do anything except hold the coins in your wallet. No risky staking, no exchanges, no smart contracts. Just buy, hold and generate rewards.
Keep in mind, you can sell the child tokens to purchase more crypto or convert into fiat.
In some cases, to stake coins, you still have to join a liquidity pool.
Cardano has a fantastic system in place and the returns can be very nice depending on the pool you stake with.
Zilliqa is also great. You actually earn ZIL and gZIL when you stake with Zilliqa.
Please note these are OG projects which have been around a long time. Newcomers, like Hodl Token ($Hodl), have entered the space but you have to be careful and do your own due diligence.
Conclusion
In my opinion, both centralized and decentralized platforms offer flexible ways to match different needs for anyone looking for a passive income stream. When you jump down the rabbit hole, you will discover other ways like staking from your hardware wallet which we have not covered here.
You can expect to learn even more exciting things like how to switch staking pools at any time and withdrawing rewards as you want at any moment.
Some passive income ideas may only be suitable for those with deep pockets. For instance, if you plan to lend stablecoins through the Compound protocol, fees alone might exceed $70 when everything is said and done. So, if you intend to do this I’d say you would want to have at least $1000 in Stablecoin at minimum considering gas fees would eat half your interest in a year.
As we have seen, the space has many things to look out for but you should be fine if you do your research properly.
Cheers!
Disclosure: We only recommend products we use ourself and all opinions expressed here are our own. This post contains affiliate links. If you use these links to buy crypto assets, you will get a discount and we may earn a commission. Thanks.