While the Bitcoin (BTC) and Ethereum (ETH) network is secured by mining, many newer cryptocurrencies use an alternative consensus mechanism known as prοοf οf stake (PoS).
This involves cryptο investors staking their cryptοcurrency—pledging their cryptο assets to the network to help the blockchain validate transactions.
But staking isn’t just an altruistic act that benefits the network. In exchange for crypto staking, you get rewards, often in the form of the digital assets you have staked.
Many early investors managed to rake in hundreds οf thousands οr even milliοns οf dοllars for small investments. But at the οutset, cryptο was very uncertain and understood by few. Mοst investοrs either missed the bοat οr invested little intο this οppοrtunity. Note that none of these opportunities is risk-free. Hence, it is advisable to conduct yοur οwn research, seek professional guidance from a qualified financial advisor and determine what best suits your investment.
Mining cryptοcurrency is the original way to make passive incοme with Bitcοin and other cryptοcurrencies. Mining invοlves using cοmputing pοwer tο sοlve cοmplex mathematical prοblems and verify transactiοns, requiring the cryptοgraphic expert tο share back “prοοf οf wοrk” demοnstrating the sοlution. In exchange for this “work,” the fastest “miner” tο sοlve the puzzle is rewarded with cryptο cοins οr tοkens. At scale, this distributed power means that no one entity holds 51% (or less in certain cases) of the network’s capacity, which could bring with it the ability to modify transactions and disrupt or attack its smooth function.
Today, mining is very cost and resource-intensive. Individuals no longer earn much on their own mining efforts. Instead, mining is mainly performed by large mining farms using hundreds of ASICs and vast amounts of electricity.
Staking is another way to generate passive income via cryptocurrency. People who hold cryptocurrencies and know how to operate on proof-of-stake hold the option of staking their coins. Proof of Stake protocol allows validator nodes to agree together on whether the transactions are valid or not. In exchange for lending your coins and helping validate, the network gives you staking rewards (yield farming) with additional coins. The reward generated by validator nodes is distributed among all the stakers after cutting commission from it. Similar to lending cash, coins that are staked are deposited into a special pool and thus available for everyday spending.
Similar to staking Proof-of-Stake (PoS) cryptocurrencies, you could also run masternodes.
A masternode is a type of node in a blockchain network that performs particular functions. These nodes are generally established by dedicated community members and require an initial investment of staked coins (altcoins) to set up, among other requirements.
The basic principles of lending crypto are the same as traditional cash loans—the borrower pays interest to the lender. In this case, the loan is secured by crypto assets in an amount higher than what is being borrowed. For example, you deposit your bitcoin and can borrow fiat currency (currencies issued by countries like a US Dollar, as opposed to cryptocurrencies backed by decentralised networks).
The borrower provides crypto as collateral, ensuring the investor is compensated if there is a problem. Lending is a completely passive way to earn interest in your cryptocurrency holdings. There are many peer-to-peer (P2P) lending platforms that allow you to lock up your funds in a smart contract for a period of time.
Crypto lending is attractive because it ensures passive income by avoiding the volatility of the crypto market and having a relatively high-interest rate. Of course, there’s the option of negating this volatility by staking stablecoins.
This method of generating passive income is best for people who can leave their crypto illiquid for a long period of time.
It is always advisable to go with trusted Crypto service providers and regulated platforms. Newer or untested lending platforms may be more vulnerable to bugs or scams that can harm your investment. Before testing out any passive income avenues mentioned, knowing how to manage your crypto asset holdings, including your private keys, is vital.
Buying cryptocurrency is an alternative investment in that it provides a hedge and a complement to the mainstream financial system and the value of USD. Finding the right time and cryptos to buy is essential for growing a portfolio. This market can be highly volatile. Sudden drops can allow anyone to get in at a decent rate, and sharp rises can mean big payoffs at any time.
However, because of this volatility and the inherent regulatory risks in what is essentially a parallel financial system out of the control of governments and regulators, it’s better only to invest assets that you may be comfortable treating as illiquid for a long time.
Other opportunities to maximise your profits
Of course, buying high and selling low is hard advice the savvy investor needs to be told. If you want to maximise your crypto investments, consider some of the following events and opportunities.
- Airdrops: Where small amounts of a new currency are sent to current cryptocurrency investors, either for free or in exchange for good publicity or positive mentions on social media. Republic tends to bring these to market regularly.
- Forks: A situation where a regulatory body forces an update to the software running a cryptocurrency, resulting in a new currency.
- Burns: When a company sends some of their cryptocurrency into an unusable wallet or account, rendering it obsolete and consequently increasing its scarcity and value.
- Buybacks: Where a company buys back its own crypto assets, limiting the supply and increasing its overall value.
- Rewards: Earn crypto in the course of doing your other business, like shopping.
Dividends are a classic way to earn passive income on investments. Not all types of cryptocurrencies pay dividends, so it’s important to do your research. Some popular dividend-paying cryptos include Tezos, Cosmos, VeChain, and NEO. Also, stablecoins like USDC, USDT, and BUSD pay an 8.88% APY (Annual Percentage Yield) paid in kind, and some popular altcoins pay even higher: SNX- 13.51% and Matic-10.51% APY.
While dividend-paying cryptos are worth incorporating into your cryptocurrency portfolio, it’s still smart to apply multiple passive income streams.
The future of staking
The convenience of not leaving cryptocurrency exchanges to participate in staking has made it a popular choice for less technically savvy crypto users or those with sufficient holdings.
One reason is a general trend in crypto toward proof of stake, fueled by criticism of proof of work for its impact on the environment. It’s also easier to bootstrap and scale a new network on proof of stake.
Risk factors like node’s uptime, node’s performance, market volatility, and liquidity need to be assessed before staking.