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How to earn passive income through investing in cryptocurrency?

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How to earn passive income through investing in cryptocurrency?

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Passive income is income that requires minimal labor to earn and maintain. We often hear rental properties being one of the most prominent passive income sources. However, such sources usually require a huge initial investment to generate any income.

How to earn passive income through investing in cryptocurrency?
Benjamin Graham, an acclaimed economist cum writer, believed that smart investors do not work for money but make their money work for them. Investing in cryptocurrencies can create wealth when the investments go up in value. However, it doesn't necessarily have to be the only way to earn returns on crypto investments. This asset class offers a variety of options to investors to earn passive income from their investments.
Passive income is income that requires minimal labor to earn and maintain. We often hear rental properties being one of the most prominent passive income sources. However, such sources usually require a huge initial investment to generate any income. The advancement in technology has opened up avenues for crypto investors to generate passive income from their holdings. Some of the earliest adopters of cryptocurrency took the approach of mining Bitcoin to earn returns.
Cryptocurrency mining refers to the act of contributing to the blockchain network by providing the computing abilities of one's computer. Different contributors collectively provide their computational power to solve complex cryptographic problems. Once the problem is solved, the solver, also known as the miner, is rewarded with crypto. Around 4-5 years back, cryptocurrency mining used to be a passive income source for several Bitcoin miners.
However, with time, the competition increased, and individual miners lost out to big institutions having massive computational power. It gave way to another similar concept called cloud mining. It involves paying an initial capital to these institutions which mine cryptocurrencies. These institutions then reward the depositors in an appropriate ratio of their investments with crypto.
Several crypto investors prefer to hold onto their investments for a significant time. It is usually referred to as 'HODL' in the crypto sphere. One of the most popular ways to earn passive income through these holdings is to stake them. Staking refers to committing the crypto assets to support a blockchain network and confirming the transactions taking place in the network.
Staking is available for cryptocurrencies that follow the Proof-of-Stake (PoS) consensus mechanism. Bitcoin cannot be staked as it does not follow the PoS mechanism.
Staking will temporarily lock your assets for a short time, depending on the network. Stakers are usually rewarded with crypto tokens based on their staked amount. Cryptocurrency exchanges offer users staking opportunities directly within the exchange. However, it is usually prudent to stake on the official mainnet of the blockchain. Staking helps to provide liquidity and helps secure the blockchain network as well.
Another popular strategy to earn passive income is through yield farming. It is an extended version of staking where the crypto holder earns yield either through lending or staking. The stakers or lenders, in this case, are known as liquidity providers (LPs). These LPs earn yields on their locked holdings in terms of annualized percentage yield (APY).
'Aave' is a decentralized lending and borrowing protocol where users can borrow assets and earn compound interest for lending in AAVE tokens. Some other popular platforms are Compound, Curve Finance, Uniswap, Pancakeswap, etc.
Some platforms offer users the chance to earn fixed interest on their digital idle assets. It can be thought of as an interest-earning bank account. Platforms offering this flexibility are Nexo, Celsius, BlockFi, etc.
These are some of the passive income opportunities from your crypto holdings. It should be noted that none of these opportunities are risk-free. It is always advisable to do one's due diligence before undertaking any of these opportunities.
The author, Edul Patel, is CEO and Co-founder at Mudrex. The views expressed are personal
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