By Edul Patel
According to Google trends, “passive income” has been one of the most searched keywords since the Covid-19 pandemic. Passive income refers to earnings where you do not have to constantly devote your time to achieving the income. It is the income that requires minimal labor to earn and maintain. One of the most famed economists in the world, Benjamin Graham, believed that intelligent investors do not work for money but make their money work for them.
Most investors become wealthy when the asset classes they have invested in go up in value. Although that is true for most asset classes, it doesn’t necessarily have to be the only way to grow wealth on your crypto investments. Passive income opportunity is one of the best characteristics of this asset class.
One might argue that there are other asset classes that provide the ability for passive income. A case in point here is rental properties. Although they are one of the most prominent passive income sources, such sources usually require a huge initial investment to generate any income.
Cryptocurrency and blockchain technology has advanced modern finance such that avenues of passive income are now accessible to all. They do not require huge capital investment. And that is not even the best part. With crypto and blockchain, investors do not have to be dependent on financial institutions for access to sophisticated financial products.
One of the earliest and most common approaches to generating passive income through crypto is mining Bitcoin. 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.
This avenue, however, did not remain profitable for the retail participants long enough. 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 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. Participants who stake their crypto tokens are called stakers. These participants 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.
Earn fixed interest
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.
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 is co-founder and CEO, Mudrex