I am always looking for ways to grow my investments passively. That’s why I love reinvesting in dividend-paying stocks. This applies to crypto investments as well. In this post, I wanted to share four different ways in which you can earn passive income with your crypto and grow your holdings over time.
Beyond the passive income aspect of these strategies, I find them very similar to dividend reinvestment in stocks. Every payment gives me a bit more of the coins I like. This is especially good for growing your allocation for your favorite coins automatically, at a regular interval.
At the same time, I will cover some of the risks involved with these strategies.
I think most people will find #2 to be the easiest to get started with.
Table of Contents
- Disclaimers
- 1. Stake your coins and validate network blocks
- 2. Earn interest by depositing in crypto lending platforms
- 3. Provide trading liquidy in decentralized exchanges
- 4. Automate your crypto lending or liquidy operations
- 5. Receive airdrops (bonus method)
- Tax implications you want to keep in mind
- Final thoughts
Disclaimers
As always, let me remind you that I am not a financial, tax, or any kind of advisor and that what I share here is for informational purposes so that you can go and do deeper research if you are interested. Investing, in general, has risks. These risks are even greater when we talk about cryptocurrency products.
With that out of the way, here are some of the 5 ways you can earn passive income with your crypto:
1. Staking Your Coins For Compounding Growth
This first approach might be the safest from this list. Essentially what you do is use your coins to validate the network, and in return, you mint new coins into the system, which belong to you. Those new coins get added to your wallet and your total staking value grows. Next time, you would receive a bigger amount because you are staking more.
Staking is possible with newer protocols that are based on Proof-of-Stake algorithms or PoS to secure networks. Some examples of these types of networks are:
- Polygon (POLY)
- Cardano (ADA)
- Solana (SOL)
- Navcoin (NAV)
- Ethereum (ETH, in transition to PoS system)
Ethereum is trying to transition to a proof-of-stake algorithm sometime in the future, but there are ways for you to stake ETH right now. For reference, Bitcoin is a proof-of-work or PoW cryptocurrency, so new coins are minted by miners solving mathematical puzzles.
Cardano staking is currently generating around 5% a year in returns. Ethereum staking could be around 7% at the moment if you stake by yourself. Each network has different inflation rates, specified by their tokenomics.
In a proof-of-stake system, stakers become network validators and replace miners. Your earnings would be proportional to the number of coins you own and lock for validation.
You have to research each individual coin to see how their algorithm works and what are the requirements.
You Can Join Staking Pools To Meet Minimum Requirements
When you stake, you typically need to lock your coins in some kind of smart contract or protocol. Different coins will have different requirements. Some will have a minimum number to start staking.
For example, for Ethereum, you need 32 ETH to create your own staking node and start validating blocks. Yet, if the server where the node is running goes offline, you will receive a penalty and lose some ETH.
Not a lot of people have 32 ETH lying around or have the ability to manage their own server. The other option is to join a staking pool where several ETH holders can “pool” their coins together to reach the required amount.
Many online exchanges allow you to stake different coins in their own pools.
At the same time, there are coins that do not have a minimum requirement. The ones I have experience with are Cardano (ADA) and Navcoin (NAV). The great thing about these ones is that you never lose control of your keys and you can stop staking at any time.
Additionally, once you set up the staking wallet, everything becomes basically hands-free.
For Cardano, I recommend Yoroi wallet since it is one of the official wallets and you can have a browser extension for it. There is no need to download the whole blockchain. For Navcoin (NAV) you can use NavPool to stake your coins.
For other coins, check with your exchange if you are keeping your coins in a hot wallet. I know Kraken has a staking pool for Polkadot (DOT) and other coins. Coinbase allows you to stake some coins, and even ETH (be careful here, because once you stake your ETH, there is no way to get it back at the moment).
2. Earning Interest With Crypto Lending Platforms
This method is probably the easiest to get started for most people. In many lending platforms, you simply deposit your coins and you start earning interest on a regular basis. Some interest rates can be as high as 17% on some coins.
What you need to remember when reading about crypto interest rates is that the percentage is quoted in terms of the crypto coin, not dollars. For example, Celsius is offering 6.20% APY on Bitcoin. If you deposit your 1 BTC into your Celsius wallet, in one year you would have 1.062 BTCs, whatever the dollar value for that amount is.
You can also play it safe and earn interest in a stablecoin, such as USDC. Most lending sites are paying over 8% yield on stablecoins. For instance, Voyager is paying 9% for USDC at the time I am writing this article. That is a good rate that beats the current dollar inflation around 7%.
The best part is that the value of stablecoins is always pegged to the dollar. As a result, you get to enjoy a nice yield on your money, without the volatility risks of traditional cryptocurrencies.
What Are Some Good Crypto Lending Platforms?
In my previous article about the best sign-up bonuses for free crypto, I mentioned some of the platforms I use to earn interest off my crypto. They are:
From that list, I mainly use Celsius, Voyager, and BlockFi. I have recently started using Nexo to test it out. I will write more about it in a later article. There are many other platforms like these ones out there, but I cannot say much about them because I have not used them yet.
Celsius pays interest weekly and does not have a minimum to start earning. On the other hand, Voyager and BlockFi pay once a month. BlockFi, like Celsius, does not have a minimum to start earning.
Voyager does have some minimum requirements to earn different coins. In some cases, those requirements might be a bit high for some people. For example, right now you need a minimum of 0.01 BTC to start generating interest on it, and at current prices, that’s around $440.
What Are The Risks With Lending?
A few risks you need to take into account with lending sites (also known as crypto banking):
- Interest rates are not fixed: Same as with traditional savings accounts, rates are not locked and can change at any time. You should keep an eye out for this. Sometimes it might make sense to transfer a coin to a better paying platform. I check my accounts every couple of months just to make sure rates are still competitive.
- Your coins are lent to someone else: These platforms usually require borrowers to put their own crypto as collateral for a loan in case they default. This should help ease your mind, but I think it is still something to keep in mind, and check the collateralization requeriments of the site if you want to know more.
- Tax implications: I explain this point in more detail at the end of the article, but any interest you earn will likely be taxed as regular income (not tax advice, and I’m only talking about the US).
- You are earning crypto, not USD: this relates to the tax point above. You get paid interest in the crypto you are lending, which can go down in value significantly. One way to counter this risk is to lend stablecoins like USDC, GUSD, etc
>> Interesting fact: I recently learned that there are ways to earn interest involving loans with NTFs
3. Provide Liquidity To A Decentralized Exchange
To become a liquidity provider, you can go to decentralized exchanges (UniSwap, SushiSwap, PancakeSwap, etc) and connect your wallet. This wallet should contain the trading pairs you plan to provide liquidity for.
Imagine you go to UniSwap (a popular decentralized exchange) and want to provide liquidity for the trading pair ETH-USDC. In that case, your wallet should contain an equal dollar amount of ETH and USDC inside.
You then lock your assets in a contract and start earning on trading fees that take place in that liquidity pool. Your earnings will be proportional to your share of the liquidity pool.
If the tokens you add to the pool account for 30% of the liquidity for that pair, then you get 30% of the trading fees collected by the exchange. Just for the record, an exchange like UniSwap has a typical trading fee of 0.3% on each trade.
There are some risks with this method since you can end up with more of one coin than you started with. In the ETH-USDC example, if you end up with more USDC when you decide to remove your liquidity, you could lose if ETH happens to grow much more in value. This is known as impermanent loss.
However, to be fully honest, this is an area that I am not familiar with. I am planning to try it for myself this year and write what I learn here. It is worth noting that some reports indicate that the majority of investors lose more money due to impermanent loss than what they make from fees.
In the meantime, I found this post that explains this process much better than I can.
4. Automate Your Earnings With Yield Farms and Yield Aggregators
Similar to the last point, I have not tried this method yet, but I might get into it in the future. This is not so much a new method as it is a way to increase profits on the previous ones mentioned here.
A yield aggregator will take your coin and try to capture yields automatically through its smart contract. It will find the best interest rates and auto-compound your investments. In some cases, the interest you earn might be in some farm-specific token, so you need to do your research on it.
Think of this as providing liquidity and earning interest with the best rates and on auto-pilot. You will probably also save substantially on gas fees. It seems that this method is good for people with low funds. However, take what I say with a grain of salt. I am mentioning this here because it is an option that exists out there.
I may make a new post once I get hands-on experience with this in the future. If you want to learn more about yield farming and yield aggregators, you can check this blog post with a nice explanation about it.
5. Wait For Airdrops
Airdrops are like free money that gets deposited into your wallet by owning some coin or meeting some requirements.
I’m adding this here as a bonus but it is not really a predictable way to make passive income. If you hold your coins in your own wallets long enough, chances are that you will get some form of airdrop at some point.
For example, if you held BTC in your wallets during 2017 and beyond, you would potentially have a claim to Bitcoin Cash (BCH) and Bitcoin Satoshi’s Vision (BSV) from the different forks created. You would not have had to do anything to get that extra money.
In some other cases, you might have to do an extra step to claim an airdrop. I am aware of at least 3 airdrops announced in 2021 for XRP holders (Spark, Songbird, and Sologenic).
In those cases, you just needed to have XRP in your wallet and then claim the tokens as an extra step.
Admittedly, you can actively look for airdrop opportunities, but then it wouldn’t be very passive, would it? There are pages like CoinMarketCap that track available airdrops and list the requirements to qualify.
This point is more about keeping track of your wallets. If you ever see some token on your ETH wallet that you never put there yourself, it could be the result of an airdrop.
Oh, and receiving airdrops would also trigger a taxable event, but do your own research about that.
Tax Implications
I don’t usually see this point covered in other blogs, but it is important to mention it. When you earn interest on crypto, it becomes a taxable event. By the way, this applies to the other methods in this post as well.
I’m talking from a US perspective, also this is not tax advice. Make sure to do your own research on your situation.
Let’s say you are making 0.01 BTC per month in interest and BTC price remains stable at $40k throughout the year. That means, from a tax point of view, you are making $400 in taxable income per month. By the end of one year, you would owe taxes on $4,800, even if you haven’t sold the 0.12 BTC you accumulated.
What’s more, if then Bitcoin suddenly drops to $20K, you still owe taxes on $4,800 even if the coins are worth half now. As a result, earning interest when a coin is at an all-time high can carry an extra risk if you don’t sell for fiat or stablecoins.
Just expanding on the tax point above, when you earn from lending or staking, you immediately owe taxes as regular income at the price the coin was worth when you received it. But then, if you sell those coins, you will owe capital gain taxes as well. Your cost basis would be the price at the time you received it.
I highly recommend a tool like Cointracker.io to keep track of your crypto holdings. It can be of great help during tax season.
Final Thoughts
My intention with this post was to share some of the ways in which you can turn your idle crypto portfolio into a passive-income machine. Not all of these options may be right for you, but now you can research more into the specifics.
One concern that some may have is that for a few of these cases, you are required to leave your coins on a hot wallet, which can be hacked. If you would rather avoid those earnings and keep your coins secure, I would recommend a hardware wallet.
I use the Ledger Nano S but I plan to upgrade to the Ledger Nano X at some point. It has more internal memory and built-in Bluetooth for wireless access to my wallets. Another competitor you might hear about is Trezor. I actually do not have experience with it, but I am interested in trying it.
Let me know in the comments if you are already using some of the methods I listed today. If I made a mistake, please let me know. This is a very interesting area and I’m always happy to learn more.
If you are interested in hearing more about tips and things I learn, I invite you to sign-up for the newsletter below. Thanks for reading, and I’ll be back next week.