Cryptocurrency Passive Income Is In The Mainstream
By now, you've seen the ads. During the Super Bowl, cryptocurrency companies made the biggest splash of them all, only rivaled by electric cars and sloths eating Doritos. Crypto.com brought in LeBron James and his uncanny valley, deep-fake doppelganger, FTX brought in Larry David with the same longevity as The Mandarin and Coinbase brought in...nostalgia.
Even companies that didn't advertise during the Super Bowl decided to load the boat on digital advertising. I feel like I can't turn around without being hit by an ad for Gemini, Celsius or BlockFi (*cough* OUCH *cough*).
These advertisements make it clear that these platforms are expertly made for buying and selling cryptocurrency, but what if you could also make passive income on the platforms as well? What if you could achieve that holy grail of investing where you get paid to do absolutely nothing? Well today, I'm going to chat through the most popular ways that you can put your cryptocurrency to work to generate passive income. I'm also going to assign each a "biscuit meter," giving you the level of risk involved because you have to remember - no risk it, no biscuit.
This article is for entertainment purposes only and is not investment advice. For individual investment advice, please seek the help of an investment professional. Every situation is different.
Staking
The Proof-of-Stake model is the new en vogue network type in cryptocurrency, which is a fucking weird statement. If you told me I'd be typing that sentence a few years ago I would have had to take an Ambien.
Regardless, Proof-of-Stake is essentially the opposite of Proof-of-Work. The PoS model relies on current cryptocurrency holders staking their tokens on the network to provide the ability for the network to reward others with new tokens. It's like a hamster wheel that makes you rich, but more importantly, it replaces PoW models which require massive amounts of energy to solve complex computational equations.
If you do choose to stake your tokens, you are rewarded with more tokens, which then stakes more tokens, which then rewards more tokens. However, the amount of tokens you need in order to stake on your own can be extremely large, which is why many (including myself) join staking pools. These are groups of users who stake their tokens together in order to get that interest, which is then split among the group participating in the staking pool.
Risks associated with staking are pretty minimal in the grand scheme of cryptocurrency: a network hack or an outage can mean you lose your tokens forever, and some platforms are ambiguous on how long you have to lock your tokens up for. But this also means that the potential payout is smaller. I currently stake my Ethereum on Coinbase at 4.5%, which is a great return in a traditional sense, but nothing compared to some of these other options.
Biscuit Meter: One of those frozen, single-wrapped plastic Jimmy Dean sandwiches
Interest-bearing Accounts
For most people looking to get into cryptocurrency, this is often the easiest one to wrap their heads around because it functions a lot like a traditional savings account.
If you put $1 in a traditional savings account at a 0.50% interest rate, at the end of the year you will have....$1.005. The reason that the bank pays you a percentage to store your money is because they then take your money and loan it out to others at a higher interest rate. The bank makes money on the difference between what they pay you and what others are paying them, called the "spread."
Interest-bearing crypto accounts are the same thing. Exchanges like Celsius or Gemini offer these types of accounts, usually on stablecoins like Tether, USDC or Gemini Coin. Each of those stablecoins listed can generally net you between 4% all the way up to 10% in annual interest. But what are the risks?
Well, let's start with Tether. Tether is unaudited, and questions have recently been raised around the actual validity of its "stablecoin" status. Is it actually pegged 1-1 to the U.S Dollar? The truth is that no one really knows, and these questions have started to introduce the idea of strict regulation around the assets. These assets are in a bit of a black box, they are not FDIC insured and they could go away tomorrow if Congress steps in.
Biscuit Meter: A biscuit sold from that southern restaurant with the store in the front that's fine, but a little salty.
Lending
In the world of cryptocurrency, "HODL" is king. HODL just means "to hold" your cryptocurrency, likely forever. So what happens when a Bitcoin hodler needs some quick cash but doesn't want to sell their token? That's where lending comes into play.
Cryptocurrency lending is essentially the swap of your crypto tokens for someone else's cash via a secured loan. Imagine that your friend needs $50, so you lend him $50. That's an unsecured loan, because if your friend doesn't pay you back, then the only thing that gets ruined is your friendship. A secured loan is backed by something, which in the friendship example means that in order for your friend to borrow $50 from you, they need to first hand you $30. Same concept with crypto lending.
In a crypto lending world run by companies like Aave, people that own crypto can place their tokens on the platform with the intention of lending it out to those that need loans. Those that take out loans are required to pay back the loaned amount, in addition to the interest rate, generating a return for the loanee. The person that deposited their crypto on the platform in the first place have essentially become their own little bank!
But what happens if a person doesn't repay the loan? Well, first of all, that would be tough. In a traditional bank loan transaction, the bank gives you the loan then you have to fill out the paperwork, spend the money, set up the auto pay, sell a kidney, etc. In the world of crypto, all of this is automated via smart contracts on the blockchain, meaning the process is pretty much baked in. This is also where that loan collateral comes into play. If they borrower defaults on the loan, they lose their collateral, leaving them in a worse place than where they started.
The risk here is that the interest rate is not fixed. If there are a lot of people that want to issue loans on a particular currency, then the interest rate will be lower as the supply is much higher. The inverse is also true, but riskier since you could be the only one issuing loans in that particular currency.
There's also downside risk to the loan and the collateral. What this means is that if you loan out $100 worth of Bitcoin, and the borrow stakes $80 worth of Bitcoin as collateral, that collateral will immediately sell-off if the value of Bitcoin plummets below that $80 collateralized mark in order to mitigate the risk of a default. This....this is bad. That means that you basically played yourself by issuing a loan, and you immediately lost that money in the event of a default.
Despite the secured nature of these loans and the general automation of the blockchain, this one is still pretty risky because you're basically handing an envelope full of cash to a stranger. I'm not in love with this one, but it's certainly a viable option.
Biscuit Meter: You bought the homemade mix from Whole Foods, but added your own secret ingredients.
Mining
Cryptocurrency mining is the OG, mac-daddy way to get crypto on your crypto. Remember in my section on staking where I mentioned the difference between Proof-of-Work and Proof-of-Stake? Well, this is that PoW model in action.
Basically, you are putting your computer, your $3,000 graphics card and your internet and utility bills on the line in order to solve complex mathematical equations on the blockchain. Once solved, the computer that solved the problem the fastest is the winner, and is rewarded in tokens. This is how you hear about people who got into the game early on and have dozens of Bitcoin, but it's also why you hear about kids in Arizona renting out shipping containers and filling them with racks full of GPU's.
So what's the risk? The risk is that you're going to pay through the nose in electrical bills and bandwidth overages and potentially get...nothing. That's right! If you attempt to mine something like Bitcoin, where competition is at its fiercest and your 13-inch MacBook Air isn't going to cut it, you're going to lose and get nothing.
However, there are plenty of other, lower competition tokens available to mine if you have an old laptop and a box fan to keep it cool. Software Testing Help has a great guide on mining profitability based on the number of tokens you get per block, along with total costs of utilities to give you a per day profitability number, so use their guide to get started!
Biscuit Meter: Grandma's Recipe
The Bottom Line
Everything I have mentioned here today has significant benefits to making passive income on your cryptocurrency holdings, but it's worth noting that all of these methods are extremely risky because they are inherently tied to the cryptocurrency world. This world, as much as we love it and for as many memes as Elon Musk can make about a Shiba Inu, could go away tomorrow. It could be hacked, shut-down in other countries or regulated into oblivion by federal governments. We saw what happened in Canada just last month, and the conflict in Ukraine at the moment is a worrying time for cryptocurrency.
However, if you're willing to stomach the risk and take the plunge, these avenues above can be extremely lucrative to driving significant passive income on your holdings. But what do you think? Do any of these stick out to you? Let me know in the comments below! And don't forget to get your FREE Bitcoin from our partners over at Coinbase when you open a new account using my link here.
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