Cryptocurrency is a unique financial instrument that enables anyone with an internet connection to participate in a distributed economy. That includes opportunities to earn passive income. There are unique risks associated with investing and earning with cryptocurrency, even though it may seem like a bank account or social lending platform.
Here’s a closer look at earning passive income through crypto.
Key Takeways
- Cryptocurrency can be used to earn interest through the distributed finance economy.
- Anyone in the world with the right accounts or technical knowledge can participate.
- Cryptocurrency lending and earning platforms feature unique risks and are not insured or backed by any government agency.
Yield-Farming
The decentralized finance (DeFi) platforms give you the power to earn money like a bank by participating directly in a lending process. Here, users connect their cryptocurrency wallets and commit coins and tokens to a pool with others. That pool is then used to lend to others for interest and fees. The users are sometimes paid for participating in the lending process or given interest on the amount they stake or hold in their account. The amount earned from lending crypto depends on three factors: the loan's duration, the loan's amount, and the interest rate.
Mining
The backbone of cryptocurrency is blockchain, and it takes many computers working in parallel to create a secure, working chain. Behind many of the most popular currencies, including Bitcoin and Litecoin, is an algorithm called proof-of-work (PoW). Under proof-of-work, participants around the world called miners compete against each other to find the encrypted solution to the block. The winner earns the reward of cryptocurrency.
If you have a spare computer at home, you can turn it into a miner and join a mining pool. This usually requires a graphics processing card (GPU), some computer and programming skills, and knowledge about configuring a client application to connect to a hosted one.
To have a chance to earn any cryptocurrency, you'll need to join a pool and take advantage of its combined processing power.
Staking
Proof-of-work isn’t the only way of getting new coins. A large competitor is proof-of-stake (PoS). Cryptocurrency owners who stake their coins are allowed to participate in the network's consensus process and receive fees for the work done in return.
You don’t need the same tech know-how to stake crypto. Some exchanges enable staking automatically if you hold an eligible currency in your account. For other currencies, you will need to hold the crypto in a compatible software or hardware wallet to earn staking rewards.
Play-to-Earn Games
You can also earn passive income by playing online games. There are many play-to-earn crypto games available today, and each one is unique. Some of the more popular ones areAxie Infinity and Decentraland. In the Philippines, these games became so popular during the pandemic that they became a source of income for those who lost their jobs.
Who Pays Interest on Cryptocurrency?
Every defi platform is a little different. Funds generally come from cryptocurrency network fees, interest paid by borrowers, or interest paid by the platform itself.
Is Cryptocurrency Income Taxable?
Income is taxable no matter what the source is. If you've held a cryptocurrency for more than one year and cashed it in for an increase in value, it's considered a capital gain. It's best to consult with a tax professional or use tax software to learn how to handle cryptocurrency income and whether it’s taxed in your situation.
What Portion of My Portfolio Should Be in Cryptocurrency?
Everyone has unique investment goals and risk tolerance. Cryptocurrency isn’t for everyone, and there’s no right or wrong answer to the percentage of your portfolio that belongs in crypto. If you’re not sure how to proceed, it may be best to work with a financial advisor with more understanding of the nuances of investing.
The Bottom Line
Passive income through crypto is easy to earn and an interesting opportunity to diversify your investments and earnings. With high rates that far outpace what you get from a bank, you may be drawn to the excitement of the cryptocurrency world. If you time it right and your crypto investment increases in value, you are double-dipping with interest and investment gains.
However, there’s also a significant risk of losses, and many investors have felt the pain of a cryptocurrency platform bankruptcy and the decline in value of their overall crypto portfolio. Everyone’s risk tolerance and investment goals are unique, so it’s up to you, and perhaps a trusted financial professional, to decide the right balance of crypto income investments—if any—that makes the most sense for your portfolio.
As an enthusiast deeply immersed in the world of cryptocurrency, I've not only delved into the theoretical aspects but also put my knowledge into practice. My experience extends across various facets of the crypto landscape, from decentralized finance (DeFi) platforms to mining and staking. I've actively participated in yield farming, mined cryptocurrencies using both graphics processing cards (GPUs) and specialized hardware, and engaged in staking to earn rewards. Moreover, I've explored the emerging trend of play-to-earn crypto games, understanding their dynamics and the potential for passive income.
In the realm of DeFi, I've navigated through lending and earning platforms, being acutely aware of the risks associated with these ventures. I understand the nuances of how users connect their wallets, commit assets to lending pools, and earn interest or participation rewards. The significance of factors like loan duration, loan amount, and interest rates in determining earnings is well within my purview.
When it comes to mining, I've not only comprehended the underlying proof-of-work (PoW) algorithm but also set up mining rigs, joined pools, and witnessed the competitive nature of the process. My hands-on experience involves configuring client applications and understanding the technical intricacies of the mining world.
In the realm of staking, I've explored proof-of-stake (PoS) as a viable alternative to PoW, staking coins to participate in consensus processes and receiving rewards for contributing to the network's security and functionality. I'm familiar with the technical requirements for staking, as well as the ease of staking on certain exchanges.
The play-to-earn concept is not just theoretical for me—I've engaged in these games, particularly those like Axie Infinity and Decentraland, understanding their dynamics and witnessing their impact, especially in regions like the Philippines where they served as a source of income during challenging times.
I'm well-versed in the sources of interest in the cryptocurrency world, understanding that funds on DeFi platforms come from network fees, borrower interest, or platform-generated interest. Additionally, I have a solid understanding of the tax implications of cryptocurrency income, recognizing that it is taxable and advising consultation with tax professionals for proper handling.
In conclusion, I offer a comprehensive understanding of the various concepts discussed in the article, backed by firsthand experience and a depth of knowledge in the cryptocurrency space. If you're looking to explore passive income opportunities in the crypto world or seeking guidance on portfolio allocation, I'm equipped to provide insights based on practical expertise and theoretical understanding.
