By Larry Wright
Introduction
Many people believe that the schools are not providing adequate and quality education to the children. For several reasons, the statement can be very accurate. There are some important skills like financial literacy that adults lack even when they have entered into their practical life. Authors and philanthropists like Robert Kiyosaki agree with the notion.
In his bestselling book, Rich Dad and Poor Dad, he emphasized the importance of introducing the concept of financial management from a young age. He also advocated for the inclusion of a suitable syllabus that can enable individuals from an early age about the importance of managing money.
Most people in the world only worry about getting a job and earning enough to get by. However, truly successful people have the knowledge at their side that allows them to invest their money and create passive income, granting them better prospects in life.
Passive Income with Cryptocurrencies
Cryptocurrencies have established themselves in the last decade as a viable investment option next to stocks and trade commodities. The people who are uninitiated about the cryptocurrency market might think that investing is a full-time job. However, it is worth noting that most professional investors start their first cryptocurrency positions as a side hustle.
Another common misconception about cryptocurrencies is that the only way to make money from them is to trade. It is worth mentioning that the first-ever cryptocurrency, Bitcoin, was intended to operate as a digital currency. Therefore, it can provide all the investment avenues as a regular fiat currency and other trade commodities. In this article, readers will find some of the most common and useful ways to create a passive income stream with the help of cryptocurrencies.
Role of Blockchain in Earning Passive Income with Crypto
The underlying function of Blockchain is to provide a decentralized, trustless, and universal network that allows the unique and uniform distribution of data. When a person spends money on any purchase, the record is added to the balance sheet of a private firm like a bank or a corporation, etc. The same happens in a blockchain as well.
However, with a blockchain, the record of each transaction is copied and sent to every single user on the network at the same time. In this manner, the need for a centralized supervisor is not needed. Cryptocurrencies use encryption that prevents any one user from altering, deleting, or editing the record of a transaction wrongfully.
Technicians around the world are using blockchain technology to improve the software that is used for supply chain, quality control, and other types of database services. For financial record keeping, blockchains are a very reliable mode of conducting international transactions.
Furthermore, blockchain also provides alternativetives to the centralized and heavily regulated financial system that can grant a lot of investment leverage to investors. On account of all these qualities, many big financial firms like JP Morgan Chase, Fidelity, Ark Invest, Galaxy Digital, and many others are taking an interest in adding cryptocurrencies as investment vehicles.
Hurdles in Earning Passive Income with Cryptocurrencies
Now that it has been established that cryptocurrencies are a suitable medium for investment, it is important to note that making money is never straight forward task. The case is the same with cryptocurrencies as well. Some new investors treat the cryptocurrency market as a gambling ring and end up losing a lot of money. Here are some of the most important causes that investors fail to use cryptocurrency as a passive income stream:
Lack of Knowledge
The most common and the biggest reason that investors are unable to earn profits from their cryptocurrency positions is a lack of knowledge. These days just about every other person is talking about cryptocurrencies. Some people get interested in the market as they have heard about it from someone else.
However, anyone who enters the market without getting educated on the subject can suffer from massive losses later. The cryptocurrency market is subject to massive and frequent price volatility. It is not ideal to purchase one type of cryptocurrency and expect it to convert your savings into millions or billions overnight. It is important to understand the dynamic of the market and conduct research on the cryptocurrency before putting any money into it.
Background Check
When it comes to cryptocurrencies, a lot of investors fail to run a background check on their issuers and managers. The case of a famous pump and dump Squid Games currency is relevant here that ended up creating massive losses for its investors. Many cryptocurrency investors let their guards down on account of the popularity of the TV series on which the currency was based.
Its investors did not conduct any research on the issuers of the fraudulent currency, which did not have anything to do with the production company or any actors that were associated with the currency. After hyping the price for a while, the Squid Game Currency issuers dumbed it driving its price to near zero and leaving its investors devastated.
All cryptocurrency transactions are conducted online. Just like a social media or digital bank account, it is possible to hack into a digital currency wallet or blockchain. Before getting into cryptocurrencies, an investor needs to learn about hacking prevention techniques.
Risk Assessment
Risk management is the winning quality when it comes to investing. Anyone who is hoping to succeed in cryptocurrency or stock trading must polish their risk assessment skills. Among professional investors, the top contenders have a dexterous ability to calculate market risk based on technical indicators.
Blind Followership
In the age of social media, where every person owns a smartphone and a social media account, social influencers are on the rise. Many people follow social media influencers and put their money on anything that their favorite personality introduces. It is worth noting that social media influencers often refrain from conducting in-depth research on the authenticity of the products or services they are promoting for a fee.
Top Ways to Generate Crypto Passive Income
Now that each reader has done their research and prepared secure accounts for conducting their cryptocurrency trades, it is time to learn about creating a passive income. Based on the market practices, there are several ways that can generate a considerable amount of profits. However, it is necessary to bear in mind that different earning methods require a different investing caliber.
Crypto Lending
Lending is the backbone of capitalism. Crypto Lending allows the investors to earn income in the form of interest by lending their digital asset reserves to others. There are various types of lending opportunities that investors can avail themselves of.
- DeFi Lending
DeFi stands for decentralized finance, and in a blockchain-based lending system, the centralized authority is replaced by Smart Contracts. In this manner, the process of lending and borrowing becomes automated and does not require hefty processing and approval delays.
- Centralized Lending
Cryptocurrency lending is also possible on centralized lending platforms. Where there is an intermediary who is responsible for conducting verifications of the borrower and the lender. Furthermore, the third-party overseer can also set the terms for both lenders and borrowers in advance.
- P2P Lending
Some blockchains provide Peer-to-Peer lending or P2P services to the users. The borrowers and lenders matched based on their listed requirements on the platform. P2P lending platforms can allow individual investors to set their personalized terms of borrowing.
- Margin Lending
Margin lending is a method that allows a cryptocurrency trader to borrow funds in the form of digital assets from another party in exchange for collateral and/or an interest return rate. The borrower then uses these funds to conduct trade and repay their borrowed digital currencies using the profits.
Yield Farming
Yield farming is a method that allows cryptocurrency traders to earn a set percentage return by pledging their digital asset reserves on a decentralized platform. Some decentralized platforms want to increase the liquidity of cryptocurrencies by offering yield returns or Liquidity Provider Tokens.
The investors can earn a passive income by pledging their crypto reserves on verified DeFi platforms such as Uniswap. They can also earn additional yield by pledging their LPTs on other decentralized platforms.
Interest
Banks allow their consumers to open savings accounts and earn a set APY or Annual Percentage Yield on their savings. In the same manner, some cryptocurrency wallet service providers increase want to increase their market appeal by offering a daily/weekly/monthly/yearly set percentage of interest income. Some good examples of such platforms are Nexo, Celsius Network, and BlockFi, among others.
Dividend
A dividend is a return on a bond. In the cryptocurrency market, some private organizations offer a dividend income to their consumers in exchange for token issues. These tokens represent a type of loan that the investors have granted the company by purchasing them, and in return, the company is obligated to share a set percentage of dividend income.
Cloud Mining
PoW or Proof-of-Work consensus cryptocurrencies depend on mining services. Cloud mining is a new idea that allows crypto miners to participate in hash rate production by passing the order to third-party services. In this instant, the person who is outsourcing the mining has to bear costs such as rent, fuel, and maintenance of the mining farm and equipment.
There are some blockchain projects such as Ethereum, Polkadot, Cardano, and Solana networks that allow cryptocurrency traders to stake their tokens on liquidity pools.
These liquidity pools increase the value of the cryptocurrency by providing an active supply of tokens at all times and allow the stakers to earn interest or income in return for a particular sum of digital assets. Some blockchains also appoint new validators from the staking pool contributors.
Spot Market
Spot market trading is the old-fashioned way of earning income from cryptocurrencies by selling and purchasing them from open markets like cryptocurrency exchanges. It is worth noting that there is a lot of experience and technical skill required to create the perfect cryptocurrency portfolio and make profitable buy and sell decisions.
Using technical indicators such as RSI, MACD, etc., and investment techniques like Dollar-Cost Averaging, Composite Interest, Stop loss and Buy/hold, the newcomers also have a good chance of creating a passive income stream.
Mirror Tokens
Mirror trading is a tried and tested investment technique from the traditional markets. Mirror trading allows a relatively new trader to join their investment portfolio with a professional broker or experienced investor for a fee. All the moves of the skilled traders are mimicked in the joint account. In the crypto community, mirror trading is conducted with the help of social media accounts, where investors can copy the best investing strategies from each other.
Margin Trading
Margin trading is the process of investing with borrowed money from a third party against collateral and interest rate. It is worth noting that margin trading requires a massive amount of experience and loss of appetite, and it is not advisable for newcomers.
Hedge Funds
Hedge funds are investment vehicles that are a mixture of different investment options such as stocks, commodities, and even cryptocurrencies. During the last five years, many popular and established hedge fund operators have started to add cryptocurrencies as a portfolio diversifier.
Hedge funds are ideal for new investors as they are operated by professional brokers. A survey by PwC reported recently that around 38% of Wall Street asset managers are willing to add digital assets to their hedge funds this year.
Tax Offsets
The tax offset is not a direct income, and it is saving by way of claiming losses on investments such as cryptocurrencies. However, tax offsets also depend on the region and regulatory guidelines issued by the government.
In the USA, cryptocurrency investors can apply for tax resets if they incur losses on IRS-recognized digital assets. Meanwhile, in India, the Finance Minister’s Office has revoked tax offsets for cryptocurrency traders in the region.
NFTs are digital multimedia files that allow the users to declare digital ownership. Some artists have managed to earn a decent income by converting their original artwork into NFTs on platforms like OpenSea. On the other hand, users can also earn money by collecting NFT collectibles and selling them for higher prices later. Web3 gamers can also sell their NFT purchases to make money.
Crypto Influencer
Anyone who has a decent amount of followers on the internet can earn income by promoting cryptocurrency services. Sponsors reach out to social media influencers regularly to expand their consumer base.
However, it is a good idea to conduct some research about the legitimacy of a product or service before asking people to buy it. Many people are earning money by writing educational material on cryptocurrencies for their blogs and websites.
Crypto Derivatives
Derivatives are the secondary trade contracts that allow the investors to earn profits without investing in an asset class such as cryptocurrencies directly. There are three main types of crypto derivatives: Options, futures, and Perpetual Swaps. Futures are traded contracts that allow the investors at a preset price, and it has an expiration date.
Futures purchases are called short, while retention is called long. Options are trade contracts just like Futures, but they allow the investors to call or put their contracts after the expiration date. The predetermined value of an option is called Strike Price. Perpetual Swaps do not have an expiration date, but traders need to maintain a minimum crypto reserve that is called margin.
Virtual Real Estate
Blockchain has inadvertently given birth to the Web 3.0 sector. There are some big companies striving to create virtual real estates that individual or corporate investors can purchase. Some of the biggest companies in the world are purchasing land in virtual digital spaces to open shops and advertise their products. Cryptocurrency investors can buy a small land on the virtual real estate strip that might grow significantly in value later.
Annuities
An annuity is the process of setting up a fund that ensures a regular paycheck every month. Retirement accounts and 401Ks are some good examples of an annuity. Financial services giant like Fidelity has recently decided to offer cryptocurrency investment options for their retirement account holders. Despite the initial regulatory pushback, many are going for this mode of income.
Token Issuance
With the help of using DAO makers, anyone with a suitable knowledge of computers can issue their cryptocurrency tokens. If the person has enough social traction and technical credibility, they can establish a new cryptocurrency investing option.
Crypto ETFs
Exchange-Traded Funds or ETFs are another great way to generate passive income from cryptocurrency trading without directly owning the asset. ETFs are pegged to the market value of a cryptocurrency, indexes, or other asset class like a mutual fund. However, investors can purchase ETFs from a Stock Exchange.
Arbitrage
Arbitrage is an old method of generating income by buying goods from one market and selling in another in return for a higher price. Cryptocurrency exchanges like FTX allow the investors to purchase digital tokens from one region or exchange and sell it to others where they can fetch a greater price.
Conclusion
Cryptocurrencies are a relatively new investment option. A considerable amount of care and knowledge goes into making a profit from the highly volatile and speculative cryptocurrency marketplace. Rather than placing random bets or getting intimidated, it is important for prospective cryptocurrency investors to invest their time in honing their skills, gaining knowledge, and conducting their research to become successful cryptocurrency traders.
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