How to generate passive income with cryptocurrencies?
One of the most interesting characteristics of human beings is how different we can be from each other. While many would rather work hard for a living, others would be extremely happy to generate money while taking a nap. For the last ones, knowing how to generate passive income with cryptocurrencies must sound like a great option.
However, let’s be honest from the beginning, no one will become rich by reading generating passive income with cryptocurrencies. Despite the fact that in crypto we will get much better returns than in the world of traditional finance, these will only be a portion of our initial amount, so here we curb illusions of instant wealth.
Nevertheless, it is a great opportunity that we should be aware of and take into account when planning our methods for earning passive income, which involves the risks inherent in a nascent technology such as the one that gives life to the world of cryptocurrencies.
What does it mean to generate passive income with cryptocurrencies?
Let’s start at the beginning, as we should. In the crypto world, we have many different ways to generate profits. The differences, beyond the type of option we choose and how we go about it, often lie in the risk involved.
As we already know, the crypto world respects the great principle of traditional finance, the greater the risk, the greater the reward. But when it comes to passive income, the idea is undoubtedly to expose yourself to the least amount of risk possible, even if you sacrifice some of the potential benefits that a riskier strategy might yield.
So, in short, generating passive income with cryptocurrencies is nothing more than depositing our coins in a smart contract and getting a percentage return in return. The latter can be variable or fixed depending on the option we select, and this will also depend on our risk aversion.
With the aim of highlighting once again the caution we should take with these strategies and clarifying once again that we are not giving any kind of financial advice, we will review the most popular options, arranged in increasing order of risk and experimentation.
Staking is undoubtedly the first security and testing level option that comes to mind when thinking about generating passive income with cryptocurrencies. Since it is not the aim of this article to analyze it in detail, it is worth mentioning that we have dedicated an exclusive article to this strategy, which you can access by clicking here.
We can stand that staking simply means delegating a native cryptocurrency to the validators that are in charge of generating the blocks that form a specific blockchain. By doing it we are going to receive a percentage of the rewards generated by that crucial activity and we can have the honour of being part of the security process of the blockchain that we believe in. It is worthwhile to clarify, that the percentage that we will get in exchange for our deposit depends on the blockchain parameters.
However, you may ask yourself, why is this the most secure way to generate passive income with cryptocurrencies? Well, the answer can be quite hard to understand but simply to be said. While every DeFi platform that we can use, was carefully designed to work on top of a blockchain, the staking process is designed and created at the same time as the blockchain that we are staking on. Therefore if we trust that blockchain, we would have more trust in its staking system, intimately related to its consensus system than in a smart contract constructed to work on top of it.
In the previous section, we presented staking in a blockchain as the safest option to generate passive income with our cryptocurrencies. However, this does not mean that smart contracts, and the DeFi platforms to which they give life, are in their entirety dangerous or insecure.
We know so many platforms of this kind, like Aave or Compound, that have been perfectly working for years. This strategy is quite simple and similar to the last one. We deposit our cryptocurrencies in a Smart Contract and we obtain in exchange a percentage that can be variable o fixed.
The difference here is where the profit comes from. While the first option comes from the rewards that validators generate for making new blocks, here the profit can come from a great variety of sources. Some protocols offer incentives on their own token, a strategy that has proven to be quite unsustainable, while others generate their user’s profits from the amount that borrowers pay for taking loans.
As I said at the beginning, do not expect to become rich with this strategy, but surely it is possible to get better rates in DeFi that in the traditional finance world. However, once again, the risk is quite higher.
To conclude this article, as I anticipated in the first section, we have left the riskiest option and are still in a state that does not go beyond experimentation and the first tests in production. Anyway, our goal of the day is to learn about the available options on the market and here is another one.
The tireless crypto-developers never stop innovating and one of their latest creations has been the staking of NFTs. As with staking by delegating with blockchain validators or depositing in a DeFi ecosystem application, here, we will block our NFTs in exchange for a percentage reward.
The question, which undoubtedly arises as soon as we take notice of this option, is where do these rewards come from? Generally, the platforms that offer this opportunity use their own cryptocurrency created specifically for this purpose. We have already mentioned that this type of strategy is not usually sustainable in the long term, but it has nevertheless yielded great benefits in relatively short periods of time.
Some of these applications have used this strategy to achieve:
– More people want to buy their NFTs
– Raise the selling price, given the expectation of generating a return with these NFTs
– Obtain higher royalties from the sale in the secondary market
Higher profits from NFT sales allow them to have an interesting cash flow that gives them the flexibility to offer rewards and thus continue to feed this circle.
Undoubtedly, as much as it pains those crypto users who vaunted this technology, the high returns, or at least their promises of them, have attracted a large number of users to this world.
The reality indicates that, although today’s yields have dropped considerably in comparison to those that existed in an upstream market, they continue to be higher than those offered in the traditional finance world.
But, once again, we must take into account all the risks involved in this kind of activity and always be aware that losing everything is an option that always remains on the table.