From HODLing to Earning: A Guide to Crypto Passive Income Strategies

HODL - Hold on for Dear Life.    It’s the mantra of every experienced cryptocurrency investor.    If you had purchased 1 Bitcoin in early 2017, you would have seen it rise from $2,000 to $20,000 per bitcoin. A year later, in 2018, Bitcoin dropped to $3,000 per bitcoin. As of writing, it stands at $60,000.    A wild ride indeed.   But did you know that you could have been earning passive income while hodling your crypto assets?   If not, then this is your guide to crypto passive income strategies.

What is Crypto Passive Income and How Does It Work?

Passive income allows you to pull in income without active work. In traditional finance, bonds that earn interest or stock portfolios that yield dividends earn investors passive income. Commercial and residential real estate, where landlords collect regular tenant rent, generates passive income. Crypto generates passive income and presents comparable opportunities. In the past, participants could produce crypto passive income through mining, the Proof of Work (PoW) consensus mechanism of Bitcoin. An investor would set up hardware to validate transactions on the Bitcoin network. In return, they would earn passive income from crypto. Nowadays, it's possible to earn passive income from crypto investments without such complicated hardware. Investors can deposit cryptocurrency directly into the blockchain network or third-party decentralized finance (DeFi) applications that earn yield.  

From DefiLlama

  The DeFi industry has grown into a multi-billion dollar industry. Investors have invested $95.0 billion in platforms that yield passive income.

What are the Different Ways to Earn Passive Income Through Cryptocurrencies?

Depending on your goals and resources, you can pursue various crypto passive income methods.   Some ways contribute to the overall strength and security of a blockchain network. Others are designed purely to generate income for users.

How Does Mining Generate Passive Income?

Cryptocurrency investors first experienced passive income through Bitcoin mining.   More than a decade ago, you could gain Bitcoin from a laptop or simple computer. Students would mine Bitcoin from their dorm rooms. These days, companies set up warehouses of machines to mine a single Bitcoin.  

Bitmain miner, as seen on Amazon

  Mining has progressed from its early days, even when performed at home. Investors now require an application-specific integrated circuit (ASIC) computer specially built for mining purposes.   A single home-based mining setup can cost up to $3,500 with varying returns. Most miners will make their profit after selling Bitcoin during a significant price increase.

What is Staking?

Many blockchain networks operate on a proof-of-stake (PoS) consensus algorithm.    To quickly differentiate from mining, PoS validates transactions based on locking up cryptocurrency. This process is otherwise known as staking. While computers are still required, locking tokens onto the network does most of the job. Stakers earn passive income based on the amount and duration staked.  

Ethereum staking statistics from Ethereum.org

  Ethereum (ETH), a proof-of-stake network, has attracted over 1,000,000 validators composed of individuals and institutional stakers. Investors have staked over $110 billion ETH to date.   An ETH solo staker (one who sets up their validator) needs $1,000 in equipment and 32 ETH (over $110,000) to start staking. Once up and running, a validator earns a 3.2% ETH annual percent rate (APR).    In addition to being a solo staker, investors may explore other staking options with lower capital entry requirements and minimal hardware:

Delegated-Proof-of-Stake (DPoS)

DPoS is a consensus mechanism where participants delegate their staked crypto to third parties. The entities with the highest “votes” become validators.    Solana, a DPoS blockchain, offers 6-8% passive income annually.

Staking-as-a-Service (Saas)

SaaS is a model where an intermediary handles the hardware requirements of staking. An investor just needs to deposit the required cryptocurrency into the platform.  

Stake.fish’s Ethereum staking calculator

  Institutions such as Stake.fish offer staking across various crypto networks, such as Polkadot, Ethereum, and Polygon.   Returns vary depending on the network.

Staking Pools

Users combine their funds with other interested people through pooled staking. An operator manages the pool and maintains the validator. Meanwhile, rewards are handed out based on the amount and duration staked within the pool.   Frequently, staking pools will also offer what is termed liquid staking.  Stakers receive liquid staking tokens (LST) equivalent to their staking capital. These LSTs represent the staked assets in a blockchain network. The LST may be used on other protocols for further trading or yield generation.  Rocket Pool, the second-biggest decentralized liquid staking platform, offers rETH liquid staking tokens in return for deposited ETH. With a minimum capital of 0.01ETH, one can earn 3.41% per annum.

How Can Yield Farming Make Passive Crypto Income?

Investors deposit cryptocurrency into decentralized finance (DeFi) applications in yield farming. While the methods to generate yield vary from platform to platform, the approach is generally the same.   Investors (called yield farmers) will transfer platforms to maximize their profits. These farmers receive yield in the protocol’s native token or the crypto pool the investors deposit into.   While staking contributes to the strength and security of a blockchain network, yield farming supports the operations of a DeFi platform. 

Liquidity Pools

In a traditional market, buyers and sellers offer different price points, creating supply and demand for a particular good. When buyers and sellers agree on a price, a trade is executed, which becomes the asset’s market price.   Decentralized exchanges (DEX) execute trades in an automated fashion. Instead of relying on a market of buyers and sellers, users trade against a liquidity pool. DEXs provide passive income to encourage investors to deposit cryptocurrency into the pool.  

ETH/USDT liquidity pool on Sushi Swap

  Sushi Swap, one of the largest DEXs, provides users with 9.76% per annum for its ETH/USDT liquidity pool.

Lending Platforms

In a regular bank, institutions gather deposits to lend to borrowers. Depositors receive a portion of the loan interest and fees, and the bank keeps the spread as profit. Lending platforms generate passive income for investors by operating a bank-like model. However, instead of having a centralized lending authority, lending platforms utilize smart contracts to operate in an automated manner.  

USDC lending on Compound Finance

  Compound Finance is one of the largest crypto lending platforms, with $2.2 billion worth of crypto locked onto the platform. With its USDC lending product, deposits can earn 6.56% per annum in passive income.

Can Playing Crypto Games Bring Passive Income?

The most intriguing way to earn passive income is by playing games.   Players treat gaming tokens as passive income as games are fun to play. The monetary incentive comes secondary.   Blockchain games reward players with in-game cryptocurrency. Players gain these rewards through winning matches or completing quests. At the same time, in-game assets carry financial value if traded on internal and external marketplaces.   In 2021, thousands of players earned $10-$50 a day while playing Axie Infinity. While the in-game economy ultimately collapsed, other game developers have launched their crypto games.

Pixels, a blockchain game

  Pixels has attracted thousands of players to play and complete in-game quests. Players earn income through $BERRY, the in-game currency. While the earnings are nothing compared to the heyday of Axie Infinity, the game does provide players with income-generating opportunities.

Crypto Statistics 2023

Crypto DeFi has become a multi-billion dollar industry.    While the current $95 billion total value is still significantly below its peak of $190 billion in March 2022, the industry displays high growth potential.

Total Value Locked in DEXs

Top 10 DEX by total value locked, from DefiLlama.

DEX platforms hold approximately $20 billion of the $95 billion total value in DeFi.  With the collapse of centralized exchanges (CEX) such as FTX, individuals may look towards DEXs to fulfill their trading needs.  These decentralized platforms would experience a growth in demand and require liquidity. They reward users for depositing their digital assets to support operations.

The Crypto Lending Market

Top 10 lending platforms by total value locked, from DefiLlama.

  Investors have locked $33 billion of digital assets on crypto lending platforms.   It’s no surprise how lending platforms have attracted users. Traditional bank financing can be complex with its numerous documents and stringent requirements.  

The Number of Crypto Games Players

Unique active wallet share, from DappRadar

  While crypto games don’t bring in substantial total value locked on their platforms, they do bring in the players.    Crypto games account for 35% of unique active wallets in the decentralized application ecosystem, translating to over 1 million users.

Can You Make $100 a Day With Crypto Passive Income?

  If you stake a million dollars worth of Ethereum onto a platform, it would earn around 3.5% yearly, translating to $100 daily. This passive income is a significant amount that people can live on.    Of course, reaching a million dollars is much easier said than done. Numerous factors also affect the annual returns.    When more stakers enter a blockchain, the staking returns typically drop. Ethereum staking returns have fallen by over 50% since ETH staking started. Asset prices also play a crucial role in passive income returns. If ETH prices fall by 50%, keeping returns constant, then you’d need to double your staking capital to meet the $100 daily goal.

Is Crypto Passive Income For You?

For any digital asset investor, generating passive income is a game changer. But Before deploying any digital assets on passive income platforms, make sure to conduct your due diligence.   Each platform and method comes with its own set of risks. You could lose your entire capital due to a rug pull or an attack on the platform. As this is all very early stage, there’s also no telling how these passive income strategies will be regulated.    At the very least, reflect on your personal risk tolerance.  

Editor’s Note: This article was originally published in December 2023 but has been updated with new information.

 

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