This blog is dedicated to sharing my experience in making money online and specifically, with cryptocurrency investments, so it makes perfect sense to revise the top opportunities of making passive income from your crypto holdings.
Typically, the most common way for most investors in cryptocurrencies is the good old HODLing – the act of buying a coin and holding it long term in the hope that it will appreciate in price. And right now most of them do. We are in a bull market, so hodling your Bitcoin, Ethereum and other coins is surely growing your fiat vlaue locked in these digital assets, but how about growing your actual assets themselves? There comes a time when the markets turn and enter a bear cycle, which could last for years. Last time this happened, it took 2 years and during that period, all of the cryptocurrencies saw around -80% to -95% loss in value, which for any investor is a deadly prospect.
This is why I do not consider Hodling a winning strategy, especially not for growing your capital in the long term.
Now, while we are in a bull market, we ought to do our best to grow our crypto holdings and once the bear cycle begins, we should (ideally at the first signs) exit and move back into fiat – at least most of it if not all.
But more about exit strategies in a different post.
Now, let’s take a look at these 5 methods for making more crypto, while crypto itself is making your fiat value more in their own right.
Staking is one of the oldest methods of gaining more of your crypto by simply holding it. It is an alternative method to Proof Of Work Mining and only applies to POS tokens. Users are making variable annual “interest” (or profit) by staking their cryptocurrency for a period of time. This could be a fixed or flexible staking and the rewards vary from project to project and depending on the time staked.
How does staking work?
Proof of stake (POS) is a way of mining, where any person who holds a certain amount of coins can validate or mine blockchain transactions. It depends on how many coins the investors hold at the time of the transaction. It means that the more coins you hold, the more mining power you have.
In recent days, we’re seeing a lot of third party services, that create pooled mining to enable those users who are not tech-savvy or who do not hold large amounts of coins, to still have a piece of the pie. The users are called delegators and the service providers are validators. Soft-staking has become the most user-friendly method and many exchanges are now offering these types of staking to their users. Binance, Kucoin, Poloniex and many other exchanges would distribute to their users staking rewards on the relevant cryptocurrencies they have in their accounts.
Some of the top staking coins currently are: Tezos (XTZ), Cosmos (Atom), NEO, Aave, Algorand (ALGO), Syntexis (SNX), Polkadot (DOT) and Cardano (ADA).
To find out the top staking rewards payable by Kucoin’s PoolX service, go here.
Too find out Binance’s flexible staking rewards payable, go to Binance and choose “Savings”
What are the risks?
Staking is relative safe and there aren’t any major risks if you do it yourself. However, if you’re using third party validators, you are at risk of falling victim to fraudulent practices since you delegate your tokens to these third parties for a period of time.
Also, a common drawback of staking is the technical complexity to doing it yourself and the fixed time that most networks would require you to stake for. In a bull market, this may not be an issue, but once we go into a bear cycle, a diminished value of the coins can result in huge losses, despite the rewards accumulated.
#4 Yield Farming.
Yield Farming is a part of the DeFi ecosystem that allows token holders to earn fixed or variable interest by investing crypto (and thereby providing liquidity) in a DeFi market. This became quite a trend last year and we saw many projects
How does yield farming work?
The practice started out by offering users a small share of transaction fees for contributing liquidity to a particular application, such as Uniswap or Balancer. However, the most common yield farming method is to use a DeFi application and earn the project token in return.
Yield Farming is still really new, it became popular in the summer of 2020 when Compound announced it would start issuing its COMP governance token to lenders and borrowers who use the Compound application. It was an instant hit, pushing Compound to the top of the DeFi rankings.
Since then, several projects have followed suit by creating DeFi applications with associated governance or native tokens and rewarding users with their tokens. These copycat tokens have replicated COMP’s success like, for example, Balancer’s BAL token, which gained 230% immediately after launching, Uniswap’s UNI token and its fork Sushiswap with its own Sushi token, all of which have made enormous gains since last year.
Yield farmers typically stake stablecoins, such as Dai, Tether (USDT) or USD Coin (USDC), as they offer an easy way to track profits and losses. However, it’s also possible to farm yield using cryptocurrencies such as Ether (ETH).
What are the risks?
Most DeFi applications are currently based on the Ethereum blockchain, creating some critical challenges for yield farmers. The Ethereum network is still struggling with a lack of scalability. As yield farming becomes more popular, more transactions clog up the Ethereum network, leading to slow confirmation times and spiraling transaction fees. In fact, Ethereum fees have gone through the roof in the past year and this becomes a huge drawback for many users now.
Another drawback besides the high fees is that yield farming is still quite complicated to many new crypto users, which is why is not too high on my list.
Anyway, the potential gains from yield farming highly depend on which protocol you’re choosing. While most projects attempt to create a long-term value proposition, each with its own risks, it might be hard to study and choose the best for you.
More about this practice will be a topic of a separate post on this blog, but for now I will mention the current market leaders in this space are: SushiSwap, Compound, YFI, Curve Finance, Balancer and Harvest.
Crypto Loans are also a product of DeFi and they work in a similar fashion to staking but for coins that are not using POS protocols. Typically, users are being paid between 4%-8% APR on average for simply holding their coins in their accounts with the service provider. In most cases they are not bound by any fixed term, but being paid interest on a daily basis. This makes Lending the easiest way to earn passive income from your crypto, but not the most lucrative one, hence why it is not on top of my list. It is safer than most though, so it should not be overlooked.
How does it work?
Crypto Lending is becoming a huge industry as it provides an alternative way to cover some of your fiat expenses while offering cryptocurrency as a collateral.
In other words, crypto-backed loans allow you to access liquidity without selling. By using your crypto as collateral, you can borrow up to 50% of the value of your assets in fiat vlaue (USD for instance). If your crypto goes up in value, then you can cover the loan from the excess value and still take your original amount back. You can also just earn interest over time and cover a loan from that interest gained. In other words, you can use some fiat money without selling your crypto, which is the main appeal of this method.
What are the risks?
The main risk is that having your crypto held by a custodian, you’re not truly the owner of your coins. You have to trust that the service provider would keep your coins safe and not do anything fraudulent. Some services like Nexo have insurance included, but not all of them do. In fact, besides Nexo and (to some extend) Blockifi, I don’t know of any others that have such insurance on your crypto funds, so they’re medium risk in my opinion.
On the plus side, this is possibly the easiest and simplest way to make a passive income from your crypto. There’s no special technical skills needed in order to take part in it and although it has a relatively small return, it’s one of the least risky methods.
#2 Copy Trading
Copy Trading enables individuals in the financial markets to automatically copy positions opened and managed by another selected individuals.
Unlike mirror trading, a method that allows traders to copy specific strategies, copy trading links a portion of the copying trader’s funds to the account of the copied trader. Any trading action made by the copied investor, such as opening or closing a position, are also executed in the copying trader’s account according to the proportion of funds allocated to this service.
The copying trader usually retains the ability to disconnect copied trades and manage them himself. Copied investors are often compensated by flat monthly subscription fees on the part of a trader seeking to copy their trades.
Copy trading has led to the development of a new type of investment portfolio, which some industry insiders call “People-Based Portfolios” or “Signal Portfolios” and in some cases, it can be referred to as “social trading”.
My favoured service for copy trading is Bityard – an exchange that offers not only cryptocurrency pairs, but also derivative markets such as Crude Oil, Precious metals (gold, silver, copper), Nasdaq, Mini Dow and much more.
What are the risks?
As with any trading, there’s a significant risk involved. Cryptocurrency markets are hugely volatile – this can be beneficial when done right, but also, quite detrimental if done wrong. This is in fact, why copy trading is so high on my list, since the risk-reward ratio is much bigger than most of the other methods of earning passively from your crypto. If you choose the right trader to copy, you can make well beyond 100% gains in a few months.
The good thing is that you can monitor the performance of the trader on a daily basis and you get to see their track record when choosing whom to follow, so you’re in control.
Another plus is the fact that your funds stay in your own account on the exchange, so you are not giving away ownership of your coins at any time, so the main risk would be in case that the exchange gets hacked, but that’s the case with any exchange account you have anyway.
#1 Auto-Trading Bots
On top of my list for making passive income from your crypto is trading via automated software, in other words: using so-called trading Bots.
These are pre-programmed set of algorithms that execute trades on autopilot for you, following a set of parameters. These can be tweaked regularly to enhance their performance and to keep them on top of their game.
Trading bots are not very easy to program, but there are services out there that make it simple by giving you access to already programmed bots that you can simply plug into.
My top choice of such service is Mudrex – a company based in San Francisco, who offer a great variety of pre-programmed bots on many different trading pairs and on a number of different exchanges, Binance being the most popular one.
How does this work?
As I mentioned, setting up trading bots is not very easy, but the way Mudrex has done it is very simple to the end-user. You just have to choose the exchange you want to use with the bot, then link your API keys from that exchange to your Mudrex account. By doing so, you only give permission to the bots to trade with your funds and not to withdraw, so the good thing is that your money is also always in your own account and you are in full control.
You can cancel or close a trade manually at any time, should you choose to do so and you also have a full transparency as to what trades are being placed and executed by the bot on your account. You choose the amount you want to allocate to each bot and you can use more than one bot at the same time (with different amounts). When making your choice of bots, you see their past performance and their winning vs losing trades and many other statistics that will help you make your choice.
The fees involved are really low (typically around 1% of the traded amount) and you only pay these fees if the bot returns a profit.
You can refer to this post if you want to know more about this service.
What are the risks?
As with any trading, the risks are related to the high volatility of the crypto market. This can be a good thing if you choose the right bot to use, but when there are sudden market moves, the bot might have to sell at a loss. If you choose a bot that has a small percentage stop-loss, you are safer but then your profits might be slightly lower compared to the more aggressive setups in other bots. However, a steady and safer profit ratio is preferred to a more aggressive and higher risk type of setups, so choose wisely. A typical profit of some of the top bots on the Mudrex platform would be around 15%-20% monthly, which beats most of the other methods listed here, which is why this one comes at the top of my list.
What do you think of my choices? Do you agree or disagree with my top 5 and are there any other methods that you are using, that I have missed? Leave a comment below and let’s get the conversation going.
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This post is part of the Crypto Corner Video Podcast ep145