How to Earn Passive Income with Cryptocurrencies [2023]

Is earning passive income on cryptocurrencies worth it?

This article will show how to earn passive income on cryptocurrencies and answer the question if it is worth it. Chances are that you’ve never heard of it and/or are not really aware of the risk that comes with it.

What is staking cryptocurrencies?

If you’ve been into the cryptocurrency space for a while, you would know that the only way to make money from them is to either a) buy & hold, b) simply trade them or c) build your own project. However, this changed with the feature of staking your digital coins and tokens to earn passive income.

Maybe you’ve heard of the proof of stake mechanism before.

Here transactions are validated by users that hold (or lock in) the currency in the wallet. As a reward for holding, users will receive either the currency itself or a related one. It’s all pure competition with competitive pressure: those who provide the most currencies also receive the highest reward. Aside from that, the returns are laid by the project itself, in the event of a rapid fall in value, the declining price of the currency can also wipe out your returns from the staking process. Still, staking is a nice side effect of increasing your posts. The more capital you put in and believe in a project, the more the community will reward you.

What is lending/borrowing

If you lend a loan, you get a return on it, I think you know how lending works. You can earn money with loans, regardless of whether CeFi or DeFi, either through lending or borrowing. Borrowing means you borrow money and have to provide a security deposit. This varies depending on the frame, but could be around 0.2 BTC. Beware, the interest rates you commit to pay can be very high, they fluctuate, averaging around 10-16%. So you have to be very sure what you are doing with your money/credit. Lending means you are the one lending. In other words, you put your money into the financial service provider’s pool, which creates capital for lending. The returns to be expected here vary, you can expect 3-12% annually here. I can’t give you any fixed numbers for either borrowing or lending, many factors play a role here.

What is yield farming?

If being a farmer is too strenuous for you in real life, you can now be one in the world of cryptocurrencies too. The word farming says it all here, because you harvest additional cryptocurrencies for your lending. “Yield” stands for yield, which you reap on your invested capital. It could also be referred to as Lending 2.0, since all investors receive a specially created currency in addition to the returns generated. These are also called “native tokens”. If you don’t really understand the difference yet: Lending -> you get a return on your invested capital. Yield Farming -> In addition to yields, you also receive the token of the respective platform. Becoming a virtual farmer can be worthwhile, but that depends on the capital you invest and the current price of the respective token.

Is staking cryptocurrencies a lucrative idea?

Only those who are already wealthy get really rich through methods like this, as it is usual in the financial world. That’s not to say it’s not worth it for small investors. My tip: The smaller your capital, the more likely you should concentrate your currencies on one method. Of course, not just on one cryptocurrency. Especially with such opportunities, it is incredibly important that you get a lot of information and opinions from others before you invest your capital. Scammers know exactly what people want: make as much money as possible without much effort. That’s why really well thought-out scams are common with these methods. Once you have decided on a provider and method, you should always research experience reports and other people’s opinions beforehand.

What risks are involved?

There are some financial service providers who have established themselves in this sector. For example, you could use Compound and see what could be possible with your amount. It is important here to compare the providers first, no matter which method/provider you take. I find this method a great way to grow your cryptocurrencies. If you keep them in your wallet, you only benefit from the price increase. Here you benefit not only from the price increase but also from the multiplication of your currencies. This method has not been around for that long in the crypto market, only entrusting your currencies to providers who can show positive references and a long history. That way you don’t completely eliminate the risks, but at best you minimize them.

How safe is yield farming? At the time of writing, yield farming is still a method which involves risks. First of all it is a DeFi service, the general risks have already been described above. Furthermore, you can quickly face a net loss here, especially for the normal retail investor. That has to do with the competition and the high GAS fees. The more you invest, the more profitable everything becomes. However, the more the indirect risk increases. With regard to the distributed token, you are also dependent on its performance, the lower it is, the less worthwhile it is of course.

The great crash of LUNA & UST

Chances are that you’ve heard of the LUNA crash in may. Some call it a failed experiment, others are saying it was a scam. Fact is that 38 billion USD have been lost

due to the crash. In a short period of time, many investors have lost all or most of their money. This was a big deal, since Terra Luna was one of the biggest projects in the space. The reason for the big crash was the stablecoin failure of the ecosystem. The project had its own stablecoin „UST“, which is an algorithmic stablecoin. This means that the token is not backed with cash and other assets, but with a complex mix of code and Luna to stabilize the process. Things got more worse after Terra’s creator, Do Kwon, bought $3.5 billion worth of bitcoin to support UST in the event of a crisis.

Shortly after this decision, Bitcoin and the crypto markets in general began to sell-off. The problem here was that UST was mainly backed by LUNA & BTC. As the prices of these currencies fell, the price from UST did too. The real reason was a huge dump of UST, due to this the stablecoin started to depeg (Losing its value against the dollar). To understand this you need to know that for every UST that is minted, $1 of Luna gets burned. This also works the other way around.

Due to the huge dumping of UST, more people mass sold it, resulting in a growing circulating supply of LUNA. As the sell-off continued, LUNA got extremely inflated, resulting in the complete loss of price for both currencies.

The big losers here were the people that locked/staked their LUNA somewhere else and could not access it during that time.

Learnings: Earning passive income/Yield with cryptocurrencies can be a great way to boost your net worth. However, you should only risk what you are willing to lose. Otherwise you could end up like the victims of the Luna crash who lost all or most of their fortune due to blindly trusting the project.