Imagine this: You go to sleep, dream about your favorite cryptocurrencies for eight hours, and when you wake up, you’ve got more crypto in your account than the day before.
Think this is just a dream? Nope. This is the reality of crypto investors who have figured out how to earn passive income from their crypto holdings.
Originally, Bitcoin was the only crypto in existence, and the only way to earn more Bitcoin was through mining. But investors today can do more than simply mine, buy, and hold their cryptocurrency. And while cryptocurrency is still a speculative asset that carries an outsized risk of loss, in most cases the return can be potentially greater than what’s possible with standard investment accounts.
These are my favorite ways to earn passive income with crypto. For each strategy I’ve included my assessment of how much experience and effort it requires, the risk it entails, its potential return on investment, and the fees that might be associated with it.
Crypto Interest Accounts
The simplest way to earn crypto passive income is with a crypto interest account. These accounts pay interest on a regular basis for simply depositing crypto onto the platform. There are several crypto exchanges and crypto lending platforms that pay interest on crypto holdings, with some automatically paying interest for holding certain cryptocurrencies in your account.
Difficulty: Easy (no prior knowledge of crypto required).
Risks: Lending accounts can freeze user assets. Interest rates may change over time.
How “passive” is it really?: This is as passive as it gets. Simply deposit (or purchase) crypto and start earning.
Potential ROI: 15% APY or more, depending on the asset
Fees: There may be withdrawal fees charged by the platform.
Coinbase is a great place to start with crypto interest accounts, as it offers interest on a handful of cryptocurrencies without the need to jump through any hoops. You can simply purchase the crypto asset and start earning daily interest that is added to your account balance on a regular basis.
Gemini is another popular exchange that offers crypto interest accounts via Gemini Earn. There are no minimum deposit amounts or lockup periods, and you can transfer your crypto (plus interest) back to a Gemini trading account at any time.
Read more: Coinbase vs. Gemini
Proof-of-Stake (PoS) Staking
While the Bitcoin blockchain requires running a powerful computer to mine additional Bitcoins (known as Proof-of-Work), newer blockchains now allow users to receive crypto rewards by “staking,” or locking up, a large amount of crypto to be able to validate transactions (known as Proof-of-Stake). This requires much less computational power than crypto mining, and pays out rewards to users that invest in validators.
Staking rewards are easy to earn for most users, as crypto platforms allow users to deposit crypto onto the platform and handle the details of staking in the background. Staking is similar to locking up funds in a certificate of deposit (CD) account, as there may be set term lengths and interest payments based on how long your funds are locked in.
Some crypto exchanges allow you to participate in Proof-of-Stake (PoS) rewards, with a simple interface allowing you to deposit crypto, select a term length, and earn interest that is deposited on a regular schedule. PoS cryptocurrencies include Ethereum 2.0 (ETH), Tezos (XTZ), Cosmos (ATOM), and Cardano (ADA).
Difficulty: Easy to advanced. Crypto exchanges are easy, becoming a validator is difficult.
Risks: Staking may require a high up-front investment if running your own validator node.
How “passive” is it really?: Depositing crypto into staking rewards on an exchange is very passive, but becoming a validator involves a lot more work to get set up and keep it running.
Potential ROI: Staking can pay out 10% interest or more, depending on the crypto asset.
Fees: There may be withdrawal fees charged by the platform; there may also be network fees charged for deposits.
DeFi Yield Farming
Decentralized Finance (DeFi) is peer-to-peer blockchain technology that allows users to transact among peers, merchants, and businesses. DeFi utilizes smart contracts that allow users to conduct financial transactions automatically, without the need of an intermediary, such as a banking network.
DeFi yield farming is the process of utilizing a DeFi application (DApp) to deposit crypto and earn interest. The deposited crypto is then lent out to borrowers, used for staking, or used as liquidity on a decentralized exchange. Deposits and payments are handled automatically via a smart contract, and many DApps have built-in protections against defaulting borrowers (such as liquidation).
DeFi Yield farming is a bit more complicated than other crypto passive income techniques, and requires some level of knowledge of interacting with DApps using a digital wallet. There is also a risk of smart contract hacking, scams, and volatility issues causing additional loss when yield farming.
Stablecoins (such as Tether or USDC) typically pay out higher rates than other cryptocurrencies for yield farming. Some of the most popular DeFi yield farming platforms include Aave, Curve Finance, and Uniswap.
Difficulty: Intermediate to advanced. Some knowledge of crypto and blockchain tech required.
Risks: Smart contracts can be hacked, some yield farming apps may be scams, and market volatility can cause additional loss.
How “passive” is it really?: This can be a truly passive return, though users will need to put in some effort to deposit crypto via their personal digital wallet to participate.
Potential ROI: 20% APY or more, depending on the asset
Fees: Blockchain network fees will apply to deposits and withdrawals from DApps.
Running a Crypto Node
While becoming a Bitcoin miner can be a lucrative business, the competition has become so fierce that simply buying the hardware to mine for Bitcoin can cost tens of thousands of dollars (or more). In contrast, running a node for a crypto network is a more lightweight way to support the network and earn rewards or a portion of the fees collected.
A crypto node is a computer in the blockchain network that processes and validates transactions to help secure the network. On many blockchains, node operators are paid crypto rewards, giving an incentive to continue participating in the network.
To run a crypto node, you simply need to install the blockchain software on a computer and connect it to the internet. This software may be easy or difficult to install and set up, depending on the cryptocurrency project you are participating in. Once the node is operating, you will receive rewards based on the specific crypto project specifications and token rewards program.
Difficulty: Advanced. Deep knowledge of crypto and blockchain tech required.
Risks: May require up-front investment into cryptocurrency, and the node may not generate much income.
How “passive” is it really?: This requires a lot of up-front work to get running, and may require monitoring and maintenance, so not the most passive at first. Once the node is running, it can be a mostly passive endeavor.
Potential ROI: Varies by asset
Fees: There may be operating fees to run the hardware required (local or cloud based).
Crypto lending has become popular over the past few years, with many crypto lending platforms collecting billions of dollars in assets and generating serious revenue for lenders. Unfortunately, the mismanagement of user funds has caused a few of the most prominent crypto lending companies to become insolvent, freezing user assets and causing massive losses in the value of their native tokens as well. Both Celsius and Voyager Digital are currently dealing with solvency issues, and have locked user crypto accounts, effectively stopping users from withdrawing their crypto from the platform.
Nevertheless, there are still some reputable lending platforms that offer high interest rates on deposited cryptocurrencies, with decent protections in place.
To participate in crypto lending, you can find a crypto exchange or lending platform, choose your terms, and deposit funds onto the platform. You will earn interest on a regular basis (hint: look for platforms paying daily interest), and most accounts will compound over time. Funds are typically locked for a period of time, though some platforms allow you to withdraw at any time.
Risks: Accounts can be frozen (see: Celsius and Voyager Digital). Interest rates may change over time.
How “passive” is it really?: This is about as passive as it gets. Deposit crypto, earn interest.
Potential return (ROI): 20% APY or more, depending on the asset
Fees: There may be withdrawal fees charged by the platform.
Read more: Crypto Lending Explained
While mining cryptocurrency is still popular, it typically requires a lot of technical know-how and expensive hardware to become profitable. In light of the increased competition for Bitcoin mining and the expensive nature of setting up personal mining rigs, a number of cloud mining companies have launched, offering a lower-cost (and simpler) way of mining cryptocurrency.
Cloud mining companies are online-only platforms that allow you to sign up for a mining contract, lease hardware and electricity, and mine for crypto using the company’s assets. Many of these companies offer slick profitability calculators to quickly see how much hardware and power you need to pay for to become profitable, but there are also many scams as well.
Cloud mining companies may have hidden fees that eat into profitability, and some require a substantial up-front investment for the contract. And price volatility can drastically reduce mining profitability.
That being said, if you are interested in mining proof-of-work cryptocurrencies but don’t have the knowledge or time to set up your own mining rig, a reputable cloud mining platform may do the trick. Just make sure to do your research before signing a contract.
Difficulty: Easy. No prior knowledge of crypto required.
Risks: Some companies have hidden fees and require a large up-front payment.
How “passive” is it really?: This is a very passive investment, as the cloud mining company handles all the details.
Potential ROI: Varies by asset
Fees: There may be contract fees, withdrawal fees, and mining fees charged by the platform.
Yes, you can earn crypto passively, but realize that your crypto earnings are only as good as the underlying asset. Crypto is designed to offer an alternative investment to traditional finance, but as an asset class still in its infancy, there are many risks involved, including the risk of total loss of capital.
Crypto exchanges and lending platforms have made it easier than ever to put your cryptocurrency to work, but as always, research any investment heavily before putting your hard-earned crypto in anyone else’s hands. And the promise of high interest rates always requires a deeper dive into how those returns are possible.