It is better to invest in Bitcoin and cryptocurrencies at the beginning of the market cycle , because you can accumulate and wait quietly for the price to rise without worrying. If, in addition, the amount of cryptocurrencies increases as they appreciate in value, it is almost a gift.
Nothing has a risk 0 and less in cryptocurrencies, so first of all, you have to remember the number 1 rule of cryptocurrencies.
If they are not your keys, they are not your coins.
Andreas Antonopoulos
Cryptocurrencies are easy to use with basic knowledge. They are yours if you have the public key (it is shown to everyone, as a user) and the corresponding private key (it is not shown to anyone, like a password). If you have both, you can do whatever you want with them, it’s that simple.
Therefore, all the services in which you trust your keys and, therefore, your coins, are susceptible to being stolen or lost due to mismanagement. It is important that you analyze the security measures of the service where you have them stored, if you do not have the keys yourself.
The ways to get passive income are:
- Staking
- Exchange cryptocurrencies that pay out dividends
- Lend your cryptocurrencies with interest
1. Staking
All cryptocurrencies have a mechanism that secures the network so that repeated expenses of the same currencies do not occur and infinite inflation is created. The best known mechanisms are proof of work (Proof-of-Work) and proof of possession (Proof-of-Stake) .
Proof-of-work coins require expensive equipment to be assembled, make noise, use a lot of electricity, and require technical knowledge.
In contrast, coins that use the proof of possession mechanism require buying a quantity of coins and putting them to generate a return more easily. When you have coins that are securing the network, it is called ” staking “.
A few years ago, if you wanted to staking, most coins needed you to set up a team for this purpose. Nowadays, you can do staking from an exchange, with the risk that you do not have your private keys, and even from a physical wallet such as a Ledger or a Trezor , having control of your coins.
The amount of profit you can get varies by currency. Those that give a high yield are very attractive, but bear in mind that high inflation is a selling pressure and it is more difficult for the price to be sustainable over time. The inflation values that I think are viable are all those below 10% per year.
What cryptocurrencies have proof of possession?
In addition, in some cases the “dividend” payments are through another currency, as in the case of NEO, which pays the rewards in the GAS token. I do not recommend these cryptocurrencies for the purpose of generating passive income, because the benefits do not accumulate or compound interest is generated and you have to be aware of two assets.
I am going to give a few examples of the cryptocurrencies that have a proof of possession mechanism, their annual profit percentages and where you can staking. It is not a purchase recommendation, just a brief summary, but they are the ones that seem most interesting to me: Tezos , Algorand , Cosmos and Harmony .
Personally, I have Tezos and Harmony and am staking both.
| Currency | % Annual | Staking From Exchange | Staking From Wallet |
|---|---|---|---|
| Tezos (XTZ) | > 5.5 | Binance, Coinbase, Kraken, KuCoin | Ledger, Trezor, Mobile Apps and Desktop |
| Algorand (ALGO) | > 8 | Binance, Coinbase, KuCoin | Ledger, Mobile Apps and Desktop |
| Cosmos (ATOM) | > 6 | Binance, Coinbase, KuCoin, Poloniex | Ledger, Mobile Apps and Desktop |
| Harmony (One) | > 8 | Binance | Binance, Mobile Apps and Desktop |
Advice
Most of the coins that have proof of possession require that you install and have your wallet connected 24 hours a day. The ones that I have included in the table can give you dividends from a physical portfolio such as Trezor or Ledger , you have the keys and therefore they are the safest way .
They usually have a “maturing” period, so you will have to go for a while without receiving rewards. However, when you withdraw your coins from the wallet, you will continue to receive rewards for a period equal to what you expected.
Make sure that the payments are in the same currency as the one you have ensuring the network. All the ones I have included in the table above meet this requirement.
If you decide to staking from an exchange, distribute your funds in different wallets or online services, for security.
Remember that you will earn a percentage of the amount you have, the more coins, the more reward and vice versa. Compound interest is generated, as you have more, you get paid more .
In addition, an increase in the price of the asset can increase the value of both the initial investment and the dividends . However, the same happens if the price decreases, keep in mind that you may lose your investment.
2. Exchange cryptocurrencies that pay dividends
Some exchange cryptocurrencies have their own token that offers dividends from the commissions they earn, commission reductions or advantages when investing in IEOs (Initial Exchange Offerings) or initial coin offerings.
Exchanges always win, like casinos, so it is a fairly safe way to make passive income with cryptocurrencies. However, it has its associated risks:
- If the exchange loses volume, you will make less money and the value of the currency will likely decrease.
- If the exchange is hacked, you lose your coins.
- You are at the complete disposal of the business executives.
One of the best-known exchange tokens is Binance Coin , which is in the top 10 of the cryptocurrencies in market capitalization at the time this article was written. However, the cryptocurrency of the Binance exchange does not offer dividends , it only offers discounts and advantages on its IEOs.
List of high dividend exchange tokens
The advantage of these tokens over proof of possession coins is that they share part of the profits and can be higher percentages.
Although Binance Coin has no dividends, Kucoin and Bitmax have a high annual dividend.
In addition, an increase in the price of the asset can increase the value of both the initial investment and the dividends. However, the same happens if the price decreases, keep in mind that you may lose your investment.
The return of Bitmax is quite suspicious, so I recommend KuCoin Shares , staking or cryptocurrency loans with interest .
3. Cryptocurrency loans with interest
It consists of lending your cryptocurrencies to third parties in exchange for interest, like lifelong loans. Interest is payments in exchange for giving others the opportunity to create value.
In most they use central organizations that guard your assets and ensure that each party fulfills its obligations. DeFi, or decentralized finance , allows these processes to be carried out without third parties involved , through smart contracts.
You can lend your cryptocurrencies to earn interest in the following ways:
Ia. Loans in exchange to operate with leverage :
- Kraken
- Bitfinex
- Poloniex
Ib. Loans on exchanges automated by bots:
- Coinlend
- Cryptolend
II. “Conventional” financial services :
- Blockfi
- Celsius Network
III. Decentralized financial services :
- AVEE (LEND)
- Compound (COMP)
- Other platforms for making user-to-user loans without a central body (DeFi)
Ia. Exchange loans to operate with leverage
Loans on a cryptocurrency exchange so that other users can use leverage and trade a position larger than the funds they have.
Kraken
Under the “staking” tab, Kraken allows you to lend Bitcoin (XBT) , Dollars (USD) or Euros (EUR) in exchange for annual interest.
The loan is made directly into your leverage pool . Therefore, it is an annual fixed interest on the amount that you put at their disposal and they are in charge of lending it at the interest they deem appropriate.
The main advantage is that you do not have to worry about setting a rate nor do you have to be aware of whether the loan has ended . You put your coins at their disposal and they take care of the rest, although the interest is lower than in other exchanges.
The interests it provides are:
Bitfinex
Under the “Funding” tab, Bitfinex allows you to make your cryptocurrencies available to traders who want to use leverage.
You can define your own terms such as the interest rate , maximum loan duration , and amount . When a trader uses leverage, they use your cryptocurrencies to buy or sell another cryptocurrency (open a position). When closing the position, the money is returned to your wallet along with the interest, in the same currency as the loan.
The amount of interest you can earn is calculated:
Daily interest = Amount borrowed * defined rate * 0.85 * seconds borrowed / seconds a day has
In the following table you can see the calculation of the benefits that can be obtained by lending $10,000 with the interest rate of the day, of 0.017%.
| Initial Amount Borrowed |
$10,000 | |
| Interest Rate | 0.02% | |
| Loan Time (Days) | Interest ($) | Interest (%) |
| 1 | $2.01 | 0.02% |
| 2 | $4.02 | 0.03% |
| 3 | $6.03 | 0.05% |
| 4 | $8.04 | 0.07% |
| 5 | $10.05 | 0.09% |
| 6 | $12.06 | 0.10% |
| 7 | $14.07 | 0.12% |
| 8 | $16.08 | 0.14% |
| 9 | $18.09 | 0.15% |
| 10 | $20.10 | 0.17% |
| 365 | $733.65 | 6.21% |
During times of high volume and therefore high demand for loans to open positions with leverage, the rate is 3 – 5%. Therefore, at the right times you can easily double this amount of interest.
You don’t lose your money if the person who asked for the money loses it . Bitfinex users can only borrow a% of their account and if they are at a 33% loss, their position is closed and the loan is returned to you.
The main problem is that you have to be aware of whether the loan has ended and renew it. Consequently, it is no longer really passive income. Bots like Coinlend fix it.
Poloniex
Poloniex offers the possibility of lending your cryptocurrencies so that other people can trade with leverage.
Unlike other exchanges, Poloniex does not guarantee the safety of your funds and warns you that you may lose your money if borrowers liquidate in volatile markets. In times of high volatility, they may not jump the stops and may lose more money than they are required to return, so they have more associated risk than Kraken or Bitfinex.
At the time of writing the article, it offers the possibility of lending the following cryptocurrencies:
- Bitcoin (BTC)
- Dash (DASH)
- Litecoin (LTC)
- Stellar Lumens (XLM)
- Tether (USDT)
- Monero (XMR)
- Ripple (XRP)
- Ethereum (ETH)
- Ethereum Classic (ETC)
- EOS (EOS)
- USD Coin (USDC)
- Bitcoin Cash (BCH)
- Bitcoin SV (BSV)
- Cosmos (ATOM)
- Tron (TRX).
Annual interest percentages range from 0.03% for less demanding cryptocurrencies to 3% per year for Bitcoin or 7% per year for USDT.
Ib. Loans on exchanges automated by bots:
Loans in cryptocurrency exchanges through bots, to automate the loans and you can get passive income with real cryptocurrencies.
Coinlend
Coinlend is a program or bot that automatically lends your money on exchanges like Bitfinex , Poloniex or Liquid .
As I have discussed in your section, Bitfinex and Poloniex loans require you to update them periodically. It is a cumbersome process because you have to be aware of whether the loan has ended to set up a new one.
Bots like Coinlend allow you to automate it 24 hours a day, 7 days a week for a minimum commission of $ 4 per month and 5% of the interest generated. I have not tried it personally, but I am convinced that it has to be worth it.
Your money is stored in an exchange and, through an API, you give it permissions to access some functions of your account that you can control . So the real risk is the same as storing your coins on an exchange.
The accepted currencies are those that the exchanges have available for loans. The following image shows those available when the article was written.
Cryptolend
Cryptolend is an exchange lending bot much like Coinlend. It currently accepts the Bitfinex and Poloniex exchanges.
Connect the bot to your exchange account through an API and in a few clicks you have the bot configured to automate loans at the best possible prices.
The risk of losing your coins is the same as having your assets on an exchange. Although I still recommend saving your cryptocurrencies in a Trezor or Ledger , it is an easy way to get passive income with the assets you have on the exchange to trade or longer trades.
II. Conventional financial services
Blockfi
BlockFi offers loans in USD guaranteed by your cryptocurrencies.
They provide you with dollars in exchange for depositing Bitcoin (BTC), Ether (ETH), or Litecoin (LTC) as a refund guarantee.
Also, you can deposit certain cryptocurrencies to earn annual interest. The annual calculation is based on current rates and the payments received are added to the same account ( compound interest ).
The coins you can deposit are:
- Cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Paxos Standard (PAX)
- Fiat currencies: USD Coin (USDC), Gemini USD (GUSD)
The approximate annual interests for each of them are:
Celsius Network
Celsius network is a mobile application that allows you to deposit, transfer, lend and take loans of different cryptocurrencies.
They offer interest on loans of a large amount of cryptocurrencies. Interest varies depending on the cryptocurrency you lend, but the values range between 3% and 9%.
You can choose to charge the interest on your CEL token, which uses the Ethereum blockchain, or you can charge it on the asset you lend. The interests you receive are higher if you charge them in your token.
The following list shows the assets that can be lent, both cryptocurrencies and stablecoins.
- Cryptocurrencies : Bitcoin (BTC), Ethereum (ETH), Dash (DASH), Bitcoin Cash (BCH), Bitcoin SV (BSV), Litecoin (LTC), Ripple (XRP), Stellar Lumens (XLM), Omise Go (OMG) , Paxos Standard (PAX), Dai (DAI), Celsius (CEL), 0x (ZRX), EOS (EOS), Saga (SGA), Tether Gold (XAUT), Ethereum Classic (ETC) and Basic Attention Token (BAT) .
- Stable or tokenized fiat currencies : True USD (TUSD), Gemini Dollar (GUSD), USD Coin (USDC), Tether (USDT), TrueGPB (TGBP), TrueAUD, TrueHKD, TrueCAD, Binance USD (BUSD).
III. User-to-user loans without a central body
This method to get passive income with cryptocurrencies is one of the safest, as with staking, you can earn interest while maintaining total control of your cryptocurrencies.
AVEE (LEND)
Aave (AAVE) is an open source, non-custodial protocol that enables the creation of money markets. Users can earn interest on deposits and borrowed assets.
AAVE changes the user-to-user (P2P) lending protocol to a pooled strategy. Lenders provide liquidity by depositing cryptocurrencies in a shared group contract.
Simultaneously, in the same contract, pooled funds can be borrowed by placing a guarantee, in the form of cryptocurrencies. Loans do not need to be matched one-to-one, but are dependent on group funds, as well as loan amounts and collateral. This allows instant loans based on the status of the group.
Unlike conventional financial services , you do not send cryptocurrencies to anyone and, therefore, you maintain control of the private keys of your cryptocurrencies . You can use wallets like Metamask or even Ledger . In this way, you lend your assets to get performance from them safely and without worry .
The returns it offers are between 0 and 13% and the assets it allows to lend are:
- Cryptocurrencies : Ethereum (ETH), Dai (DAI), ETHLend (LEND), Basic Attention Token (BAT), Enjin Coin (ENJ), Ren (REN), Kyber Network (KNC), Chainlink (LINK), Decentraland (MANA) , Maker (MKR), Augur (REP), Synthetix Network Token (SNX), Wrapped Bitcoin (WBTC) and 0x (ZRX).
- Stable coins or tokenized fiat currencies : True USD (TUSD), sUSD (SUSD), USD Coin (USDC), Tether (USDT) and Binance USD (BUSD).
Compound (COMP)
Compound (COMP) is a decentralized lending application that uses the Ethereum blockchain. Essentially, anyone who owns an accepted cryptocurrency can deposit it into a Compound smart contract, where it joins a pool and starts earning interest.
This interest comes from other users who borrow funds and pay interest on the loans. However, unlike banks, when you withdraw the funds, they do not stop earning interest.
When you deposit funds in Compound, the protocol generates tokens for you. If you deposit Ether (ETH), you receive an amount of cETH, which you can use as collateral (or surety) to request a loan and spend the funds while earning you interest.
The interest earned is regulated by smart contracts, based on supply and demand. If there are a large number of people borrowing a particular asset, the smart contract will increase the interest rate to attract lenders and make it more expensive to obtain a loan.
Compound currently supports assets:
- Cryptocurrencies: Ethereum (ETH), Dai (DAI), Basic Attention Token (BAT), Augur (REP), Wrapped Bitcoin (WBTC) and 0x (ZRX).
- Stable currencies or tokenized fiat currencies: USD Coin (USDC) and Tether (USDT).
Other platforms for making user-to-user loans without a central body (DeFi)
DeFi or decentralized finance is all the rage and there are many similar projects trying to take the lead in the sector.
Here is a non-exhaustive list that will grow in the near future. I have not personally checked if they are reliable, if they are scams and I do not gain anything by mentioning them.
- Kava
- Nexus
- EOSRex
- Fulcrum
- NUO Network
- Voluto
- PoolTogether
- Dharma
- dYdX
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