Do you want to learn how to use cryptocurrency to make passive income? From staking to yield farming to liquidity provision, there are many options. Discover more in our guide.

Can you make passive income with crypto?

You can use cryptocurrency to generate passive income, yes! In fact, several cryptocurrency interest-bearing platforms offer interest rates that are significantly higher than those offered by traditional financial institutions, with triple-digit interest rates for many well-known currencies.

How to earn passive income from crypto

There are many ways to get passive income from Defi and crypto, therefore to assist you in getting started, we’ve compiled the top 7 methods, which include the following:

  1. PoS staking
  2. Crypto interest-bearing platforms
  3. Liquidity provision
  4. Lending crypto
  5. Yield farming
  6. Dividend earning tokens
  7. NFT staking and rentals

PoS staking

In search of cryptocurrency passive income? One of the most well-liked methods for generating passive income from dormant cryptocurrency assets you hold is through staking, and there are many proof of stake blockchains to choose from.

You can learn more about crypto staking and how it works in our guide, but in brief, crypto staking involves investors pledging their crypto to help validate transactions on a given blockchain as part of the blockchain’s consensus mechanism.

While running a validator node is a bit more technical, with most blockchains, there are simpler options for staking your crypto including staking through a centralized exchange and delegating your crypto to stake using a non-custodial wallet.

Once you’ve staked your crypto, you’ll start earning passive income from your crypto. Rewards vary depending on the blockchain, but APY is up to 75% depending on the blockchain.

Crypto interest-bearing platforms

Crypto interest-bearing platforms essentially work like savings accounts for your crypto – except in most instances the interest rates offered are far higher than you’d find with savings accounts from traditional financial providers like banks, making them a popular option for earning passive income from crypto.

Crypto interest-bearing platforms reached peak popularity in 2022 before many of them came crashing down due to unsustainable yields offered, and in fact, many collapsed platforms have now been accused of outright criminal behavior. All this to say, you should always DYOR when choosing a crypto interest-bearing platform and remember that if it sounds too good to be true (like insanely high yields) then it probably is.

With the word of warning out the way, some of the most popular and trusted options to earn crypto interest include:

Liquidity provision

Liquidity providers provide a vital function for dApps, as without them there would be no crypto for investors to trade or otherwise transact with on the platform. And they’re rewarded for their service with a percentage of the fees, as well as sometimes other tokens – like governance tokens. This is also sometimes known as liquidity mining, but it’s the most popular way to earn passive income from crypto in the decentralized space.

It’s easy to become a liquidity provider for decentralized exchanges and other decentralized platforms. All you need to do is have a non-custodial wallet, go to the app you’d like to provide liquidity for, find the pool you want to provide liquidity for, and connect your wallet. You’ll generally need to provide two tokens for a given pool, for example, USDT & ETH.

Once you’ve added your liquidity to the pool, you’ll usually receive liquidity pool tokens in return, representing your capital in the pool. Generally, these LP tokens will accrue value as you earn fees related to the pool, but depending on the protocol you may also earn additional tokens. When you want to remove your capital, you’ll just trade these tokens back for your crypto.

Some of the most popular platforms to provide liquidity on include:

  • Uniswap
  • SushiSwap
  • PancakeSwap

A little word of warning on liquidity provision though, there is a unique risk that comes in the form of impermanent loss. It’s effectively an opportunity cost, but it’s still well worth being aware of before you dive in.

Crypto lending

Just like banks earn interest on loans, you can too in the cryptoverse – and there are plenty of lending platforms to pick from including centralized lending platforms and decentralized lending platforms.

For centralized lending platforms, you’ll find most lending products in the ‘earn’ sections and they may even cross over with the interest-bearing platforms we’ve mentioned already as lending is one of the most common ways to earn interest on your crypto. Currently, some of the most popular centralized crypto lending platforms are offering APY of up to 32%, and include:

Lending is also a popular way to earn passive income from crypto in the decentralized market as well. Much like with the liquidity provision platforms we mentioned above, with decentralized crypto lending platforms usually works by depositing your capital into a given pool or protocol, after which, you’ll generally receive tokens representing your capital. Many of these platforms, including Compound Finance, also reward investors with additional governance tokens which may then be sold, staked and so on.

Some of the most popular decentralized crypto lending protocol include:

Yield farming

In crypto, yield farming refers to the compostability of dApps – which is a bit of a mouthful so let’s break it down with an example.

You want to earn passive income from your crypto, so you decide to stake your ETH using a decentralized protocol Lido. When you stake your ETH with Lido, you don’t lose liquidity, as you receive stETH tokens (a kind of token representing your staked ETH in the pool).

You’ll accrue staking rewards already, but you want to earn even more, so you head over to Curve Finance, a decentralized automated market maker. You can add your stETH to the pool to provide liquidity here, allowing you to earn even more income from one asset. In fact, if you provide liquidity to certain pools on Curve, you’ll be additionally rewarded with CRV tokens, which you could then go on to stake for rewards in Convex Finance and other platforms.

It’s this interoperability that allows DeFi investors to effectively earn compound interest, and the highest yields available. Each investor has their own strategy when it comes to yield farming, but some popular options to explore include:

Dividend earning tokens

Just like a company may distribute profits to shareholders in dividends, there are some specific cryptocurrencies that work in a similar way, allowing you to earn passive income just by holding a particular cryptocurrency.

In most instances, these dividends are a share of trading fees or profits on a given platform, though the way rewards are payed out varies. For example, AscendEX has the ASD token and ASD holders earn dividends through automatic airdrops. Meanwhile, KuCoin has the KCS token and KCS holders are paid daily dividends in KCS, based on 50% oil of the fees from users on KuCoin.

Some of the most popular dividend earning tokens include:

Earn passive income with NFTs

Got NFTs? You can even earn passive income from NFTs with some new and innovative protocols popping up in the decentralized market.

One such example is reNFT, an NFT rental protocol, where investors can loan (or rent) NFTs for a given time. If your first question is why would anybody rent an NFT, then you’re not the only one. But there’s plenty of use cases, including renting gaming NFTs for a particular purpose, event ticket NFTs for access to particular pre-sales and so on, virtual land NFTs, and more.

Some of the most popular platforms to earn passive income from NFTs include:

How to pick a platform

You need to be careful when choosing a platform to lock up your crypto with to earn passive income. Each platform has its own pros and cons. You should consider:

  • Centralized or decentralized: There are centralized and decentralized options available to earn passive income from your crypto – both with unique benefits and risks. With centralized platforms, you no longer hold custody of your crypto, meaning if the platform collapsed, your crypto may go with it. Whereas with decentralized platforms, you retain custody (or a token representing your capital) of your crypto. This said, decentralized platforms are more prone to hacks, rug pulls, and other risks, whereas centralized platforms often offer principal-protected investments.
  • Reputation and trustworthiness: Reputation matters in crypto. You should always thoroughly research any platform or protocol you’re using before investing to make sure you understand the risks involved, how the platform or protocol is perceived by the wider community, and more.
  • Strong knowledge of protocol and risks: Yield farming, liquidity provision, and decentralized lending sound great, but a lot of these protocols aren’t made for beginners. You need to have a firm understanding of how the protocol works, so you can safely move your capital in and out as you wish.
  • Principal-protected investments: Some centralized platforms offer what’s known as principal-protected investments. This means that regardless of what happens in the market, you’ll receive the same number of tokens that you deposited as well as the minimum yield determined. In a volatile market, this can be extremely appealing to investors.

Is passive income from crypto taxable?

Now for the bad news – it’s likely your passive income from crypto is taxable.

While tax offices like the IRS haven’t yet released guidance on a huge number of crypto investments, including many of those mentioned in this guide, they are clear that crypto may be taxable. Generally, tax depends on how you’re seen to be earning.

So if you’re earning new tokens – like from staking – this is generally seen as additional income and subject to Income Tax on receipt based on the fair market value of your tokens in your fiat currency at the point you received them.

Meanwhile, if you’re trading tokens – like with liquidity provision, lending, or yield farming – this may be seen as a crypto-to-crypto trade and, in most instances, any gain from a trade is subject to Capital Gains Tax.

FAQs

More questions about crypto passive income? Here are the answers to some of the most common.

What are the interest rates on crypto?

This very much depends on the platform you’re using and the cryptocurrency you’re looking to invest. For more popular cryptocurrencies like Bitcoin and Ethereum, the interest rates tend to be lower, but the investments are less risky. Meanwhile, for lesser-known cryptocurrencies, or riskier investments, the interest rates are often much higher, sometimes reaching triple digits!

What are the risks of interest-bearing crypto platforms?

The main risk of interest-bearing crypto platforms is that you need to trust the platform you’re using. With centralized platforms, that platform holds custody of your crypto, so if it goes down, your crypto goes down with it – and this was the case for many notable interest platforms like Celsius and BlockFi. With decentralized platforms, you still retain custody of your crypto (or an equivalent token representing it) so this risk is reduced. There are however other unique risks for decentralized platforms including impermanent loss, rug pulls, hacks, and so on.

Recommended Posts