Cryptocurrency is a unique financial instrument that enables anyone with an internet connection to participate in a distributed economy. That includes opportunities to earn passive income. There are unique risks associated with investing and earning with cryptocurrency, even though it may seem like a bank account or social lending platform.
Here’s a closer look at earning passive income through crypto.
- Cryptocurrency can be used to earn interest through the distributed finance economy.
- Anyone in the world with the right accounts or technical knowledge can participate.
- Cryptocurrency lending and earning platforms feature unique risks and are not insured or backed by any government agency.
The decentralized finance (DeFi) platforms give you the power to earn money like a bank by participating directly in a lending process. Here, users connect their cryptocurrency wallets and commit coins and tokens to a pool with others. That pool is then used to lend to others for interest and fees. The users are sometimes paid for participating in the lending process or given interest on the amount they stake or hold in their account. The amount earned from lending crypto depends on three factors: the loan's duration, the loan's amount, and the interest rate.
The backbone of cryptocurrency is blockchain, and it takes many computers working in parallel to create a secure, working chain. Behind many of the most popular currencies, including Bitcoin and Litecoin, is an algorithm called proof-of-work (PoW). Under proof-of-work, participants around the world called miners compete against each other to find the encrypted solution to the block. The winner earns the reward of cryptocurrency.
If you have a spare computer at home, you can turn it into a miner and join a mining pool. This usually requires a graphics processing card (GPU), some computer and programming skills, and knowledge about configuring a client application to connect to a hosted one.
To have a chance to earn any cryptocurrency, you'll need to join a pool and take advantage of its combined processing power.
Proof-of-work isn’t the only way of getting new coins. A large competitor is proof-of-stake (PoS). Cryptocurrency owners who stake their coins are allowed to participate in the network's consensus process and receive fees for the work done in return.
You don’t need the same tech know-how to stake crypto. Some exchanges enable staking automatically if you hold an eligible currency in your account. For other currencies, you will need to hold the crypto in a compatible software or hardware wallet to earn staking rewards.
You can also earn passive income by playing online games. There are many play-to-earn crypto games available today, and each one is unique. Some of the more popular ones are Axie Infinity and Decentraland. In the Philippines, these games became so popular during the pandemic that they became a source of income for those who lost their jobs.
Who Pays Interest on Cryptocurrency?
Every defi platform is a little different. Funds generally come from cryptocurrency network fees, interest paid by borrowers, or interest paid by the platform itself.
Is Cryptocurrency Income Taxable?
Income is taxable no matter what the source is. If you've held a cryptocurrency for more than one year and cashed it in for an increase in value, it's considered a capital gain. It's best to consult with a tax professional or use tax software to learn how to handle cryptocurrency income and whether it’s taxed in your situation.
What Portion of My Portfolio Should Be in Cryptocurrency?
Everyone has unique investment goals and risk tolerance. Cryptocurrency isn’t for everyone, and there’s no right or wrong answer to the percentage of your portfolio that belongs in crypto. If you’re not sure how to proceed, it may be best to work with a financial advisor with more understanding of the nuances of investing.
The Bottom Line
Passive income through crypto is easy to earn and an interesting opportunity to diversify your investments and earnings. With high rates that far outpace what you get from a bank, you may be drawn to the excitement of the cryptocurrency world. If you time it right and your crypto investment increases in value, you are double-dipping with interest and investment gains.
However, there’s also a significant risk of losses, and many investors have felt the pain of a cryptocurrency platform bankruptcy and the decline in value of their overall crypto portfolio. Everyone’s risk tolerance and investment goals are unique, so it’s up to you, and perhaps a trusted financial professional, to decide the right balance of crypto income investments—if any—that makes the most sense for your portfolio.