How to Earn Passive Income Through Crypto

Cryptocurrency is a unique financial instrument that enables anyone with an internet connection to participate in a distributed economy through online brokers, crypto exchanges, or DeFi platforms—including 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 a few ways to earn passive income using crypto.

Yield-Farming

Some decentralized finance (DeFi) platforms and decentralized exchanges (DEXs) allow users to earn money like a bank by participating directly in a lending process. Yield farming techniques let users connect their cryptocurrency wallets and commit coins and tokens to a lending 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, amount, and interest rate. The top lending platforms in 2023 were Uniswap, Curve, and Balancer.

Many DEXs also provide liquidity pools, where users stake their cryptocurrency in a pool. These pools allow other users to have faster transactions so they can take advantage of fluctuating prices. Liquidity providers generally earn a percentage of the cryptocurrency they have locked into the pool.

Some exchanges you can yield farm on by providing liquidity are Uniswap, Pancakeswap, and Sushiswap.

Mining

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 a process called proof-of-work (PoW). Proof-of-work is basically a race where miners compete against each other to find the encrypted solution to the block, which acts as proof of the work to validate the information in it. 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 dedicated graphics processing unit (GPU) and some computer and programming skills. Some pools provide executable programs that guide you through the setup process.

Many minable cryptocurrencies have periodic events where the block reward is reduced. Bitcoin's reward is cut in half about every four years; Litecoin is on a similar schedule but reduces its reward by 20%. This means that as time passes, mining becomes less profitable because operating costs remain the same (or increase) while fewer coins are available.

Staking

Proof-of-work isn't the only way of getting new coins. Proof-of-stake (PoS) blockchains exist, where cryptocurrency owners "stake" their coins to participate in the network's validation and consensus process. Stakers receive fees for the work done in return.

You don't need the same tech know-how to stake crypto as you do for other methods. Some exchanges allow you to stake and receive rewards if you hold an eligible currency in your account. For other currencies, you only need to hold the crypto in a compatible software or hardware wallet to earn staking rewards.

On some blockchains, like Ethereum, you can delegate your ether to a validator node, which earns rewards and pays those who have delegated their ether. You can also join staking pools, which pay out depending on the rules of the pool. These functions are not built into the blockchain but are provided for by other parties that have created these abilities.

Play-to-Earn Games

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.

Crypto Passive Income Risks

As with all investment opportunities, there are risks involved with generating passive income using cryptocurrency.

Security

Digital currencies are a favorite target for hackers and thieves because they are new and valuable, and the technology supporting them is still under development. Exchanges are constantly under attack by hackers and thieves.

Attacks can be, but are not always, directed at the exchange. For instance, in July 2022, a liquidity provider on the Uniswap platform fell victim to a phishing scam and ended up providing approval for transactions on fraudulent positions.

Volatility

It's no secret that cryptocurrency prices are volatile and subject to the same risks as traditional high-risk investments. Prices sometimes swing thousands of dollars daily, impacting your invested capital or profitability.

Crypto markets have responded wildly to news and regulatory developments in the past—press releases have resulted in large price swings from exuberance and fear.

Losses

Cryptocurrencies might not give you the returns you expect, so you might need to invest even more to make the yields worth it. If you do invest in enough crypto to earn yields that are worth it, you could lose a large amount of capital if prices suddenly drop and don't recover.

Associated Costs

Competitive mining equipment is expensive, as are the energy costs associated with running it. You might never break even if you're trying to mine Bitcoin or other minable cryptocurrencies because enormous mining farms corner the mining networks. Pool payouts are generally per share of work done, so unless you have a powerful miner contributing a lot of work to the pool, your shares will be minimal.

Fakes

Many DEXs provide yield-farming opportunities, but it is difficult to tell whether tokens are real because they and the exchanges are not regulated. You'll need to conduct your research to ensure you invest in something real, and even then, you might get fooled.

Some of these fakes are very convincing, with websites, whitepapers, chain explorers, metrics, and seemingly active development communities.

The Bottom Line

You can earn passive income using crypto as an 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.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.