How to Earn Passive Income with Cryptocurrencies
This article first appeared at CoinCentral.com – by:
Traditional investors (and our friends at the IRS) differentiate capital investments and passive investments based on where the investor derives his/her literal returns. A return realized on the sale of an investment asset (say, selling an ICO token after it rose in value), is considered a capital investment. A return, or income, realized independently of an asset bought or sold is considered an income or passive investment. The clearest cut example from traditional finance is stock dividends.
Passive income is the most highly sought-after form of investment since it’s the literal actualization of “your money working for you.” Yet passive income is notoriously hard to attain. From Airbnb, to blogging with affiliate links, to collecting stock dividends, to franchising, to leasing real estate, passive income is really hard to capitalize on and often becomes less passive than intended. Additionally, passive income often requires large upfront capital and more importantly, time, yet often returns less than ideal rewards.
Thankfully, a few pioneers from crypto-world are turning the tide by offering a few different methods that resemble income and passive investments.
*Note: This is not investment advice, and is for informational purposes only.
Different Ways Of Earning Dividends In Crypto
The following is a list of the general ways a cryptocurrency can offer passive income:
- Staking – holding a Proof-of-Stake coin in a special wallet
- Master Node – controlling a Masternode
- Utility Tokens – holding tokens designed for periodic income
Blockchains and cryptocurrencies use special algorithms, known as consensus algorithms, that mathematically determines the next block producer. Bitcoin introduced the most popular type of consensus algorithm known as Proof-of-Work (mining).
However, an alternative consensus mechanism known as Proof-of-Stake, has also gained some popularity. Which leads us to door number one for creating passive crypto income: staking.
In Proof-of-Stake, new blocks are created by holding cryptocurrencies in a staking wallet. A staker puts up a stake (coins), or locks up a number of their coins, to verify a block of transactions. Ideally, the more coins one stakes, the bigger the chances are that one will be awarded with a block reward.
Some coins require a 24/7 connection and power-source, while others require very literally just holding coins in a special wallet. From my research, NEO takes the cake in terms of lowest barrier-to-entry both fiscally and technically wise. All it took was downloading the official City-of-Zion NEON wallet and transferring purchased NEO from an exchange to said wallet.
That’s it! As long as I keep my NEO in the official wallet it’s already staked — no additional steps necessary and I can claim my staked rewards (in GAS) up to every 5 minutes. As far as the “passive” part of passive investment goes, PoS certainly fits the bills.
Other cryptocurrencies offering staking rewards are Lisk, NavCoin, Decred, and ARK.
Method number two for leveraging an income stream from crypto-holdings more resembles traditional passive income as it typically requires a substantial amount of startup capital. A growing number of crypto-projects have two or more layers of governance — with the upper, higher-power layer, or node, commonly referred to as the masternode.
These masternodes usually provide some additional governing effort to it’s underlying crypto-community. Some examples are actively/passively voting on software updates, verifying private/instant transactions and participating in community events.
Holders of master nodes are usually rewarded handsomely. For example, in Dash, masternodes receive a whopping 45% of the block reward on every single new block. The official Dash website claims that “typically, around 2 Dash (~$369) is paid to each masternode every 7 days.”
What’s the cost to own a master node you say? Well, that depends on which coin we’re discussing – to continue with Dash, a masternode costs 1000 Dash locked up for a fixed period of time. Unfortunately, not many crypto-enthusiasts have ~$185K liquid lying around that they’re willing to tie to a single coin.
This final category represents the widest range of projects as each passive income derives its value from the success (or failure) of a tokens main utility; the core difference between the PoS model previously defined and this utility token model stems from exactly which part of the cryptocurrency project correlates with the decrease or increase in the dividends.
PoS rewards are derived from a cryptocurrency protocol in an almost-standard way, while utility tokens rewards are derived from a cryptocurrencies transactional purpose.
An example is the decentralized blockchain asset exchange CryptoBridge DEX. DEX is an exchange, which means that in order to succeed as a project, DEX seeks long-term growth in terms of exchange volume: the more traders and capital are using DEX, the more transaction fees will be collected. Additionally, the team distributed an accompanying token named BridgeCoin (BCO) on the Bitshare blockchain. through a public mine over the course of six months,
By purchasing and staking BCOs on the DEX exchange, holders are rewarded to a whopping 50% of transaction fees (after-profit*). Even more interestingly, the rewards received from BridgeCoin are not paid out in BridgeCoin, but in the transaction pair that resulted in the transaction fee. If only strictly Bitcoin, Litecoin, Monero and Ethereum are traded on DEX, then the bi-weekly staking rewards would be strictly in Bitcoin, Litecoin, Monero, and Ethereum, not in BridgeCoin – a pretty nifty way to passively grow a diverse portfolio.
Dex/BCO are only one of many utility tokens such as COSS, Kucoin, who’s main business function correlates with an increase/decrease in dividends. As more blockchain teams rush to disrupt archaic business models, it’s likely a growing amount will award dividend-like financial rewards tied to their business model.
Ultimately, the cryptocurrency space still resembles the Wild West – volatility and clickbait headlines will continue to dominate the scene for the foreseeable future. However, slowly but surely, stability will provide a pathway for passive income vehicles with growth potential unlike the previous era of standard dividends. For now, Proof-of-Stake, Masternodes, and a growing number of utility tokens lead the way for the first generation of passive income cryptocurrencies. Undoubtedly a few of these projects will fail, however, those that don’t will surely pay out a cushy income stream in the decades to come.