Cryptocurrencies offer exciting opportunities to grow your wealth with minimal barriers to entry – all you need is an internet connection. While the majority of crypto-activity is focused around trading coins like Bitcoin or Solana, investors like you are looking for ways to generate a passive income by letting their digital assets work for them.
In this article, we’ll explore the best methods for generating passive income with crypto, including staking, yield farming, and crypto lending. We'll explain how each method works, highlight the benefits, and discuss the risks, so you can make informed decisions. Whether you're experienced or new to crypto, these strategies can diversify your investments and boost your returns.
Passive Crypto Income Overview
<figure class="block-table">
<table>
<tr>
<th>Method</th>
<th>Pros</th>
<th>Cons</th>
<th>Efficiency</th>
</tr>
<tr>
<td>Staking</td>
<td>Relatively low risk compared to other methods. Regular and predictable rewards. Supports the network’s security and operations.</td>
<td>Requires a significant initial investment. Some staking platforms lock funds for a fixed period. Returns can be affected by network performance and token price fluctuations.</td>
<td>Moderate to high, depending on the network and staking conditions.</td>
</tr>
<tr>
<td>Yield Farming</td>
<td>High potential returns. Flexibility to switch between platforms for better yields.</td>
<td>High risk due to volatile markets and smart contract vulnerabilities. Complexity in managing multiple platforms and assets. Potential for impermanent loss.</td>
<td>High, but highly variable.</td>
</tr>
<tr>
<td>Crypto Lending</td>
<td>Stable and predictable interest income. No need to sell assets to earn returns.</td>
<td>Counterparty risk if the borrower defaults. Platform risk if the lending platform faces liquidity issues.</td>
<td>High, with consistent returns.</td>
</tr>
<tr>
<td>Liquidity Pools</td>
<td>Earn trading fees in addition to rewards. Supports decentralized exchanges (DEXs) and DeFi ecosystems.</td>
<td>Impermanent loss risk. Complex management and monitoring required.</td>
<td>Moderate to high, dependent on trading volume and pool performance.</td>
</tr>
<tr>
<td>Masternodes</td>
<td>High rewards for running a node. Contributes to network governance and stability.</td>
<td>High initial investment and technical knowledge required. Ongoing maintenance and operational costs.</td>
<td>High, but requires significant initial and ongoing investment.</td>
</tr>
<tr>
<td>Dividend-Paying Tokens</td>
<td>Regular dividends in the form of additional tokens. Participation in the success of the underlying project.</td>
<td>Dividend amounts can vary based on project performance. Risk of project failure or token devaluation.</td>
<td>Moderate, depending on the project's success.</td>
</tr>
<tr>
<td>Cloud Mining</td>
<td>No need to purchase or maintain hardware. Potential for steady income.</td>
<td>High risk of scams and unreliable providers. Lower profitability due to service fees and reduced mining rewards.</td>
<td>Low to moderate, dependent on mining conditions and service provider.</td>
</tr>
<tr>
<td>NFT Royalties</td>
<td>Continuous income from secondary sales. Supports the creative economy.</td>
<td>Highly speculative and dependent on the popularity of the NFT. Market for NFTs can be volatile and illiquid.</td>
<td>Variable, based on NFT demand and resale activity.</td>
</tr>
<tr>
<td>Crypto Savings Accounts</td>
<td>Predictable interest earnings. Simple and user-friendly.</td>
<td>Interest rates can be lower than other methods. Risk of platform insolvency or hacking.</td>
<td>High, with consistent and predictable returns.</td>
</tr>
</table>
</figure>
Understanding Passive Income in the Crypto World
Passive income refers to earnings derived from an enterprise in which a person is not actively involved. In the context of cryptocurrencies, passive income can be generated in several ways, including staking, lending, mining, supporting the network and more. The key is to understand the process and choose the method that best suits your investment goals and risk tolerance.
The potential returns from generating passive income with cryptocurrencies can vary widely. Staking and lending can provide regular interest payments, while mining offers rewards in newly minted coins. The returns are influenced by factors such as the cryptocurrency's price movement, network demand, and your level of participation.
<div fs-richtext-component="info-box" class="info-box protip"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4b151815fb0be48cec_Lightning.svg" loading="lazy" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">To effectively generate passive income, we recommend diversifying your strategies, staying informed about the crypto market and regularly reviewing your progress.</p></div></div></div>
Staking
Staking is a popular method for generating passive income due to its relatively low risk compared to other methods. It involves holding and locking up a certain amount of cryptocurrency in a wallet to support a blockchain network's operations and security.
Your participation in a proof-of-stake network earns regular and predictable rewards, which makes staking an attractive passive income option if you’re looking for stability.
Depending on the blockchain, staking can require a significant initial investment, and some staking platforms lock funds for a fixed period thereby limiting liquidity. Additionally, returns from staking can also be affected by the performance of the network and fluctuations in token prices.
Despite these drawbacks, we’d rate staking’s efficiency as moderate to high, depending on the specific network and its conditions.
Factors Influencing Returns
- The more participants staking, the more diluted the rewards can become.
- Longer staking periods can yield higher returns, but may also lock your funds for longer.
- Changes in the market value of the staked tokens can significantly impact the actual value of returns.
- Fees charged by staking pools or platforms can reduce the net returns.
- Longer lock-up periods may offer higher returns but reduce liquidity.
How to Get Started
- Choose a cryptocurrency that supports staking, like Ethereum 2.0, Cardano (ADA), or Polkadot (DOT)
- Set up a staking-compatible wallet and transfer your cryptocurrency
- Delegate your tokens to a pool or stake independently, following network-specific instructions.
- Lock your tokens in the staking wallet and begin staking.
- Periodically claim your staking rewards according to network procedures.
Yield Farming
Yield farming involves lending or staking cryptocurrencies in DeFi platforms to earn returns, often through interest or additional tokens, by providing liquidity to various protocols. It is an attractive method for generating passive income due to its high potential returns and the flexibility to switch between platforms to find the best yields. You can maximize your earnings by moving assets to more profitable opportunities as they arise.
However, yield farming comes with significant risks based on the volatile nature of crypto markets and vulnerabilities in smart contracts, which can lead to losses. There is also the risk of impermanent loss, where the value of assets in liquidity pools can fluctuate compared to the same asset being held outside the pool.
We’d describe yield farming as an advanced passive income strategy suitable for higher risk tolerances. Its efficiency and returns can be quite high but are very dependent on individual strategies and a good understanding of the DeFi landscape.
Factors Influencing Returns
- Different platforms offer varying yield rates, incentives, and rewards structures.
- Price volatility influences returns, with more stable assets providing steadier returns.
- Transaction fees, platform fees, and gas fees reduce net returns.
- Vulnerabilities or hacks in smart contracts can lead to significant losses.
- The length of time assets are committed to yield farming can influence returns, with longer durations often leading to higher cumulative rewards.
How to Get Started
- Choose reputable DeFi platforms like Uniswap, Aave, or Compound.
- Use a secure wallet such as MetaMask or Trust Wallet.
- Transfer crypto to your wallet and link it to the DeFi platform.
- Select a liquidity pool based on potential returns and asset stability.
- Deposit your assets into the pool.
- Periodically claim and reinvest or diversify rewards.
Crypto Lending
Crypto lending lets you earn stable and predictable interest income without having to sell your assets. You can generate passive income by lending your cryptocurrency to borrowers through platforms like BlockFi, Celsius, or Nexo. The main advantage is the ability to retain ownership of your assets while still earning returns.
But this method comes with its own set of risks. There is counterparty risk, where the borrower may default on the loan, and platform risk, where the lending platform could face liquidity issues impacting your returns.
Despite these risks, we view crypto lending as an attractive option for those looking to earn passive income in the crypto space while maintaining control over their investments.
Factors Influencing Returns
- The interest rates offered by lending platforms can vary significantly.
- Higher demand for borrowing specific cryptocurrencies lead to better interest rates for lenders.
- The stability and reputation of the lending platform affects returns and risk levels.
- Longer loan terms can lock in higher interest rates but reduce liquidity.
- The risk profile of borrowers impacts the likelihood of defaults and the interest rates offered.
- The type and amount of collateral required by the platform impacts loan security.
- Fees charged by the lending platform reduce net returns.
How to Get Started
- Choose a reputable crypto lending platform like BlockFi, Celsius, Nexo, or Aave. Compare their interest rates, terms, and security measures.
- Transfer your crypto from your wallet to the lending platform.
- Select the lending terms that suit your preferences. This includes deciding on the duration and the amount to lend.
- Initiate the lending process by following the platform’s instructions. Your crypto will be lent out to borrowers, and you’ll start earning interest.
- Regularly check your account and withdraw your earned interest or reinvest it to compound your returns.
Liquidity Pools
Liquidity pools are a way to provide liquidity to decentralized exchanges (DEXs) and DeFi ecosystems. By contributing to liquidity pools, you can earn passive income from trading fees in addition to potential rewards.
This method comes with the risk of impermanent loss, where changes in the prices of pooled assets can lead to lower returns compared to simply holding the assets. Managing and monitoring liquidity pools can also be a complex task, as it requires constant attention to market conditions and pool performance.
Still, the efficiency of liquidity pools can range from moderate to high, largely depending on trading volume and the performance of the specific pool. If you’re willing to navigate the complexities and risks, liquidity pools offer a compelling opportunity to earn passive income while contributing to the growth and stability of decentralized finance.
Factors Influencing Returns
- Higher trading volume generates more fees.
- The types and ratios of assets in the pool affect stability and returns.
- Fees collected from trades in the pool directly contribute to returns.
- Additional incentives or rewards offered by the platform can boost returns.
- Fees charged by the platform can reduce net returns.
- Larger pools may dilute individual returns but provide more stability.
How to Get Started
- Pick a DeFi platform like Uniswap, SushiSwap, or Balancer. Compare their liquidity pools, rewards, and fees.
- Link your wallet to the chosen DeFi platform by following their connection process.
- Choose a liquidity pool that matches your cryptocurrencies and offers favorable returns.
- Deposit your tokens into the liquidity pool by following the platform's instructions. Ensure you understand the pool's terms and potential risks.
- Regularly check your liquidity position, returns, and the pool's performance. Be aware of market conditions that might affect your investment.
- Periodically claim any earned rewards or trading fees. Some platforms require manual claiming, while others distribute automatically.
- Decide whether to withdraw your liquidity and rewards or reinvest them into the pool or other opportunities.
Masternodes
Running a masternode offers high passive rewards by facilitating instant transactions, enhancing privacy, participating in governance and voting, and improving network stability and security. However, it requires a significant initial investment and technical knowledge, which is a barrier for many potential participants.
Additionally, there are ongoing maintenance and operational costs that must be managed to ensure the node runs smoothly.
If these benefits and requirements fit your profile, masternodes can be a highly effective method of generating a passive crypto income.
Factors Influencing Returns
- The overall health and activity level of the blockchain network.
- The number of rewards allocated per block and their distribution among masternodes.
- The cost of acquiring the required number of tokens to run a masternode.
- Expenses related to running and maintaining the server, such as electricity and hosting fees.
- Consistent operation and availability of the masternode, as downtime can lead to missed rewards.
- The number of active masternodes, which can affect the share of rewards each node receives.
- Changes in network policies or reward structures decided by the community or developers.
How to Get Started
- Pick a cryptocurrency that supports masternodes, such as DASH, PIVX, or Zcoin. Consider factors like initial investment, rewards, and network stability.
- Set up a reliable server to run the masternode. This can be a dedicated physical server, a Virtual Private Server (VPS), or a cloud server.
- Download the official masternode software from the project's website. Follow the instructions to install and configure the software on your server.
- Transfer the required tokens to your wallet and follow the specific instructions to initiate the masternode setup. This often involves locking the tokens in a specific address.
- Begin operating the masternode by following the project's startup procedure.
- Regularly check the status of your masternode to ensure it is running smoothly. Perform necessary updates and maintenance to avoid downtime.
- Claim and manage your rewards.
Dividend-Paying Tokens
Dividend-paying tokens come closest to passive income generation from traditional financial products. They offer the advantage of regular dividends in the form of additional tokens so you can participate in the success of the underlying project much in the same way a company would pay dividends to their shareholders. All you have to do is HODL.
Dividend-paying tokens provide a steady income stream as long as the project performs well.
However, the dividend amounts can vary significantly based on the project's performance, which introduces an element of unpredictability. There is also always the risk of project failure or token devaluation, which impacts the value of the dividends and the initial investment.
You don’t need a lot of technical knowledge to get started with dividend-paying tokens (at least not compared to some other crypto passive income methods on this list) but you’ll need to be able to evaluate crypto projects, as most of the risk lies in project failure.
In our opinion, dividend-paying tokens aren’t the most efficient way to generate a passive income, as they are heavily dependent on the success and stability of the project.
Factors Influencing Returns
- The overall success and profitability of the underlying project.
- The project's policy on how often and how much it distributes dividends.
- Fluctuations in the market price of the token.
- Higher demand for the token might lead to increased token value and potentially higher dividends.
- Changes in regulations can affect the project's operations and its ability to pay dividends.
- The rate of adoption and growth of the project's user base enhance profitability and dividend potential.
How to Get Started
- Pick a token that offers dividends, such as KuCoin Shares (KCS), NEO (GAS), or VeChain (VTHO). Evaluate the project, its tokenomics, dividend policies, and market performance.
- Purchase the tokens and transfer them to your wallet.
- Some tokens require staking or holding them in a specific manner to earn dividends. Follow the project’s guidelines on how to qualify for dividend payouts.
- Regularly check your wallet or the project's platform to monitor your dividend earnings and ensure you receive payouts as expected.
- Keep up with news and updates about the projects you're invested in. This helps you stay aware of any changes in dividend policies or project developments.
- Some projects may require you to manually claim your dividends. Follow the project's procedures to claim and reinvest or use your earnings.
Cloud Mining
Cloud mining lets you participate in cryptocurrency mining without the need to purchase or maintain hardware, offering the potential for a steady passive crypto income with little upfront investment. By renting mining power from a service provider, you can mine cryptocurrencies remotely, making it an accessible option for those who lack the technical expertise or resources to set up a mining rig.
Unfortunately, cloud mining comes with significant risks, including the high potential for scams and unreliable providers. Profitability is often lower compared to other methods, due to service fees and reduced mining rewards, which can erode earnings.
The efficiency of cloud mining is generally low to moderate, heavily dependent on current mining conditions and the reliability of the chosen service provider. We recommend carefully investigating providers and calculating the probability of the mined token compared to cost of cloud mining.
Factors Influencing Returns
- The value of the mined cryptocurrency directly affects the profitability of cloud mining.
- Increased mining difficulty can reduce the number of coins mined, impacting rewards.
- The mining power rented from the cloud mining service; higher hash rates can lead to more coins mined.
- Fees charged by the cloud mining provider will reduce net rewards.
- The length and conditions of the cloud mining contract influence overall returns.
- The cost of electricity, typically borne by the provider, can affect profitability.
- Changes in block rewards, such as halving events, impact the number of coins earned.
- The reputation and reliability of the cloud mining service provider affect the consistency of returns.
How to Get Started
- Look for reputable cloud mining companies with positive reviews and a track record of reliability. Examples include Genesis Mining, Hashflare, and NiceHash.
- Compare the mining plans and contracts offered by different providers. Consider factors such as hash rate, contract duration, fees, and supported cryptocurrencies.
- Register an account with your chosen cloud mining provider and select a mining plan that fits your budget and goals.
- Track progress using the provider’s dashboards.
- Periodically withdraw your mined cryptocurrency to your digital wallet.
NFT Royalties
NFT royalties offer a continuous income stream from secondary sales. Artists and creators earn a percentage of the sale whenever the NFT is sold or resold, generating ongoing income.
This passive income method is highly speculative and depends heavily on the popularity and demand for the specific NFT. The NFT market is already very volatile and illiquid, with a significant drop in prices and interest since the NFT boom of 2021/2022. As a result, the likelihood of earning from NFT royalties is variable, heavily influenced by market conditions and resale activity.
Nevertheless, we believe NFT royalties present a unique opportunity for creators to monetize their work over time. If you’re willing to navigate the uncertainties, NFT royalties might be a lucrative way to generate passive income while supporting and participating in a new era of digital art and collectibles space.
Factors Influencing Returns
- Well-known creators with a strong following tend to generate higher demand and more sales, increasing royalties.
- Trends in the NFT market, including interest in particular types of art or collectibles.
- The percentage of royalties set by the creator affects the income earned from each resale, as well as the incentive to re-sell in the first place.
- Different NFT marketplaces have varying policies and support for royalty payments.
- Unique and high-quality NFTs are more likely to be resold at higher values, increasing royalty income.
How to Get Started
- Develop unique digital content that can be minted as NFTs. This could be digital art, music, videos, or other creative works.
- Select a blockchain platform that supports NFTs, such as Ethereum, Binance Smart Chain, or Flow. Each platform has its own benefits and costs.
- Choose an NFT marketplace to mint and sell your NFTs. Popular marketplaces include OpenSea, Rarible, Mintable, and Foundation.
- Use the marketplace's tools to mint your digital content into an NFT. During the minting process, specify the royalty percentage you want to earn from secondary sales.
- List your NFT on the marketplace. Set a competitive price and provide a detailed description to attract buyers.
- Regularly check the marketplace and your wallet to track sales and royalty payments. Most platforms automatically credit royalties to your wallet when your NFT is resold.
Crypto Savings Accounts
Much like your traditional savings account, crypto savings accounts offer a straightforward and user-friendly way to passively grow your digital assets. These accounts provide consistent and reliable returns, making them an attractive option if you’re looking for the simplest way to generate passive income.
One of the main advantages is the predictability of interest earnings, allowing for better financial planning and stability. However, the interest rates offered by crypto savings accounts are often lower compared to the other, more complex crypto investment methods. There is also always a risk of platform insolvency or hacking, which could jeopardize your invested assets. Keep in mind that crypto savings accounts, unlike your bank account, are generally not insured!
Factors Influencing Returns
- Interest rates offered by the platform can vary significantly between providers and tokens.
- Fees charged by the platform for services can reduce net returns.
- Larger deposits may qualify for higher interest rates.
- Longer lock-up periods can sometimes offer higher interest rates, but reduce liquidity.
- Higher demand for borrowing specific cryptocurrencies usually lead to better interest rates for savers.
- Some platforms offer promotional interest rates for new users or specific cryptocurrencies, affecting short-term returns.
How to Get Started
- Pick a crypto savings account provider, such as BlockFi, Celsius, Nexo, or Binance. Review their interest rates, fees, and security measures.
- Sign up for an account on your chosen crypto savings platform. Complete any necessary verification processes, such as KYC (Know Your Customer) requirements.
- Select the savings terms that suit your needs. Some platforms offer flexible accounts with variable interest rates, while others have fixed terms with higher rates.
- Deposit your cryptocurrencies into the savings account. Follow the platform's instructions to ensure a smooth transaction.
- Periodically withdraw your earned interest or reinvest it into the savings account to compound your returns.
Paying taxes on passive income from crypto
Even a passive income generated from cryptourccencies counts as an income – and needs to be taxed accordingly. Tax laws differ vastly from country to country and may even depend on the method you chose to earn your passive income. We've created in-depth crypto tax guides for many countries to help you understand when you need to pay taxes on your crypto income, when you don't need to pay taxes, and how much taxes you need to pay – check them out here: