How to earn passive crypto income with Bitcoin
Bitcoin (BTC), along with other cryptocurrencies, has given people a place to earn passive income, making money without active involvement. One does not need to take unnecessary trading risks or spend time reading and analyzing volumes of information.
Although the concept of passive income is not new, cryptocurrency has undoubtedly added new dimensions. Concepts such as interest compounding or dividend reinvestment are also used in the cryptocurrency market, creating an ecosystem where one can earn passively.
Let’s discuss various ways to earn passive income with Bitcoin. This article includes Interest Accounts, Lending, Mining, Trading and Liquidity Pool.
Bitcoin Interest Accounts
Holding Bitcoin in a cryptocurrency savings account is similar to regular savings accounts. These accounts offer fixed interest on the deposited crypto funds. One can choose flexible savings plans, which allow depositors to withdraw assets whenever they wish, or fixed savings plans, where the assets remain deposited for a predetermined period.
The interest rates are usually higher when you deposit funds for a fixed term than in a regular savings account. The duration of time deposits is significantly shorter than that of conventional bank accounts. On some protocols, there is also no minimum deposit requirement.
One can also try a financial advisor to implement investment strategies such as dollar cost averaging (DCA). The strategy involves investing the same amount of BTC in a target security regularly over a set period of time, reducing their average cost per share and reducing the impact of volatility on their cryptocurrency holdings.
Bitcoin lending
Bitcoin lending occurs when anyone who has BTC lends the cryptocurrency to borrowers through a centralized, decentralized or peer-to-peer (P2P) platform. In return, borrowers pay daily, weekly or monthly interest. The lending platform usually charges a fee for the service.
The three factors that affect earnings are the total value of Bitcoin that is lent, the duration of the loan and the interest rate. Users must rely on a third party for the Bitcoin lending infrastructure and terms on centralized lending platforms. Most platforms require users to deposit BTC on the lending platform. While this provides users with expert level assistance, their Bitcoin is in the custody of platforms.
On the other hand, no intermediaries are involved in decentralized lending platforms. Smart contracts automate the lending process, setting aside any human role. The interest is finalized autonomously, and the contract is executed when the relevant conditions are met.
On P2P platforms, users can define their individual terms. For example, they can decide the interest rate and the amount of Bitcoin they want to lend. The platform’s role is to provide the necessary infrastructure to complete the deal, and they usually charge a fee for their services.
Bitcoin mining
Mining allows one to earn a reward for using computing power to secure the Bitcoin network. Bitcoin is a proof-of-work (PoW) protocol that requires network participants to solve an arbitrary mathematical puzzle to prevent any unauthorized person or even an insider with mala fide intentions from initiating changes harmful to the network .
In earlier days, users mined Bitcoin on regular PCs and then on general mining rigs. However, with the growth of the network, the complexity of mining increased, and miners were forced to use specially manufactured mining equipment called application-specific integrated circuits (ASICs), which have integrated chips designed for mining.
Miners could set up and maintain mining rigs to keep costs down. Doing so, however, requires them to have the necessary seed capital along with some technical expertise as they need to maintain Bitcoin mining hardware. This has made it possible for people to mine Bitcoin without having to invest a lot of money. Being part of a pool with a lot of computing power gives a better chance of generating a winning hash than miners who lack such advanced equipment.
Bitcoin trading
As is the case with all financial assets, the price of Bitcoin is affected by the laws of supply and demand. Anyone holding BTC can take advantage of the inherent volatility of the cryptocurrency to make money with Bitcoin trading, either by going long or short. Going long refers to selling BTC when prices go up while going short is the act of selling when prices go down.
Timing the market accurately to make money is virtually impossible for anyone. However, the basic idea, in the long run, is to buy BTC when you expect the price to go up and sell it later at a profit margin. For example, if BTC is trading at $20,000 and one guesses that it may move to $25,000 or above, they can buy Bitcoin or exchange any other cryptocurrency for BTC, wait for the price to go up and then sell the cryptocurrency, earning a clear profit of $5000.
A shorting strategy is usually implemented by traders when cryptocurrency prices decline. For example, suppose the price is currently at $20,000 and the trader expects it to drop to $17,000. The trader can sell his BTC right away and later buy it back when prices reach the desired level, making a profit of $3,000. Shorting Bitcoin can be done through derivatives such as futures and options. One can also participate in prediction markets for shorting Bitcoin.
To simplify trading and minimize the chances of loss, exchanges allow one to enter stop-limit orders. If prices fall below a certain level, the system will execute the trade independently and limit losses. To fully automate trading with Bitcoin, one can use algorithmic trading. Pre-programmed trade instructions are issued based on time, volume and price. When the market triggers the specified instructions from the trader, the software executes the orders.
Bitcoin liquidity pool
Liquidity pools, the lifeline of decentralized exchanges (DeX), can also be a place for anyone holding BTC to earn some passive income. A Bitcoin liquidity pool refers to a digital pile of cryptocurrency locked in a smart contract, thereby creating liquidity for faster transactions.
Users of various crypto platforms, called liquidity providers (LPs), are rewarded with a share of fees and incentives in exchange for the amount of liquidity they have added to the liquidity pool. They are paid in the form of LP tokens, which can be used across the decentralized finance (DeFi) ecosystem. UniSwap, SushiSwap and PancakeSwap are some popular DeFi exchanges.
A liquidity pool has cryptocurrencies in pairs, such as BTC-USDT, ETH-USDC, etc. Here is an example to help you understand how it works on SushiSwap, with someone investing $5,000 in a BTC-USDC liquidity pool. The procedure is:
Keep up with the changing ecosystem
An ability to earn passive income from Bitcoin increases the value of one’s holdings. Investing in cryptocurrency always has a risk quotient due to volatility. Nevertheless, a passive income makes it possible to make money steadily without active exposure to the sharp ups and downs in prices. Before deciding how to make money with passive income, one must do adequate research on expected returns, risk factors, etc.
The cryptocurrency ecosystem is evolving, and new use cases for Bitcoin may emerge, making it essential to stay constantly alert to new opportunities. Local regulatory sanctions are also an important aspect to consider. Cryptocurrencies, including Bitcoin, are under the supervision of regulatory authorities, and one must be aware of what they approve and do not approve.
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