Making a plan for a crypto passive income

Making a plan for a crypto passive income

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Mike
Mike

An editor at Coincrop


13 Jan 2022 | 10 min read
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O

nly several years ago, the idea of making a passive income through crypto would have seemed an alien idea.  Today the industry presents a number of opportunities for generating a passive income without the need for actively trading.

In this guide:

Disclaimer: All of the information written on Coin Crop is without influence and based on our analysis. No guarantee is offered concerning the accuracy of this information and therefore, any individual following up on it does as such completely at their own risk. Rates are correct at time of publication.

Introduction

Historically, investors in crypto currencies have generated returns by trading in the financial assets.  In most cases, this approach is akin to little more than gambling as predicting the future direction of a particular token is extremely difficult.

As the crypto currency industry has matured, new possibilities for earning a passive income from assets have emerged.  We can broadly consider these categories of passive income as follows:

    • Saving - assets are deposited with an organization that pays a return.

    • Staking – earning a reward for securing a network by storing tokens in the network.

    • Yield farming – provide liquidity to enable an exchange and earn a return on the trading fees.

    • Air drops – the random receipt of tokens from a network.

It’s worth looking at the motivations of investors to invest in the crypto currency space.  Certainly individuals are attracted by past gains but it is the low returns offered by banks on fiat currencies that has drawn depositors to crypto currencies.

It should be noted that centralised finance (CeFi) crypto institutions don’t have the same guarantees or protections as banks – this risk is counted by interest rates that commonly exceed 12% on stable coins.

Choosing a source of passive income

In choosing a means of earning a passive income there are a number of considerations:

    • How do the rates of interest compare with other organisations?  We recommend using a rate comparison tool (such as Seedling) to compare products.   

    • Do I want to give my assets to a centralised or decentralised organisation.  Decentralised finance organisations will typically pay higher rates of interest but they come with greater risks and a greater complexity to use.

    • In the case of centralised organizations, it is worth questioning what will happen to your assets when you hand them over.  Will the organization lend them to more risky organizations?

    • Does the centralised organization have insurance in place? CeFi institutions are not typically FDIC insured. Some companies have private policies intended to prevent depositor loss from theft.

    • How long will my assets be locked-in? Centralised finance organizations will typically offer higher rates of interest if you agree to lock up your assets for a longer period of time.  Choosing to stake assets usually involves locking up your assets for a number of days before they can be withdrawn.

Saving

The following table illustrates rates of interest that can be earned by depositing your crypto currency assets with  centralised finance (CeFi) crypto institutions:

AssetAPY Rate

Elrond (EGLD)

375%

Elrond (EGLD)

375%

Kadena (KDA)

332%

Polygon (MATIC)

123%

Avalanche (AVAX)

102%

Terra (LUNA)

73.0%

Tether (USDT)

70.0%

Staking

More recent crypto currencies have evolved from being “proof of work” (PoW) in which the fastest computer finishes the task gets given crypto.  In contrast, staking uses a method referred to as “proof of stake” (PoS) in which  a computer is randomly assigned by the blockchain to execute a task.  The more you stake, the more you are rewarded with interest.

The following table illustrates rates of interest that can be earned by staking your crypto currency assets:

OrganizationTermsRatingAPY Rate
Binance Chain Staking

(Validator BNB48 Club)

Fixed (7 days)

10.0%

Binance Chain Staking

(Validator Legend II)

Fixed (7 days)

9.03%

Binance Chain Staking

(Validator Legend III)

Fixed (7 days)

8.78%

Binance Chain Staking

(Validator pexmons)

Fixed (7 days)

7.99%

Binance Chain Staking

(Validator Legend)

Fixed (7 days)

7.91%

Yield farming

Yield farming is the process in decentralised finance (DeFi) in which an individual allocates their crypto currency assets to DeFi protects to generate a return from lending or other activities.  The most common is the funding of liquidity pools with two assets that enable an exchange to facilitate the swapping of assets – the earned return is a share of the trading fees associated with the exchange.

The following table illustrates rates of interest that can be earned by participating in yield farming:

AssetAPY Rate

+

Biswap (BSW)

+ Alpha Finance (ALPHA)

477,994%

+

Biswap (BSW)

+ Alpha Finance (ALPHA)

458,162%

+

Biswap (BSW)

+ Alpha Finance (ALPHA)

234,635%

+

Biswap (BSW)

+ Alpha Finance (ALPHA)

147,944%

+

Biswap (BSW)

+ Alpha Finance (ALPHA)

25,093%

+

Biswap (BSW)

+ Alpha Finance (ALPHA)

23,811%

+

Ethereum (ETH)

+ Pancake Bunny (BUNNY)

3,651%

Airdrops

The concept of airdrops emerged in 2017 when it initially was used as an unusual form of marketing.  Today they are used to reward loyal users, encourage growth of a community and increase adoption of the particular token.  Airdrops are popular for the rather obvious reason that they are perceived as free money.

An airdrop typically involves gifting sums of newly created crypto currencies and targets individuals of a particular blockchain platform.  The terms of airdrops are sometimes kept vague in order to encourage individuals to acquire the initial asset.  For example, on the 2nd December 2021, DeFi Kingdoms made public its attentions to expand the game to the Avalanch blockchain in a new realm called Crystalvale.  The terms of the airdrop, in which holders of $Jewel assets would receive new token $Crystal are such that a snapshot would be taken sometime during the month of January 2022 and a proportion number of new $Crystal tokens issued to existing users.

There are several examples of successful past airdrops:

    • Uniswap (UNI) – Uniswap is a popular decentralized exchange (DEX) in which users can swap crypto currency assets on the Ethereum blockchain. In 2020, Uniswap issued an airdrop in which past users of the exchange received 400 units of the token.  At today's price, those tokens would now be worth over $6,500.

    • 1inch – In December 2020, DEX 1inch airdropped 90 millions tokens to 55,000 addresses that had traded $20 or more prior to the airdrop date.

Airdrops represent a novel means of generating a passive income from crypto currencies.


Mike

Mike

An editor at Coincrop
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