Apart from trading, there are other methods of earning cryptocurrencies. Thanks to the growth and development in the area Defi. It consists of several different applications and services that provide different financial services but are not owned by a central body like banks. DeFi also allows cryptocurrency investors to generate passive income on their cryptocurrencies. We will discuss all 3 ways you can earn passive cryptocurrency income and which one suits you best.
Related article Top 5 best DeFi tokens and best investment platforms in 2022
Waiver: This article is for educational purposes only. Information is provided according to reliable sources and industry trends. The value and position of cryptocurrency in the market are subject to change. Please research and check before investing.
Ways to earn passive income from cryptocurrencies
There are 3 ways to generate passive income from cryptocurrencies other than trading or holding cryptocurrencies. All 3 require prior knowledge and you should research before investing. We’ll take a look Fit, Lending, i Yield agriculture. How they work, what you need to know about them and what risks are associated with them.
1. Staking out
Investing is about locking your coins for a certain amount of time crypto exchange to earn interest-based rewards on it. Think of it as a fixed deposit in which you lock up your funds for a certain period of time and make money on them. The exchange uses your coins to validate transactions on the blockchain. In return, the stock exchange receives a reward that it appropriately distributes among investors.
The investment is not supported by all types of cryptocurrencies such as Bitcoin or Ethereum. Coins like Theses, Polygon, Theta, Ethereum 2.0 (Not published yet, but you can still invest), and Cardano supporting investment. Binance stock market allows investment.
In Staking Pool, a group of people collect and invest cryptocurrencies for investment. Earned interest is then shared among the members of the investment group. The rewards here can be very high, but these investment sets are not as reliable as exchanges. They can be rug-pull scams and you can lose all your cryptocurrencies.
Things to know about Staking
- You can invest a small amount of your own funds
- Limited crypto investment support
- Exchange offices will charge a small investment fee
- Not all stock exchanges support investing
Risks in the role
Investing is a method of minimal risk because you will earn in units of cryptocurrency, not in its value. . Any risk involved is mainly due to bugs in the smart contract.
In lending, you deliver cryptocurrencies to cryptocurrency platforms for a fixed period of time with a fixed interest rate. This crypt has been borrowed borrowers who have to pay interest on your borrowed amount. You have been rewarded with other tokens that represent your initial deposit + interest at current market value. You can choose to sell these tokens, HODL them or exchange them for another cryptocurrency.
Exchanges like Binance, CoinDCX, i BlockFi support lending and borrowing and offer different interest rates than 5% to 13% which you can earn on your cryptocurrency.
DeFi vs CeFi lending
DeFi uses Smart Contracts or Automated Market Manufacturers (AMM) to facilitate lending on decentralized platforms. Protocols like Compound and AAVE create a market for certain cryptocurrencies like Ethereum, YES AND, ChainLink, or Bitcoin wrapped borrow and lend. It removes any intermediary in the process and allows the lender and borrowers to interact directly.
CeFi or Centralized finance includes centralized exchanges like Binance, CoinDCX, and BlockFi who take custody of your cryptocurrency to lend it to Market Makers, hedge funds and other users of their exchange. These exchanges accept lending in a variety of coins, even in Bitcoin for liquidity purposes, and have an easy-to-use interface that does not require a learning curve. These are reliable options if you are new to lending.
Related article What are decentralized crypto exchanges? Find out the pros and cons here
What you need to know about lending
- You can also choose a fixed period based on the interest on the deposit
- Awarded the original mark of exchange
- Not all cryptocurrencies are supported
- With CeFi you can use cryptocurrencies in your exchange
Risks in lending
The risk is minimal in borrowing, but be sure to look for which exchange can give you the best interest in your crypt. The main risk involved is in lending fraud or carpet exchange or smart contract bugs which are rare.
Also, read: Top 5 Metaverse Coin Investments in India (2022)
3. Yield agriculture
Yield agriculture, also called Token breeding is a new concept. Priority is given to maximizing return on investment using various methods such as Liquidity pool, lending, investing and leveraged lending. We’ve already talked about investing and borrowing so we’ll talk about the other two.
In the liquidity pool, you together with a large group of people can borrow 2 funds of equal value for exchange. This makes you a liquidity provider. The exchange office uses funds in the pool to pay transaction fees and maintain the price even after a large order. In turn, the stock exchange distributes the fees it has collected for several transactions to liquidity providers.
Automated Market Maker and smart contracts are used for liquidity pools. Exchanges like Uniswap fees 0.3% fee. This multiplied by the huge number of transactions during the day can result in large returns. Replacement and Pancake replacement are the 2 most famous exchanges for this.
We will understand this by example. You borrow 1000 rupees worth BAT (Basic Attention Token) which has a high lending rate. Then you borrow YES AND using its borrowed BAT as insurance or collateral. Because you can only borrow 50-60% of your security, you get a DAI worth 600 rupees. Then you go on an exchange and use this DAI to buy more BAT and borrow that BAT again for interest. And follow the same procedure until you can move on.
This is called leverage and has a very high risk for high rewards. You need to be active and veteran in the crypto market on a daily basis to succeed. Usually only recommended for crypto veterans.
Things to know about growing yields
- There is a great risk
- Not recommended for new crypto investors
- We are actively checking the crypto market
- You need to plan how and where to invest
Risks in yield cultivation
Yield cultivation, especially lending and the liquidity fund, involves many risks. The changing nature of cryptocurrencies can drastically affect leverage, while fraud and withdrawals to the liquidity pool can lead to the loss of all your cryptocurrencies.
Also, read | Crypto Regulation Act 2021 in India: 5 points you should know
These were the best ways to generate passive income from cryptocurrency. All of these concepts carry potential risk, so we emphasize that you take appropriate precautions before investing your crypt. This can bring you more profit than just holding cryptocurrencies. We hope we have helped you understand the 3 best ways you can earn passive cryptocurrency income.
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