Many crypto newbies and even some aficionados often only see cryptocurrencies as alternative payment methods to transfer money across borders more efficiently. This can’t be further from the fact. Today, decentralized blockchain technology not only facilitates the creation of digital currency and validation of global payments, but it also provides opportunities for cryptocurrency investors to earn passive income.
Previously, salty skeptics have insisted that the jury is still out on the ability of cryptocurrencies to act as a reliable store of value or investment vehicles. But, over the last few years, these concerns have been unequivocally dispelled and blown out of the waters.
Through cutting-edge blockchain technology, Cryptocurrencies have solidly established their status as a reliable and secure investment vehicle. Blockchain developers around the world have created various on-chain alternative investment vehicles where people can invest crypto assets and earn a sizeable income.
At press time, data from Coinmarketcap shows that the global cryptocurrency market capitalization is worth about $1.25 Trillion. Up 95% from the 2020 year-end figures. And according to estimates from The Money Project, investments in crypto assets represent about 20% of the global liquid-money supply.
This indicates that the popularity of crypto investments is fast-growing among retail investors and institutional investors alike. And with sovereign countries like El-Salvador and Paraguay mulling over the adoption of Bitcoin as legal tender, the train is showing no signs of slowing down.
So are you wondering how you too can get a slice of this largesse? Well, you’ve wandered into the right woods. In this article, we will explore the various investment options available for you to earn steady passive income on your crypto assets.
What Are The Different Ways To Earn Yield On My Crypto Assets?
Like every other form of currency, holders of cryptocurrency often seek to convert their holdings into an alternative investment vehicle to earn passive income. The ubiquity of the blockchain platform and widespread proliferation of Decentralized Finance Applications, known as DeFi Apps or DApss, have provided diverse opportunities for you to earn a steady healthy yield on your crypto assets.
As far as investment vehicles, passive income schemes, and payment methods go, there are a gazillion options to choose from on the global markets. However, with the efficiency, transparency, and security of the blockchain, Crypto Assets have somehow managed to stand heads and shoulders above the crowd.
There are three broad ways to earn interest on your Crypto Assets;
- Staking
- DeFi Yield-Farming
- Crypto Lending
Sounds familiar? Well, read along, let’s dissect each of them.
Staking
What is Staking in Crypto?
In general terms, Staking cryptocurrencies is the process of setting aside a certain amount of tokens dedicated to validating nodes of transaction for the network. By simply holding these coins, the holder facilitates the network’s operations and security infrastructure and is compensated accordingly with units of the native token.
To fully understand how staking works, you’ll first need to gain some insights into the Proof-of-Work and Proof-of-Stake system.
What is Proof-of-Work?
Proof-of-Work is a cryptography validation system in which miners compete to solve complex mathematical puzzles. The miner who successfully solves it first gets to add the next block to the blockchain and is rewarded a unit of the crypto currency native to the blockchain platform. Some of the prominent blockchain platforms.
What is Proof-of-Stake?
Proof of work has so far, gained plaudits from all corners as a highly secure, decentralized and transparent system. The problem, however, is that it involves a huge volumes of computing power to solve the arbitrary computations required for miners to validate transactions.
As a result, the blockchain have reached a consensus that such dependency on electrical power is not only expensive but also environmentally unstainable in the long run. So, enter the next best option – the Proof-of-Stake system.
In the Proof of Stake system, Network participants (Miners) can earn passive income by simply locking in their crypto assets on a blockchain platform. And at intervals, the blockchain algorithm randomly assigns them the task to validate the next block of transaction.
At the successful validation of each transaction, the staker is rewarded with units of Ether, Bitcoin, ADA etc., depending on the blockchain platform that you have chosen to pitch your tent on. Typically, the probability of being assigned a block of transactions depends largely on the amount of assets that each miner has locked in. So, you guessed it, the higher your stake, the better you earn.
Where to Stake Your Crypto Assets to Earn Income?
There’s a ton of blockchain platforms available for you to stake your crypto assets to earn passive income. The most prominent blockchain platforms include Bitcoin, Cardano, Polkadot, and Ethereum among others.
Let’s take the Ethereum blockchain for example. Due to its customizable smart contract features and relative efficiency, Ether (ETH) has gained widespread adoption as a tradeable digital currency, as well as a reliable store of value.
How to Earn Interest by Staking on Ethereum?
“ETH 2 is a set of interconnected upgrades that will make Ethereum more scalable, more secure, and more sustainable.”
– Ethereum Dev Team
Since inception, to verify and validate transactions, the Ethereum blockchain has utilized the Proof of Work system. In November 2020, in response to scalability and energy efficiency concerns, Ethereum developers announced the plan to overhaul the platform and transition to the Proof of Stake system in the update to ETH 2.0.
Co-founder, Vitalik Buterin has highlighted Scalability, Security and Sustainability as they key changes that users can expect in the new and improved ETH 2.0. The transition is expected to cut down on energy consumption on the Ethereum by at least 99.95% and significantly increase the efficiency of transaction validation. The full transition is expected to be complete by 2022. However, staking features are already available.
To facilitate the transition to the ETH 2.0, users and members of the Eth community can assist the developers by providing ETH tokens for them to facilitate tests.
Through the Beacon Chain, Ethereum creates an avenue for ETH holders to earn up to 10% income from staking as developers continue to lay the groundwork for the upgrades that will coordinate the new ETH 2 system.
How Do I Stake My ETH?
Staking Ethereum is simple and secure way to earn more Ether.
If you wish to stake Ethereum independently, you can do so by connecting your crypto wallet like Trust Waller or Argent. However to take stake independently, you must have at least 32 ETH, which is quite a sizeable amount. So, alternatively, Crypto exchanges provide crowdfunding staking pools for people who cannot afford to stomp up the minimum 32 ETH.
If you fall in this category, you can join the waitlist to stake Ethereum today on Kraken or Coinbase. These exchanges aggregate retail investors’ Ether holdings to stake them collectively on the Ethereum blockchain.
This allows you to you can deposit any amount of Ethereum that you can afford and earn a proportionate amount of the annual yield. However, it is important to note that these exchanges may charge you an administrative fee worth around 15% to 25% of the annual yield that accrues to you.
If you have any questions about staking Ethereum, EthStaker community is a good place to get urgent help! You can also find much-needed support on Discord or Reddit.
In most cases, you’ll be able to stake your coins directly from your crypto wallet, such as Trust Wallet, Argent.
DeFi Yield-Farming
DeFi is an abbreviation of Decentralized Finance. It is an umbrella term for an emerging range of blockchain-based financial applications. They do not rely on any central financial intermediaries such as banks, brokerages or the stock markets. Likewise, they do not trade traditional financial instruments like derivatives, or stocks.
DeFi platforms make use of smart contracts with an interactive frontend user-interface that you can access on your internet-enabled mobile phones or PC. The developers of the DApps can then create a business model or diverse investment features, using the decentralized networks and Smart contract features of the blockchain platform as their underlying framework.
How Do I Use DeFi To Earn A Yield On My Ethereum?
There are many DApps and Decentralized finance platforms that offer users diverse investment opportunities.
Some of the prominent DApps that are hosted on Ethereum offer yield-farming features that allow users to earn token in exchange for holding their tokens.
By holding or locking in the native tokens of these platforms, you provide liquidity for the functionality and transactional efficiency of the DApp platform as well as much needed funding for the developers to scale up the functionalities and marketing of the platform.
In return, you earn a percentage of your holdings at intervals. These earnings vary widely depending on the policies of the platform or DeFi project that you have signed-up on.
For Ethereum-based DApps, the native tokens are often created using ERC 721 or ERC 115 tokens.
In order for you to earn yield on your Ethereum through Defi Apps (Dapps) you have to follow these steps.
- Purchase Ether or any ERC 20 token
- Convert your Ether or ERC 20 token into your desired ERC 721 or 115 token of your chosen DeFi platform through a DAO merchants, such as Uniswap, Gateio, Maker DAO etc.
- Add your ERC 721 tokens to the Defi Platform staking pool by transferring them into a dedicated wallet address.
- Earn a specified percent of token returns on the total amount of tokens that you have deposited.
Lending
What is Crypto Lending?
In crypto terms, Lending involves transferring custody of you crypto currency holdings in to the hands of a lender company for a specified period. The companies pays you a certain amount of interest, while loaning out your funds to others at a higher rate.
How to Earn Interest on Your Crypto Assets Through Lending?
Decentralized lending platforms offer ETH holders opportunities to earn passive income by offering interest-yielding savings accounts. By keeping your Crypto assets in these accounts, you can earn a sizeable interest yields over a specified period of time.
Lending platforms like CoinLoan, YouHolder, Blockfi, CelciusNetwork etc, use your deposit funds to supply loans to institutional and retail crypto borrowers. In return, they offer you a sizeable interest rate ranging from 2% to 20%. The rates you get usually depend on the coin that you deposit as well as the duration of deposits.
This arrangement is quite similar to fixed deposit accounts offered by traditional banks. Only that this is offered by blockchain-based decentralized platforms, and of course, the yields are far more competitive.
What’s The Difference Between Staking and DeFi Yield-Farming Interest Account?
For any investor, Defi Yield-farming and Interest lending are both geared towards the same goal – earning passive for your Ethereum holdings. However, the two concepts differ widely in terms of methodology and application.
The key difference between them is that, in Yield farming, you retain the full ownership and custody of your token throughout the staking duration. Conversely, in Defi Lending, you transfer the custody of your crypto holdings into the hands of the Lending platform until a specified date.
Another difference is that DeFi Lending offers a fixed rate of returns over a specific period, meanwhile in Yield farming, the total amount returns that you can during the staking period is relatively unknown. As it is often determined by actions of other people on the platform i.e. volume of transactions.
What You Should Look out for When Choosing Crypto Lending Platform
Like every other legitimate investment, investing in crypto lending involves some element of risk. To mitigate these risks as an investor, you must always DYOR (Do your own research).
Here are some of the factors that you should look out for before you invest your ETH in an interest account.
Reputation Of The Lending Platform
To choose a reputable crypto lending platform, it is important that you take your time to do your research. Get to know the founders, CEO and top executives of the platforms. Another good indication of the reputation of a platform in the industry is how much funds that the platform is currently managing. If it’s available, you can also take a look at their publicly published financials to assess their past performance.
Security
Asides the risk of a rug pull, another menace that you need to be aware of is hack attacks. Many lending platforms are seen as honey pots. Because of the massive amount fund that they collect, it makes them a viable target for hackers. So it is important to access the security of any lending platform that you pitch your tent with. You can do this by checking for the audit report of the company’s software and code.
You also have to do the good old research into the history of the company if the lending platform or its users have fallen victim of hackers due to lapses in the platform’s software engineering.
If you are able to do this objectively, your crypto investments should be safe and secure.
Deposit Insurance and Guarantees
To be safer, it’s important to check if your chosen platform offers any form of deposit insurance or guarantees to their customers. Likewise, you should look out to see if there are any astronomical charges or bottlenecks in place if you choose to withdraw your assets before the maturity date.
Rates Offered
If a platform is offering rates that are way above competitors, you should be wary of foul play ahead. Conversely, you also don’t want to lose money by investing in a platform that offers derisory rates.
Reviews From Previous Users
One of the most reliable indicators of safety of a platform the reviews from their current or existing customer. So, it is crucial to examine reviews from previous and existing users of the platform to access the reputation that they have in the industry.
Regulatory Requirements
To avoid running into cross hairs with the law, it is important that the platform you chose possess all the required licences to operate within the jurisdiction of your country.
What Are the Tax Implication of Earning Passive Income on your Crypto Assets?
As the saying goes, the things are certain in life, Birth, Death, and Taxes. So, like every other investment, whenever you make some earning yields on your ETH, the taxman may demand his cut. This taxes on gains on crypto currency vary widely across different countries and regions.
In the USA for instance, if you held the crypto-asset for less than one year, your gains will be taxed as a short-term capital gain at the same rate as your regular income from stocks or traditional investment vehicles. Short-term capital gains in the USA range between 10% – 37%.
Conversely, if you have held the asset for over a year, you will liable to pay the long-term capital gains tax rate ranging between 0% – 20%.
Europe is generally seen as one of the tax-friendly regions to hold crypto assets. Taxes on crypto investment gains varies widely across the EU. Although the European countries have the EEU which is a well-established economically coordinated markets, there is no blanket tax rates levied on Crypto assets.
For instance, in the UK, taxes on digital assets are categorized based on your trading or investing activity. If you are a HODLer, meaning that, you have deposited your Crypto assets in an interest yielding account or staking pool, then your gains are subject to the 10% capital gains tax. However, if you are a trader, then your profits or losses are subject to general income tax laws. If your total income from trading cryptocurrencies is below 12,500 GBP, then you’re exempted from paying any taxes. Crypto traders who earn profits above 12,500 GBP will have to pay between 20% and 45% depending your tax bracket. Any losses that you incur can be applied to reduce your taxable income.
In countries like Portugal and Switzerland income from crypto investments are free from all forms of taxation.
The Conclusion: Earning A Passive Income From Crypto
Income from Staking, Yield-farming and Crypto Lending enables you to accumulate gains on your crypto assets, without depending on the swings of the exchange markets. Asides providing a veritable source of passive income, it can make a huge difference in helping HOLDlers to smoothen out effects of the ever-volatile waves of the crypto markets.