Advanced Topics Having invested in cryptocurrency, many are wondering: what to do next? Tracking the ups and downs of Bitcoin, Ethereum, and other coins, and actively trading them during these fluctuations, is a full-time job that not everyone has time for.
Fortunately, the introduction of cryptocurrencies has created new opportunities for passive income with a low barrier to entry. So participants do not need to have a large capital for investment.
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Passive income in crypto staking
Staking does not require the purchase of special equipment. All an investor needs are to have a cryptocurrency in stock. It can be placed on a special PoS algorithm (Proof of Stake) under the terms of a special smart contract. That is, it is similar to a bank deposit with interest.
PoS algorithms are designed to mine cryptocurrencies, and the digital assets of participants are used to maintain the performance of the entire blockchain system. At the same time, the investor’s (staker’s) cryptocurrency involved in staking is not transferred to another person but continues to be stored in his crypto wallet. That is, the meaning of staking is to support the blockchain and its internal processes at the expense of its assets, which helps to increase the efficiency of the system. For the assets involved in PoS algorithms, stakers receive interest income in the form of a share of the mined cryptocurrency. That is, they receive cryptocurrency without mining on special equipment.
However, if the value of the cryptocurrency suddenly decreases, then the investments of the crypto-investor will also decrease: he will not be able to sell them at a favorable price until the end of the contract. It is similar to a savings deposit – money cannot be withdrawn (sold cryptocurrency) while the terms of the contract are in effect. Therefore, various experts recommend using only free assets in staking, and not the entire cryptocurrency portfolio. With a perpetual smart contract, interaction with the PoS algorithm stops at the moment the involved cryptocurrency is sold. There is also a risk of fraud — investors can fall for ads with an offer of alleged staking. In them, attackers can offer to transfer cryptocurrencies directly to their accounts to get them back with a reward.
Crypto lending passive income
This way of earning income is similar to a bank deposit but in the field of decentralized finance. Its essence lies in the transfer of part of the available coins to a special service for a fee in the form of interest.
An alternative option is to issue money directly to the user.
Landing takes place on centralized or decentralized cryptocurrency exchanges, as well as specialized platforms for borrowing funds. The conditions for granting and the amount of remuneration are set individually. Centralized exchanges pay the most — up to 45% per annum. The advantage is that the platform guarantees a refund. Therefore, the investor does not lose them.
Another option for crypto lending is lending to crypto exchanges for margin trading. Return insurance is the deposit of a trader who uses leverage. Therefore, the person who provided the crypto also does not risk losing it.
Loans
It is possible to place cryptocurrencies at interest not only on exchanges. For example, many cryptocurrency services allow owners of crypto to issue their digital coins to other users of interest. There are two types of such platforms: decentralized, including Maker, Compound, and Aave, and centralized, such as Nexo and Crypto.com.
On decentralized sites, profitability is usually lower. They are more secure because they do not store user funds. Interest rates on loans in cryptocurrencies are usually not fixed, but vary depending on the volume of digital coins on the lending platform.
The lender’s risk lies in the fact that when using decentralized platforms, there is a chance of encountering unscrupulous borrowers. In the case of using centralized exchanges, there is still a risk of losing funds as a result of a hacker attack on the site’s wallets.
What to pay attention to when investing in cryptocurrencies
It is recommended that you only own or accumulate the stablecoins or cryptocurrencies that you would like to own, even if they do not guarantee you any profit.
Don’t be fooled by the particularly high returns offered by exotic and highly volatile cryptocurrencies. You should also maintain adequate portfolio diversification and only invest through reputable platforms.
