In order to understand how crypto can become a source of passive income, we must first understand or define what passive income is.
What is Passive Income?
Passive income is earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved. As with active income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS). Portfolio income is considered passive income by some analysts, so dividends and interest would therefore be considered passive.
Passive income is a big step for cryptocurrency: it’s about time that people use digital assets productively. There are options that vary in time-intensity to fit one’s investor capacity and crypto needs at the same time.
Cryptocurrencies are complicated so you need to make the point that it could be very easy. It’s common knowledge that institutional investors, specifically from CME, are increasingly embracing the world of crypto. As far as passive income is concerned, institutional clients may be interested in these types of earnings in which case certain conditions are met. For example, the return on investment should be at one level or higher than the return on investment instruments in the classical market. At the same time, risk level must not exceed fiat market risks. Otherwise, investments will be deemed as risky and may be of interest only to highly speculative hedge funds that specialize in this domain.
Staking isthe simplest way to earn passive income, as the market pays you for holding cryptocurrencies for a certain period of time. It offers an investor a potential ROI which is more predictable than others and no investment in hardware is required. Technically, staking means a user stakes his coins to “forge” blocks by maintaining a wallet or node. When staking your coins, investors usually go through a lock-up period while voting — rules on this vary from project to project. After voting, investors get their coins back as well as the staking reward (up to 30% of the coins put in stack). Staking has been misrepresented as the equivalent of a bond in cryptocurrencies. In reality, it is much more of an instrument to participate in the corporate governance of a project and getting paid for it. As mentioned earlier, you don’t need mining hardware because staking is fulfilled via e-wallets.
Blockchain has two layers: application and implementation. The lightning network belongs to the implementation layer or Layer 2. The owner of lightning has the ability to quickly process a lot of transactions. This method does not offer an immediate return on investment; however, they offer transaction fees. Lightning network nodes have strong potential: they are expected to grow in demand within the market. So, if you invest in lightning nodes, your returns will increase in line with their usage maximization.
Here everything starts with setting up automated lending on a crypto exchange platform. AI is used to manage lending operations. Again, the income depends on the amount of your holdings: the more you own, the more AI works for you, and ultimately, the more your passive income is. While the process of lending is fully automated, an investor can take control of parameters — loans can be varied in size and length.
For beginners, here are a few tips to make cryptocurrency a profitable investment.
First of all, always assess the risks cold-headed. You should never invest in an asset if you have heard about or just because it is “hype”.
Secondly, rumours in the cryptocurrency market should be carefully filtered. There is no need to jump on every headline risk before properly checking the news provider and if the story has legs.
Finally, work with credible exchanges — your prudence matters a lot for your own safety and the stability of the entire ecosystem.