No one will deny that cryptocurrencies are highly volatile assets that can help investors build passive income, especially if they add digital coins like Ethereum, which have numerous utility cases to their portfolios.
Cryptocurrencies are a portfolio play that has gained traction over the last few years, and it's expected to catch up to stock trading because people are in search of alternative investments. Statistics show that 13% of Americans bought digital currencies in the last year, and 24$ of them invested in stocks over the same period.
Bitcoin and Ethereum's price have increased in popularity lately, especially after the crypto market started to show signs of bouncing back. Depending on an investor's strategy, they can make money by trading cryptocurrencies. This article offers information about how investing in cryptocurrencies enables people to build passive income.
Why do investors believe they can make money with crypto?
There's a reason why cryptocurrencies are listed among the most popular alternative assets, you can make money by trading them. Considering their inherent volatility, you can earn a huge profit or lose all your funds in a single trade. Therefore, deep knowledge and expertise of the market is required, considering that you work with one of the most volatile assets on the market.
Trading digital currencies is often the answer to the question of how to build passive income in the long run because cryptocurrency projects have great growth potential. However, sticking with well-known digital currencies that have proved utilities and survived several crypto winters is recommended. Bitcoin, Ethereum, Polygon, Cardano, Tether, Dogecoin, and AMP are among the most traded cryptocurrencies.
Likewise, it's advisable to trade cryptocurrencies through a reliable exchange platform like Binance to make sure that your funds are safely stored in your wallet.
Are there any risks associated with investing in cryptocurrencies?
Similarly to any other investment, putting money into crypto projects comes with a couple of risks. Like other assets, the price of a digital currency can spike or plummet as soon as you add it to your portfolio. However, some specific risks are associated with cryptos, and it's wise to research them so you make an informed decision.Â
The risk most investors fear is the looming threat of government regulation. Digital currencies have gained significant popularity worldwide due to their deregulated and decentralized nature. They are popular among investors because no government or third authority controls them. However, governments could decide to take a more aggressive stance on them and regulate them locally, which could prevent people from investing in them.
In addition, where investors choose to store their cryptocurrencies is also important because not all platforms are secure. Sometimes keeping the assets on an online exchange platform leaves them vulnerable to cybercrime. Additionally, you could forget your password, which would prevent you from accessing the funds.
Ways to earn passive income through crypto
Most people think that investing in crypto implies buying a specific amount of digital currency and holding it until you find it suitable to sell it for a profit. However, many other strategies could earn you income, especially because cryptocurrencies have a very volatile nature. Here are some of the most commonly used.
Yield-farming
You can make a profit from investing in blockchain-based currencies by using decentralized finance platforms, connecting your wallet with those of other investors, and committing your funds to a pool. When someone needs to borrow crypto, they take it from the pool of crypto, and you are rewarded in fees and interest. You gain a reward according to the amount you stake or hold in your account.
This is a very profitable venture, but you must research to ensure that you understand the protocol of your DeFi platform. Considering that the returns tend to fluctuate when employing the yield-farming method, you need to keep an eye on the market constantly.Â
Mining
Cryptocurrencies are developed using blockchain technology, which relies on a network of computers connected together worldwide. They work in parallel to create a working chain that allows no interference from other authorities. Blockchain is one of the most secure technologies available at the moment, and therefore it has gained unparalleled popularity among investors. The most popular digital assets are based on blockchain technology and use an algorithm called proof-of-work which allows miners to earn crypto rewards if they solve mathematical problems first.
If you have a computer that meets the blockchain network requirements at home, you can become a miner individually or join a mining pool. However, it's essential to note that only specialized computers can be used to mine new blocks, and if you don't have one, this strategy requires investing in hardware.
Crypto games
This is one of the most enjoyable and entertaining means to make a profit, playing crypto games. The Metaverse presents you with the opportunity to engage in play-to-earn games that allow you to make a profit while playing games online. Different Metaverse games offer different rewards, so research the market to identify the ones that match your needs best.
Decentraland and Axie Infinity are among the most popular crypto games people play these days. During the pandemic, these two games became income sources for professional gamers looking for remote jobs to earn a profit.
Staking
This method implies you leave coins in your digital wallet and pledge the funds to the network, which uses them to validate transactions. The strategy works similarly to investing in stocks because you earn rewards from interest. Investors view staking as a long-term means to make a passive income because it allows you to grow your profit over time. Only a limited number of cryptocurrencies allow you to gain a passive income through this method, so you'll have to invest in digital tokens that employ the proof-of-stake algorithm.
Final words
You can make a passive income through crypto, but it's essential to understand how the sector works. Be cautious in the beginning because you must first educate yourself and then allow yourself to get excited.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
