For many people, earning passive income is a lifetime goal. Income without actually actively earning it? It makes a lot of sense, and it’s worth looking at ways in which cryptocurrency can help fulfill this objective. It is always said that smart people make money work for them - and cryptocurrency is money after all.
Whilst there are strict definitions used in accounting and taxation, the term passive income is generally a catch-all description for income you get which is decoupled from your time and effort spent earning it. It’s certainly an attractive notion - I love writing, and consider it a privilege to make my living writing columns and copy and articles. But if I chose not to write another word, or experienced a change in circumstances such that I could not do so, then the income would stop. But I did write a book once, and the dribble of royalty payments that yields is passive income.
You’ll read a lot online about creating a passive income through activities like affiliate marketing or network marketing - just do this, and it will somehow continue to grow downstream with other people doing the same, whilst you sit back and let the commission roll in. The mathematics of these models depend on continual fresh blood and infinite layers, to feed those higher up the pyramid. I know several people who make good livings from this kind of marketing, but they do so far from passively - those who are truly successful at developing these network tend to be very active and busy with it the whole time. And those trying to sell you on the dream depend on you being one of those others coming into the network.
The crypto space is far from immune to this kind of thing as you will be aware, with schemes ranging from the highly unlikely to the downright fraudulent. Which is why you should rightly be sceptical about the phrase “passive income” being bandied about, and first check out whether the scheme is technically legal/feasible - provided you can recruit enough people - or whether it’s an outright Ponzi scheme. The Bitconnect scandal in 2017 depended on newly-pledged loans to pay out existing loan interest, and it collapsed leaving thousands of ripped-off investors in its wake. Despite warnings from Vitalik Buterin and others, the temptation of promised interest rates of 1% daily compounded were highly attractive to many, who overlooked the fact that this was utterly unsustainable.
People who make real passive income tend to be those who have learned the art of making their money make more money, one way or another.
Other good passive earners invest in different things, because the curious thing about serious money is that it makes money all by itself. In the most conservative and safe investment vehicles and depressed economic times, it still manages to return growth just ahead of inflationary erosion. And of course investors are frequently tolerant of higher risk and reward financial products which can produce much higher returns, and they spread their risk over a number of different assets.
This diversification is critical, because investors seek to protect their returns, and look to find a range of investments which aren’t linked to each other, don’t tend to move in parallel. Some advisors (eg Chris Burniske and Jack Tatar in Cryptoassets: The Innovative Investors Guide to Bitcoin and Beyond) have recognised the potential for cryptocurrency investments to add protection to a portfolio, because they are decoupled from the typical rise and fall of the stock market - so when one goes down, the other may well go up.
Even within your crypto asset portfolio, diversity is essential, probably more so than in any other asset class. Coinmarketcap is currently tracking over 2000 separate coins, many of which will undoubtedly drop away to zero, and a handful of which may make spectacular, unprecedented gains. That’s why this is all so exciting to be part of! Others may increase reasonably steadily, in a world of such volatility, but the truth is nobody knows.
So, how can you actually make money from your cryptos, other than by trading?
- One way might be to look at cryptolending platforms. These can support you financially in two ways. Some of them enable you to lend your crypto to other borrowers, and receive payments in return. But their core offering is crypto-collateralised lending - so if you need to borrow money for investment you can do so without risking other assets. This might not feel directly like a route to passive income, however if it supports an investment in an income-generating business, then your crypto is earning for you.
- You can invest in a dividend-yielding token, such as Local Coin Swap Cryptoshares - this enables you to earn dividends in a basket of top-20 cryptos. The best way to acquire these is via P2P trading on the platform itself.
- Staking is another superb way of earning in the cryptocurrency space. For this, you simply need to buy and hold your coins in a special wallet to earning regular dividends or profits on it. There are a range of coins using POS as a consensus mechanism, but the most exciting news will be when Ether finally moves across to it.
- Get ‘free money’ via Airdrops. Look out for alerts on Twitter and Telegram, and this is yet another reason to always keep your coins on a proper wallet rather than an exchange, incidentally.
- Finally, there are at last emerging a range of hybrid banking solutions, which have the potential to actually pay interest on crypto deposits. Look out for more information on these as 2019 unfolds.