Much of Military personnel, and people in general, do not always have the time to pay close attention to their finances. With life being so busy, a passive income may sound like a good choice for you and the topic nowadays is with passive income is cryptocurrency.
Since its inception in 2009, cryptocurrency has been growing in popularity, and with the to the political independence and impenetrable data security of most cryptocurrencies’ users, these users can enjoy benefits that traditional flat currencies simply cannot. However, cryptocurrencies do have various risks factors and drawbacks that should be considered
Passive Income from Crypto: Past and Present
In recent years, the idea of passive income through cryptocurrencies has become a hot topic since it first came out in 20009. Satoshi Nakamoto was a developer who created the original currency. This new currency created a whole new age of blockchain technology and cultivated the idea of decentralized digital currencies. By the fall of 2010, many similar cryptocurrencies were beginning to appear.
Due to the political independence and impenetrable data security of most cryptocurrencies’ users, crypto users can enjoy benefits that traditional fiat currencies simply cannot. However, cryptocurrencies do have various risks factors and drawbacks that should be considered. These can include value volatility and illiquidity that do not affect most flat currencies.
The goal of passive income is to be hands-off and let the systems work to make you money. This money is not earned from an employer or a contractor. Since the money does not come from an employer the income often comes from rental properties or a business in which they are not active.
Find Good Investments
The first way to start earning a passive income with cryptocurrencies is simply to start investing in them. The best way to do this is by buying the cryptocurrency at a low price, and after some time, if the value starts to go up, then you know you are making passive income. Many investors claim it is best to hold onto the currency for as long as possible, due to the flatulating market, and it allows for it to reach its peak value.
Some strategies can include diversifying the types of cryptocurrencies. This means investing in different types of currencies or through different types of investments. Since there are a lot of different options when it comes to cryptocurrency this should be easy to do. There are also all-new currencies coming all the time. All these new currencies following the same path of Bitcoin with small differences in how the currency works to make it unique.
Finding Good Investments are Risky
While a lot of investors are continuing to make a profit, the others are having a good chance at losing it all:
- Cryptocurrency is Incredibly Volatile: Because cryptocurrency is a younger currency its price is highly unpredictable. This means that it has lots of swing in terms of the price value of the currency.
- It is Not Real Money: Cryptocurrency is not real money, which means that it is also not backed by anything. There are no government or regulating bodies to help the currencies retain their value either.
Maybe you are willing to take the risks of the unknown, or maybe you might find that the different investment strategies for cryptocurrencies are too much of a risk for you.
Start Staking
Not all cryptocurrencies will have this option it will depend on the currency itself that you are investing in. To stake cryptocurrencies, means that buy different amounts of a currency and then set certain amounts of the currency to the side to become part of a node on a network. In other words, you are staking holdings. When the buyer holds onto these coins, they then in return become a piece of the network’s security infrastructure or begin to earn a percentage-rate reward over time. When they do this, they are then compensated. The reason the person can start earning these rewards is that while it is staked it puts a blockchain into effect. These currencies allow for a mechanism called Proof of Stake, which in turn ensures that all transactions are secured and verified without having to have a processor in the middle.
Risks of Staking
While crypto staking can generate above-average returns, several risks are involved in it.
- Market Risks: There is the risk of potential drops in the value even while earning a reward for the staking asset, which will result in a loss.
- Liquidity Risks: If you are stalking, you may find it difficult to sell your assets or make exchanges. You can also find it hard to convert them into standard physical currencies.
- Lockup Periods: Depending on the asset, some come with a locked period where you are not able to access the asset meaning you are unable to unstack it, even if the asset price drops.
- Loss or Theft: If you do not have good security, you may find that your information can easily get stolen or that your funds were stolen.
Along with these risks, there is also the technology level that is required to be successful at stalking, it requires effort and keeps up to ensure you can protect your assets.
DeFI Lending
DeFI lending is a shorthand of decentralized finance. It is where a group of blockchain-based applications offer financial services that you would normally see at a bank, credit union, insurance broker, and other financial entities. When we say decentralized it means that there is no third-party working in the middle, instead, it is known as a dapp that runs autonomously. The lending protocol allows for the lender to earn interest. Right now, because of the Defi has the highest lending growth rate.
The money lent out through decentralized exchanges goes toward creating liquidity, at the lender in this situation you earn interest as a reward. These rates have no set deposits and are determined by the market instead.
Risks of DeFI Lending
Many of the interest rates that are being offered on these are significantly higher than other traditional financial products. Because of this, it makes Defi Lending highly attractive when it comes to passive income streams with crypto. However, like all lending assets there are risks everyone should be aware of:
- Impermanent Loss: This is when the price of the asset is locked up in a liquidity pool is changed after being deposited. Which can create an unrealized loss when compared to holding the asset in a crypto wallet.
- Flash Loans: These are a type of unsecured loan that involves a small contract to make the risks less serve when associated with traditional banking.
- Rug Pulls: A new type of exit scam where the developers create a new type of token, and they pair it to a leading currency and set up a liquidity pool with the promise of high yield returns. Once there is a lot of money, they then use back doors to put millions of coins into, draining the popular currency, leading the mullions of coins left in the pool worthless.
One of the ways to reduce the amount of risk you could be getting involved in would be to verify the credibility. You can do this by reading through the project’s white paper, check to see if the code has been audited by a third party, and being aware of unrealistic returns.
Begin Participating in Cloud Mining
Cloud Mining is when you pay to mine for a stake of their mining rewards. The idea being when you do not have the proper resources to do it yourself, you pay someone who has them to do it for you instead.
Risks of Cloud Mining
Like all currencies there are various risks involved that you should be aware of before investing
- Scams: One of the biggest risks is scams. There are a ton of cloud-mining companies that are fake. Although through are a lot more legitimate companies than there are scams, you must be careful. All you have to make sure to do is in-depth due diligence. This ensures that the company and product are legit and have credibility.
- Change of Protocols: If there is a change in the exchange protocol that is implemented by the community, it could put your cloud operations at risk.
- Mining Difficulty May Increase: The difficulty if mining may or may not increase over time, this means that number of coins you can use to mine can also decrease. To minimize this risk, favor shorter contracts over longer contracts and to have different contracts than just one.
Though there are a lot of risks associated with Cloud Mining, there are also various ways to minimize the risks.
Start Looking into Decentralized Gaming
Decentralized gaming works by buying items in a Dapp game. You then earn through the value and the higher number of players that need the item means the higher the value gets. To be able to get into this you do not have to be a gamer, you just need to be able to find a popular game on Ethereum or other gaming platforms and purchase collectible items.
Risks of Decentralized Gaming
The risk with this is that you need to at least understand the economics of the game to determine which items will be valuable and which ones will not be. If you are not able to make this determination you risk buying an item that is worthless in the game. Buying a worthless item means that no one will want to buy it back.
Running Masternodes
A Masternode is a node used to help secure a network but does not need to do anything. All that is needed from the investor is a set number of coins, and then the coins are locked up.
Risks of Running Masternodes
Like all investments, Masternodes do come with different risks that need to be considered before entering an investment.
- Price Fluctuations: The biggest risk with Masternodes is the price fluctuations. If it dips too much the losses will outweigh the income you were to make.
- Scams: Most Masternodes are a scam. The coins themselves may not be a scam, but the place where you put the assets are. They are just abandoned schemes where your assets go to die.
To protect yourself from potential scams, make sure you check in the companies or currencies to ensure that they are legitimate and verify the policies.
Check Out Interest Bearing Crypto Accounts
A cryptocurrency interest-bearing account works just like a regular savings account. You deposit the funds into your currency with no lockup period or any sort of deposit limit, over time your assets earn compounding interest that you receive payouts for. With these types of accounts, you can withdrawal your funds at any time.
Risks of Interest-Bearing Crypto Accounts
Though the amount of interest you can earn may seem ideal, there are different risks involved in these types of accounts.
- No FDIC Insurance: With a traditional savings account there is a federally backed program that products customers up to $250,000 per account if the bank was to fail. Crypto accounts do not offer this kind of protection.
- The Rules on Withdrawals: Depending on the account, there may be different rules that make it difficult for you to withdrawal your assets. These difficulties can include limiting when you can or how much you can withdrawal.
When thinking about investing your assets in an interest-bearing account, make sure to check out the rules and policies of the savings accounts.
Yield Farming (Liquidity Mining)
Over the last year, yield farming has become one of the cornerstones use for Defi. It’s when users can stake their crypto assets into protocols, and in return for doing this, they receive high returns. To do this, it involves depositing capital to the protocol, which is called a smart contract, to earn the returns.
These protocols allow for it to carry out procedures that are very similar to a normal financial service including borrowing, lending, and exchanging. This strategy is viewed as an effective way to increase the profits of an investor. Because of yield farming, investors can now hold onto their holdings to get more rewards, these rewards can come in the form of a different cryptocurrency.
Risks of Yield Farming
Yield farming is very complex, and because of its complexity, it can make it a little risky. However, if you do have a relatively large investment capital it may be worth trying if you are careful.
Liquidation Risk: It can become a liquidation risk if the colleterial no longer covers the value of the loan. This can result in a penalty charge to the collateral if the value goes down on the collateral and the loan amount increases.
Impermanent Loss: The market is always changing, which means that you could be at risk for losing your money if it changes the wrong direction.
Smart Contracts Can Be Risky: Though they are typically safe, there can still have bugs. Which can lead to errors or not being used as intended. It also can open them up to hackers.
When it comes to investments it is very important to do your research before investing any money into something. This can help protect you from investing into scams or other risk factors.
Investments May Carry Risks but Also Have Rewards
While the idea of cryptocurrencies may be a newer class of investments, it is starting to redefine the idea of passive income. It has opened a lot of doors and various ways of investing that stray from the standard financial industry protocols. The thing to remember, that it is newer, which does carry risks. Along with not being federally back, prone to scams, and large amounts of changes in the market it can make investing a risk. Remember to do your research before making any investments to attempt to protect yourself from those types of scams.
Sources
https://trustwallet.com/blog/top-7-risks-of-staking-crypto
https://www.moneycrashers.com/cryptocurrency-history-bitcoin-alternatives/
https://www.entrepreneur.com/article/372885
https://www.techsling.com/passive-income-with-crypto-top-methods-for-2021/
