Passive income. What is it anyway? We can find many articles, websites, or videos about how to get incredible returns from our investments. Whatever the investment is, it could be money, time, private data, or even our contacts.
Let’s not play by a book. Passive income has a definition, for example, Investopedia offers one. What I imagine under the phrase is something, which generates you reward with minimal, close to no effort, but it could require some initial investment. It could be an investment of your time into building a web service, application, or some financial investment producing a yield.
I guess you have seen many articles promising incredible income. Follow these steps, get 1000 USD per month (or week, or even hour) and similar shit. Yeah, I said shit. Why? Because most of this stuff is built on the assumption of greed and hope. As described in the previous article Gold rush, the idea is the same.
The idea is not new and I kinda experienced it in every phase of life. Let’s imagine this:
In kindergarten, when you wanted to play with another kid’s toy, you had to pay the kid in gummy bears to borrow the toy. It is his/her toy and the kid can generate profit on it.
In school, there were video games. If you want to get the game, you have to pay your pocket money for the copy.
In high school, some people started with part-time jobs and got recruited by scammy financial advising firms. They sold shitty financial products to friends and relatives. If they built the pyramid scheme (from their friends), there was passive income from commissions.
At university, you shared your homework or semestral work results, you could earn money on it, if they didn’t check for plagiarism, of course.
Answer a few questions to yourself. How many people did really profit when they tried? Everyone? Because it was easy? or only a few?
Internet is full of ideas of guaranteed passive income, which mostly end up as a scam and money loss. Similar to the pyramid scheme I mentioned with financial products, you can find offers such as ad clicking, affiliate marketing, captcha solving, selling likes on social media, or even fake reviews and app downloads.
If you build up a strong group of followers, you can enjoy some juicy commissions from their work. Is it moral? It is up to everyone to decide. But let’s face the facts, most people involved in these activities will end up at a loss because there is usually required some initial investment. Probably you did not want to hear that, right?
Many YouTubers or blog writers share their ideas and show their successes. Imagine if others would share their failures. But no one wants to watch or read that. We love hope. We want to believe dreams can come true.
But can crypto change it? And what are the options in crypto? Let’s put aside obvious scams and check options I noticed with the time.
1) Mining
You can invest in mining devices. But let’s face the truth. Mining as a solo miner will be most probably not much profitable (include initial investment, current energy prices, crypto volatility, increasing hash rate & obsoleting mining device). Recently, there were some lucky shots from smaller solo miners, but relying on this is like gambling.
If you do not plan to invest a big amount of money, you can join mining pools. It gives space to speculate if you burn less energy than the value you will produce.
You can also buy or rent your hash power through marketplaces like Nicehash. And estimate your profitability based on market demand and your current energy rates (which went up drastically lately).
Also, you should be ready that your mining device might become obsolete soon and it can stop being profitable to mine. Again, you can speculate on price, but once you will have to pay the bills.
Also, it is good to pay attention to how secure the network is. It means how the mining power is distributed (no pool with the higher majority) and the possibility of one big miner hijacking the network. Some overview of costs of the attack brings Crypto51.info.
If you are decided to give it a try, What To Mine is a great tool to check, before you will jump in. Interestingly enough, they provide open free API for devs also.
Pros
- mining device can be used to mine different coins
- option to participate in pools
- option to buy/sell your computing power on the market
Cons
- mining device can become obsolete
- energy prices can cause mining unprofitable
- 51% attacks on weak Proof of Work chain
2) Staking
Staking is another technique for securing the blockchain. Some people are still not convinced about its security, and mining-staking arguments are still a thing. Mainly between Ethereans and Bitcoiners. But that’s out of the scope of this article.
In simple words, you need to invest in coins/tokens instead of mining devices. These coins are used as your stake in the game of securing the network (or securing DAapps). Based on the weight of your stake, you get the reward. Similar to mining.
The advantage of mining is you can switch your mining device to another network and keep mining if something goes wrong in the network you currently mine on. Thus, you should be really sure about the project you invested in for staking. Because if something goes wrong then your whole investment might be lost. An interesting overview is offered by Staking Rewards service.
Pros
- no mining device needed
- usually easy to set up
- low energy consumption
Cons
- investment into volatile asset
- big holders could attack the network similarly to 51%
3) Master nodes
Masternodes are special nodes, which verify new blocks. They demand to have some initial collateral, which should serve as protection against bad actors in the network, who risk the loss of the collateral if they are caught. If they are honest, they get reward for securing the network.
A big boom of masternode coins happened by the end of 2017. Most of these projects were cheap copypasta with huge technological debt. And it all crashed in the following months.
However, a few projects survived the blood bath of the bear market and are still active. With more or less success. A nice overview of masternode coins can be found at masternodes.online.
Pros
- no mining device needed
- governance of the protocol
Cons
- mostly high-risk investment into volatile asset
- higher initial investment requirement (collateral)
- setup of the node might complex
4) Yield farming
With the birth of Decentralized finance (DeFi), we got a new opportunity, how to earn a yield on our idle assets in a decentralized way (kinda). The biggest boom started with lending markets and the collateralization of synthetics. Together with AMM decentralized exchanges, we opened Pandora’s box.
The term “money Lego” says it all. At first, you could earn a share on fees generated on the platform for providing your liquidity for use. Later, it was leveled up by liquidity mining, the possibility to earn an extra reward in governance tokens for contributing and using the protocol.
It lead to crazy investing strategies and automated investing vaults using leverages, tokenized liquidity positions, and harvesting the yield across many projects at once. Total gamechanger was introducing of flash loans, undercollateralized loans, which can be repaid in the same block.
There are a couple of yield comparing tools, but I am not aware of any good aggregator, which would cover all types. To mention some, LoanScan provides a lending market overview, and Liquidityfolio tracks yields on AMMs.
Pros
- access to a variety of financial tools for everyone
- option to multiply the yield by using complex strategies
- automatized investing vaults and compounding
- undercollateralized loans (flash loans) and arbitrage trading
Cons
- multiple risks (smart-contract exploit, flash loan exploit, impermanent loss)
- complex for new people to fully understand risks
- sometimes not fully decentralized
- has to rely on the security of the blockchain (51% attack, double-spend)
6) NFT
Flipping NFTs (meaning buy low, sell high) becomes quite a topic on social media. We all saw incredible gains generated by a few people. This is mostly gambling, and every success covers many failures of others. And the flipping itself is active trading, thus I would not count it as passive income.
What might be considered as a passive income are royalties. Royalty is a reward for the NFT issuer, the percentage reward from the future trades. It means that every future sale will generate a reward for the original issuer. If the NFT is a successful and often traded asset, it can become a real treasure for the original author.
NFTs got big attention, especially on the Ethereum blockchain. One of the most used marketplaces nowadays is OpenSea.
Pros
- accessible to everyone
- easy way how to monetize digital properties
Cons
- high-risk investment
- questionable decentralization
- has to rely on the security of the blockchain (51% attack, double-spend)
7) Airdrops
Multiple crypto projects decided to switch, or at least they pretend it, into Decentralized Autonomous Organization = DAO. To be able to govern the future steps of the project, you need to have governance votes. But how to get the community involved? Airdrop, mostly retroactively to the users of the project. Initially, it was not a bad idea.
Users who used the project got a chance to decide about its future. But it got exploited by airdrops hunters in the time. Some airdrops were even more like rewards for investors. But still, it is an interesting idea, to get onetime income for only using your favorite product.
An interesting service for tracking airdrops across multiple chains and projects is AirDrops.io.
Pros
- reward for using the project
- voting right in governance
Cons
- can be gamed by whales
- whales might takeover voting
- fake airdrops are often used for phishing
8) Security tokens
The last category I would like to mention are tokenized securities. It could be tokenized equity, debt, or even tokenized ownership of real estate. This invokes that these tokens might appreciate in value in time and might pay a dividend, same as traditional securities. But like everything, it can drop also.
Securities tokens are regulated and thus should be safer for investors. But it brings all necessities connected to it, like requirements such as AML, KYC, or even being an accredited investor.
One of the services providing existing security tokens is STOmarket.com.
Pros
- regulated, should a be safer investment
Cons
- regulated, might be seized, frozen
- can not be fully decentralized
Conclusion
So, what the hell? Where should I put my money to get a nice passive income? If there were a working pattern, we would be all rich. All promises you see on the internet are highly deceiving. There must be losers who will generate the profit for winners.
Finding who you are will take time. It is essential to understand the investment risks and the product you decide to invest in. If you have this knowledge, it reduces the risk and may boost your reward, or help you to prevent the loss.
To answer the initial question: It is possible, but also risky. I tried to highlight a couple of options, which you can explore more deeply and decide what fits you the most. If you miss any, please let me know in the comments. Stay safe and good luck on your path.
Join Coinmonks Telegram Channel and Youtube Channel learn about crypto trading and investing
