What are the Best Ways to Make Passive Cryptocurrency Income During a Volatile Market?

With the future price action of the cryptocurrency market uncertain, many people are trying to figure out how to continue making passive income during a down market. Fortunately, cryptocurrency has plenty of options, including lending cryptocurrencies, staking, and liquidity pool providing.

Even though the cryptocurrency market somewhat recovered from its recent fall, almost every crypto is still down significantly from its all-time high, and there is no guarantee that everything will rebound quickly. In the meantime, investors who have gotten used to daily gains in the cryptocurrency market have begun looking for other opportunities to supplement their income. As one of the most disruptive and revolutionary financial tools in recent history, blockchains and cryptocurrencies are offering numerous opportunities for investors to make passive income, and they suit all levels of risk.

One of the least riskiest ways to make passive income in the cryptocurrency market is through staking crypto on proof of stake blockchains. Proof of stake is a consensus method that allows blockchains to be secure and immutable. It is similar to mining cryptocurrencies using machines, which is known as proof of work, but instead of using computers, investors “stake” their cryptocurrency on the network and use it as collateral to confirm transactions. This is seen by many to be the future for cryptocurrencies, as it is both more efficient and environmentally friendly than mining.

Almost all major smart contract blockchains allow for staking, including Binance Smart Chain, Cardano, Polkadot, and Solana. Additionally, Ethereum is currently moving to a proof of stake model in the near future, and investors can lock up their ETH with custodial services available on exchanges like Kraken and Binance in order to start earning staking rewards using their Ethereum. The rate of return, or ROI, of staking depends on the blockchain, and is usually not as good as it appears. For example, Polkadot advertises a 13% annual percent yield, or APY, but a lot of the DOT being given to stakers comes from the network’s inflation, so the real APY is closer to 4%. Just because a coin has a high APY does not mean that it is a good investment. In fact, many DeFi coins that can be staked and offer staking APYs greater than 100% usually have lots of inflation, making them an unsafe place to store money in the long-term.

It is important to choose a good and reputable custodian when staking. If the custodian makes an error or stops helping secure the network, your funds may be slashed. However, if one chooses a good staker and a cryptocurrency with strong fundamentals, staking is one of the easiest and risk-free ways to make passive income.

Another way to make money with passive income is through DeFi protocols. There are two main opportunities available for investors. The first is depositing funds into a lending platform such as Aave or Compound. These platforms take tokens such as USDC, ETH, WBTC, and LINK, among others, and lend them out to borrowers who want to get overcollateralized loans. These yields are significantly higher than those in traditional bank savings accounts, and can be as high as 15-20% in some cases. For example, Terra’s Anchor Protocol aims to achieve a 20% ROI for stablecoin deposits.The two main issues with lending money are the risks of the DeFi protocol getting hacked and the interest rate being variable and volatile, meaning that one day the 15% ROI could turn into a .1% ROI. For audited and well-known projects, the risk is minimal, but still there nonetheless.

The other main opportunity in DeFi is depositing funds into liquidity pools, such as those on Uniswap or Pancakeswap. In traditional finance, when someone wants to use a stock trading platform like Fidelity or Robinhood, those platforms have to hold both the stock that a user wants to purchase along with dollars in case people want to sell. In the decentralized finance world, this obligation is given to liquidity pool providers, who can deposit two coins, such as ETH and USDC, into a liquidity pool and earn the trading fees from users using the exchange. For example, if someone deposits USDC and ETH into Uniswap, they will get a cut of the trading fee every time someone decides to buy ETH using USDC on Uniswap. On Pancakeswap and Sushiswap, these yields are even more lucrative, as they offer their CAKE and SUSHI tokens as an incentive to provide liquidity. This can lead to incredibly high APYs of 100% or greater on some token pairs.

The main risk with liquidity providing is that there is the chance of impermanent loss. This happens when one token rises more than another, and it occurs because the liquidity pool has to keep a 1:1 ratio between each coin. So if the Etheruem price increases, and more people are buying ETH using USDC from the pool, the pool providers will have a larger portion of USDC than ETH, and would have made more money holding the assets outright. There is also the risk of a hack, like with any DeFi protocol. However, the token rewards on Pancakeswap and Sushiswap mitigate impermanent loss to a degree. Nonetheless, it is one of the more risky options presented.

One final option to consider is centralized finance, or CeFi, lending through platforms such as BlockFi, Nexo, and Celsius. These platforms offer a stable interest rate on popular cryptocurrencies and stablecoins, and are sometimes insured against hacks. Unfortunately, these services require KYC and are subject to traditional banking laws, but can be a good option for people not experienced enough to feel comfortable with DeFi.  

Just because the cryptocurrency market isn’t increasing daily does not mean that there are no opportunities to receive a yield. Through DeFi platforms and staking opportunities, investors can rest assured that their assets are making them money while they sleep, and helping them achieve their goal of financial freedom.

By Lincoln Murr

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