Top 7 Crypto Passive Income Streams

20 Dec 2023 by Rory Kejzerko 7 min read

Crypto passive income streams are certainly one of the most attractive propositions of DeFi, as with thanks to the likes of Bitcoin (BTC), Ethereum (ETH), and other multi-feature altcoins, investors have ways to boost their crypto bags without having to actively trade.

Furthermore, with the almighty topic of ‘trading’ now not a necessity for making money via the world of DeFi and Web3, the following article will explore 7 alternative methods for making crypto passive income streams.

What is Crypto Passive Income?

Before delving into different ways to earn it, let’s first define what crypto passive income actually is.

When it comes to ‘passive income,’ this is by no means a new concept. Most famously, the finance industry has long provided various avenues for earning it, such as through offering savings accounts which involve depositing funds in return for interest. Here, the interest earned on a particular savings amount is classed as a ‘passive income stream,’ as the client in question has collected revenue in return for the ‘passive’ act of keeping their money at a particular bank.

Thanks to several technological innovations, crypto passive income streams work in a similar manner. Furthermore, such methods involve obtaining returns with minimal individual involvement - where again, efforts could be as straightforward as locking your cryptocurrency on an exchange for a specified duration.

As intuition suggests, such strategies obviate the need for constant market monitoring and active trading. Instead, crypto hodlers and enthusiasts alike can simply allocate a specific crypto sum in order to generate a passive income…a multi-optional process that will be explored below (in no particular order).

Top 7 Crypto Passive Income Streams - A Review

Crypto Staking

Starting our list off is the most accessible crypto passive income stream on the market; staking.

Staking is a procedure inherent to Proof-of-Stake (PoS) blockchain networks. It demands ‘the most minimal of minimal efforts,’ as the primary action users have to perform is locking their cryptocurrency for a predetermined duration on a particular crypto exchange or DeFi platform. In return, they are rewarded with the network’s/platform’s native cryptocurrency.

Here, staking rewards may manifest in the form of newly minted tokens or transaction fees, contingent on the specific network.

Further, staking is recognised as a low-risk strategy for passive income, particularly appealing to those engaged in long-term cryptocurrency trading.

Liquidity Mining

Next is fellow low-effort crypto income stream, liquidity mining.

Liquidity mining’s popularity has surged alongside the ascent of decentralised exchanges (DEXs) and swap pools. Its core concept involves DEXs relying on liquidity pools to execute transactions for specific tokens. These tokens are contributed by community members known as liquidity providers, who deposit their tokens into a liquidity pool (i.e. a smart contract designed for the DEX).

In return, users receive passive income as a reward for their contribution to the operational aspects of the DEX.

Yield Farming

Another prevalent approach for earning a crypto passive income is yield farming, a practice where individuals deposit cryptocurrencies into yield-generating pools on DeFi platforms.

Whilst widely adopted for generating passive income, yield farming requires thorough research because of the diverse range of DeFi protocols out there. Additionally, it demands more attention due to the fluctuating nature of the returns involved, therefore making it a more risky and ‘less passive’ crypto passive income stream compared to staking and liquidity mining.

DeFi Crypto Lending

Similar to its TradFi counterpart, crypto lending stands as one of the foremost methods for generating passive income within the cryptosphere.

Analogous to liquidity mining, DeFi crypto lending entails depositing cryptocurrencies into a lending pool (therefore requiring minimal effort from the user). Quite simply, interest then accrues from borrowers who utilise the coins deposited in the lending pool.

Through smart contract facilitation, borrowers are obligated to return the funds within the agreed-upon timeframe and pay interest rates. Additionally, borrowers typically need to provide some form of collateral - a measure designed to safeguard the lender in the lending process.

Crypto Mining

Of course, there’s also the formidable method of crypto mining.

Remaining as a popular method for earning crypto passive income, crypto mining involves operating on a blockchain network that operates on a Proof-of-Work (PoW) consensus mechanism (with Bitcoin being a famous example).

In the mining process, miners contribute their computational power and electricity to a blockchain network’s algorithm. Such algorithm utilises these power resources to validate transactions and organise them into blocks - where upon a successful block creation, they receive a reward in the form of the network's native cryptocurrency.

Here, it's crucial to note that mining can incur significant expenses, underscoring the importance of carefully selecting the cryptocurrency to mine.

Dividend-Earning Tokens

Moving on, we have the relatively self-explanatory passive crypto income method of dividend-earning tokens.

Dividend-earning tokens are cryptocurrencies that are designed to provide regular dividend rewards to their holders. Whilst not a widespread occurrence, some tokens even incorporate this mechanism directly into their code.

Put simply, such concept closely resembles earning dividends from stocks, with the primary distinction being that it involves cryptocurrencies instead.

Bitcoin Lightning Nodes

The final method for earning passive crypto income involves running crypto nodes - or more specifically, running Lightning Nodes on the Bitcoin network.

Here, node operators earn fees by facilitating transactions through their nodes. This activity takes place on Bitcoin's Lightning Network (LN), which is a Layer-2 scaling solution designed for enabling faster and more cost-effective transactions.

It's important to note that running the LN demands technical expertise, along with the necessary hardware, software, and a robust internet connection. If you possess the requisite skills and resources to run a node, this can most certainly be an effective way to generate passive income.

Top 7 Crypto Passive Income Streams - Conclusion

Determining whether crypto passive income streams are the optimal approach for maximising your crypto bags hinges on individual factors such as financial goals, risk tolerance, and personal preferences.

However, either way, all of the aforementioned methods hold the potential to yield consistent returns over time - and notably, they demand less active involvement compared to trading.

For long-term holders looking to retain crypto assets over an extended period, passive income can be especially rewarding as it allows them to earn additional funds while patiently awaiting potential price surges.

However, it's also crucial to acknowledge the associated risks involved - which broadly encompass market volatility, regulatory changes, and potential losses of funds. Therefore, it’s imperative for every crypto user to be well-informed about their chosen strategy and the inherent risks involved.

And whilst our list features relatively technical and explicit crypto and DeFi options, you can also earn a passive crypto income through Play-to-Earn (P2E) Web3 games, token airdrops, and more.

Top 7 Crypto Passive Income Streams - FAQ

Are crypto nodes passive income?

Yes, running crypto nodes is a method of earning passive income from crypto, typically rewarded for validating transactions depending on the network.

Can you make money from crypto nodes?

Yes, it is possible to make money by running crypto nodes and validating transactions, with the potential for passive income, depending on the network and its token.

What crypto generates passive income?

Many cryptocurrencies offer passive income through various methods within the DeFi sector, present on blockchains with smart contracts. Ethereum is a notable example, but other similar networks also provide valid opportunities.

Is crypto good for passive income?

The profitability of crypto for passive income depends on factors like the amount invested, chosen method, and more. Options range from modest earnings to substantial amounts, such as validating transactions and running crypto nodes on Bitcoin, which can be highly rewarding.

Are crypto nodes taxable?

Profits from the crypto industry, including earnings from nodes, are subject to taxation. While nodes themselves are not taxable, the crypto earned through transaction validation may be subject to taxation, depending on your country's laws and whether you convert the earnings.

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