The cryptocurrency market is incredibly volatile, which can be both good and bad for investors and traders. Volatility creates opportunities to make profits, but it can also lead to losses. Passive income strategies, however, could be helpful in offsetting these losses.
Passive income strategies provide investors and traders with opportunities to earn profits even in difficult market conditions such as bear markets. For those investing in Ether (ETH), or any crypto in general, earning passive income from crypto offers a way to hedge market crashes and downturns.
Hodling was once the primary means of earning interest on its crypto assets. But, with the rise of decentralized finance (DeFi) protocols, there are now many ways to earn interest on Ether and DeFi protocols. This article is a guide on how to make money with Ethereum for beginners and those already familiar with the space.
What is Ethereum and how does it work?
Ethereum is a decentralized blockchain network that works smart contracts. These are applications that run exactly as programmed without the possibility of fraud or interference from third parties. Ethereum’s native token, Ether, allows users to perform multiple functions on the network such as transacting, staking, trading, storing non-fungible tokens (NFTs), playing games and more.
Ethereum is also used to build decentralized applications (DApps), which are open-source software that runs on the blockchain. DApps can be built on the Ethereum network by anyone with the skills and expertise to do so, making it one of the most popular platforms for developers.
Ethereum used to use a proof of work (PoW) consensus algorithm, which rewards miners for validating blocks of transactions. However, Ethereum has officially transitioned to a proof of stake (PoS) consensus algorithm on September 15, 2022 at 1:42:42 a.m. EST.
The historical transition is part of this Vitalik Buterin, co-creator of Ethereum, dubbed The Merge, noted as the first part of several in the network’s multi-year scaling roadmap. The move to PoS is designed to make Ethereum more scalable and energy efficient by eliminating the need for miners who use large amounts of electricity to secure the network.
How to earn passive crypto income with Ethereum?
Here are some popular ways to make passive income with Etherum:
Staking is the process of locking one’s funds onto a PoS blockchain (like Ethereum) to help validate transactions and earn rewards. When users stake their ETH, they are essentially putting their skin in the game and helping to secure the network. In return for their efforts, bettors earn rewards in the form of ETH or other tokens.
Ethereum Staking is a popular way to earn passive income through cryptocurrency, although it may be too expensive for hobby investors. The new PoS version of Ethereum requires at least 32 ETH – roughly over $50,000 – to run a full validating node and participate in staking.
Apart from direct staking, one can also use service providers like StakeWise and Lido. These are DApps that provide Ethereum staking services without having to run a full node, allowing network participants to stake with minimal amounts. These services usually charge fees on rewards above 10%, which can reduce profits, but at least they won’t need to invest 32 ETH upfront.
Hodl, a derivative of “hold”, also “hold on for dear life”, is a cryptographic slang term used to describe the act of holding a cryptocurrency for long-term investment purposes. When Ethereum investors hold their Ether, they are essentially betting that its price will rise in the future and that they can sell it for a profit. It is one of the easiest and most popular ways to earn passive income from cryptocurrency. And, although this strategy does not offer any immediate or guaranteed return, it can be profitable in the long run if the price of Ether does indeed increase. Considering this, Ethereum has grown tremendously since its inception and is currently one of the most valuable cryptocurrencies in the world, so there is a good chance that its price will continue to increase in the future.
However, it is important to keep in mind that cryptocurrency prices are very volatile and can fluctuate quickly. This means that there is always a risk of loss when dealing with crypto, so investors should only invest the amount of money they are comfortable losing.
Another way for users to generate passive income from their Ethereum investment is to use an automated Ether trading bot. Automated trading robots are software that use pre-programmed algorithms to buy and sell cryptocurrencies on exchanges 24/7.
These bots can be configured to place trades automatically under certain market conditions, such as price changes or volume. Coinrule and Bitsgap are just a few examples of automated trading software that allows users to define trading rules, either using predefined templates or customizing them based on risk preferences.
If successful, automated trading can generate a steady stream of profits, although it comes with some risk. Bots aren’t perfect and can sometimes make mistakes, like selling too early or buying too late.
Additionally, the cryptocurrency market is very volatile and can undergo sudden changes that a bot might not be able to anticipate. As such, investors should closely monitor their auto trading activity to avoid any significant loss.
Lending is another popular way for investors to generate passive income from their ETH investment. Typically, investors make a profit by lending cryptos to borrowers with a high interest rate. This can be done either by centralized or decentralized lending platforms.
On centralized platforms, users generally do not have to worry about technical issues such as security, data storage, bandwidth usage, or authentication. The platform manages all the technical details and offers investors the opportunity to optimize the return on their assets.
Centralized platforms usually have higher interest rates than decentralized lending platforms. A downside, however, is that centralized platforms are more susceptible to hacks and data breaches.
On the other hand, decentralized lending platforms allow users to enjoy a higher level of security, transparency, and customization, allowing experienced investors to tweak settings to maximize their profits. The downside is that these platforms are often more complex to use and require a higher level of technical expertise. Interest rates also tend to be lower on decentralized platforms.
Liquidity mining or yield farming is also an alternative to generate passive income from Ethereum. Here, users lend their Ether or other assets to liquidity pools on decentralized exchanges like Yearn.finance, SushiSwap, and Uniswap to earn rewards.
Many yield farming platforms include the ability to trade one token for another in a liquidity pool. Traders pay fees when trading cryptocurrencies, and these fees are then distributed among the farmers who contributed to the liquidity of this pool. The amount of the reward depends on the farmer’s share of the total pool liquidity.
Yield farming can be a great way to generate passive income, but it’s important to remember that it’s a relatively new practice and therefore subject to change. Moreover, it can be a risky investment, as the price of the underlying assets can fluctuate rapidly, leading to losses.