How to earn passive crypto income with Bitcoin

Bitcoin (BTC), along with other cryptocurrencies, has provided people with a place to earn passive income and make money without active participation. There is no need to take unnecessary trading risks or spend time reading and analyzing tons of information.

While the concept of passive earning is not new, cryptocurrency has undoubtedly added new dimensions to it. Concepts such as compound interest or dividend reinvestment are also applied to the cryptocurrency market, creating an ecosystem in which to earn passively.

Let’s discuss different ways you can use Bitcoin to earn passive income. This article covers Interest Accounts, Lending, Mining, Trading, and Liquidity Pool.

Bitcoin Interest Accounts

Storing bitcoin in a cryptocurrency savings account is similar to owning regular savings accounts. These accounts offer fixed interest rates on the deposited crypto assets. One can choose between flexible savings plans, which allow the depositor to withdraw money at any time, or fixed savings plans, in which the assets remain deposited for a set period of time.

Interest rates are typically higher when depositing fixed-term funds than in a regular savings account. Fixed-term deposits have a much shorter term than conventional bank accounts. Some protocols also have no minimum deposit requirement.

One can also consult a financial advisor to implement investment strategies such as dollar cost averaging (DCA). The strategy involves investing the same amount of BTC in a target security on a regular basis over a period of time, lowering their average cost per share, and reducing the impact of volatility on their cryptocurrency holdings.

Bitcoin Loans

Bitcoin lending occurs when someone who owns BTC lends the cryptocurrency to borrowers through a centralized, decentralized, or peer-to-peer (P2P) platform. In return, borrowers pay interest on a daily, weekly or monthly basis. The lending platform usually charges a fee for the service.

The three factors that affect earnings are the total value of the bitcoins lent, the length of the loan, and the interest rate. Users must trust a third-party provider for Bitcoin lending infrastructure and terms on centralized lending platforms. Most platforms require users to deposit their BTC with the lending platform. While this provides users with expert-level help, their bitcoin is in the care of platforms.

In the case of decentralized credit platforms, on the other hand, no intermediaries are involved. Smart contracts automate the lending process and ignore any human role. Interest rates are set autonomously and the contract is executed once the relevant conditions are met.

On P2P platforms, users can define their individual terms. For example, they can determine the interest rate and the amount of bitcoin they want to lend. The platform’s role is to provide the necessary infrastructure to close the deal and they usually charge a fee for their services.

Bitcoin mining

Mining makes it possible to receive a reward for using computing power to secure the Bitcoin network. Bitcoin is a Proof-of-Work (PoW) protocol that requires network participants to solve a random mathematical puzzle to prevent unauthorized persons or even insiders with malicious intent from making changes that are detrimental to the network.

In earlier days, users mined bitcoin on regular PCs and then general purpose mining rigs. However, as the network grew, the complexity of mining increased, and miners were forced to use purpose-built mining equipment called application-specific integrated circuits (ASICs), which have integrated chips designed for mining.

Miners could set up and maintain mining rigs to reduce their costs. However, to do so, they need to have the necessary initial capital and some technical know-how as they need to maintain the Bitcoin mining hardware. This has enabled people to mine bitcoin without having to invest a lot of money. Being part of a pool with lots of processing power gives you a higher chance of generating a winning hash than miners who lack such advanced equipment.

Bitcoin trading

As with all financial assets, the price of bitcoin is influenced by the laws of supply and demand. Anyone holding BTC can take advantage of the cryptocurrency’s inherent volatility to make money trading Bitcoin, either by going long or short. Going long refers to selling BTC when prices are rising, while going short is the act of selling when prices are falling.

Accurately timing the market to make profits is practically impossible for anyone. However, the basic idea with long positions is to buy BTC when you expect the price to go up and later sell it at a profit. For example, if BTC is trading at $20,000 and they suspect it might go to $25,000 or higher, they could buy Bitcoin or trade any other cryptocurrency for BTC, wait for the price to rise, and then sell the cryptocurrency to get a clear one Earning profit $5,000.

A shorting strategy is usually implemented by traders when cryptocurrency prices are falling. Suppose the price is currently $20,000 and the trader expects it to drop to $17,000. The trader can sell their BTC immediately and buy it back later when prices reach the desired level, making a profit of $3,000. Bitcoin can be short sold through its derivatives such as futures and options. One could also participate in short bitcoin prediction markets.

To simplify trading and minimize the risk of loss, exchanges allow stop limit orders to be placed. When prices fall below a certain level, the system executes the trade on its own, limiting losses. To fully automate bitcoin trading, one could use algorithmic trading. Pre-programmed trading instructions are issued based on time, volume and price. When the market triggers the trader’s set instructions, the software executes the orders.

Bitcoin Liquidity Pool

Liquidity pools, the lifeline of decentralized exchanges (DeXs), can also be a place for anyone who has BTC to make some passive money. A bitcoin liquidity pool refers to a digital pile of cryptocurrency locked in a smart contract, creating liquidity for faster transactions.

Users of various crypto platforms, called Liquidity Providers (LPs), are rewarded with a share of the fees and incentives in exchange for the amount of liquidity they have injected into the liquidity pool. They are paid in the form of LP tokens that can be used across the decentralized finance (DeFi) ecosystem. UniSwap, SushiSwap, and PancakeSwap are some popular DeFi exchanges.

A liquidity pool has cryptocurrencies in pairs, like BTC-USDT, ETH-USDC, etc. Here is an example to understand how it works at SushiSwap, with a $5,000 investment in a BTC-USDC liquidity pool. The steps are:

Keep an eye on the changing ecosystem

The ability to generate passive income with Bitcoin increases the value of one’s holdings. Investing in cryptocurrencies always has a risk quotient due to volatility. Nevertheless, a passive income makes it possible to earn money steadily without being actively exposed to the strong ups and downs in prices. Before deciding how to make money through passive earning, one needs to do proper research on expected returns, risk factors, etc.

The cryptocurrency ecosystem is evolving and new use cases for Bitcoin could emerge, making it imperative to keep a constant eye on the opportunities that are emerging. Local government sanctions are also an important aspect to consider. Cryptocurrencies, including Bitcoin, are under the scrutiny of regulators and one needs to be aware of what they approve and what they disapprove.

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