According to Coinmarketcap, Bitcoin is worth around $19,600 USD as of October 2022, which is significantly down from its all-time high value of $68,000 in November 2021. Making sustainable profits from this kind of uncertain market conditions may not be possible all the time.
That said, Bitcoin and other cryptocurrencies present multiple opportunities for traders to generate passive income. Traditional passive income methods like compounding interest and reinvesting dividends are also employed in the crypto market. Let’s discuss the various methods for generating passive income with Bitcoin, despite the volatility of the market.
Bitcoin interest accounts
Similar to how banks pay interest on the stored amount in a savings account, cryptocurrency savings accounts also pay interest. Most of these accounts pay a fixed interest on the deposited crypto assets.
Bitcoin and other crypto interest accounts usually have two plans - a flexible savings plan and a fixed savings plan. Investors can choose a flexible savings plan to withdraw the deposited assets at any time. For a fixed savings plan, investors need to deposit funds for a fixed predetermined period.
Investors can benefit from higher interest rates by choosing fixed savings plans. The tenure for these plans is also less when compared to traditional banks, and some platforms do not have minimum deposit requirements. This way, investors can generate passive income by depositing their Bitcoin holdings in interest-bearing accounts.
Bitcoin holders can lend their coins to borrowers on centralized, decentralized, or peer-to-peer platforms. In exchange for lending their BTC, traders can receive interest from borrowers on a daily, weekly, or monthly basis. For facilitating this service, the lending platform will charge a specific fee from users.
A lender’s earnings depend on three factors: the total value of Bitcoin lent, the duration of the loan, and the interest rate. When using centralized platforms, users need to trust the BTC lending infrastructure and terms of the platform, because the funds will be in the custody of the platform.
Decentralized platforms automate the lending process by using smart contracts. Lenders can set their preferred interest rates and the time period and the contract will be executed when the specified conditions are met. There are no commission fees in decentralized platforms.
Peer-to-peer platforms also allow individuals to define their terms. However, unlike decentralized platforms, they charge fees for providing the infrastructure to facilitate lending and borrowing.
Bitcoin uses a Proof-of-Work (PoW) consensus mechanism to operate the network, which depends on miners. Miners solve complex mathematical puzzles to maintain the security of the network. In exchange for using computing power, solving puzzles, and producing new blocks, miners receive rewards in the form of BTC.
Initially, miners used hardware equipment like mining rigs. As the Bitcoin network increases, the complexity of mining increases. As a result, special manufactured mining equipment, called application-specific integrated circuits (ASICs), are required for mining purposes.
Miners can set up and maintain mining rigs to bring down the costs. However, it involves initial capital and technical expertise to maintain the hardware. Alternatively, miners can join pools and contribute their computing power to increase the chances of finding the next block. This way, miners can earn passive income with Bitcoin mining.
Even though trading involves active time and effort to gather information and analyze past market trends, it can be a good passive income-generating method with automated bots. By automating the trading strategies, investors can earn profits without actively trading 24/7.
To simplify the trading process and reduce the possibility of losses, exchanges and crypto trading bots allow investors to set stop-limit orders. When the Bitcoin market price reaches the predefined price point, the order will automatically be executed. This way, investors can make profits without actively participating in it.
Investors can use pre-programmed trading instructions and set time, volume, and price to execute a trading strategy. However, it’s important to choose secure and reliable platforms or trading bots to ensure that the orders get executed on time. Investors need to research platforms thoroughly and use demo accounts to test before choosing any platform.
Bitcoin liquidity pool
Liquidity pools are crucial aspects of decentralized exchanges. They provide an opportunity to make passive income by depositing the required cryptocurrency. Bitcoin liquidity pools are where a large amount of BTC is locked in a smart contract for creating liquidity, and also to enable faster transactions.
Investors who deposit their crypto holdings into a liquidity pool are called liquidity providers (LPs). In exchange for locking their funds in the smart contract and contributing to the liquidity, LPs receive rewards in the form of LP tokens. A part of the transaction fee is also rewarded to LPs based on the amount of liquidity they provided.
Cryptocurrencies are known for their volatility and trading them may not result in making constant profits. This is the reason passive income generating methods are suitable for investors who do not find time to actively pay attention to the market prices and analyze them.
However, before choosing a platform to generate passive income from cryptocurrencies, investors need to research and have a clear understanding of the various risk factors, platform security, expected returns, locking periods, and other necessary details.