12 Smart Strategies to Earn Passive Income with Crypto

Yes, it is possible to consistently generate passive income with crypto through a wide range of methods, including lending, staking, and yield farming. Different crypto passive income methods entail various risks, with potentially substantial rewards for those willing to do their own research, understand the risks involved, and commit to a long-term crypto passive income strategy.

In this article, we look at a dozen approaches to crypto passive income so you can begin to identify the best way to earn passive income with cryptocurrency based on your goals and level of experience.

Earning passive income with crypto could be considered a more conservative approach over speculative trading. Really the best way to earn from crypto will depend on your circumstances and personal preference. 

Some may prefer to speculate on low market cap coins and look for large returns during a bull market, while others may prefer to actively trade or use bots to execute trades for them and slowly accrue earnings through arbitrage or simple market fluctuations. Ultimately the question is how active do you want to be in your investments. If you prefer a hands-off approach and are satisfied with methodical, steady, and secure returns, passive crypto income is probably for you.

The following methods offer different opportunities for generating passive income with cryptocurrency. It's essential to evaluate the risks and choose the methods that align with your financial goals and risk tolerance. 

This list will begin to show you how to make passive income with crypto. Before you jump in, however, we strongly recommend you do your own research to fully understand each of these passive income methods and the risks involved.

Affiliate programs

Some crypto-related businesses offer affiliate programs where you can earn rewards for referring new users or customers. You typically receive incentives when the referred user takes specific actions, such as signing up to a crypto exchange through your affiliate link. Learn more about the TokenTax affiliate program.

Dividend tokens

Some cryptocurrencies offer dividend-like rewards to holders. These tokens distribute a portion of trading fees or profits to holders. Examples include KCS (KuCoin Shares), ASD, and NEO.

Forks and airdrops

Occasionally, existing cryptocurrencies undergo forks, creating new chains or tokens. Crypto airdrops distribute new tokens to existing holders based on specific criteria. While you can't control these events, participation in the crypto community increases your chances of benefiting from forks and airdrops.

Interest-bearing digital asset accounts

Some platforms offer interest-bearing accounts for cryptocurrencies and stablecoins. By depositing your assets into these accounts, you can earn interest over time. Stablecoins like USDC and DAI typically offer competitive interest rates. Be aware of lockup periods and platform risks.

Crypto lending

Cryptocurrency lending involves loaning your digital assets to borrowers in exchange for interest payments. The income you earn depends on factors such as the loan amount, duration, and interest rate. There are different forms of crypto lending:

• Margin Lending: Lending assets to traders for margin trading.

• Centralized Lending: Using third-party platforms with fixed interest rates.

• Decentralized Lending (DeFi): Direct lending through smart contracts.

• Peer-to-Peer Lending: Borrowing and lending directly between users.

Liquidity provision

Liquidity providers play a critical role in decentralized platforms by supplying crypto for trading. They earn a percentage of fees and, in some cases, additional tokens like governance tokens. Popular liquidity provision platforms include Uniswap, SushiSwap, and PancakeSwap.

Master nodes

Certain blockchain networks (such as Dash) have master nodes that help secure the network and validate transactions. Running a master node may require holding a significant amount of the network's cryptocurrency. Master node operators receive rewards from block rewards.

Mining

Crypto mining forms the backbone of blockchain technology, leveraging numerous computers to create secure transaction blocks. Many popular cryptocurrencies, such as Bitcoin and Litecoin, use the proof-of-work (PoW) algorithm, where miners compete to solve encrypted solutions. The winner is rewarded with cryptocurrency. 

NFT staking and rentals

Non-fungible token (NFT) owners can earn passive income by renting out their NFTs for various purposes, such as gaming, event tickets, virtual land, and more. Platforms like reNFT, NFTX, and Binance NFT PowerStation facilitate NFT rental and income generation.

Play-to-earn games

Online games offer another avenue for passive income. Play-to-earn crypto games like Axie Infinity and Decentraland have gained popularity, even providing income sources in some regions during economic downturns.

Staking

Proof-of-stake (PoS) is an alternative method for earning new coins. Crypto owners who stake their coins participate in the network's consensus process, receiving fees in return. Crypto staking typically doesn't require advanced technical knowledge, as some exchanges enable automatic staking for eligible currencies. 

Yield farming

DeFi platforms empower individuals to act as lenders, participating directly in the lending process. Users connect their crypto wallets and contribute their coins and tokens to a shared pool. This pool is then used to provide loans to others, earning interest and fees. Users may receive compensation for their participation or earn interest based on the amount staked. Earnings depend on factors such as loan duration, loan amount, and interest rates.

Yes, passive income from cryptocurrency is taxable. Regardless of the source, all income from crypto is subject to taxation. Additionally, when you sell crypto for profit, you realize short- or long-term capital gains with corresponding crypto tax consequences.

Taxpayers outside the US can refer to our international crypto tax guides for further information about passive crypto income and taxes in their region. When in doubt, consult with a tax professional or use tax software like ours at TokenTax to manage cryptocurrency income, determine your tax obligations, and report cryptocurrency on your taxes.

Passive income in crypto refers to the process of earning money from cryptocurrency holdings or activities without actively trading or working to earn it. It involves various methods, such as staking, yield farming, lending, and participating in DeFi platforms, to generate income over time. This income can come in the form of interest, rewards, or dividends, depending on the method used.

Earning passive income in crypto offers unique advantages, including:

• Higher rates of return than traditional banks

• Diversified investment and income sources

• Potentially substantial returns, especially if the value of your crypto appreciates significantly

While the potential for rewards through passive income in crypto is enticing, significant risks are associated with earning passive income through cryptocurrency. These include 

• Platform bankruptcies

• Wild fluctuation of your crypto's value 

• Security risks, including personal and platform hacks

Because crypto is highly speculative and notably volatile, it’s best to assume every crypto interaction comes with a degree of corresponding risk and to approach crypto activity cautiously and with as much information as possible. Your risk tolerance and investment goals are crucial to determining the right crypto income investment balance for your portfolio.

Here are answers to frequently asked questions about passive income in crypto, generating crypto passive income, the best way to earn passive income with cryptocurrency in 2024, how to make passive income with crypto, and more.

What crypto generates passive income?

Cryptocurrencies can generate passive income through methods including yield farming, crypto staking, mining, and more. The specific crypto assets that generate income depend on the method you choose and the platform you use.

What portion of my portfolio should be in cryptocurrency?

The ideal portion of your portfolio allocated to cryptocurrency depends on your individual investment goals and risk tolerance. Cryptocurrency investments are not suitable for everyone. If you're uncertain, consider consulting a financial advisor with expertise in crypto to make informed decisions.

Is crypto good for passive income?

Cryptocurrency can be a promising avenue for passive income due to the potential for relatively high returns compared to traditional methods of generating passive income. 

That noted, it's essential to understand that the crypto market is highly volatile and speculative. While the rewards can be substantial, the risks are equally significant. Carefully assess your risk tolerance and consider diversification when incorporating crypto into your passive income strategy.

Is crypto passive income safe?

The safety of crypto passive income depends on various factors, including the method chosen and the platform used. Here's a breakdown:

• Centralized Platforms: Centralized platforms may offer principal-protected investments, providing a level of safety in volatile markets. However, they come with the risk of platform failures or regulatory changes that might affect your assets.

• Decentralized Platforms: Decentralized platforms provide more control over your assets while introducing different risks such as impermanent loss, hacks, and rug pulls. Conduct thorough research and choose reputable platforms to mitigate risk.

• Staking: Crypto staking is generally considered safe, especially when using reputable exchanges or wallets. However, it's essential to stay informed about the specific risks associated with the cryptocurrency you're staking and diversify your staked crypto in case of an unforeseen disaster like the 2022 Terra Luna collapse.

To safeguard your investments, conduct due diligence, diversify your portfolio, and stay updated on the latest developments in the crypto space.