- Cryptocurrency trading holds the potential for profit but it is an inherently risky practice.
- Few individuals are willing to devote the time and effort to really understand how the market operates.
Although cryptocurrency trading holds the potential for profit, it is an inherently risky practice, since few individuals are willing to devote the time and effort to really understand how the market operates. Because of these risks, cryptocurrency investors are now beginning to look for ways to grow their holdings with minimal risk or effort. With that in mind, we’ve found four ways to passively turn a profit on your crypto balance.
Note that although some of these options are expected to offer a better yield than others, it is important to diversify your portfolio and spread your investment over a variety of options. This helps to minimize your exposure to risk, while providing some redundancy in case one revenue stream proves less profitable than expected.
The cryptocurrency industry has seen a huge explosion in the number of peer-to-peer lending services available in recent years, including both centralized and decentralized options.
Part of the reason cryptocurrency lending is so popular is the ease and safety of the practice, since the vast majority of lending platforms require borrowers to put up more than 110% of the loan amount as collateral. Borrowers, on the other hand, are given a way to easily extract value from their portfolio without selling their assets. Cred, for example, pays quarterly interest in crypto and fiat for users who lock up any one of almost 30 cryptocurrencies or fiat currency. A fixed interest rate is promised, regardless of which direction the crypto market happens to move.
In general, cryptocurrency lending platforms allow borrowers to request a loan, while loan providers can post a loan offer and set the terms of their offer, such as the interest rate, accepted types of collateral, and minimum collateral amount. As such, the interest rate and terms can vary considerably.
Nonetheless, BTC and altcoin loans tend to provide a higher interest rate than stablecoins, whereas shorter duration loans typically offer a better APR.
Stake Your Coins
Cryptocurrency staking was once considered to be a rather difficult process, requiring complex wallet setups that made it challenging for less experienced investors to benefit from staking rewards.
Recently, however, companies like Switchain have come along to make the process practically foolproof with their new staking API. Now, cryptocurrency wallet providers and exchanges can simply integrate this API to allow users to benefit from Switchchain’s non-custodial staking solution.
By providing a way for people to stake their cryptocurrencies without understanding the nitty-gritty of how the process works, while eliminating the need for wallet providers to build any additional infrastructure, Switchain has effectively made staking as simple as holding.
As it stands, this solution currently supports Tezos (XTZ) which offers 6.09% APR in staking rewards, while allowing holders to benefit from the underlying appreciation in value. Since these rewards are provided by the Tezos network itself, it can be considered a completely risk-free way to grow your investment.
Of the options listed here, cryptocurrency staking is arguably the safest, since it does not require you to trust third-parties with your funds when using a solution such as Switchain’s.
Although most people might be familiar with peer-to-peer lending platforms, few are aware that most cryptocurrency derivatives exchanges also allow users to provide loans—though not quite in the same way.
When cryptocurrency derivatives traders open a trade on margin, the additional funds used to open the position typically come from other users, known as funding providers. In exchange for temporarily borrowing these funds, traders pay a regular fee known as the ‘funding rate’ to funding providers.
Depending on the exchange and crypto asset being lent, this funding rate can provide a yield of around 6-12% APR. However, achieving this yield depends on borrower demand. Binance enables dozens of crypto assets to be loaned for margin trading, and publishes daily and annual interest rates that lenders can expect. These rates vary depending on the VIP level the lender holds, but start at an APR of 3.65%, rising to 14.6% for ETC.
Although at first glance it might appear that margin lending is an extremely high-risk practice, this typically isn’t the case, since margin exchanges will have an automatic liquidation policy and other safeguards in place to ensure borrowers maintain sufficient collateral to prevent losses.
Earn Dividends on Tokens
Similar to dividend-paying stocks, there are a number of crypto organizations that offer cryptocurrency tokens with similar benefits.
For the most part, these work in a similar way to staking, but instead rely on a centralized organization to disburse payments, while profits are generally tied to the profitability of the underlying company they are issued by.
Nonetheless, the yield of popular dividend tokens, including Kucoin Shares (KCS) and Nexo tokens (NEXO) tends to range between 5-10% APR, but this can fluctuate considerably based on market conditions.
If you are considered investing in dividend tokens, it is important to double-check whether the tokens you hold are considered security tokens, as this can be problematic if they are not registered as securities with the correct regulatory bodies.