The cryptocurrency market is extremely 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. However, passive income strategies can be useful to offset these losses.
Passive income strategies allow investors and traders to earn profits even in difficult market conditions, such as bear markets. For those who invest in ether (ETH), or any cryptocurrency in general, earning passive income from cryptocurrencies helps with market crashes and downturns.
Hodling was the main way to earn interest on his cryptocurrencies. However, 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 who are already familiar with the space.
What is Ethereum and how does it work?
Ethereum is a decentralized blockchain network that runs smart contracts. These are applications that work exactly as programmed, without the possibility of fraud or third-party interference. Ethereum’s native cryptocurrency, ether, allows users to perform numerous functions on the network, such as transactions, staking, trading, storage of non-fugible tokens (NFTs), playing games and more.
Ethereum is also used to create decentralized applications (DApps), which are free software that run on the blockchain. Anyone with the necessary skills and expertise can create DApps on the Ethereum network, making it one of the most popular platforms for developers.
Ethereum used a Proof-of-Work (PoW) consensus algorithm, which rewards miners for validating transaction blocks. However, Ethereum officially switched to a Proof of Stake (PoS) consensus algorithm on September 15, 2022, at 1:42:42 Eastern time.
This historic move is part of what Ethereum co-founder Vitalik Buterin has dubbed The Merge, which he sees as the first part of a long series of planned steps in the network’s multi-year journey. The move to PoS is designed to make Ethereum more scalable and energy efficient, eliminating the need for miners who use large amounts of electricity to secure the network.
How to earn passive income in cryptocurrencies with Ether?
Here are some of the popular ways to earn passive income with Ethereum:
Staking
Staking is the process of locking one’s funds on a PoS blockchain (like Ethereum) to help validate transactions and earn rewards. When users stake their ETH, they are essentially putting their hands together and helping secure the network. In return for their efforts, they receive rewards in the form of ETH or other tokens.
Staking on Ethereum is a popular way to earn passive income from cryptocurrencies, although it can be too expensive for hobby investors. The new PoS version of Ethereum requires at least 32 ETH, or roughly over $50,000, to run a full validation node and participate in staking.
Apart from direct betting, it is possible to use service providers such as StakeWise and Lido. These are DApps that provide stacking services on Ethereum without having to run a full node, allowing network participants to bet with minimal amounts. These services usually charge a reward fee of over 10%, which can reduce profits, but at least participants do not need to invest 32 ETH upfront.
Hodling
Hodl is a crypto slang term used to describe the act of holding cryptocurrency for long-term investment purposes. When Ethereum investors hold onto Ether, they are essentially betting that its price will rise in the future and that they will be able to sell it for a profit. It is one of the easiest and most popular ways to earn passive income from cryptocurrencies. Although this strategy does not offer immediate or guaranteed returns, it can be profitable in the long run if the price of ether rises. Since Ether has grown tremendously since its inception and is currently one of the most valuable cryptocurrencies in the world, 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 the possibility of losing cryptocurrencies, so investors should only put in the amount of money they are willing to lose.
Automated trading
Another way for users to generate passive income from their Ether investment is to use a robot for automated ether trading. Automated trading bots are software that use pre-programmed algorithms to buy and sell cryptocurrency on exchanges 24/7.
These bots can be configured to automatically place trades under certain market conditions, such as price or volume changes. Coinrule and Bitsgap are just a few examples of automated trading software that allow users to set up trading rules, using pre-made templates or customizing them based on risk preferences.
If successful, automated trading can provide a steady stream of profits, albeit with some risk. Bots are not perfect and can sometimes make mistakes, like selling too early or buying too late.
In addition, the cryptocurrency market is very volatile and can experience sudden changes that a bot could not anticipate. Therefore, investors should closely monitor their car trading activity to avoid any big losses.
Loans
Lending is another popular way for investors to generate passive income from their ETH investment. In general, investors make a profit by lending cryptocurrencies to debtors with a high interest rate. This can be done through centralized or decentralized lending platforms.
On centralized platforms, users usually do not need 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 best return on their assets.
Centralized platforms tend to have higher interest rates than decentralized lending platforms. However, centralized platforms have a downside: they are more susceptible to hacks and data breaches.
In contrast, 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. Decentralized platforms also tend to have lower interest rates.
Liquidity mining
Liquidity mining or yield farming is another option to generate passive income from ether. In this case, users lend their ether or other assets to liquidity pools on decentralized exchanges such as Yearn.finance, SushiSwap, and Uniswap to receive rewards.
Many yield farming platforms include the ability to trade one token for another in a pool of liquidity. Traders pay a commission when they trade cryptocurrencies, and then this commission is shared among the investors who contributed to the liquidity of this pool. The amount of the reward depends on the share of the total liquidity of the pool provided by the investor.
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. Also, investing can be risky, as the price of the underlying assets can fluctuate rapidly and lead to losses.
