When you put your money in a bank savings account you’ll typically earn around 0.5% to 2% per annum in interest from it, depending on what country you’re in, the account type and other factors. Often that’s barely enough to keep up with inflation. Fortunately, if you’re sick of your money just lounging around like a bum, there are some safe(ish) ways to earn guaranteed (kind of) double-digit per cent returns every year. There are (pretty much) no hidden costs, (almost) no unpleasant surprises and it’s all (maybe) much easier than you expect… and that’s a promise. There are several different types of passive income to be derived from cryptocurrency, such as from mining, validating transactions through “staking” and so on.
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How cryptocurrency passive income works
But that’s too complicated, and it exposes you to all that cryptocurrency volatility. What we’re looking for here is high – 10% or more per year – guaranteed returns on rock-solid US dollars, no technical expertise required.
Let’s walk through exactly how it works, in detail, starting with traditional bank savings accounts.
Read on for context to understand it in detail, or just skip to the end if you’re only interested in the snappy cryptocurrency money hacks.
Bank deposits: Safe, guaranteed returns of around 0.5% to 2% p.a.
When your money’s in a bank, the bank is investing it in various ways. In particular, it’s lending it out to other customers. Of the money paid by borrowers, the vast majority is typically pocketed by banks and paid out to shareholders as dividends, while depositors are just an afterthought.
So your money is working harder than ever, and you’re indirectly lending your money to people, but you’re only getting a tiny sliver of the amount it earns. On the plus side, it’s very safe, open to everyone and whatever amount it says it pays is guaranteed.
Peer to peer lending (P2P lending) aimed to improve on those numbers. It got part way there.
P2P lending: Risky, non-guaranteed returns of around 5% p.a.
The basic idea behind P2P lending is to directly connect lenders and borrowers online, cutting out all that bank fat in the middle.
In theory there’s enough money flowing around for borrowers to get a better deal than they’d find at banks, and for lenders to earn considerably more than they’d make from bank deposits.
But in practice it’s been a little harder.
Some early P2P start-ups got wiped out by unexpectedly large numbers of loan defaults, while a couple of years after the first P2P lender launched in the United States (Prosper, in 2006), the Securities and Exchange Commission required loan requests to be packaged as securities.
In other words, it officially turned lenders into investors.
Since 2009, the average return for investors on P2P lending platforms has been around 5%, some of which is usually lost to fees.
But these higher returns compared to bank savings accounts come with more downsides.
- Not guaranteed: As an investment, there’s no guarantee of returns from the money you lend on these platforms. It’s possible to lose it all.
- Risky: Adverse circumstances such as, hypothetically speaking, a simultaneous pandemic and economic crisis, could see more people default on loans. It’s just as exposed as many other investments.
- Eligibility requirements apply: Because lending on these platforms is risky, people may be restricted from lending. For example, Prosper was the first P2P lender in the US but it’s only available to investors in about 30 states of the US. And in those states, eligibility requirements often apply, such as a minimum annual income of US$80,000 per year.
Peer to peer lending has disrupted the space, but these days the returns are primarily for hedge funds and high net worth investors seeking variety rather than a place for the average Joe.
As for borrowers, they can often find a better deal with the right P2P platform, but the platform itself still has to spend big on screening applicants, collecting debts and meeting its regulatory obligations, all of which cuts into the rates offered to borrowers and the returns of investors.
Cryptocurrency lending: Theoretically safe, guaranteed returns of 10%+
Cryptocurrency lending is practically identical to P2P lending: investors are putting their money into a platform from one side, borrowers are putting in loan requests from the other side, and in between the P2P lending company acts as a matchmaker, directing loans to the borrowers and interest repayments to the investors… except in this case, all the money coming in and going out of these platforms is cryptocurrency.
Currently it’s pretty normal for these kinds of crypto P2P lending platforms to pay investors 10% or more. The highest this author has personally seen on an easy-to-use platform is 22%, albeit with lots of unideal strings attached.
At the same time, these returns are (theoretically) guaranteed. Borrowers can’t not make repayments even if they try, so there are practically no overhead costs for the P2P platform middleman, they never need to screen applicants – except to the extent legally required – and they will never have to chase down delinquent borrowers.
These kinds of guarantees are made possible by cryptocurrency. Borrowers are required to put up cryptocurrency as collateral, and can typically only borrow less than the value of their collateral.
For example, they might put up $10,000 worth of Bitcoin as collateral and use that to get a $5,000 loan.
If Bitcoin prices then fall, the P2P lending platform can automatically sell part of that Bitcoin backing to keep the loan safely collateralised. Because the total size of the collateral is larger than the loan, the lender can theoretically never lose money even if the borrower never makes a repayment at all.
All of this is fully automated, passive cryptocurrency income and done with minimal human intervention. Cryptocurrency can be transferred to these platforms from anywhere in the world at negligible cost, and the collateral rebalancing and liquidation system is fully automated.
Voila – it’s a theoretically 100% safe and risk-free P2P lending system that runs at practically zero cost, which frees up much more money for the investors and better rates for the borrowers. This is how you can simultaneously have safety – in theory – and high returns.
The reason this is only possible to earn this passive income with cryptocurrency, so far, is because of its unique characteristics as an asset class which make it perfect for use as collateral in loans. Specifically:
- It’s purely digital. It can be moved anywhere in the world quickly and at low cost.
- It’s a bearer instrument. Whoever holds it is in possession of it. There’s no need to involve other expensive third parties like banks.
- It’s quite liquid. It has a clear market value and can be easily, automatically and instantly converted to cash when needed.
And just as importantly, it’s not money. If cryptocurrency was money, there wouldn’t be much reason for people to put it up as collateral for loans – you wouldn’t lock away $100 just for the privilege of paying interest on a $50 loan. But if you view your cryptocurrency as an appreciating investment in its own right, and need cash but don’t want to sell it, these kinds of loans start looking very attractive.
Cryptocurrency Passive Income: How to begin
The easiest way of becoming a crypto lender and earning those sweet, safe(ish) returns without any kind of technical knowledge is to simply sign up for a P2P cryptocurrency lending platform. There are quite a few options these days.
From there it’s as easy as purchasing a suitable cryptocurrency, depositing it onto that platform, or just buying it directly through the platform after sign-up, and clicking some buttons on the platform’s UI to designate that cryptocurrency for lending.
A “suitable cryptocurrency” in this case will meet two criteria:
- Mandatory: Your chosen P2P crypto lender pays returns on it.
- Optional: It’s an eligible “stablecoin” type of cryptocurrency. The value of these is pegged to normal currencies, such as USD, so using these means you won’t have to contend with volatility, except to the extent that the value of the greenback also fluctuates. Examples of cryptocurrency stablecoins include USDT, DAI, GUSD, USDC and more.
This brings us to the risks. If you look really, really closely, you might have seen that we’ve implied at various points that this whole thing might be less than 100% safe.
What’s the catch?
On paper it all works very well, but in practice there are risks at every level.
The first one is your choice of P2P lending platform. Some of them are outright scams. Sidestep this problem by choosing the biggest and most popular platforms that already have millions of existing users.
But even then there are no perfect guarantees. If things go wrong – the platform is robbed or goes bankrupt and so on – there’s a non-zero chance of you losing all your deposits without recourse.
The next risk is the one associated with your cryptocurrency holdings themselves. All stablecoin-type cryptocurrencies have some kind of balancing mechanism which keeps their market value pegged. Most commonly, this mechanism is simply that the company issuing the stablecoin has a lot of dollars in a bank somewhere to back up all the stablecoin in circulation.
If it turns out that the issuing company is lying about its reserves, or if it gets robbed, raided by the police, wiped out by a tsunami or whatever, your stablecoins may also lose their value.
Cryptocurrency Passive Income: Conclusion
Then there’s the chance of technical issues or edge cases, given that the entire crypto P2P lending system is automated. For example, if crypto prices collapse faster than the collateral can be liquidated, a loan may end up under-collateralised and lenders left out of pocket.
As unlikely as some of these are, they’re still very possible, and the current state of cryptocurrency means you may be left out of pocket and with no recourse if it does occur.
The returns are very high and very real, and the system as a whole works remarkably well and is an incredible example of how blockchain and cryptocurrency can bring real innovation to the financial system.
The upside is arguably well worth the risk if you’re careful, but there’s still a more-than-zero chance of losing it all, so don’t put all your eggs in this basket no matter how nice it is.
Still, you can get returns of over 10% a year, theoretically, practically, almost sort of guaranteed! Caveat emptor!