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Introduction to Passive Income

The need to make money is fundamental to human survival. The experience of many people is that life's necessities often tend to be greater than available resources. Such a situation is not pleasant and can bring about a substantial psychological burden. The desire to be financially sufficient is what universally motivates people to seek ways to make extra money. It is all in a bid to have some measure of financial security and increase the ability to live life to one's taste.

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What is Passive Income?

Generally, income is any reward that a person earns in return for an activity or service rendered. In this article, we will consider the most common form of income which is money.

Passive income, by simple definition, is the money that a person earns from a secondary source. It often requires little effort. This source of earnings is not from the person's primary vocation. To bring it in clear view, consider this example: an electrical engineer who works in a power station (primary vocation) but who has 1,000 units of shares in a stock which earns him dividends at intervals(passive income).

In this case, the engineer's primary vocation is his active income source, while his shares are his passive income source. Generally, the difference between active and passive income is about what time is devoted to each. Active income activities take up the bulk of your time and energy. You are rewarded based on your hourly participation. On the other hand, passive income activities do not have such terms: you do it at your convenience with minimal time and energy obligation.

Having alternative sources of income is undoubtedly good advice. The beauty of it is that it does not require much of your attention or time. You can focus your time and energy on your active source while it keeps bringing in much helpful extra income by the side. Having such channels of passive income is key to building sustainable wealth; most wealthy people have at least four passive income sources.

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Earning Passive Income in Crypto

Since trading involves much time and research effort, we can liken it to traders' active income source. But apart from trading, there are a number of other activities in crypto that a person can engage in and earn some money passively. In fact, you can engage in several of them at the same time. The crypto market is well developed and has many sources of passive income. Crypto enthusiasts who shy away from trading can still make money from your assets instead of leaving them idle in your wallet. The following are some of the ways you can earn passive income with crypto:

1. Staking.

In a blockchain, there is what is known as Proof of Stake (PoS). It is a consensus mechanism that enables a person to improve a network by validating block transactions and receiving rewards based on the number of tokens the person has.

Staking involves locking up your crypto asset in a staking pool for a specified period of time to earn an ROI. The lockup time can be in small concurrent steps (daily for example) or larger time blocks such as weeks or months. When the time elapses, you can unstake the original quantity of your assets in addition to the returns earned.

2. Airdrops.

Airdrops are crypto tokens distributed either free, in exchange for very easy marketing tasks, or as rewards for early participation etc. Crypto platforms often use it as a means of bootstrapping a user community. Experience in this sector can vary. At times a project that gave out tokens via airdrop may eventually not gain traction. In that case the tokens end up being worthless. But normally you can earn a couple dollars from airdrops over time. You may also be fortunate to come across some spectacular ones. DeFi platforms like UNI and 1Inch airdropped tokens worth thousands of dollars each to early users of their platforms.

3. Mining.

Mining in blockchain terms is solving the cryptographic equations of blockchain, validating blocks etc., and receiving new tokens of that blockchain as a reward. It is usually a capital-intensive endeavor because of the need for computer hardware, energy costs, etc. It was more viable in the early days of Bitcoin and other cryptocurrencies for an individual to mine. Nowadays, because of high running costs, it is currently dominated by institutions and corporations.

4. Hard Forks.

Sometimes, a split can happen in a blockchain that produces two or more separate networks. This usually leads to the creation of new native tokens for the breakaway networks. When this happens, those who had tokens on the old blockchain also get tokens on the new networks. The key is to ensure that you have the old blockchain tokens before the time the fork happens. More on hard forks is explained here.

5. Affiliate Marketing.

A large user-community plays a role in the sustainability of every project. Many crypto platforms will offer you some rewards if you draw more people to become their platform users. This is now easier to do with the popularity of social media. If you have a sizeable number of followers on a social media platform, you can earn reasonable income by referring your followers to these crypto platforms.

6. Lending.

There are automated lending systems on several crypto exchanges like Binance, KuCoin, etc. These platforms allow you to deposit your crypto assets for a period of time. The deposited assets then serve as a lending pool. At the end of the lockup period, you recover your assets together with interest. This option may be one to consider if you have a plan to hold your assets for a long time.

7. Yield Farming.

With the rapid growth of decentralized finance, yield farming is becoming more popular. A yield farmer deposits crypto assets to a platform's liquidity pool to support the platform's activities. This consists of exchanging tokens, borrowing etc., and is rewarded by the platform. Such rewards can come from the platform's native tokens or a portion of the platform's fees.

These are just a couple of opportunities for earning passive income in the crypto market. More options are likely to be innovated as the evolution of decentralized finance continues.

Bear in mind, though, that you need to keep your expectations balanced. Passive income is almost by design a supplementary means of earning. Take note of these few caveats:

1. It's not a get-rich-quick scheme. In the Crypto and DeFi space you are likely to find unscrupulous folks with an eye on defrauding you of your funds. If a platform promises you 300%, 400% monthly return on investment (ROI), then it is likely a very high-risk investment or total scam altogether. Think twice when it sounds too good to be true.
2. Some of the ways of earning passive crypto income have a risk of impermanent loss. This loss arises when the exchange rate between two pairs of crypto assets diverges from what it was at the point they were committed to a liquidity pool. Here's a detailed breakdown of impermanent loss.
3. Temporary loss of Access. If a platform requires you to lock up your assets for a period of time, it means that you won't be able to make use of it till time elapses. The implication is that you cannot take advantage of a bullish market if that particular asset experiences a bull run. Again, should the value of your asset fall during the time of lockup, you are fully exposed and cannot sell off to minimize loss of value.

These are some of the issues you need to be wary of when exploring the crypto space for passive income opportunities.

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Concluding Thoughts

The desire to be financially comfortable and stable is the usual motivation for seeking out ways of earning passive income. Crypto offers many opportunities such as airdrops, staking, affiliate marketing etc. which you can take advantage of to make extra money on the side. Just as most good things have their cons crypto does as well. While investing in crypto, there are things to be wary of, such as impermanent loss and prevalence of scam platforms. These would go a long way in ensuring that you maximize your earning opportunities while avoiding pitfalls.

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