If you don’t want to miss out on another spike in the price of crypto, think about looking into how to earn with crypto. Countless early adopters realized the potential of blockchain technology and now everyone wants to jump on the bandwagon.
As recent times demonstrate, earning with crypto can be an efficient precaution against the banking system’s failures and inflation. Regardless, this market is still uncertain and most of us prefer not to risk our hard-earned cash.
Generating crypto used to be done through a process known as “mining.” However, many blockchains have started moving toward a different mechanism called “staking“. This brings us to the first of three popular methods for earning with cryptocurrency:
- Yield farming
- The HODL strategy
How to Earn with Crypto: Staking
Staking is the process of validating transactions and supporting blockchain processes. This process encourages people to make transactions and update the blockchain and is based on the proof of stake (PoS) consensus mechanism.
Users lock up or stake their cryptocurrency for a certain length of time. The network randomly grants one staker the right to add or forge the next block to the blockchain at specific intervals. The winner gets a portion of the network’s transaction fees in a certain cryptocurrency. This reward is usually the same type of cryptocurrency that was staked.
Staking calls for an investment in the native cryptocurrency of the blockchain.
How to Stake
To participate in a network’s staking process, individuals must lock in a certain amount of cryptocurrency. The odds of you being selected to forge the next block on the chain are generally higher if your stake is larger. However, other factors such as token age may also play a role in ensuring holder diversity.
Staking can serve as a passive investment strategy where you put your existing cryptocurrency holdings to use to earn more crypto. This strategy may be wise as it can help you generate income and support a blockchain network instead of merely keeping your assets idle.
When researching how to earn with crypto, you can directly stake by yourself. However, there are high barriers to entry. Running special software continually is also necessary, otherwise you’ll face penalties.
It is much easier to stake cryptocurrency via cryptocurrency exchanges. You can stake many cryptocurrencies on numerous popular exchanges with a lower entry threshold — like CEX.IO. CEX.IO lets you fund your account balance with crypto and helps your coins or tokens start earning for you.
The reason for the lower threshold when staking on an exchange is that you are essentially contributing your coins to a larger pot known as a staking pool. This pool has a better chance to rake in token rewards, which the pool’s contributors can then proportionally distribute among themselves.
How to Earn with Crypto: Yield Farming
Yield farming is a way to take the idea of staking your cryptocurrency to a higher level. This process is more complex and riskier than traditional staking, earning the nickname “DeFi’s Wild West.”
Yield farming is similar to staking pools. You contribute cryptocurrency to a liquidity fund which can earn you more crypto. This process is noteworthy as two of the most common uses of DeFi nowadays are:
- decentralized cryptocurrency exchanges
- crypto-based lending/borrowing platforms
Both cases involve yield farmers providing liquidity — the funds that enable these platforms to function.
Decentralized Cryptocurrency Exchanges
Decentralized cryptocurrency exchanges, just like local foreign exchange brokers, must be able to instantly purchase and sell different currencies any time a customer shows up. An exchange must have all of the different currencies stocked in its drawers to achieve this goal. This same type of liquidity, in a digital format, allows a decentralized cryptocurrency exchange to function as an automated market maker.
When looking into how to earn with cryptocurrency, note that yield farmers provide this liquidity to the crypto exchange by depositing various cryptocurrencies. In return, the exchange pays a portion of the transaction fees to yield farmers in the form of additional crypto. These payments often take place in the form of smart contracts.
Crypto-based Lending/Borrowing Platforms
DeFi lending platforms function just like any bank. They take in customer deposits and lend that money to other customers who need loans. The “bank”, in this example is a DeFi lending/borrowing platform. This platform receives crypto liquidity from depositors, and these depositors earn interest through smart contracts. The main difference is the absence of an actual bank.
However, remember that yield farming is not as straightforward as staking. Yield farmers use complex strategies to move their crypto across different DeFi platforms to maximize their returns. Therefore, this strategy is best suited for experienced blockchain users who can afford to deploy significant funds. Yield farmers typically need to deposit a substantial initial amount to generate meaningful profits.
How to Earn with Crypto: the HODL Strategy
The HODL strategy’s roots predate the invention of cryptocurrency. It simply involves purchasing cryptocurrencies or other assets and holding them for a long time (hence the acronym HODL standing for Hold On for Dear Life). However, it is critical to differentiate the HODL approach from short-term trading.
On the one hand, short-term trading is an investment strategy based on buying assets when prices are low, holding on to them until the value increases and trying to sell them before the price dips.
On the other hand, the HODL strategy does not imply that an individual purchasing cryptocurrency is trying to “time” the market. Similarly, they will not sell their investments when they think the market might dip. Adopting this strategy means purchasing an asset — such as cryptocurrency — and holding it for several years.
The HODL approach operates under the assumption that the asset’s price will increase over time, rather than trying to time the market. When looking into how to earn with crypto, this strategy has a particular benefit. The HODL approach helps reduce costs associated with transaction fees when you don’t trade regularly.
Cryptocurrencies are extremely popular to discuss nowadays, partly because they can help you earn passively and partly because they’re simply exciting. Regardless, you should do your due diligence before you get into the game to ensure your hard-earned money keeps growing. When it comes to learning how to earn with crypto, we recommend taking things slow to build a solid foundation of knowledge and experience to avoid costly mistakes.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.