In this article, we will introduce you how to invest cryptocurrency to earn interest and passive income.
Why is this important?
Well, if you don´t earn the possible interest rate on your cryptocurrency someone else will earn it and you will pay for it.
So, why should you just HODL when you can invest your cryptocurrency to earn interest and passive income?
First, you need to have cryptocurrencies to invest, otherwise we recommend this guide on how to buy your first cryptocurrency.
Earn Interest and Passive Income on Cryptocurrencies
There are several different ways to earn passive income from cryptocurrencies. At Cryptocoinzone we will list the following
- Interest accounts
- Staking rewards
However, there are other alternatives like yield farming, margin funding and more. We have tried those as well but we have find it most convenient to use interest accounts and staking rewards for the moment.
Cryptocurrency Interest Accounts
A cryptocurrency interest account is where you deposit your cryptocurrency to earn interest.
This is a completely passive income source.
Usually, your funds are used to lend out to borrowers to generate interest. Also, some actors use the funds for different DeFi liquidity mining pools.
Some of the companies we list that are offering cryptocurrency interest accounts are
Cryptocurrency Staking Rewards
Cryptocurrency staking rewards are generated from proof-of-stake protocols. There are numerous proof-of-stake protocols out there and to mention a few
- Ethereum 2.0
Here, you can stake your coins to earn staking rewards. At Cryptocoinzone we list different 3th parties offering staking as we have found this the most convenient way to stake for the moment. Also, this is less technical but you have to pay a bit larger fee.
How to earn compund interest with Cryptocurrency?
It´s very important to understand to compound interest effect to maximize the crypto passive income.
In the graph below we have illustrated why it´s so important to understand the value of compound interest effect and take advantage of it.
What is the cryptocurrency compound effect?
Here, we will explain what cryptocurrency compound effect is and why it´s so important to achieve it.
Basically, there are three ways to HODL your cryptocurrencies. Let´s make an example with calculations. Pretend we have Bitcoin worth $1000 today and we HODL for 30 years. For simplicity, Bitcoin doensn´t gain anything over 30 years in value (unlikely).
- HODL with no interest, $1000
- HODL with interest, $4000
- HODL with compounding interest, $17449
What are the risks associated with investing cryptocurrency to earn interest and passive income?
Of course, we need to discuss the risks involved when investing cryptocurrencies to get interest and earn passive income.
As for any investment, there are risks associated with investing with cryptocurrencies. On top of the risks associated with cryptocurrencies there is often an additional risk with interest accounts since it usually involves a 3th party.
Let´s start to identify and address the risks.
What are the cryptocurrency investment risks?
Here, we will focus on the risks associated with the interest products which will generate interest on your cryptocurrency holdings.
However, don´t forget that there are also risks associated with the cryptocurrencies itself since they are unregulated financial assets.
When you deposit your cryptocurrencies, or HODL, on a 3th party service, like an exchange there are certain risks you should be aware of. Here, we list some of the major risks associated with storing your cryptocurrencies on an exchange or with any other 3th party service
- The 3th party service can be a scam
- The 3th party service can be legit but fail due to bad business
- The 3th party service can be shut down by regulators
- The 3th party service can be hacked
How to minimize the cryptocurrency investment risks?
So, how can you minimize your risks when you invest in cryptocurrency to to earn interest and passive income?
First, information is KING when it comes to minimize risks. The more information you got the better decision you can take.
However, information can be limited and also manipulated so another source for risk minimization is diversification.
Let´s break this down to diversification and over diversification.
What is cryptocurrency diversification?
What does it mean to diversify your cryptocurrency investments?
Did you ever hear the famous term “don´t put all your eggs in one basket”?
If you drop that basket all eggs will crush and you will be left with nothing.
The same risk diversification can be applied for cryptocurrenccy invetments.
- Don´t put all your money into one cryptocurrency
- Don´t put all your cryptocurrency in one wallet or one exchange
- Don´t put all your fiat into cryptocurrency
- Don´t put all your fiat into the cryptocurrency market on one specific time
Fine, but you you overdo it? Can you over diversify your cryptocurrency portfolio?
What is cryptocurrency over-diversification?
Now, you have learned how to diversify your cryptocurrency portfolio. However, can you do to much diversification?
The simple answer is:
Yes, you can.
Why, or how?
Well, imagine yourself buying every cryptocurrency out there. Not only would it be an administration night mare for your crypto tax file but also it would
- Cost you a lot of spreads
- Cost you a lot of exchange fees
- Give you a lot of job to keep track of all cryptocurrencies
- Will not give you an advantage over the overall crypto market
You certainly will hit those extreme home runs but you will also catch every single cryptocurrency that completely fails.
In the end of the day, everything about investments are to beat the market.
Again, how do you beat the market?
->Knowledge, information and handle your fear and greed.