The cryptocurrency market is incredibly volatile, which can be both good and bad for investors and traders. Volatility creates opportunities for profit, but it can also lead to losses. However, passive income strategies can be helpful in offsetting these losses.
Passive income strategies offer investors and traders the opportunity 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 in cryptocurrencies provides a way to hedge market dips and declines.
Hodling used to be the main way to earn interest on one’s crypto assets. But, with the rise of decentralized finance (DeFi) protocols, there are now many ways to earn interest with Ether and DeFi protocols. This article is a guide on how to make money with Ethereum for beginners and those 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 run exactly as scheduled, with no possibility of fraud or third-party interference. Ethereum’s native token, Ether, allows users to carry out various functions on the network, such as transacting, staking, trading, storing NFTs, gaming, and much more.
Ethereum is also used to create decentralized applications (DApps), which are open source programs that run on the blockchain.. Anyone with the necessary knowledge and experience can create DApps on the Ethereum network, making it one of the most popular platforms for developers.
Ethereum once 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 am EST.
The historic transition is part of what Ethereum co-creator Vitalik Buterin dubbed The Merge, noting that it was the first part of many in the network’s multi-year scaling roadmap.. 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 generate passive cryptocurrency income with Ethereum?
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 (such as Ethereum) to help validate transactions and earn rewards. When users stake their ETH, they are basically putting their skin in the game and helping to secure the network. In exchange for their efforts, stakers earn rewards in the form of ETH or other tokens.
Ethereum staking is a popular way to earn passive income from cryptocurrencies, although it can be too expensive for amateur investors. The new PoS version of Ethereum requires at least 32 ETH — roughly over $50,000 — to run a full validator node and participate in staking.
Apart from direct staking, service providers such as StakeWise and Lido can also be used. These are DApps that provide Ethereum staking services without having to run a full node, allowing network participants to stake with minimum amounts.. These services usually charge a commission on rewards of more than 10%, which can reduce profits, but at least they will not have to invest 32 ETH up front.
hodl
Hodl, a derivative of “hold”, also “hold on for dear life”, is a crypto slang term used to describe the act of holding a cryptocurrency for long-term investment purposes. When investors in Ethereum hodl their Ether, they are basically betting that its price will go up 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 cryptocurrency. And, although this strategy does not offer any immediate or guaranteed return, it can be profitable in the long run if the price of Ether does increase. Since Ethereum has seen tremendous growth since its inception and is currently one of the most valuable cryptocurrencies in the world, there is every chance that its price will continue to rise in the future.
Nevertheless, it is important to note that cryptocurrency prices are very volatile and can fluctuate rapidly. This means that there is always the possibility of losing when investing in cryptocurrencies, so investors should only put in the amount of money they feel comfortable losing.
automated trading
Another way users can generate passive income through their Ethereum investment is by using an automated Ether trading bot. Automated trading bots are software programs that use pre-programmed algorithms to buy and sell cryptocurrencies on exchanges 24/7.
These bots can be configured to automatically trade under certain market conditions, such as changes in price or volume. Coinrule and Bitsgap are just a few examples of automated trading software that allow users to set trading rules, either using pre-made templates or customizing them based on their risk preferences.
If successful, automated trading can provide a steady stream of profit, although it does come with some risks. Bots are not perfect and can sometimes make mistakes, such as selling too early or buying too late.
Also, the cryptocurrency market is very volatile and can experience sudden changes that a bot would not be able to anticipate. Therefore, investors should closely monitor their automated trading activity to avoid significant losses.
loans
Loans are another popular way for investors to generate passive income from their ETH investment. Usually, Investors make a profit by lending cryptocurrencies to borrowers at a high interest rate. This can be done through centralized or decentralized lending platforms.
On centralized platforms, users typically don’t have to worry about technical issues like security, data storage, bandwidth usage, or authentication. The platform manages all the technical details and offers investors the possibility to optimize the performance of their assets.
Centralized platforms usually have higher interest rates than decentralized lending platforms. Nevertheless, One drawback is that centralized platforms are more susceptible to hacks and data breaches.
Secondly, decentralized lending platforms allow users to enjoy a higher level of security, transparency, and personalization, allowing experienced investors to adjust settings to maximize their profits. The drawback is that these platforms are often more complex to use and require a higher level of technical knowledge. Interest rates also tend to be lower on decentralized platforms.
Liquidity mining
Liquidity mining or yield farming is also an alternative to generate passive income with Ethereum. In this case, users lend their Ether or other assets to liquidity pools on decentralized exchanges like Yearn.finance, SushiSwap, and Uniswap to earn rewards.
Many liquidity mining platforms include the ability to exchange one token for another in a liquidity pool. Traders pay a fee when they trade cryptocurrencies, and this fee is divided among the farmers who have contributed to the liquidity of that pool. The amount of the reward depends on the part of the total liquidity of the pool that the farmer has contributed.
Yield farming can be a great way to generate passive income, but it is important to remember that it is a relatively new practice and therefore subject to change. Furthermore, it can be a risky investment, as the price of the underlying assets can fluctuate rapidly, causing losses.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.