Bitcoin (BTC), along with other cryptocurrencies, gives people a place to earn passive income and make money without active participation. One does not need to take unnecessary trading risks or spend time reading and analyzing information packages.
Although the concept of passive earning is not new, cryptocurrency has undoubtedly added new dimensions. Concepts such as compound interest or reinvestment of profits are also used in the cryptocurrency market, creating an ecosystem where one can earn passively.
Let’s discuss different ways to earn passive income with Bitcoin. This article includes interest calculations, lending, mining, trading and liquidity pool.
Bitcoin Interest Calculations
Keeping bitcoins in a cryptocurrency savings account is like having regular savings accounts. These accounts offer a fixed interest rate on deposited crypto assets. One can choose flexible savings plans, which allow the depositor to withdraw assets at will, or fixed savings plans, where the assets remain deposited for a predetermined period.
Interest rates are usually higher when a person deposits money for a specific period of time than they are in a regular savings account. The term of term deposits is much shorter than for traditional bank accounts. In some protocols, there is also no minimum deposit requirement.
One can also hire a financial advisor to implement investment strategies such as Dollar Average Costing (DCA). The strategy involves investing the same amount of BTC in a target security regularly over a specified period, reducing their average cost per share and minimizing the impact of volatility on their crypto holdings.
Bitcoin lending occurs when anyone who has BTC lends cryptocurrency to borrowers through a centralized, decentralized or peer-to-peer (P2P) platform. In return, the borrower pays daily, weekly or monthly interest. The lending platform usually charges a fee for the service.
The three factors that affect earnings are the total value of bitcoins that are lent, the term of the loan and the interest rate. Users must rely on third parties regarding Bitcoin lending infrastructure and terms of centralized lending platforms. Most platforms require users to deposit BTC on the lending platform. While this provides expert assistance to users, their bitcoins are in the custody of the platforms.
On the other hand, no brokers are involved in decentralized lending platforms. Smart contracts automate the lending process and remove any human role. The interest rates are determined independently, and the contract is executed as soon as the relevant conditions are met.
On P2P platforms, users can define their own individual terms. For example, they can decide the interest rate and how much Bitcoin they want to lend. The platform’s role is to provide the infrastructure needed to complete the transaction, and they usually charge a fee for their services.
Mining allows a person to earn a reward for using computing power to secure the Bitcoin network. Bitcoin is a Proof of Work (PoW) protocol that requires network participants to solve an arbitrary mathematical puzzle to prevent an unauthorized person or even a knowledgeable person with bad intentions from initiating malicious changes to the network.
In the earlier days, users mined bitcoins on regular computers and then on general mining rigs. As the network grew, the complexity of mining grew, and miners were forced to use custom mining equipment called application-specific integrated circuits (ASICs), which contain integrated chips designed for mining.
Miners can set up and maintain mining rigs to reduce costs. However, doing so requires them to have the necessary seed capital along with some technical expertise as they need to maintain bitcoin mining hardware. This has made it possible for people to mine Bitcoin without having to invest a large sum of money. Being part of a pool with a lot of computing power gives a higher chance of generating a winning hash compared to miners who lack such sophisticated equipment.
As with all financial assets, the price of bitcoin is affected by the laws of supply and demand. Anyone who holds BTC can take advantage of the volatility inherent in the cryptocurrency to make money trading Bitcoin, either by buying or selling. Buying refers to selling BTC when prices rise while selling is the act of selling when prices fall.
Timing the market accurately to make money is virtually impossible for anyone. However, the basic idea, when buying, is to buy BTC when one expects the price to rise and then sell it at a profit. For example, if BTC is trading at $20,000, and one of the guesses may go to $25,000 or higher, they can buy Bitcoin or exchange any other cryptocurrency for BTC, wait for the price to go up, and then sell the crypto, max.