Crypto Investment Strategies: Choosing Between Active and Passive Income

Choosing between active and passive income in crypto could be a hard decision especially when a newbie.

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Jay Crypto

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Last updated Mar 21, 2023 at 11:33 AM

Posted Mar 20, 2023 at 11:57 AM

Crypto Investment

As cryptocurrency is highly volatile and its prices keep fluctuating each day, there are various risks in trading cryptocurrency, but with a sound investment strategy, there are also many ways to make a profit in the crypto space. One of the major advantages of cryptocurrency investment is that you can make a fortune with both passive and active income. The many major changes crypto has gone through recently have also brought a lot of new opportunities for the investor to earn profit in both ways.

One thing every crypto trader should keep in mind is that free money doesn’t exist in cryptocurrency. Whether you are adopting the active income strategy or passive income strategy, you still have to take some risks.

Active and passive income in crypto

Here we discuss the difference between active and passive income and the pros and cons of each strategy to help you decide which strategy is more suitable for you.

Active Income in Cryptocurrency

Earning crypto actively through trading or mining is an example of an active source of income in cryptocurrency. As active income requires direct involvement in the crypto market, it requires a lot of time and time. It includes trading, mining, and other forms of active participation in the crypto market.

1. Trading

Trading cryptocurrencies is somewhat similar to trading stocks as your main goal is to buy low, sell high, and generate a profit. Because the crypto market's prices fluctuate due to high volatility, investing in cryptocurrencies is considered riskier than investing in traditional stock markets. Cryptocurrency exchanges, the platforms where users trade cryptocurrency, charge a small fee for every trade they make. This fee varies depending on the cryptocurrency exchange.

active and passive income in crypto

2. Mining

Mining is the process of solving extremely difficult mathematical problems to validate a transaction on the blockchain. There is strong competition among miners to solve each mathematical puzzle first. The miner who succeeds is rewarded with the next block of that coin, and the process starts over. Mining can be highly lucrative when you have the right tools for mining and join a mining pool. Mining profitability depends on the price of Bitcoin or whatever token you are mining.

mining  profitability

For example, the price of Bitcoin has a significant impact on Bitcoin mining profitability. The number of mining rigs increases in a bull market and decreases in a bear market. As miners are rewarded in Bitcoin tokens, the value of tokens earned in a bull market is higher than in a bear market. As evident by the chart above, the mining profitability was maximum when the Bitcoin price was at its peak, and it gradually decreased with the falling price of Bitcoin.

Passive Income in Cryptocurrency

Passive income in cryptocurrency involves the process of earning rewards by holding or staking cryptocurrencies without actively participating in the market. Generating passive income is less risky than active income as you don’t have to trade the volatile asset. As crypto is a “high risk, high reward” category of investment, passive income offers fewer returns than active income does. There are several methods less risky than simply buying and selling crypto. Here is a list of passive income sources almost anyone can take advantage of.

1. Staking coins

Proof of stake or staking coins is an alternative method to Bitcoin’s proof of work, where users have to hold a certain amount of cryptocurrency in their wallet to validate crypto transactions. Blockchain randomly selects the validators from a broad pool of users and rewards them with tokens in return. Proof of stake is a great way of generating passive income because you just have to maintain a specific amount of crypto in your wallet and enjoy the rewards without doing anything. Popular blockchains like Ethereum 2.0, Polkadot, and Solana validate transactions on the proof-of-stake mechanism and incentivize the validators in return. Every blockchain has different criteria to choose validators. For example, to be a validator on the Ethereum blockchain, you have to maintain at least 32 Ethereum in your wallet. So if you are looking for a way to generate passive income in crypto, staking might be the best option as you just have to buy tokens, store them in your wallet, join a staking pool, and enjoy the rewards.

2. Yield Farming

Yield farming, a relatively new phenomenon in the crypto space, is a DeFi (decentralized finance) method of earning passive income. In yield farming, investors lock up their crypto tokens in DeFi protocols for lending, borrowing, and trading and are incentivized in the form of crypto tokens.

To participate in yield farming, users need to deposit their cryptocurrency into a DeFi protocol’s smart contract. This cryptocurrency is used by DeFi for a variety of purposes such as lending, borrowing, and trading, and the users who deposit their crypto are called liquidity providers. These liquidity providers are rewarded with governance tokens that tokens can be withdrawn or re-invested for higher returns.

3. Join Airdrops

New and emerging projects reward users with airdrop tokens to create buzz around the token, gain new followers, and increase brand exposure for being a part of the community. Users have to perform different tasks to make themselves eligible for the airdrops – following them on Twitter and other social media platforms, subscribing to their YouTube channels and referring new users, etc.

4. Play-to-earn games

Play-to-earn games are blockchain-based games that reward players with crypto tokens for the time they spend playing the game. Players are incentivized with coins, tokens, NFTs, and other valuable crypto assets by performing various tasks during gameplay and users can either withdraw these tokens in their private wallets or spend them to purchase in-game items like guns, armor, and other outfits.

5. Referral Programs

Referral programs are another easy way to generate passive income in the crypto space. Many projects have referral programs where you are rewarded for recruiting new users. You can simply join the platform, invite your family and friends and enjoy the rewards.

Which strategy is better for you?

Both active and passive income strategies have their pros and cons and the decision to choose one totally depends on your risk tolerance capacity, portfolio diversification, and personal goals. If you are a risk taker and are expert in analyzing the ever-changing crypto market, an active income strategy might be better for you.

On the other hand, if you are a risk-averse personality and comfortable with lower returns, passive income sources may be more suitable for you.

Conclusion:

Both strategies have their own benefits and risks. Whatever strategy you choose, it is important to remember that the crypto market is highly volatile and unpredictable and there are high chances of losing your valuable assets. So it is important to conduct due diligence and do your own research before any investment.

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