Digital Asset Investment: 3 Strategies to Grow Your Crypto Portfolio
It’s a well known fact that the wealthiest people do not work for money, rather, they let their money work for them. It’s a tried and tested method that holds true for most multi-million dollar hedge fund managers and real estate investors, but for the average person, generating a passive income from those markets is a tough ask. Cryptocurrency, however, may have the potential to change that.
Those who’re new to crypto usually try to make money through what’s known in the industry as “HODLing,” or buying and holding cryptocurrency tokens in the hope that the value of those assets will mushroom spectacularly. It’s a strategy that worked well enough for some of the earliest investors in crypto. Anyone who bought Bitcoin back in the day when it was selling for $30 per coin, and continues to hold those assets, is no doubt sitting very pretty at the moment.
The majority of budding crypto investors have missed that train though. It can be extremely tricky to try and predict which new crypto assets might have the potential to perform as well as BTC did, and the potential for getting burned is high.
The good news is that crypto investors today have many more options besides simply “HODLing” and hoping. With the rise of decentralized finance, it’s possible for investors to grow their portfolios appreciably using a number of different methods.
One of the most popular ways to earn passive income with crypto is known as staking. Numerous blockchains today, including Ethereum, have spurned the energy intensive Proof-of-Work consensus used by Bitcoin in favor of Proof-of-Stake, which is a mechanism that enables participants in a distributed network to agree on new data that’s added to the blockchain.
Asset holders on PoS blockchains can choose to stake their coins and earn a percentage-rate reward over time. Usually, this happens through a “staking pool,” which can be thought of as a kind of interest-bearing savings account. Users agree to stake their tokens for a specified amount of time – during which, they cannot spend or use those coins. That’s because the blockchain will put those assets to work, powering the PoS that verifies and secures each transaction on the network.
Staking works like this: first, users pledge their coins to the protocol, which will then choose at random which ones get to act as validators to confirm the next block of transactions. So the more coins a user stakes, the more likely they are to be selected as a validator. Then, each time a new block is added to the blockchain, the validator is rewarded for lending their tokens to the network with freshly minted tokens.
Some of the best PoS blockchains to consider for staking include Ethereum, Cardano, Polkadot and Solana, though there are many others.
Staking is one of the easiest ways to earn passive income on crypto as it doesn’t require any additional investment. That said, it might not be for everyone. Note that many blockchains require a minimum deposit – in Ethereum’s case, 32 ETH. Also, staking generally requires locking coins up for a minimum amount of time, and there may also be an “unstaking period” of seven days or more once the user decides they wish to access their coins.
A better alternative to staking that isn’t tied to any specific blockchain may be lending. Dozens of DeFi lending platforms and protocols have emerged in the last few years that allow asset holders to provide collateral to others in the community that wish to borrow. With such protocols, there’s no central bank or credit checks. Instead, smart contracts are deployed as an automated digital intermediary, with interest rates set according to the amount of coins available in a collection of funds, known as the “liquidity pool.”
Lenders who commit their tokens to the liquidity pool will profit on the interest accrued by tier loan. To borrow, users must provide collateral in the form of another cryptocurrency that’s worth more than the amount they borrow.
The advantage of DeFi lending is that the rates on offer can be extremely favorable for lenders, with deposits earning between 1% and 5% interest.
A good example of a lending protocol is Aave, which is a decentralized, non-custodial platform that allows depositors to provide liquidity to its market and earn passive income. Users simply deposit their chosen asset and earn income based on borrowing demand. There are other benefits too. For instance, users can leverage that deposit as collateral, even while it’s earning passive income, to borrow other token assets. Assuming there is high demand for the asset they deposited, the interest earned may be enough to offset the interest rate users pay for borrowing other assets.
Other popular DeFi lending protocols include MakerDao, Compound and Alchemix.
A more complex crypto investment strategy that blends lending, borrowing and staking, yield farming can deliver some of the biggest potential gains in DeFi by combining interest and staking rewards.
Also known as liquidity mining, it’s similar in some ways to staking as it involves locking up coins to obtain rewards. It often becomes more complex however. In many cases, yield farmers will use liquidity providers to add funds to liquidity pools that other users can borrow from, and in return they will receive a reward for doing so. Some liquidity providers reward users in multiple crypto tokens, and those reward tokens can then be deposited in additional pools to earn more rewards there.
As a result, yield farmers typically move their funds between various protocols and blockchains. In turn, many DeFi platforms offer their own economic incentives to attract capital, leading to further rewards for investors. So with large amounts of capital, it becomes possible to fold an investment many times over to maximize the staking rewards and interest earned on them.
Besides the higher rewards, yield farming is also more flexible, allowing investors to earn passive income from NFTs for example. An innovative project called Drops makes it possible for NFT owners to accrue funds by depositing those assets as collateral. They can earn significant returns with minimal risk, as all loans issued through Drops are backed by an NFT with value that is equivalent to, or exceeds the loan amount.
Drops also enables users to generate returns by providing assets such as governance tokens and stablecoins to fungible and non-fungible lending pools that generate competitive annual percentage yields. In addition, Drops makes it possible for anyone to create an NFT lending pool by specifying accepted NFTs and amounts that may be borrowed against them. It means users that want to earn consistent yield can provide liquidity through NFT lending pools to back only the assets they believe in.
Investors may also try popular DeFi platforms such as UniSwap, Curve Finance and SushiSwap for more yield farming opportunities.
The crypto investment strategies described above are just some of the many ways it’s possible to earn passive income from idle digital assets. Users should beware that none of these methods are entirely risk-free, so the old adage goes without saying – do your own research, understand the risk, and only then can you determine which opportunities are best for you.