How Can You Earn Passive Income with Bitcoin (BTC)?
Earning money without being actively involved is commonly known as Passive Income. Along with many other cryptocurrencies, Bitcoin has also provided the opportunity to the people to earn passive crypto income. Earning money in such a way does not involve many risks and also saves one from spending energy and time on carrying out research and analysis of the trade processes.
Though the concept of earning passive income has been in practice since a long time, however many new dimensions have been added to it by the cryptocurrency. In the crypto market, compounding interests and investing the dividends again are concepts that help the users earn income passively by providing them a suitable environment.
Here is a guide article that will help the readers to learn about Bitcoin and how to earn income passively by trading in Bitcoin. It will also explain some ways to the readers that will help them making careful and reliable investments in Bitcoin.
What is Bitcoin?
In the year 2009, Bitcoin was introduced by an anonymous group of developers that used the name Satoshi Nakamoto as their identity. Since its inception, Bitcoin has earned a lot of popularity in the crypto space and also has influenced the creation of many other cryptocurrencies.
Bitcoin is actually a virtual currency. It is the type of cryptocurrency that is not controlled by any entity such as an institution, a firm or any person. It is similar in behavior to the traditional money we use to carry out our daily life trade processes and is used to make payments in the same way. It thus eliminates the interference and involvement of any external party in the daily life transactions and payments.
It can be purchased over multiple exchanges and is usually presented in the form of rewards to the miners over the blockchain network in order to verify the transactions. The developers are now working upon replacing the traditional currencies by integrating Bitcoin in the daily life financial activities. In addition to that, some of them are also talking about using Bitcoin as security tokens in the emerging financial technologies and other blockchain networks.
Bitcoin and Blockchain Technology
The blockchain technology and a network is required to empower the cryptocurrencies. A database that is shared, basically a distributed ledger is known as blockchain. Different encryption methods are used to store the data over the blockchain.
The information that is present on a block in the network is copied on an entire new block in order to carry out any transaction over the blockchain network. This new block contains completely new data that is then encrypted and then verified by the miners. Miners are the validators that are present over the blockchain network.
A new block is opened in case the transaction is verified. This results in the creation of a Bitcoin, and it is then rewarded to the miners on the blockchain. Then it is up to the miner that he uses those Bitcoin, sells them or keep them safe with him as they are his property now.
Are Bitcoins Considered Safe?
Being highly volatile like all other cryptocurrencies, there is always a risk attached with Bitcoins. One should always take professional advice before investing in Bitcoin.
No matter if the investment of the trader depends on the trading portfolio, financial profile, risks involved, investment goals or tolerance level it is better to carry out a detailed research initially. One should always be vigilant as Bitcoin operates without any central authority, and any minor mistake at any step may lead one to a greater loss.
Ways of Earning Passive Income with Bitcoin
The traders can also earn passive income using Bitcoin by adopting any of the following ways.
- By Bitcoin Interest Accounts
Saving accounts for cryptocurrencies such as Bitcoin function in the same way as the traditional saving accounts. On every cryptocurrency deposited in the account, a fixed amount of interest is offered by these accounts.
The assets can be withdrawn by the depositors at any time of their choice by choosing any of the flexible saving plans offered. Moreover, if they want their assets to be saved or deposited for some period of time, they can also choose the fixed saving plans. However, the deposit period has to be determined by the depositor beforehand.
When the assets and funds are deposited for a fixed period of time, the regular saving accounts pay relatively higher interest rates. However, it should be kept in mind that crypto saving accounts offer relatively lesser period of time than the traditional banks for fixed term deposits. Moreover, crypto saving accounts do not ask for any minimum deposit over some protocols too.
Investment strategies such as Dollar Costing Average (DCA) can also be implemented by taking proper advice from experts and professionals. The same amount of Bitcoin can be invested in the security target regularly, the average cost per share can also be lowered and the impact of volatility on the crypto assets can also be brought down by implementing this strategy.
- By Bitcoin Lending
When any person who owns Bitcoins lend them to any person via a P2P platform, through centralized or decentralized ways, then this entire process is called Bitcoin (BTC) lending. After that, the borrowers are made to pay interest as a return either daily, weekly, or in some cases on monthly basis. The platform that will be used for carrying out the lending process may also charge a fee for their services.
The total value of the Bitcoin that one intends to lend, the duration for which the loan is lent and the interest rate over the loan are the three factors that influence the earnings made through Bitcoin lending.
Centralized Lending Platforms: Using the centralized lending platforms, for lending Bitcoin infrastructure and the terms required for it the users depend on the third party. It is the requirement of most of the lending platforms that the Bitcoins have to be deposited with the lending platforms by the users.
This provides help to the users as they get a platform where they can get expert level help by the professionals and the platform keeps their Bitcoin safe in its custody.
Decentralized Lending Platforms: In case, when one is using the decentralized lending platforms no mediating bodies are involved. The human role is set aside by the smart contracts that help in automating the lending process. When one meets the relevant conditions, it executes the smart contract and also finalizes the interest rates.
Peer-to-Peer (P2P) Lending Platforms: The individual terms can be defined by the users using the Peer-to-Peer lending platforms. The amount of Bitcoin that is to be lent by the user and the interest rate over it can be determined by the platform. The provision of all the required necessary infrastructure for the completion of the deal is the duty of the platform being used. However, for the services being provided, the platform may charge a fee too.
- By Bitcoin Mining
In order to secure the Bitcoin network, the computing power is used that enables the users to earn a reward in return, it is called as Bitcoin mining. The protocol that is used by Bitcoin is Proof of work (PoW) protocol. By using this protocol, the participants are made to solve cryptographic complex mathematical problems.
This helps in preventing any external entity with illicit intentions or even any person working in the mining process with the intention to manipulate the network and the process of mining. The regular desktop computers were used by the miners to solve the mining puzzles by the miners in the earlier days and then they shifted to mining rigs for general use.
The mining process became complex with the passage of time and the growth of the mining network. Therefore, the miners were compelled to use the mining equipment with chips integrated in it for mining purposes, that mining equipment is called as application specific integrated circuits (ASICs). In order to bring the costs down, mining rigs can be set up and maintained by the miners.
However, to maintain the Bitcoin mining hardware, some amount of initial capital is required in addition to the technical expertise for carrying out the process. Without investing a large amount of money, it offers the opportunity to the people to mine Bitcoin easily.
However, one can also get a higher chance of creating the reward winning hash by becoming a part of a mining pool that provides him with additional computing power. As the individual miners do not have the access to the latest equipment, this gives the miners in a pool an edge over the ones who mine individually.
- By Bitcoin Trading
The universal law of supply and demand influences the price of Bitcoin in the market similar to all other assets. In order to make money using the Bitcoin trading by going shorter or longer, one can take advantage of the volatile nature of the crypto assets in case he holds some Bitcoins.
In case the price of Bitcoin is increasing in the financial market, one can opt for selling the Bitcoin. This is referred as going long. On the other hand, if one sells the Bitcoin in the market because the price is continuously decreasing, it is referred as going short.
It is practically impossible for anyone for anyone to set the market in a way that he could earn profit from every possible situation. The traders implement these strategies in the market according to the situation they are facing.
Going Long Strategy: One tries to buy the Bitcoin at lower rates and then in order to earn profit while going long, sell them when the market prices increase. This can be understood by an example that if the market price of Bitcoin is 15,000 dollars and someone predicted it to reach 20,000 dollars or more in the upcoming time, the owner holding the Bitcoin will then swap any other currency with Bitcoin or will buy more of it.
Then in the later period, when the price of Bitcoin actually rises, he will sell it in the market and end up earning a good profit of about 5000 dollars or more than that.
Going Short Strategy: When the prices of the crypto assets are falling, the traders implement the short strategy. To understand this, consider an example that in case the price of Bitcoin is expected to fall from the present value of worth 15,000 dollars to about 10,000 dollars.
The trader will implement the strategy and sell all the Bitcoins he holds immediately in the market. Later on, when the prices actually fall, he will purchase it again and end up gaining the profit of about 5000 dollars.
Using the derivatives of Bitcoins such as Options or Futures, the traders can implement the shorting strategy in Bitcoin. Moreover, while going short, in order to have a better idea about market situations, the traders can also be a part of prediction markets.
One is allowed to place the stop-limit orders by the exchanges, in order to simplify the trade processes and to minimize any chances of losses. The loss will be limited in case the prices fall considerably lower than a given limit as the trade will be executed by the system independently.
One should use algorithmic trading in order to automate the trading of Bitcoin completely. Depending on the price, volume and time, the algorithm issues the pre-programmed trading instructions. When the instructions that are set by the trader are triggered by the market, the orders get executed by the software.
- By Bitcoin Liquidity Pool
One can also earn passive income through Bitcoin by using the central core of the decentralized exchanges (DeXs) known as the liquidity pools. When a smart contract is used to lock a digital pile of cryptocurrency, it creates liquidity to carry out the transactions quickly.
The term liquidity providers (LPs) is used for the people who use different crypto platforms. They provide liquidity to the liquidity pools and as a result they are paid incentives and are also rewarded with a share in the fees.
The users get the reward in the form of tokens. They are known as LP token that can be utilized anywhere in the decentralized finance platforms by the users. Some of the important and well-known decentralized exchange platforms are PancakeSwap, SushiSwap and UniSwap. The cryptocurrencies exist in pairs in the liquidity pool like ETH-USDC, BTC-USDT etc.
Working on SushiSwap: In order to understand the working of liquidity pool, consider an example where using a BTC-USDC pair one invested 5000 dollars in a liquidity pool. He will follow the following steps.
First of all, on the exchange one needs to find out the liquidity pool that uses BTC-USDC pair. Then he has to split his funds into two equal parts and deposit one part with BTC and second part with USDC. So, in the following example 2500 dollars will be deposited in worth of BTC and remaining 2500 dollars in worth of USDC.
After that the user is required to earn the LP tokens compatible with BTC-USDC pair. The next step will be that for predetermined period of time, one has to deposit the LP tokens in the BTC-USDC staking pool. The process will be completed finally when as a reward, the user receives a SUSHI token.
Keeping an Eye on Evolving Ecosystem
The value of holdings that one carries increases as one starts using them for earning the passive income. Being aware of the volatile nature of the cryptocurrencies, there is always a risk factor attached to trading with them. However, without being significantly affected by the ups and downs of the financial market, passive income provides one the opportunity to earn money smoothly.
Before investing in earning income passively, however it is very important that one should carry out a proper and thorough research about the risks and challenges involved in trading with crypto. As the advancement in the crypto ecosystem is occurring continuously, there are many new applications of Bitcoin emerging on the screen. This has made mandatory for one to keep a constant eye on the newly created opportunities and ways for earning profit.
However, it is very important to consider the native regulatory sanctions while dealing with Bitcoins and even other cryptocurrencies. The higher regulatory authorities are constantly keeping an eye on all the cryptocurrencies, and it is important for the ones dealing with it them that they should have the knowledge of what is right to do and what is not.
Passive earning through crypto provides the opportunity to the traders to earn income during the market downfall and crashes. The traders who actively participate in crypto trading everyday are aware of the importance of passive earning in the crypto market. It helps the traders to stabilize their financial needs at the time of bear market.
Bitcoin being one of the most popular cryptocurrency is not only making its place in the everyday financial activities but also providing the traders with multiple ways of earning passive income without being an active part of the daily market.