Digital currencies like Bitcoin, Ethereum, Dogecoin are currently hot investments. While the technology behind these tokens is more than a decade old, the skyrocketing trading prices are a more recent phenomenon.
But the value of price jumps is paired with massive volatility. And unlike many stocks, crypto tokens don’t pay dividends, which can provide stable income during times of low stock prices. However, investors looking to generate passive income through crypto may be able to do so through interest-bearing cryptocurrency accounts.
In collaboration with Hodlnaut, let’s talk about what it means to earn interest on cryptocurrency holdings, how it can help increase long-term holdings, and what depositors need to consider when choosing an interest-bearing crypto account.
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How can you make passive income through crypto?
In the past, cryptocurrency investors made money trading coins. Taking advantage of price fluctuations enabled the most successful traders to generate high returns from their trading activities. Of course, this type of trading is very active.
Other “digital workers” earned tokens through mining activities (which are necessary to keep the blockchain running). But that also requires a lot of manual work.
Nowadays there are some key ways that crypto investors can generate income in a more passive way. These methods include:
Why interest is an important part of passive income for crypto investors
Today, Centralized Finance (CeFi) institutions make it possible to generate passive income through crypto investments. They do this by paying investors interest on the deposits held with the establishment.
The compounding of cryptocurrency holdings reflects the process of compounding fiat currencies. When you deposit money (US dollars) into a high yield savings account with a bank, you can expect a return of around 1% every year. The bank puts your money to work by lending it to qualified borrowers. You make a small amount of interest on the money you make. And the bank makes money on the spread.
CeFi institutes are the cryptocurrency equivalents of banks. They don’t have the same guarantees as banks (aka, you could lose your crypto tokens due to theft). But they work in a similar capacity. A CeFi institution like Hodlnaut accepts cryptocurrency deposits. It lends these tokens to creditworthy parties. Then it pays the depositors an interest rate. Typically, the interest is paid in the same token as it was loaned. However, some companies offer depositors the option to choose their interest rate token.
Right now, cryptocurrency rates are astronomical compared to fiat currency rates. But many cryptocurrency investors are still reluctant to deposit their money into CeFi institutions. Even if many of these companies have asset protection insurance, crypto banking is still a new concept. And the risk feels high.
But CeFi institutes usually compensate investors well for taking this risk. For example, Hodlnaut currently offers up to 12.73% APY on your deposits. That’s a solid return when you simply keep your money in one account.
They offer different payouts for different cryptocurrencies. Check out Hodlnaut here and see what you can make with BTC, ETH and more >>
Why is it so important to earn interest on crypto holdings?
In the past few years, many cryptocurrency investors have seen their tokens increase in value. In 2011, Bitcoin was worth less than a dollar. Today it’s worth over $ 47,000 per coin. Given the massive surge in value, it seems like “buy and hold” is the best way to appreciate in digital currencies.
However, one bitcoin in 2011 is still worth one bitcoin today. While the value of fiat has grown exponentially, the underlying asset remains the same. In this sense, digital currencies don’t “grow in value” like most conventional investments (like stocks, ETFs, bonds or even real estate). All conventional investments have some element of compound interest (such as compound interest or appreciation over time).
If a digital token does not earn interest, the value of the token is determined exclusively by demand. Since 2011, the demand for digital tokens has grown exponentially. But there is no guarantee that the pace of growth will continue.
Earning interest on digital currencies ensures that the underlying value of the asset will continue to grow over time. For example, if you have 1 bitcoin today that is earning interest at Hodlnaut, you can count on 1.06 bitcoin in 1 year. By earning interest, you increase the underlying value of your investment. Regardless of the current trading price for Bitcoin, you will have more of it if you earn interest on the token.
Here’s how to look for a crypto account that pays out passive income
Cryptocurrency investors who are not used to working with CeFi institutions can be cautious when considering the idea of depositing tokens. The hesitation makes sense.
Fraudulent companies posing as CeFi institutions can lure investors out of their holdings. In addition, CeFi institutions are a target for hackers who want to steal digital currencies.
To mitigate the risk of depositing tokens, it is important to study the platform and company first.
Is Crypto Making Passive Income Right For You?
Decentralized financing (DeFi) is the dominant trend in cryptocurrency today. Most investors want to keep their tokens safe in hardware wallets. If you give your keys to a CeFi institution, you lose control of the keys. But the risk comes with a fantastic benefit. When you earn interest on your tokens, you reap the benefits of growing growth, not just changes in demand.
As cryptocurrencies become more mainstream, it may be worth considering whether a CeFi approach fits your investment philosophy. Depositing tokens with a trusted CeFi institution like Hodlnaut gives you the benefit of investing in blockchain technology and the benefit of a more holistic approach to digital currency management.
Start earning passive income through crypto here with Hodlnaut >>>