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The Complete Guide to Earning Passive Income With Crypto

If you talk about the cryptocurrency market, the last thing that comes into your mind is words like “safe”, “slow and steady income”, “low risk”, and so on.

Also, if you see someone talking about a safe and passive income on the internet, the word “scam” should be the first thing coming to your head.

Unfortunately, only a handful of people who enter the crypto markets take their time from trying to make millions on meme dog coins, which is a shame.

If you are a frequent visitor of this blog, you probably know that I focus on day trading most of my time, but when I trade, I only need a small % of my capital to dedicate to a single trade.

So what can you do with the money you necessarily don’t need right now, and you don’t want them to rot on your bank account where they will de-evaluate anyway?

This is what we are going to explore in this article.

But before we do so, I would like to mention compared to day trading, which I talk about in the blog and Trading Blueprint, I don’t have years of experience with these passive income strategies, and I am not a fan of when people act like they know everything to look impressive.

Because of that, I will be linking other resources through out of this article, and you should definitely go and check them out.

The Complete Guide to Earning Passive Income With Crypto

In general, there are two ways how you can think about earning passive income with crypto; the first one is delta neutral, which means that you are not affected by moves of underlying assets, or if you are a believer in crypto, you can remain your directional exposure. Still, you also have to keep the directional risks of that in mind.

Cons of earning passive income with crypto

Every time you take your hard-earned money from under the pillow and move it somewhere, you are facing a third party risk.

If you have money in the bank, the bank’s probability of getting hacked or disappearing with all the funds is almost none.

In crypto, these things happen quite often.

Exchange hacks or exchanges pulling exit scams are not so unique in the crypto space; because of that, you must realize you are facing quite a large counterparty risk, especially if you dip your toes to defi.

Because of that, no matter of strategy you chose, you should spread your funds across different venues.

If you decide to dedicate $50,000 to this, you should not have it resting on one exchange.

Even though you might have to sacrifice some % yields, it is still a much smarter choice to spread your money to multiple venues, so if one gets hacked or your account gets hacked, you won’t lose everything.

Although this is not an article about privacy, you should always use maximum security on your accounts, with 2FA, unique emails, passwords, use only whitelisted addresses for withdrawals and so on.

Another con is the amount of capital you need to dedicate to this if you want to see some tangible results.

If trading is not a rich quick scheme, earning passive income while being delta neutral is a prolonged process.

Percentage-wise, it depends on how risk-averse are you, but if you want to focus only on the safest ways, you are looking at around 30% yearly gains on your capital.

Which is still miles away from any saving account you get in a traditional bank.

Although earning 30% on a $1000 account is not much, and you will get eaten by the transfer fees, I recommend this to everyone even if you have as little as five or ten thousand dollars you don’t need.

It is still better than having this money lying in the bank.

The last thing worth mentioning before we jump into actual strategies is that you never know what the future brings, especially in crypto, so things relevant today can be long gone in few months.

What I won’t cover

This article is not going to be about mining, affiliate links and airdrops.

Mining requires a large initial investment and is getting less and less lucrative for retail traders.

Affiliate links and airdrops are pretty much free but take a lot of time spent on social media looking for airdrops or promoting your links.

They can still be very lucrative, but I think there are better ways of earning passive income in crypto.

 

Margin Lending

Trading with a margin can be a risky business.

If you are using margin in your trading, you are essentially borrowing more funds than you have, which allows you to trade bigger position sizes.

Traders who use margin rarely think about where this money comes from.

There is no option for other traders to provide their free margin for someone else in traditional markets, but it is very popular in the cryptocurrency space.

FTX, Bitfinex, Binance, Kucoin or Crypto.com all offer margin lending.

The first two are my personal favourite picks.

You can lend a variety of coins within a few click; there are just some different conditions depending on the exchange.

Some require coins to be locked for a few days or longer; some will compound your interest automatically; sometimes, you will have to do it yourself.

 

In lending space, you will often see % quoted in APR and APY; knowing the difference between those two is important.

APR represents the annual rate charged for earning or borrowing money; APY already considers daily compounding.

This means that seeing % rates in APR is better because these are your un-compounded gains.

To see how much APY will get from APR, you can use this simple website.

You might think about what happens if the trader you borrowed your money to, will realize a large loss.

Thanks to liquidation engines on exchanges, there is nothing to worry about, so, in theory, your capital is always safe.

Although this sounds great on paper, markets can get into conditions where there is not enough liquidity, resulting in capital loss.

The good thing is that exchanges are very protective of lenders, and the only thing you should really worry about is when the whole exchanges go down.

 

Two margin lending strategies

There are pretty much two things you can lend.

Cryptocurrencies and stable coins.

Stable coins lending

The stable coins are easier to manage as you don’t have directional risk since they are obviously pegged to dollar with the stable price of $1.

The rates of stable coins lending fluctuate based on market sentiment; if you come from legacy markets, you can find similarities with risk-on/risk-off market environments.

When prices of cryptocurrencies are rising, people are feeling ready to put a risk. Therefore, they are borrowing stable coins for their margin trading, this rising demand will then increase rates, and you are getting paid more as the lender.

Opposite to that is when markets are ranging/going down, and people don’t want to put on risk; in this environment, rates on stable coin lending is decreasing.

As I already mentioned, my two favourite exchanges for margin lending are FTX and Bitfinex.

On FTX, the interest is paid on an hourly basis, and you need to compound it manually.

This is why you will see a much larger fluctuation in lending % since rates are constantly adjusting to market volatility.

Opposed to FTX, lending on Bitfinex offers more flexibility as they have an order book to set your own bids and offers, auto-renewal options and more features like the Lending Pro interface.

One downside of Bitfinex is that your lent funds are a lock for a minimum of 2 days, but they can be returned sooner if the borrower doesn’t need them anymore.

On FTX, you click the “Stop Lending” button and funds are unlocked within approximately 30 minutes.

So what are the returns? From what I have seen, it is safe to say you can get between 10-20% APR by lending stable coins.

Bitfinex has a more fixed rate floating between 9-12%, while FTX rates go back and forth with huge spikes to 100% and periods of only 2%.

If  I could recommend you something, don’t chase the better rates.

Spread your funds across both exchanges and put half your funds to USD and a half to USDT.

Although Tether fud has been in crypto for years now, you never know, something can always happen to stable coins, and if you think huge exchange like Bitfinex or FTX cant go down, it very much can.

Because of that, spreading your risk as much as you must be your key tactic.

 

Cryptocurrency Lending

Lending your crypto to exchange usually brings a very small % return, usually under 5%.

Besides Bitfinex and FTX, you can look at Nexo, Celsius network, and others, but do your due diligence first.

I would only recommend lending your cryptocurrencies if this is really a long-term play for you and you don’t want to touch it for a year or more.

Many of these platforms reward users in their own tokens have different terms and conditions about earning and more, so before you do anything, you should read all the terms and conditions first.

Bear in mind that if you are lending cryptocurrencies, you still have directional exposure to the given asset.

This exposure can be easily hedged by shorting perpetual futures.

 

Perpetual Funding

If you are an active crypto trader, I’m sure you heard about funding.

Funding is something everyone always talks about but not that many people know what it actually is.

Funding rates are periodic payments by traders holding open positions; the period varies based on an exchange; it is mostly 8 hours, but for example, on FTX, funding is paid once per hour.

Funding is based on a difference between spot and perpetual futures contract price.

If funding is positive, those that are holding longs have to pay a fee.

If funding is negative, those that are holding shorts have to pay a fee.

 

 

So how can you make money on this?

If we take a look at FTXPremiums, an excellent website I will be referencing many times in this article, you can see the average annualized funding rate for different coins.

If we take a look at the 90-day period of ETH-Perp, for example, you can see that you would receive 29.17% for just holding a short position on ETH perpetual futures contract on FTX.

Obviously, as ETH was going mostly up, holding naked short would be very costly. However, this can be easily fixed by holding spot ETH of the same amount as your short position.

Another way of executing this trade is on Bybit inverse futures.

Because these are solely denominated in crypto, you are not getting your funding rewards in USD (USDT) but crypto.

As far as I know, there is not a website that spits out exact annualized rates on this funding; you can take a look at funding history on the Bybit website and calculate rates by yourself.

bybit funding

 

Combination of Margin Lending and Perpetual Funding

With this information that we have covered so far, you can start getting a little more creative.

Let’s say you decide to Margin Lend XRP on FTX for approx 10% APR.

I didn’t pick XRP because I like it; I picked it because lending has good % returns, and more importantly, holding short on Perpetual futures will pay me another approximately 20%.

I hope you understand how this works.

By shorting perpetual futures, I created a delta neutral position on XRP; in other words, I don’t have any direction risk for the token, but I am getting paid for both lending and also receive funding on my short.

 

Cash and carry (Basis) Trade

Basis trading is no stranger to legacy futures traders.

Because dated futures often trade above spot price and converge at the day of expiration, basis trade means shorting a futures contract while holding the same amount in the spot market.

For example, you can short BTCUSD_0625 futures at Binance that are currently trading 2% above the price and hold the same amount in the spot Bitcoin.

The table you see above comes from Laevitas website that, besides other things, shows premiums of Bitcoin and Ethereum of Binance, Bitmex, Bybit, FTX, Deribit and Okex.

As writing this article on the 10th of June, you will have to wait 16 days until the futures contract price converges toward the spot price to collect the 2% premium.

You can also create a chart on Tradingview that will track your premium of different assets.

Formula is quite simple: (FTX:BTC1231-FTX:BTCPERP)/FTX:BTCPERP*100)

For other coins and dates of expiration, you need to change symbol names.

If you are doing a basis trade, you have to be mindful of one thing, especially if you look at expiration months away.

If you short a futures contract and it only goes down, you are all good, your futures position is making money, but you are obviously losing the same amount on your spot holding.

If, on the other hand, the underlying asset goes up, your futures trade is going into a loss. Although some exchanges offer using the coin as collateral, you might get yourself to the situation when you receive a margin call and will be required to provide more margin.

Because of that, make sure you have some extra money to “feed” the position until the expiration.

 

Staking

From all things described in this article, staking is the most straightforward one.

I’m sure you all heard about the Proof of Stake if you have been in the cryptocurrency space for some time.

You stake your tokens and get rewarded for it.

Staking works on-premise that you keep your coins on wallet suitable for performing network functions (validating transactions and so on), and because of that, you get a reward from it.

binance staking

If we look at the Binance staking platform, you can see different coins, APY (the number shows your annual compounded gains, so don’t get fooled by high % next to short term staking periods), Duration and minimum locked amount.

This is pretty much the same at any other exchange like FTX, where you can stake FTT and SOL, SRM and other tokens.

FTT Staking

As you can see from the screenshot above, staking SOL will reward you with 10% annualized staking rewards.

If you are bullish on SOL and you know you want to hold it for at least a year, this is a good way to earn passive income in SOL by just holding a token.

But what if you don’t really care about SOL or any other token you plan to stake, you can hedge it by shorting the Perpetual futures, as I covered before.

Once your initial investment is fully hedged, you can decide what you want to do with rewards; you can either rebalance the hedge or keep your staked SOL and hope prices will rise in the future.

 

Defi

The last thing to cover in this article is Defi.

Defi is quite a complex topic; you have different ecosystems like ETH, SOL or BSC.

And you need to understand how liquidity pools work, how automated market markers operate, what is impermanent loss and more.

Instead of me covering everything, here is a list of free resources that helped me understand the topic:

Before we jump into Defi, there is something worth reminding you again, all of the strategies that I mentioned above are done on CEXes (centralized exchanges).

Although you are exposed to counterparty risk, the chances of Binance or FTX just going insolvent is quite small.

Of course, that’s something you could also say about Lehman Brothers in 2008, but your money is never safe as long as you hold them in your hands.

But when it comes to Defi, you are truly coming into something new where scams, hacks, bugs in code happen daily.

Because of that, you need to really be careful what you are putting your money into and still expect the worst to happen.

This section will cover things that I used and consider to be relatively safe instead of listing 20 different pools here and then having people coming back to me saying some of these got rugged.

After you learn the basics, set up all your wallets (which you will protect well enough and make a promise to yourself to never share your seed phrase with anyone!).

You will have several options on how to make some money in Defi.

Starting with the most simple one and something I already covered, staking.

Compared to centralised exchanges like FTX or Binance, Staking on Defi is much better if you can stomach the less secure platform.

If we take a look at Raydium (Solana) or Pancake (BSC), you can Stake platform tokens, RAY and CAKE.

 

raydium

The whole process is very easy; all you have to do is connect your wallet and start staking Ray.

Compared to CEXes, these tokens can be unlocked at any time, and the APR is also higher.

 

Pancake swap gives you a little more options; the process is more so the same.

Once again, if you are staking and want to keep your position neutral, you need to short perpetual futures on FTX or Binance.

You will find out that Cake, Ray or any other coins used mostly for farming/staking have negative funding most of the time.

This means that you will be paying for holding a short position.

If you decide to stake a Cake, you might be better of shorting it with a margin account on Binance instead of shorting perpetual futures on FTX.

pancake swap

This is something you need to research yourself once again and calculate the cost of holding that hedge, but because APR on Defi tends to be very high, it will still most likely be well worth it.

When it comes to pools things, get a little bit more complicated.

raydium

The vast majority of pools are 50/50 split.

If you want to add liquidity to COPE-USDC LP, and you have $1000 worth of COPE token, you will need $1000 in USDC to add the liquidity.

Because of the impermanent loss, which is well explained in this video, rebalancing and hedging in these pools is quite complicated.

Although most people automatically gravitate towards pools that consist of stablecoins, because of the high APR, you will have an easier time hedging in a dual yield pool where you get rewards in two tokens.

I recommend you look for coins that are trading inside the range on low ATR as that is the best situation and how you will avoid the impermanent loss.

Start with a small amount of money and try the whole process of connecting wallets, adding liquidity, hedging, etc.

Once you get more comfortable with everything, you can add more capital.

 

Conclusion

Earning passive income with crypto is something that everyone can do.

It doesn’t take much time in your day, and even though you won’t make high % returns, it is great to put your capital to work, which is something you can’t really do in the traditional finance space.

On a final note, never forget about risks, spread your assets across the exchanges, protect your exchange account. If you enter the Defi space, be careful where you allocate your capital.

Although risks are much smaller than actual trading, you still should only risk the money you can afford to lose.

Comments

  • reply
    Dario
    June 12, 2021

    Excellent beginners guide.

    If I want to partake from the US I’d have to use a VPN to do most of this stuff though right?

  • reply
    Tim
    June 13, 2021

    Thank you so much!
    Awesome guide. What happens when the environment changes?
    I assume short futures and spot holding works until the futures expires.
    But what about negative premium? Futures below spot? Are you just sell spot and go long futures?

  • reply
    Liam
    June 14, 2021

    Awesome overview Adam. Nicely done. I’m particularly interested in the dual yield options on Raydium, but can’t get my head around the hedging of the 2 assets (I assume its shorting the perp of both assets in the pool) but how do you balance it out accounting for Impermanent Loss? If both assets go up, you have less of each asset (thru IL mechanism) but the original amount of assets in the short perps. Are you out of balance then? Do you then long the perps for the difference? Or is there somewhere I could read further to assist? thanks very much, love your stuff!

  • reply
    jrcryptotools
    June 15, 2021

    Hi Adam,
    Very good article thanks!
    Just a question, on FTX, if you stake you coin and short the perp, won’t you have to pay some USD borrowing to post as collateral (if the prices go up)?
    In which case this would deduce from the yield you can generate.
    Thanks!
    Jez

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