How to earn passive crypto income with Ethereum?

The cryptocurrency market is incredibly volatile, which can be both good and bad for investors and traders. Volatility creates opportunities for making profits, but it can also lead to losses. Passive income strategies, however, could be handy in offsetting these losses. 

Passive income strategies offer investors and traders opportunities to earn profits, even during challenging market conditions such as bear markets. For those investing in Ether (ETH), or any crypto in general, earning passive crypto income provides a way to cover market crashes and downturns.

Hodling used to be the primary way to earn interest on one’s crypto assets. But, with the rise of decentralized finance (DeFi) protocols, there are now many ways to earn interest on Ether and DeFi protocols. This article is a guide on how to make money with Ethereum for beginners and those already familiar with the space.

What is Ethereum and how does it work?

Ethereum is a decentralized blockchain network that runs smart contracts. These are applications that run exactly as programmed with no possibility of fraud or third-party interference. Ethereum’s native token, Ether, allows users to carry out several functions on the network such as making transactions, staking, trading, storing nonfungible tokens (NFTs), playing games and more.

Ethereum is also used to build decentralized applications (DApps), which are open-source software that run on the blockchain. DApps can be built on Ethereum’s network by anyone with the skills and expertise to do so, making it one of the most popular platforms for developers.

Ethereum once used a proof-of-work (PoW) consensus algorithm, which rewards miners for validating blocks of transactions. However, Ethereum officially shifted to a proof-of-stake (PoS) consensus algorithm on September 15, 2022, at 1:42:42 am EST.

The historic transition is part of what Ethereum co-creator Vitalik Buterin, dubbed The Merge, noted as the first part of many in the network’s multi-year scaling roadmap. The move to PoS is designed to make Ethereum more scalable and energy-efficient by eliminating the need for miners who use high amounts of electricity to secure the network.

How to make passive crypto income with Ethereum?

Here are some of the popular ways to make passive income with Ethereum: 

Staking

Staking is the process of locking one’s funds on a PoS blockchain (such as Ethereum) to help validate transactions and earn rewards. When users stake their ETH, they are essentially putting their skin in the game and helping to secure the network. In return for their efforts, stakers earn rewards in the form of ETH or other tokens.

Ethereum staking is a popular way to earn passive income from cryptocurrency, although it might be too expensive for amateur investors. The new PoS version of Ethereum requires at least 32 ETH — roughly over $50,000 — to run a full validator node and participate in staking.

Apart from direct staking, one can also use service providers like StakeWise and Lido. These are DApps that provide Ethereum staking services without having to run a full node, allowing network participants to stake with minimal amounts. These services usually charge a fee on rewards upward of 10%, which might cut into one’s profits, but at least they won’t need to invest 32 ETH upfront.

Hodl

Hodl, a derivative of “hold,” also “hold on for dear life,” is a crypto slang term used to describe the act of holding onto cryptocurrency for long-term investment purposes. When Ethereum investors hodl their Ether, they are essentially betting that its price will go up in the future and that they will be able to sell it for a profit. It’s one of the simplest and most popular ways to earn passive income from cryptocurrency. And, while this strategy does not offer any immediate or guaranteed returns, it can be profitable in the long run if the price of Ether does indeed increase. Given that, Ethereum has seen a tremendous amount of growth since its inception and is currently one of the most valuable cryptocurrencies in the world, so there is a good chance that its price will continue to rise in the future.

However, it’s important to keep in mind that cryptocurrency prices are highly volatile and can fluctuate rapidly. This means that there is always the potential for loss when hodling crypto, so investors should only put in as much money as they’re comfortable losing.

Automated trading

Another way for users to generate passive income through their Ethereum investment is by using a bot for automated Ether trading. Automated trading bots are software programs that use pre-programmed algorithms to buy and sell cryptocurrency on exchanges 24/7.

These bots can be set up to place trades automatically under certain market conditions, such as price changes or volume. Coinrule and Bitsgap are just some examples of automated trading software that allow users to set up trading rules, either by using premade templates or customizing them based on risk preference.

If successful, automated trading can provide a steady stream of profits, although it does come with some risks. Bots are not perfect and can sometimes make mistakes, such as selling too early or buying too late. 

Moreover, the cryptocurrency market is highly volatile and can experience sudden changes that a bot might not be able to anticipate. As such, investors need to monitor their automated trading activity closely to avoid any major losses.

Lending

Lending is another popular way for investors to generate passive income from their ETH investment. Typically, investors make a profit by lending crypto to borrowers with a high-interest rate. This can be done either through centralized or decentralized lending platforms.

On centralized platforms, users typically don’t need to worry about technical issues such as security, data storage, bandwidth usage or authentication. The platform manages all technical details and provides the potential for investors to optimize their assets’ yield. 

Centralized platforms usually have higher interest rates than decentralized lending platforms. One drawback, however, is that centralized platforms are more susceptible to hacks and data breaches.

On the other hand, decentralized lending platforms allow users to enjoy a higher level of security, transparency and customizability, allowing experienced investors to tweak settings to maximize their profits. The downside is that these platforms are often more complex to use and require a higher level of technical expertise. Interest rates also tend to be lower on decentralized platforms.

Liquidity mining

Liquidity mining or yield farming is also an alternative to generate passive income from Ethereum. Here, users lend their Ether or other assets to liquidity pools on decentralized exchanges like Yearn.finance, SushiSwap and Uniswap to earn rewards. 

Many yield farming platforms include the ability to exchange a token for another in a liquidity pool. Traders pay a fee when they trade cryptocurrency, and this fee is then divided among the farmers who have contributed to the liquidity of that pool. The size of the reward depends on how much of the total pool’s liquidity is provided by the farmer.

Yield farming can be a great way to generate passive income, but it is important to remember that it is a relatively new practice and is, therefore, subject to change. Moreover, it can be a risky investment, as the price of the underlying assets can fluctuate rapidly, leading to losses.