Crypto Global

Passive income

Sep 29, 2020

The general idea of investing is essentially to make the money work for you. What are the passive income options for people holding BTC for the long term? Is it perhaps about granting loans via DeFi (decentralized financing) or about services via central crypto exchanges or something else?

So far, when you have Bitcoin, you've only had one option that is very simple and that is to hold it. And when you are invested, you hope that capital will be valued by broader market forces. But you never know how that will work out in the long term. The problem with this buy-and-hold strategy is that the capital doesn't make any money. It doesn't earn dividends; it doesn't earn interest. It may have capital appreciation as the price changes, but capital is not working for you.

Passive income is when one uses the capital, but always involves additional risks. One way to generate passive income is to invest in ICOs via central crypto exchanges. One risk here is that you give money to other people. But among the risks of theft and seizure, freezing of cryptocurrencies, and all the other risks of the custody system, money can also be poorly managed.

The ability to use decentralized financial platforms to generate passive income is already very popular and is usually achieved through lending. There are already a few options for borrowing Bitcoins, e.g., Native Bitcoin Options. On SALT Lending, for example, you can take out a loan and also lend your own Bitcoins to earn interest. The disadvantage here is that you give your coins to someone else, which means that it is a custody system for cryptocoins. Another option to pass the coins on to someone else is to use a DeFi contract. One way to do this is to convert Bitcoins into ether or a stablecoin and put it on a platform where you can borrow that stablecoin and earn interest. In a DeFi ecosystem, there are half a dozen different platforms for this, such as the MakerDAO platform.

Simply put, you are taking a much greater risk than just staying invested, but then again, you cannot get any return on your investments without risk. Ultimately, it's about balancing, diversifying and deciding the risk that you can afford in your portfolio in order to “spice it up” and generate returns.