A couple months ago, in late 2018, I started seeing things popup in all the cryptocurrency newsletters about earning passive income.
I was already staking NEO (just by holding it in a NEO wallet it earns GAS), so I already had a taste for this sort of extra income but had never considered it as an actual form of investment.
Essentially, it’s a method of buying into quality blockchain projects that use staking (Proof of Stake) instead of mining (proof of work) as a way to reward users for supporting decentralizing the blockchain’s network.
Dividend investing with Cryptos
Passive income investing with cryptocurrencies is essentially the same as with dividend paying stocks. In the stock market, there are certain companies that pay out dividends to stock owners – a portion of their profits that is split up evenly and distributed to each shareholder.
There are essentially 2 different types of crypto payouts available – one that comes from holding a share in an exchange and receiving a portion of the exchange’s trading fees, and the other is with staking a certain cryptocurrency and earning ‘rewards’.
The difference between traditional dividend paying companies, and even crypto projects that pay a portion of trading fees earned, and staking cryptocurrencies is that dividends are only paid out when a company does well and has lots of profit – with cryptocurrencies, the payout is hard-coded. It’s programmed right into the blockchain, so regardless of the market conditions, profitability of the crypto coin, etc, you still receive a payment.
Granted, if the price of the coin has come way down, your payout will also be worth less. However, that’s why I think 2019 offers an interesting opportunity to start getting some passive income off of these crypto projects.
Right now, many of the passive income cryptos are trading at 10-20% of what their all-time-highs were back in late 2017. And these coins payout anywhere from 5% to 20% in rewards. For simplicity, let’s assume you get paid once a year – actually, it’s typically weekly or even daily, but the total amount received will add up to 5% over the year.
What that means is that if you invest $100 in a passive income earning cryptocurrency, every year you will receive an additional $5. That’s nothing to write home about – even though it’s better than the typical 2-3% interest you would receive for a ‘high-interest’ savings account or CD (certificate of deposit) at your local bank.
However, if these coins return to their all-time-highs, your $100 would now be worth $1000, and your yearly payout would be $50 – that means you are earning 50%. In some extreme cases, if you pick the right coins, your investment could go 100 times – meaning that your original $100 is now worth $10,000, and your yearly income off of it is now $500. Now that is something to write about, and that’s what I’m doing now.
The potential here is just amazing, but it can’t go without saying – this is guaranteed. These returns are assuming that the cryptocurrency market as a whole will return to 2017 levels, and perhaps even higher. But this is not a sure bet – please don’t risk money you can’t live without, don’t put money into this that you need to buy food for your children etc. However, if you have a few hundred dollars you can take a risk with, keep reading.
How much money should I invest in staking cryptocurrencies for passive income?
I love the idea of the asymmetric bet. What that means is that because of the potential for massive return on investment, there is no need to put tons of money into this. If there is a potential for a 1000% or 10000% gain, even $100 can make you life-changing money. If you have more, put more at it, but this isn’t a sure thing.
Another thing to keep in mind is using similar position sizing. Each of the coins you choose to invest in for staking should get the same investment – whether that means $50 each or $500 each is up to you.
This is so important – equal position sizing distributes and minimizes your risk.
Example of unequal position sizing: Let’s say you invest in 5 different coins, and you break the rules and put $500 into one of them, and $100 into the other ones, for a total of $900.
Scenario 1 – If the $500 investment goes up 10x and the others go to zero, you now have $5000 (which is more than 5x the original $900 you put in).
Scenario 2 – If one of the $100 investments goes up 10x and the others go to zero, you now have $1000 (which is only $100 more than the original $900 you put into it).
Are you smart enough to know which ones are more likely, which one to put the $500 into?
Example of equal position sizing: Let’s say you invest in 5 different coins, putting $200 into each for a total of $1000.
Scenario 1 – If any one of the coins goes up 10x and the others go to zero, you now have $2000 which is twice your normal investment.
It’s an easy way to spread out your investments and minimize your risk, because you likely don’t have a crystal ball – if you did, you wouldn’t be reading this, you’d be somewhere else already wealthy
What coins should I stake for passive income?
Here is a quick rundown of the best cryptocurrencies for passive income – this is, of course, objective, and based on my own research. Invest at your own risk.
I think these are the best cryptocurrencies for earning passive income and I’ve put some of my own money in these, but you need to put on your big-kid pants and make your own decisions!
KuCoin is a cryptocurrency and blockchain exchange that has it’s own coin called KuCoin shares. When you own these shares, you receive part of the daily dividend called the KuCoin bonus. Read our guide on how to stake KuCoin Shares
BiBox is an artificial-intelligence enhanced and encrypted cryptocurrency exchange platform. With a founding team made up of Chinese top tier blockchain giants, BiBox is growing rapidly. Read our guide on earning passive income with Bix tokens
PundiX is a dividend token that pays out a portion of the fees earned by users of the network. This network has potential as it has already released real world products, such as a point-of-sale payment system and a cryptocurrency friendly smartphone. Read the guide on how to stake PundiX to earn dividends
It is scalable, collaborative, and opensource, and aims to create an ecosystem of linked blockchains. ARK is a secure platform for blockchain technologies. ARK is a fast, decentralized blockchain that uses a delegated proof-of-stake system. By owning ARK, and voting for a ‘delegate’, you will receive a portion of the delegate’s reward for running the network. Read how to stake your ARK and vote for delegates
Based off of a ZCash fork, Komodo uses a multi-chain design to ensure privacy and usability for developers on multiple blockchain systems. Read about earning Komodo staking rewards here
Reddcoin is a cryptocurrency (completely unrelated to Reddit) dedicated to bring a tipping system to social networks as a way to give revenue to content providers, rather than the network owners. Read more about staking ReddCoin here