Can you make money passively with a cryptocurrency portfolio? (5 minute read time)
(Photo by Nicole Harrington, via stocksnap.io.)
A warning to noobs
If you’re thinking about getting into this market quickly due to a fear of missing out, slow down. There’s a lot to learn before you dive in.
It’s an extremely volatile market, with huge price swings, both up and down, and you probably shouldn’t get into it unless you have an interest in the technology and are willing to research and read the news about the topic.
Understanding the basics of investing will also be helpful, even if the guides you read don’t mention cryptocurrency. Concepts like diversification and knowing your own risk tolerance will serve you well.
Do your research. Even the top cryptocurrencies aren’t necessarily safe to invest in. BitConnect was often one of the top listings on CoinMarketCap, even though simply searching for the name would have brought up articles explaining it was a ponzi scheme. It’s now shut down.
If you’re still interested in investing even after reading the warnings, this article from @martinreddot breaks down some of the important beginner steps you’ll need to take.
Totally passive: Holding
Traditionally, passive investing comes from holding assets that provide a cash flow via dividends. While there are some structures in this space that look similar, you should probably treat cryptocurrencies more like currency than stocks.
Which ultimately means you shouldn’t expect cryptocurrencies to generate cash flow, though you could make money if the value is higher when you take it out than when you put it in.
Professor Aswath Damodaran with the Stern School of Business at NYU wrote a thoughtful and unbiased article attempting to classify bitcoin, and lands on the definition of a currency.
The main takeaways from his article are:
- Cash generating assets can be both valued and priced, commodities can be priced much more easily than valued, and currencies and collectibles can only be priced.
- Bitcoin is not an asset because it doesn’t generate cash flow -- it can only be priced relative to other currencies.
- If you have a longer term interest in Bitcoin, your focus should be less on the noise of day-to-day price movements and more on advancements in its use as a currency
Of course, some cryptocurrencies don’t act like currencies at all, such as Ethereum; the way it’s used to fuel smart contracts, it may end up acting more like a commodity.
However, because this market is still very new, it’s probably safer to think of all of your cryptocurrency investments as purchasing another currency.
Pretty passive: Staking
Staking is a relatively new feature in the cryptocurrency space: Holding certain coins in specialized wallets gives you mining power -- while your computer is turned on, you have a chance to help solve the problems in the blockchain that keep the whole system running.
If you solve a problem, you get rewarded, and because this Proof of Stake system is based on the amount of the currency you hold, it’s not as energy intensive as mining. It’s an alternative to the Proof of Work system that centres around miners.
The benefit is that if you have enough of the right kinds of coins, simply holding onto them in one of these wallets will give you a reward. It does require you to use some of your computer’s power to solve the problems, though, so you’ll have to decide if that’s worth it for you.
Here are a few articles that have good rundowns on the topic:
- Definition of 'Proof of Stake (PoS)' from Investopedia
- Top Proof of Stake (PoS) Cryptocurrencies: Hold, Validate, And Earn
- Top 7 Profitable Proof Of Stake (POS) Cryptocurrencies
Sort of passive: airdrops and hard forks
Airdrops are free coin giveaways. Hard forks are when the blockchain is copied to a new coin -- if you owned coins on the original, you’ll own the same amount in the new one.
In both cases, you get cryptocurrency tokens without having to make a purchase, which sounds like you might be able to make money passively, but...
It depends on what your definition of “passive” is. Airdrops may sound passive, but you’ll likely need to take some action to acquire them.
Airdrop Alert gives a good rundown on just what the heck airdrops are. The takeaways are:
- Every airdrop has a different set of rules to claim the prize.
- For example, you may need to have a certain number of Twitter followers, or be active on a particular forum, or hold your coins in a certain exchange.
- It’s a way for new cryptocurrencies to advertise.
- Most notably, when something’s free, you’re the product.
Cryptocurrencies rely on community to thrive, one of the reasons why they’re often referred to as a ponzi scheme. Those free coins you’re getting in an airdrop are a way to get you involved in the community.
It’s also worth noting that some of the coins might be too new to sell on an exchange.
Hard forks may sound more promising; a copy of your coins will simply exist on another blockchain, no action from you required.
But you will need to keep track of those hard forks if you want to sell the coins or gain any value from them.
It’s also a mixed bag -- maybe you’ll get valuable coins, but maybe they’ll be scams. Even though they’re free, you’ll still have to do your research like you would for any other investment. Is this a project you’d like to support?
The coins that see hard forks most often are Bitcoin and Ethereum, so those are the ones to hold if you think there’s potential value in forking.
The future of cryptocurrencies
Many people argue the cryptocurrency market is nothing more than a bubble. But even detractors agree that there’s something interesting happening in this space. The technology is new and exciting, and while it may take 10 years to fully develop, it has the potential to change the world.
One of the best thinkers in this space is Andreas Antonopoulos, and he recommends only putting in as much as you’re willing to lose. This investment is highly speculative, but if you can stomach the risk, the gains could be awesome.
Further reading
A lot of research went into writing this article, and I didn’t end up linking to all of it. Here are a few more of the articles that informed my opinion, all of which I found to be good reads.
On “passive” income with cryptocurrency:
On staking and masternodes:
- NEO versus Ethereum: Why NEO might be 2018’s strongest cryptocurrency
- What is NEO, and what is GAS?
- What is Proof-Of-Work & Proof-Of-Stake?
- What Is A Masternode And How Is It Useful For Cryptocoin Investors
Other interesting reads: