“Make money while you sleep!” and other wild claims.

How do you earn a passive income from cryptocurrency?

For many people, earning passive income is a lifetime goal. Income without actually actively earning it? It makes a lot of sense, and it’s worth looking at ways in which cryptocurrency can help fulfil this objective. (However, nothing in this article, or elsewhere in the blog section of this site, constitutes financial or investment advice of any kind - this is a discussion for information and entertainment only. Good to get that cleared up.)

Whilst there are strict definitions used in accounting and taxation, the term passive income is generally a catch-all description for income you get which is decoupled from your time and effort spent earning it. It’s certainly an attractive notion - I love writing, and consider it a great privilege to make a living researching and writing for columns and blogs like this one, but it’s still ‘work’ in the sense of it being the exchange of time for reward. If I chose not to write another word, or experienced a change in circumstances such that I could not do so, then the income would stop. But I did write a book once, and the dribble of royalty payments that yields is passive income.

You see a lot of hyperbole online about creating a passive income through activities like affiliate marketing or network marketing - just do this, and it will somehow continue to grow downstream with other people doing the same, whilst you sit back and let the commission roll in. The mathematics of these models depend on continual fresh blood and infinite layers, to feed those higher up the pyramid. I know several people who make good livings from this kind of marketing, but they do so far from passively - those who are truly successful at developing these network tend to be very active and busy with it the whole time. And those trying to sell you on the dream depend on you being one of those others coming in to the network.

The crypto space is far from immune to this kind of thing as you will be aware, with schemes ranging from the highly unlikely to the downright fraudulent. Which is why you should rightly be sceptical about the phrase “passive income” being bandied about, and first check out whether the scheme is technically legal/feasible - provided you can recruit enough people - or whether it’s an outright Ponzi scheme. The Bitconnect scandal in 2017 depended on newly-pledged loans to pay out existing loan interest, and it collapsed leaving thousands of ripped-off investors in its wake. Despite warnings from Vitalik Buterin and others, the temptation of promised interest rates of 1% daily compounded were highly attractive to many, who overlooked the fact that this was utterly unsustainable.

People who make real passive income tend to be those who have learned the art of making their money make more money, one way or another. Though the degree of passivity can be misleading: I have a friend who owns a string of high-value properties in our town, due to savvy decisions at the right time, and makes a great living from renting them all out. He could probably make more by leaving them all to an agency to run, but instead he looks after each one and each guest personally to add value. The thing is, he earns in so many more ways than the cleaners he employs to work alongside for changeovers, because even if the villa is stood empty for a period it’s still growing in equity almost continually (he did buy at exactly the right time), and cleaning it up is actually developing and improving his own asset.

Other good passive earners invest in different things, because the curious thing about serious money is that it makes money all by itself. In the most conservative and safe investment vehicles and depressed economic times, it still manages to return growth just ahead of inflationary erosion. And of course investors are frequently tolerant of higher risk and reward financial products which can produce much higher returns, and they spread their risk over a number of different assets.

This diversification is critical, because investors seek to protect their returns, and look to find a range of investments which aren’t linked to each other, don’t tend to move in parallel. Some advisors (eg Chris Burniske and Jack Tatar in Cryptoassets: The Innovative Investors Guide to Bitcoin and Beyond) have recognised the potential for cryptocurrency investments to add protection to a portfolio, because they are decoupled from the typical rise and fall of the stock market - so when one goes down, the other may well go up.

Even within your crypto asset portfolio, diversity is essential, probably more so than in any other asset class. Coinmarketcap is currently tracking 1644 separate coins, many of which will undoubtedly drop away to zero, and a handful of which may make spectacular, unprecedented gains. That’s why this is all so exciting to be part of! Others may increase reasonably steadily, in a world of such volatility, but the truth is nobody knows.

A carefully-chosen portfolio which is regularly rebalanced, keeping a very careful eye on the way markets are behaving, and timing your trades carefully - that’s the way dedicated cryptocurrency investors can make a killing. Some do, some don’t… For me, I’d rather write words than crunch numbers, and the chart I’d be most worried about would be my own blood pressure curve if I did that for a living.

Much simpler and easier to invest in LCS Cryptoshares. Payment of dividends from entire spread of currencies listed on the exchange, without having to chart or balance or track or research or speculate?

That’s the cryptocurrency passive income solution which works best for me.