Dividend stock and coupon bond investors earn passive income via dividends or their coupon payments. For the longest time, no regular paying passive investments were available in the crypto world, having to rely solely on capital gains, but that has quickly changed. Now there are options for earning passive income through crypto lending, crypto staking, and protocol dividends.
Lending, staking, and dividends are now ways for crypto holders to make money with their crypto holdings without selling their holdings. This set of options leads an investor to ask what is the difference between them, and is there one preferable to the other two?
We will start with a brief crypto introduction, explain the different passive income choices for crypto investing, and then explain the positives and negatives of choosing one over the others for a passive investment choice.
Until the advent of Bitcoin in 2009 by the mysterious Satoshi Nakamoto, virtual digital currency was a thing of science fiction. The only type of currency the present generations knew was fiat. That which was only backed by the good name of the government and central banks that issue it. Some older readers might have known a time when a currency was tied to assets like gold and, in some cases, silver.
Notice what is written directly below the picture of George Washington, “IN SILVER PAYABLE TO THE BEARER ON DEMAND.”
Since the Great Depression, the U.S. dollar has been defined by the county’s economic outlook and a promise that the U.S. government will always consider the dollar redeemable for lawful currency at the U.S. Treasury. This is the meaning behind, “Backed by the full faith of the U.S. government.”
Cryptocurrency has an aim to avoid any governmental or institutional middleman through the decentralization of money, giving power back to the holders. Such decentralization is meant the make the transfer of value between the users of the currency easier, reducing the costs of these transfers and preventing any tampering or corruption possible by a middleman.
Cryptos are able to do this with the advent of blockchain technology. In its most simple form, a blockchain is a database that proves the crypto’s value by maintaining a transaction record in a decentralized manner, which is accessible by all. However, it is “immutable” or alterable by none.
Bitcoin is the most well-known crypto, and it was the first. However, Bitcoin is only one form of virtual currency and is often misused to mean cryptocurrency in general. With the advent of so many different cryptocurrencies, their concept can be confusing because Bitcoin is considered a tradable asset.
Cryptocurrencies are now not just for tracking the transfer of a single coin’s value, but blockchain projects such as Ethereum, Cardano, and Polkadot have been created to facilitate a vast array of new activities. These projects have more native functionality and are cheaper to operate.
This article focuses on token rewards, like the dividends paid by a share of stock owned. However, in two cases, this is not a profit share. It is a form of compensation received from lending your tokens back to the blockchain project for use in the facilitation of transactions and administration of processes on the blockchain.
· Crypto lending is the leasing out of owned crypto to human borrowers, and in return the lender receives interest.
· Crypto staking is the leasing out of owned crypto to that particular coin’s blockchain to receive token rewards.
· Protocol dividends represent the newest passive income streams and are closest to the dividends of stocks. These tokens give their holders a payment as a portion of the issuer’s profits, but the difference is that the token owner does not have any other rights to the company.
Let’s review the adoption of these different passive earnings approaches. In April, the largest institutional crypto lender, Genesis, released its Q1 2022 Market Observations Report. The report stated that as of March 31, 2022, cumulative loan originations reached $195 billion, with $44.3 billion in Q1 2022 alone. This Q1 result is more than double all of the crypto loans that originated in 2020 combined.
Though the value of crypto has decreased significantly DeFi Pulse shows that there is nearly $39 billion locked in lending, up from just over $9 billion two years prior (June 21, 2020).
In the past 12 months, staking has also increased in volume. In the Staked “State of Staking” Q1 2022 report, it was stated that staking yields increased to 15.4%, and the staking rate grew to 49.3%. This resulted in staking rewards that were just under $15 billion for Q1, up 57% over Q1 2021. To get such a return, investors would need to purchase about $860 billion in 10-year U.S. Treasury bills to realize a similar return. This report also stated that Proof of Stake protocols account for 30% of cryptocurrency’s total market cap.
Dividend-paying tokens are the newest form of coins that provide owners a passive income. The payouts may be regular, weekly, monthly, they may be dependent on a defined level of token ownership. The larger holders are first in line, and they may also require the network to reach a particular milestone of performance. Being new, there is very little info about these types of tokens’ overall performance. However, there are several tokens that have chosen this route to provide a source of income for holders.
All crypto investments can be risky due to their volatility, and even stablecoins have shown that they are not immune to the risk. Depending on the type of stablecoin, the backing behind it can make its peg to a fiat currency stronger, lowering the risk to investors.
Crypto lenders will lease their crypto to borrowers on specific platforms. These platforms charge borrowers’ interest on the loans and pay a portion of that interest to the lender. The loans are secured with a deposit of the borrowers’ crypto.
Bitcoin lending can generate 3-8%, and other altcoins can generate returns in the double digits. Stablecoins can be lent out for good returns without the typical crypto volatility. Some platforms offer up to 12% returns, but returns are generally a bit higher than the typical 0.5% of a bank savings account.
An essential crypto lending positive is that your money is tied up for a term of between 1 and 90 days, not years.
Stakers commit their tokens to the native blockchain. The stake is used to ensure the network’s security infrastructure, and the staker is compensated with a reward of more coins. Staking is usually for a 30-day cycle of commitment, and staking will usually provide better rates than a bank CD. There are staking pools where you don’t have to stake the entire required minimum amount needed (Ethereum requires 32ETH, approximately $38,300USD at the time of writing).
A new method called “liquid” or “soft” staking is also available, giving you access to your funds even while staking them, giving the returns for staking and the liquidity for trading when needed.
Being similar to stock dividends, protocol dividends vary greatly in how and how much gets paid to holders. For example, Hong Kong-based Kucoin will share 50% of the transaction fees with the holders of 6 or more KCS tokens. The better the exchange does, the higher the dividend.
Decred supplies decentralized credit. This multi-platform crypto has a hybrid proof of work (PoW) and proof of stake (PoS) consensus mechanism that is run by the DCR token. DCR stakers can receive dividends of up to 30% per year.
Ontology offers peer-to-peer trust infrastructure, and users can benefit from dividends and staking rewards. A $10,000 investment currently has the potential to make a 43% annual return.
There are some issues with crypto passive income. Lending always has the risk of default, and coin volatility can happen when the investment is ongoing. The recent crypto market falls have shown that even Bitcoin and stablecoins are susceptible to volatility. This natural uncertainty means that a coin can drop in value while staked or lent out, leaving you unable to get out and limit losses.
Governments have been pressuring lending platforms over certain methods that are considered “unlicensed securities.” This gives reason to use platforms that are centralized and licensed to conduct business in your nation.
Staking does not have the same regulatory concerns as lending, but volatility remains. For traders looking at capital gains as their source of income, only liquid staking may be the optimal choice.
Crypto lending, staking, and platform dividends are new ways to earn passive income on crypto holdings. If any of these are in your portfolio, be diligent with the tax and regulatory requirements of your locality to ensure that you are compliant. As the crypto world expands further, there will likely be more types of passive crypto investments.
These revenue streams have incredible potential for economic gain, but they also have corresponding risks. They should be considered part of an overall portfolio, not stand alone. Review the different options for lending platforms–they differ significantly and have different risk profiles.
Most staking and lending activities are not warranted if liquidity is needed, but liquid staking and dividends could make sense. If you are a long-term holder, then any of the methods may produce significant results assuming that the coin’s volatility matches your risk profile.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
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