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With interest rates down near zero, conventional low-risk sources of passive income deliver yields so low these days they're hardly worth the bother.
Savings accounts at banks, which in the 1970s and 1980s routinely offered yields of 5.25% or more, now offer interest rates below 0.10%.
The yields on U.S. Treasuries run below 0.25% until you get to the three-year notes and below 1% until you get to the 20-year notes.
Certificates of deposit (CDs) aren't much better. Even longer-term CDs only offer a yield of 1.25% to 1.4% — and you're required to keep your money locked up for three years, five years, or longer.
But income investors have some new options now, thanks to some innovative cryptocurrency-based fintech companies. And better still, these options are great alternatives for long-term crypto investors who are "HODLing" as well.
Cryptocurrency Comes to the Rescue of Passive Income Investors
Crypto companies around the world have sprung up over past few years to make it easier for people to earn more on their crypto deposits while using those same deposits to make low-interest loans to others.
And by more, I'm not talking about a few fractions of a percent. I'm talking a lot more.
Interest rates on deposited cryptocurrencies like Bitcoin and Ethereum run between 3% and 6%.
The rates on "stablecoins" – cryptocurrencies with values linked to the U.S. dollar – are even more impressive, ranging from 8% to 9%. Even 8% is a better yield than 88% of the stocks that pay dividends – with very little risk.
And in most cases, you don't need to lock up your money for any set period. You can withdraw it whenever you want with no penalty.
REVEALED: This one opportunity touches practically any industry you can think of. Real estate… technology… financial services… the list goes on and on. So if you want the best shot to turn a small stake into life-changing money… this is where you want to be.
This is ideal for passive income investors looking for a place to park their money while earning a nice return. It also fits the mindset of crypto investors determined to hold for the very long term.
Note that using a stablecoin means you're not exposed to the wild volatility that affects cryptocurrencies like Bitcoin and Ethereum. If you deposit $1,000 on Jan. 1, your principal will still be $1,000 on Dec. 31. But you'll also have an extra $85 or so in interest.
This is part of a trend called "decentralized finance," or "defi" for short. It's a great example of how crypto can disrupt financial services in a way that benefits individuals.
How It Works
Paying customers interest to attract deposits to lend out to other customers isn't new, of course. It was the bread and butter of community banks for decades.
But many banks now see their customers as profit centers. Basically, crypto has made it possible to revive the idea of the community bank but do it in way that's better for customers than banks ever were.
"We lend out and do all the functions banks do but with crypto-assets," Alex Mashinsky, founder and CEO of Celsius Network, said in a recent Forbes interview. "Unlike most banks and financial institutions, I turn back the majority of my profits to my depositors."
Celsius is one of the most prominent crypto fintech companies usurping the role of traditional banks.
Mashinsky's explanation of how Celsius works roughly applies to other companies that also pay "crypto dividends."
"When you look at the yields that we pay, it looks too good to be true – that is the first thing people say because they got used to [earning] almost nothing on their deposits," he said. "We lend crypto to institutions and charge them interest. Instead of keeping 100% of it like banks do, we share 80% of these revenues with our customers."
At the same time, there are caveats to using crypto for passive investing:
- No insurance. Unlike bank deposits, funds deposited with crypto "banks" are not FDIC insured. If the company goes out of business or gets hacked, you could lose some or all of your money.
- Regulatory limitations. Because of the patchwork of regulations that govern crypto in the United States, many companies that offer interest on crypto deposits cannot serve U.S. customers. Even among the four I review below, there are some exclusions and limitations.
- Two–Factor Authentication. Just about every crypto service requires this. Basically, you need an app on your phone such as Authy or Google's Authenticator that generates a number you must type in when you log in.
- Wrong addresses. Cryptocurrencies use long strings of letters and numbers as addresses when transferring funds from one wallet to another. But you must be very careful, as sending funds to an address for a different crypto will usually result in the loss of those funds. Sending Bitcoin to an Ethereum wallet, for instance, will result in the permanent loss of that Bitcoin.
- Taxes. Gains from interest on crypto investments are taxable just like any other gains. But many crypto companies won't send you a year-end statement, or will only do so if you meet a particular threshold (typically $600 of earnings). You'll likely need to keep your own records.
With that out of the way, here's a look at four crypto-oriented passive investing services I recently tested…
The Best Sites for Earning Crypto Dividends
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.