How to Earn Passive Income (and Risks)

Most people buy cryptocurrencies in the hope that their value will rise, but just holding them is not the only way to make money. You can also run your own cryptocurrencies and generate passive income through staking, lending, and farming the proceeds. However, before trying any of these investment strategies, you should understand how they work and the risks involved.

What is Cryptocurrency Staking?

Cryptocurrency is stored when you temporarily lock up your cryptocurrency to help the blockchain – the decentralized ledger that secures crypto transactions – function properly. By doing this, you support the blockchain network, i.e. all the computers that work together to record and verify transactions, and you can earn additional cryptocurrency as a reward.

Only some blockchains, called proof-of-stake (PoS) networks, use staking to verify transactions, while others, like Bitcoin, use a different system called proof-of-work (PoW).

What is Cryptocurrency Yield Farming?

Cryptocurrency farming is when you provide cryptocurrency to a decentralized platform, usually in liquidity pools, so that the platform can use it for trading, lending, or other financial activities. In return, you can earn crypto rewards.

“It’s like renting your crypto for transaction fees and/or additional tokens,” Lucas Wenerstein, CFA, CFP, owner of 49th Parallel Wealth Management, told Investopedia. “The returns can be better than staking, but with greater risk.” This is because your cryptocurrencies are actively used in financial transactions, rather than held as collateral to secure the blockchain, as in staking.

What drives the returns?

Returns from staking and yield farming depend on the prices set by the platform you are using. For example, Coinbase lets you earn 3.85% APY by staking a cryptocurrency called USDC. Meanwhile, you can earn up to 10.3% annual yield by lending USDC (as of October 21, 2025).

However, these are nominal rates. Your actual returns could be affected by:

• Symbolic Supply and Inflation: Many networks mint new tokens as rewards. If the token supply grows faster than demand, the market price may fall, which may reduce the value of your rewards.
• Market volatility: Cryptocurrency prices can fluctuate sharply, which may cause the US dollar equivalent value of your returns to increase or decrease.
• expenses: Validator fees for collection and transaction fees can reduce your actual return.
• Liquidity and pool size: In yield farming, the proceeds are shared among all participants.

In short, the advertised annual percentage yield (APY) is just a starting point. Your actual returns depend on network conditions, fees, and changes in token prices.

Understand the risks

Like any investment, betting with cryptocurrencies and farming returns comes with risks. On top of a lower-than-expected profit due to variable return factors (listed above), you may experience the following:

Staking risks

When you stake cryptocurrencies, you typically secure them with a network validator – a participant who helps maintain the blockchain. If a validator or network fails, or if a validator misbehaves, you may lose some of your tokens through a penalty called “severing” or miss out on rewards. Different blockchain networks have different rules about how much risk stakeholders face.

Risks of yield farming

Yield farming typically involves providing your cryptocurrencies to a protocol, which is a set of smart contracts on the blockchain that automatically handles lending, borrowing, or liquidity pools. Risks include:

• Non-permanent loss: If the prices of tokens in the liquidity pool change significantly, the value of your stake may become lower upon withdrawal.
• Weaknesses in smart contracts: Bugs or exploits in the protocol can allow hackers to steal funds. Some platforms may offer limited insurance, but no system is completely risk-free.

While storing cryptocurrencies and farming can provide high returns, they come with unique risks. Understanding them can help you manage your exposure and make better investment decisions.

How to choose a platform

“When exploring platforms to earn cryptocurrency rewards, I recommend prioritizing ease of use, flexibility, and secure environment, as well as full transparency about the fees associated,” said Joe Wilson, chief evangelist at Bunq Bank, an online bank that offers cryptocurrency stakes. “For storage, for example, you might want a platform that is easy to use and gives you the freedom to dispose of your assets at any time.”

Taxes and record keeping

Keep in mind that your cryptocurrency earnings are taxable. In fact, if you have any transactions with digital assets, you must report them on your annual tax return. To facilitate this, the Internal Revenue Service (IRS) recommends keeping records that document the following:

• Your purchase, receipt, sale, exchange or other disposition of digital assets
• The fair market value, measured in US dollars, of all digital assets received as income or payment in the ordinary course of a trade or business

Keeping accurate records of your cryptocurrency returns is especially important if you are ever audited because it provides evidence to support your tax returns.

Bottom line

Ultimately, earning income through betting or yield may seem like easy money – but it requires understanding the trade-offs between reward and risk. With the right research and forecasts, you can limit risk and avoid the temptation of unrealistic returns.

“I recommend starting with an approach that helps you learn,” Wilson said. “For example, something like flexible staking could be a good entry point. It allows you to earn rewards on your assets but have the freedom to divest them at any time. This is ideal when you’re starting out, because it helps you start to understand cryptocurrencies without being tied into long-term commitments.”

“Staking is the best strategy for beginners because it is the least complex, and the rewards are taken from the network, so there is less risk to the counterparty,” Wennersten agreed.