Do cryptocurrencies pay dividends?
The short answer here is no, not in the traditional sense that stocks pay dividends. Cryptocurrencies are lots of things- but they are not stocks. Some coins do pay an annual percentage yield (APY) to you just for holding them, and cryptos offer ways to make passive income- but despite what any crypto claims these are not dividends. Before we dive in to all of the awesome ways that cryptos can pay you, something has to be cleared up. Let’s quickly outline the differences between stocks and cryptocurrencies:
Stocks/Equities are slices of ownership of an actual company and are theoretically supposed to be valued as the net present value of all of the future dividends that a company can produce for its shareholders (but there’s mass speculation on stocks just as there is in crypto). Companies make money, and then share some of that money with shareholders. A good example of a dividend-paying stock that almost everyone loves is Apple Computer- the stock costs around $150/share today and usually has paid out something around $1/share per quarter- although this has decreased to just $0.20/share/quarter in 2021. It’s almost as if they have a gigantic project going on in the background that’s forcing them to pay less dividends- like making an electric car to compete with Tesla.
Cryptocurrency is an umbrella term that encases all the different blockchain technologies including stores of value cryptos, smart contracts, oracle cryptos, payment cryptos, privacy cryptos, exchange tokens, and memecoins/shitcoins. These coins/tokens/etc are stores of value or items that can be staked to help the blockchain function and/or use other computing techniques to provide economic value to the world. These platforms award stakers with more coins (for proof of stake platforms), miners with more coins and fees (for proof of work platforms), cut supply, and employ other techniques to increase the value of coins and tokens.
Despite the differences between stocks and cryptos, you can still make plenty of passive money with your crypto, often at interest rates that are unheard of in traditional finance right now.
How can I make money with my crypto?
Now this is one of the most fun parts of crypto! The good news is that cryptocurrencies have several ways to make passive income. The main ways are:
- Lending your crypto on a platform like BlockFi or Celsius: these entities pay you an APY in US dollars or Euros for locking up your crypto with them. APYs on most coins are between 3-6% for non-stable coins and up to 12% for stablecoins like Tether (USDT). The reason BlockFi and Celsius pay you for lending your crypto is because on exchanges there are often huge spikes in demand for certain cryptocurrencies that they cannot fill- so it helps to have a backup ‘reserve’ of cryptos to be able to handle order volume. Don’t worry though- you can quickly withdraw your crypto at any time.
- Joining mining pools and supplying computing power: You hook up your computers to a mining pool, and then earn a share of the rewards if your mining pool is the lucky winner of the Bitcoin (or insert other coin) proof-of-work lottery. A proof-of-work cryptocurrency that individual users can still make money mining on with their CPU or GPU is Monero, a proof-of-work privacy crypto.
- Staking and staking pools: You stake your crypto on the network (most of the time in a “pool” with other stakers) and get a share of the rewards when your pool gets to write a block. This can be done through a hardware or software wallet, or on an exchange and is by far the most popular way to make passive gains with cryptocurrency. You should figure out if any of the cryptos you’re holding are PoS cryptos, and stake them in a pool to start earning passive income.
- Passive APY cryptos: These are nearly the exact same as staking pools, but you only need to buy them- no additional action is required for rewards. These tokens are automatically staked by the provider, and the rewards are paid out to you for holding the crypto. Examples include Atom and USDC.
I have a full piece on staking that is a must-read if you’re interested in boosting your returns through staking.
Enjoy it while it lasts
Some coins currently give some pretty impressive annual yields in the double digits (10%+). Of important note is that as the asset class grows and gains mainstream adoption, the staking rewards are likely to decrease drastically. It simply isn’t possible to have tens of millions of people staking crypto and earning 80% annual interest like some do now on Pancake Swap. Even when a staking pool is joined by a user, the returns on that pool are diminished as more people join the pool and the pool becomes “saturated”. If you own proof of stake coins and earn rewards from staking the coins, it’s because you’re an early adopter of cryptocurrency. Currently less than 2% of the world’s 8 billion people own or transact in crypto, and you’re being rewarded with high staking returns because you’re one of this small number of people who have adopted crypto. The good times can’t last forever. Bernie Madoff’s fund guaranteed a 13% return to its investors until it was unravelled as a Ponzi Scheme and he went to jail. The Ponzi Scheme argument is a rather deep well- and we’ll stay away from it in this article.
No way to stake rewards with crypto ETFs and trusts
While it’s pretty awesome to be able to invest pre-tax dollars in cryptocurrency via Grayscale’s Bitcoin and Ethereum trusts and other ETFs in countries like Japan, you cannot earn staking rewards from holding shares in a trust. Remember, when you hold shares in one of these trusts or ETFs you actually don’t have custody of the cryptocurrency- Grayscale or Goldman Sachs or whatever institution owns the fund holds the crypto. Holding huge amounts of crypto in cold storage costs a lot of money, so these institutions likely stake the currencies and just keep the rewards for themselves, in addition to charging their investors high fees for holding shares of their trust. It’s quite the racket- but enthusiasm among investors for crypto is at an all time high and investing via a trusted vehicle like a 401k is far easier and takes less brain power than setting up an account on Coinbase with KYC and the like, or buying a hardware wallet. Remember, crypto is still very much a fringe technology and if you’re here reading this post there’s a good chance you know more about crypto than 99% of the population. Most people don’t know about coin storage, and half the people in crypto just buy and hold crypto on exchanges because they don’t want to go through the hassle of storage, which is fine.
But what about Ethereum? And non-proof-of-stake cryptos?
In order to earn staking rewards, the crypto you hold needs to be a proof of stake (PoS) cryptocurrency. To find this out, just run a quick Google search on the crypto you hold. Keep in mind that the largest and king of all cryptos- Bitcoin – is a proof of work cryptocurrency, so you cannot earn staking rewards with Bitcoin. In order to make passive income on your Bitcoin, you have to join a lending platform like BlockFi. This video by Guy over at Coin Bureau does a deep-dive on BlockFi and Celsius, the two largest platforms.
Ethereum holders will eventually be able to stake the world’s second largest cryptocurrency once Ethereum 2.0 is released, which is currently set for early 2022. The current Ethereum network (believe it or not) is a proof-of-work network. This means there are ETH miners the same way there are Bitcoin miners, and these miners are awarded ‘gas fees’ for mining blocks. These gas fees are sometimes abnormally high, and this has created headache for those transacting on the Ethereum network and created an opening for Polkadot and Cardano to come in and bill themselves as a low-cost alternative to ETH.
Make your crypto work for you
I cannot recommend staking and lending enough, so long as it is done safely and carefully. As seen in the chart on the head of this article, making extra on your crypto and reinvesting can take small seemingly meaningless amounts of money and turn it into the basis of your financial security much further down the road. There is always a non-zero chance of failure or a security breach in a staking pool or a lending platform- so be sure to spread your crypto passive income generators around, and have some crypto on a hardware wallet that you neither stake nor lend.
Disclaimer: I am not a financial advisor and none of this is financial advice- it is meant to be for educational purposes only.