Effective passive yield options are highly sought after, and not without reason. Hard work and smart decisions might bring you consistent revenue with minimum effort on your part.
Adding passive income streams to your portfolio can help you reach your financial goals in tremendous ways. Passive yield options can help you get out of debt or, even better, achieve financial independence. This means that you can live a life where you are guided by your personal ambitions rather than the need to fill your wallet.
But how do you choose a passive yield option that is right for you? The two most important aspects to consider are risk and APY return (annual percentage yield). You have to decide which amount of risk you are able to tolerate. We will help to inform you, but in the end, the decision is yours.
We put together a list of the seven best passive yield options. Are you ready to take control of your financial life?
7. Government bonds
A government bond is a debt security issued by a government. They are meant to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payments.
Government bonds are low-risk investments since the government backs them. There are various types of bonds that are offered by the U.S. Treasury and other national governments. They are considered to be among the safest in the world.
Around 2.24 % APY (annual percentage yield).
6. Municipal bonds
Municipal bonds, or ‘munis’, are debt securities. They are issued by governmental entities, such as cities or counties, to fund daily obligations and to finance bigger projects. Think about building schools, a new highway or sewer systems. You are in effect lending money to the bond issuer. But what is in it for you? In exchange you receive the promise of regular interest payments, usually semi-annually, and the return of the original investment.
In general, municipal bonds are considered low risk. However, there are a few scenarios you should consider. For example, there is the ‘call risk’. This refers to the possibility of an issuer to repay a bond before its maturity date. When interest rates decline, the call risk increases.
The most important risk you should consider is the credit risk: when the bond issuer may experience financial problems that make it difficult or impossible to pay interest and principal in full. Luckily, credit ratings are available for most municipal bonds.
Around 4 % APY (annual percentage yield).
5. Mutual funds
A mutual fund is an entity that pools money from multiple investors. The fund invests the money in securities such as bonds, stocks, and short-term debt. The combined holdings are known as the portfolio. Investors can buy shares in mutual funds and each share represents the investor’s partial ownership in the fund and the income it generates.
Mutual funds have many upsides, such as professional management of your assets, diversification of your portfolio, and affordability. Furthermore, because of the size and liquidity of most funds, investors can easily redeem their shares when they unexpectedly need some cash.
The amount of risk you take when investing in a mutual fund is highly dependent on the fund itself. Always do your research! Here are some general risks to look out for.
First of all, there is the market risk. Simply put, this is the risk that you might lose some or most of your assets because the markets fluctuate. Furthermore, the interest rate risk means that your mutual fund might decline in value because bond prices decline when interest rates rise. Let’s not forget the currency risk, when a decline in the exchange rate reduces your gains.
Lastly, it is important to consider the credit risk. This occurs when the issuer doesn’t have enough money to make its interest payments or redeem the bonds when they are due. Higher default risk tends to mean higher returns. The balance between risk and reward is up to you.
Average APY (annual percentage yield) of 9,5 %.
4. Flash loans
An interesting passive yield option is the flash loan. Flash loans are the first uncollateralized loan option in decentralized finance (DeFi). How do they work, exactly?
They enable users to borrow instantly and easily. There is no collateral needed, provided that the liquidity is returned to the pool within one transaction block.
If this does not happen, the whole transaction is reversed to undo the actions executed. This system guarantees the safety of the funds in the reserve pool.
The advantages of flash loans are definitely great. However, there is one problem that presents a dealbreaker for most. Flash loans are quite susceptible to smart contract exploits. Developers have still not figured out how to protect their users’ funds from hackers.
Most flash loans have a 0.09% loan service fee. How much you decide to lend is up to you!
3. Stablecoin staking
You can earn money through a process called staking a stablecoin. A stablecoin is a form of cryptocurrency meant to offer price stability. Stablecoins are backed by a reserve asset. They have gained attention because they attempt to offer the best of both worlds — the security and privacy of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
Stablecoin staking means that you are involved in maintaining the flow of the blockchain network on a certain asset. In return, you are compensated by earning income from the network. In a way, the staking process is similar to depositing money in a savings account. The rewards come in the form of coins or tokens in a particular blockchain or in the stablecoin that you are staking.
Stablecoin staking comes with certain risks. First of all, there is a volatility risk. It’s common for cryptocurrencies to lose or gain a large portion of their value in a short time.
A problem with volatility is that it can spread from a single point to the entire industry. The market is dominated by Bitcoin. When the price of BTC goes down, others follow. This means that the value of the stake can rapidly decrease even though there’s nothing wrong with the coin itself.
The only volatility-proof option is currently USDN.
Secondly, there is the risk of project closure. At the moment, there are over 5000 coins and tokens listed. This is more than any industry needs. Thus, you run the risk of the closure of your entire coin.
Thirdly, there is the smart contract risk. Each coin has its own smart contract. Any vulnerability in it can be exploited by hackers.
Up to 20 % APY.
2. Yield farming
Yield farming is a process that allows cryptocurrency holders to earn rewards on their holdings. They are also called liquidity providers. A liquidity provider deposits units of a cryptocurrency into a lending protocol. The goal is to earn interest from trading fees. Some users are also rewarded with yields from the protocol’s governance token.
Let’s use Compound as an example. The protocol provides liquidity to borrowers who want to borrow funds in cryptocurrencies. The Compound Finance system does this using smart contracts on the Ethereum blockchain. Liquidity providers deposit funds into the liquidity pools. These contracts serve as the matching engine for market participants. When the interest rate for the loan has been agreed upon, the borrower gets access to the funds.
In exchange, liquidity providers receive Compound Finance’s native tokens. They get a cut of the interest that the borrowers pay as well.
Unfortunately, smart contracts are susceptible to attacks and bugs in the code. Many users of popular DeFi protocols have suffered losses to smart contract scams.
There also exists a liquidity risk. DeFi platforms use their customers’ deposits to provide liquidity to the markets. A problem could appear when the value of the collateral drops below the loan’s price. Let’s take a look at an example. Let’s say you take out a loan in ETH which is collateralized by BTC. If the ETH price increases sharply and the loan is being liquidated as the value of the collateral (BTC), this would be less than the value of the ETH loan.
0,3% — 34% APY.
1. Participating in Gain DAO
Gain DAO (decentralized autonomous organization) is a crypto-based pool, currently starting out with Ether, powered by machine learning optimized trading algorithms. These algorithms are operating in traditional financial markets. This way, Gain DAO serves as a bridge between centralized and decentralized financial systems, leveraging their strengths to create something new: Hybrid Finance. As a GAIN token holder, you benefit from the possible appreciation of the underlying base asset (Ether) and from algorithmic trading strategies intended to grow the amount of Ether in the Gain Pool.
As a community-driven project, GAIN tokens also serve as a governance mechanism for Gain DAO, allowing the ecosystem to evolve through community voting and grant issuing. This ensures that Gain is able to create additional pools and maintain alignment between management and token holders.
If you are willing to be more active, you can also join the marketing volunteer program and earn GAIN tokens with your likes and shares! You can find more information in the Telegram channel.
While the decentralized economy is growing substantially, there are still some places where the infrastructure and its scalability are lacking. Fiat currency markets offer greater stability and liquidity. This can be leveraged by automated trading algorithms. The success of such algorithms is dependent upon high amounts of liquidity, competitive exchange rates, and high-quality historical data. As most cryptocurrency markets lack these features, algorithmic trading tends to be more successful in traditional currency markets. In conclusion, because Gain DAO combines the best of both worlds, it is relatively low-risk.
30 to 60 % APY.