Key takeaways
- Hodling remains a well-known investment strategy, but crypto holders can also earn through staking, yield farming, lending and airdrops.
- Staking locks crypto to earn rewards, while yield farming provides liquidity for potential returns with added risks.
- Lending crypto generates interest, and airdrop farming offers free tokens but requires caution against scams.
- Advanced strategies like basis trading and investing in crypto index funds offer potential income but come with higher risks.
“Hodl” is an internet wordplay based on “hold,” where a cryptocurrency user chooses not to sell their position for a long period of time.
Hodling, a term that originated from a misspelled word for “hold” on an internet forum, has become a cornerstone strategy in the cryptocurrency world. It’s all about buying and holding cryptocurrency over the long haul, no matter how wild the market gets or how prices swing.
This term first appeared in a 2013 Bitcoin (BTC) forum post and has since grown into a philosophy for those who believe in the revolutionary potential of blockchain technology.
Hodlers tend to ignore seasonal market downturns, banking on the idea that their assets will grow in value over time. But hodling isn’t the only way to manage crypto assets. There are plenty of other ways to earn rewards and grow wealth, like staking, yield farming, lending and more.
Let’s dive into these strategies, exploring how they work, their upsides and the risks involved.
Understanding staking: Earning while you hold crypto
Staking is a big deal in proof-of-stake (PoS) blockchain networks like Ethereum and Solana. Instead of the energy-heavy mining process you see in proof-of-work (PoW) systems like Bitcoin, PoS relies on validators.
These validators stake their cryptocurrency to the network, which basically means locking it up to help verify transactions and keep the network secure. In return, validators and users earn rewards from inflation and other activities on the blockchain.
So, where do these rewards come from?
First, there is the inflation reward. These rewards are minted as fresh tokens as part of the inflation of the blockchain. The next component that makes up the staking rewards is maximum extractable value (MEV). MEV refers to the extra profits that a blockchain validator can make by reordering, including or excluding transactions in a block.
The third staking rewards component is block rewards, which are new tokens created and handed out to validators for adding blocks to the blockchain. Next, there are transaction fees, paid by users moving their assets around on the network. Validators that have a higher number of tokens staked have better reward generation opportunities, as they are able to land more transactions on the network.
The size of rewards that validators pass on to users depends on various things, such as how much crypto is staked overall, how long you stake it for, and the blockchain’s rules.
For example, Ethereum’s PoS network offers yearly yields of around 3%– 4%, while platforms such as Solana or Avalanche might offer even more. Staking is ideal for passive rewards and helps support the network, but it’s not all sunshine and rainbows.
Key staking risks to consider
Validators can get penalized through “slashing.” It is a penalty mechanism designed to ensure validators act honestly and maintain the network’s security.
For instance, if a validator misbehaves — such as attempting to create invalid blocks, staying offline for too long or double-signing conflicting blocks — the protocol imposes a penalty by slashing a portion of their staked cryptocurrency.
Another issue with staking is the liquidity risk that comes with it. Staked funds are often locked up, so you can’t access them easily if the market takes a nosedive. The unbonding period when a user unstakes their assets can differ based on the blockchain.
For instance, Ethereum can take a few weeks for the unstaking to happen, while Solana takes two to three days for assets to be unlocked. And let’s not forget that market volatility can shrink the value of your staked assets, which might eat into those rewards.
Did you know? Staking-as-a-service (SaaS) lets users earn rewards by delegating their tokens to third-party platforms that manage staking on their behalf. This eliminates the need for technical setups while providing secure and passive income. SaaS is available via PoS networks like Ethereum, Solana and Cardano.
How to earn crypto rewards with yield farming
If you’ve ever heard the term “yield farming” in crypto, it’s all about earning rewards by providing liquidity to decentralized finance (DeFi) protocols. Basically, you’re lending your crypto to a liquidity pool that helps others trade, borrow or lend. In return, you get a cut of the transaction fees or even bonus tokens.
Here’s how it works: You deposit your assets into a liquidity pool managed by protocols like Uniswap or PancakeSwap on Ethereum Virtual Machine-compatible chains. There are liquidity pools on Solana, like Raydium, that address Solana-based assets. These pools let people trade without needing an intermediary.
As a liquidity provider, you earn tokens that reflect your share of the pool. On top of that, many protocols throw in extra incentives like governance tokens, which give you a say in how the platform evolves.
Yield farming ties in closely with liquidity provisioning, the backbone of decentralized exchanges (DEXs). Liquidity can be provided through mechanisms like automated market makers (AMMs) or central limit order books (CLOBs).
AMMs, used by platforms like Uniswap, rely on algorithms to set prices based on supply and demand. While they ensure constant liquidity, they can expose providers to impermanent loss, a tricky situation where the value of your pooled assets shifts. Meanwhile, CLOBs work like traditional order books, letting users place buy and sell orders.
Key risks of yield farming
Yield farming can be super lucrative, especially for early adopters of new projects. But it comes with significant risks:
- Newer protocols are more vulnerable to cyberattacks.
- Impermanent loss is a key challenge, which means the value of your assets can change within the liquidity pool, potentially reducing your returns.
- There’s always the chance of smart contract bugs or hacks.
- The reward tokens you earn are often volatile, so their value could drop just as easily as it could rise.
Can you earn income by lending crypto assets?
Crypto lending is one of the simpler ways to earn passive income. Platforms such as Aave and Compound let you lend out your crypto to borrowers and earn interest in return. Borrowers usually have to put up collateral, so you’re covered if they can’t pay back.
Here’s how it works: You deposit your crypto into a lending pool. Borrowers access these funds by putting up collateral, usually worth more than what they’re borrowing.
The interest rates depend on supply and demand within the pool. While lending can be relatively low-risk, it’s not foolproof. Smart contract bugs, oracle issues or extreme market volatility can lead to losses, especially if collateral gets liquidated too quickly.
How to earn free crypto via airdrop farming
Airdrop farming is like hunting for free crypto. Projects often give away tokens to early adopters or participants as a way to promote their platform. For instance, early users of Uniswap received UNI (UNI) tokens in a retroactive airdrop, some of which turned out to be worth thousands of dollars.
On Solana, projects like Jupiter have executed airdrop programs that have been extremely lucrative for early backers of such projects.
To snag these opportunities, you usually need to engage with new platforms, bridge assets, or take part in governance. It can be a rewarding strategy, but it takes effort to stay on top of upcoming airdrops. Plus, you have to watch out for scams, as fake airdrops are a common trap.
Tokenized assets and NFTs to earn crypto income
Tokenized assets and non-fungible tokens (NFTs) are exciting ways to earn in the crypto space. Tokenized assets transform real-world assets, such as real estate or art, into digital tokens on the blockchain, making them easier to trade. For instance, you can own a fraction of a property through tokenization, opening up real estate investment to more people.
NFTs are unique digital items linked to art, music or collectibles. While NFTs are mostly linked to digital art, they can represent ownership of physical items as well. This means you could diversify investments with the added benefit of liquidity in previously less accessible markets. However, they come with risks, such as market volatility and the potential for low demand, so it’s important to approach them carefully.
Advanced strategies to earn while hodling crypto
Basis trade: Hodling and shorting derivatives
For those looking for more advanced strategies, combining hodling with shorting cryptocurrency derivatives can be an ideal strategy. Known as basis trading, this involves holding the underlying asset and lending it for a yield on lending platforms while shorting an equivalent amount in the derivatives market. The goal is to earn funding rate payments from traders who are betting long.
This is particularly lucrative in a more bullish market where traders betting long pay traders betting short. The risks are lower as this strategy is agnostic to the direction in which the cryptocurrency’s price moved.
Let’s understand this strategy using an example. Imagine you hold some Bitcoin (BTC) and want to make extra money without selling it. You can lend your Bitcoin out on a platform for a yield (interest) and, at the same time, bet against Bitcoin’s price (shorting) on a derivatives market.
What’s in it for you?
In a rising market (bullish market), traders who expect prices to rise (long traders) pay you because you’re betting against them. This is called the funding rate. As a result, you earn money from these payments while still holding onto your Bitcoin.
In short, you’re earning from two sources: interest on lending and payments from traders betting long on Bitcoin.
Now you might be wondering: Why do long traders pay short traders?
In a derivatives market (like futures contracts), the prices of contracts can drift away from the actual price of Bitcoin (the “spot price”). To ensure that the contract price aligns with the spot price, exchanges use funding rates.
- If there are more long traders than short traders, the price of the derivative can go higher than the spot price, so the exchange needs to incentivize short traders to stay in the market and keep the price balanced.
- To do this, long traders pay short traders a funding rate, which is a fee based on the difference between the contract price and the spot price.
The funding rate is paid periodically (usually every few hours or daily) directly between long and short positions. If you’re shorting (betting against Bitcoin), you receive this funding rate from long traders who are betting that the price will rise.
But it’s not a guaranteed win, as funding rates can swing, and managing both positions requires advanced skills. It’s not a beginner-friendly approach but can be a reliable way to earn when done right.
Did you know? Basis trading in crypto is not directly governed by specific laws tailored to the practice, but general regulations apply. In many jurisdictions, crypto-related trading activities fall under existing financial market regulations, such as the Commodity Futures Trading Commission (CFTC) in the United States, which regulates futures contracts, including those related to cryptocurrencies.
Crypto index funds
Crypto index funds can be considered a form of hodling, as they involve holding a diversified mix of cryptocurrencies for the long term. Instead of focusing on one specific coin, you invest in a range of assets, reducing the risk of individual asset volatility.
Like traditional hodling, the goal is to hold through market fluctuations, aiming for long-term growth. While you’re not actively trading, you still benefit from the overall market’s performance.
Some crypto index funds may also offer additional returns through staking rewards, which can enhance passive income while holding. However, just like any investment, there are risks involved, such as market volatility and changes in the value of the assets.
Tokenized debt instruments (bonds)
Tokenized debt instruments, or crypto bonds, allow you to earn passive income while hodling. These are digital versions of traditional bonds, where you lend your crypto to a project or platform in exchange for regular interest payments over a fixed term.
By holding these tokenized bonds, you can earn a predictable return without actively trading your assets. The main advantage is that they offer fixed returns, making them a stabler income source compared to volatile crypto markets. However, the risks include the potential default of the issuer or market downturns.
Holding while earning strategies for beginner to advanced crypto users
Crypto offers a ton of ways to earn, but not all of them are easy to get into. Here’s a quick breakdown:
- Beginner-friendly: Staking is probably the most beginner-friendly option. Centralized platforms like Coinbase and Binance make it as simple as clicking a button. In addition, there are DeFi staking options in Lido and Rocket Pool on Ethereum.
- Moderate complexity: Lending is another accessible choice, though it still demands some caution to avoid pitfalls like smart contract vulnerabilities.
- Advanced: Yield farming and liquidity provisioning, while offering higher rewards, require more know-how and a tolerance for risks such as impermanent loss. Similarly, basis trading is more complex and carries higher risks.
Balancing risks and rewards
Every crypto-earning strategy comes with its own set of risks and rewards. Market swings, regulatory changes and technical glitches are all things to watch out for. The key to success is diversifying your approach, doing your homework and staying up to date with industry trends.
With the right mix of strategies, anyone can tap into the vast earning potential of the crypto world. Whether it’s staking, yield farming, lending or more advanced methods like basis trading, the secret is understanding the game, managing risks and aligning your moves with your financial goals.
In essence, hodling is still a core strategy for many in the crypto space, reflecting a long-term belief in blockchain’s transformative power. But beyond holding, staking, yield farming, lending and other methods offer plenty of ways to grow wealth. Each comes with its own risks and rewards, so it’s all about finding what works best for your style and goals.
Tax and legal considerations for earning crypto income without selling
Earning crypto income without selling can have tax implications, which vary by jurisdiction. In many countries, crypto income from staking, lending or yield farming is taxable, even if you don’t sell the assets. It’s essential to treat any rewards or interest as taxable income and report them accordingly.
- Reporting requirements: Reporting requirements differ by country. For example, in the US, the Internal Revenue Service treats crypto income as taxable, and you must report staking rewards, yield farming and other crypto earnings. Other countries may have similar rules, with some offering more relaxed regulations. It’s important to consult local laws to stay compliant.
- Capital gains vs. income: Some regions may treat crypto earnings as income, while others may treat them as capital gains. Clarify the classification in your jurisdiction.
- Withholding taxes: Some crypto platforms may withhold taxes on earnings, but you might still need to report them on your tax return.
- Record-keeping: Keep accurate records of all crypto transactions, rewards and interest earned for tax reporting and compliance.
So, how do you stay compliant in 2025?
As regulations evolve, staying compliant means keeping track of your crypto activities, including earned rewards, staking rewards and income from lending or liquidity provision. Regularly update your knowledge of tax laws to ensure compliance.
Written by Arunkumar Krishnakumar
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.