It would be a euphemism to say that bitcoin has not yet convinced the masses, from investors and users. Indeed, its high volatility, as the many uncertainties concerning the future regulatory framework, has led the majority of people to stay away from cryptocurrencies in general.
Bitcoin is not just an excellent opportunity to make some money in the Financial Markets. It is also a way of creating passive income for those knowledgeable enough to learn how.
The advantage of bitcoin as a new payment solution and passive income generator has also highlighted the operation of its underlying technology — the blockchain, and, more particularly, the considerable energy consumption generated by the process of the Bitcoin protocol.
The most intense critics of bitcoin have moreover insisted on the non-ecological nature of its operation. According to some estimates, the bitcoin network would have consumed more than 1.7 billion kilowatt-hours in February. That is more than 21 billion kWh in one year.
Equivalent to the energy of at least seven nuclear power plants. It does only an estimate since many parameters come into play? But again, how can someone create a passive income if the electricity bill goes through the roof?
Bitcoin Proof of Work
The relationship between bitcoin’s energy consumption and the generation of passive income may seem obscure. However, these two phenomena have a common denominator, which is the mode of governance or, more specifically, the rules that allow the network to reach consensus at the transaction level. Indeed, the use of a decentralized architecture poses the problem of trust between users.
How do you know if this individual, or a particular party, has submitted correct information in the database? In other words, how to make sure there are no fraudulent transactions? Surprisingly, the solution to this problem and the creation of passive income is quite simple since it relies on economic incentives.
In the case of Bitcoin, the chosen solution is the Proof-of-Work consensus. As you probably already know, this protocol consists of asking the user who wants to register new information – called minor – to solve a mathematical problem as quickly as possible.
The miner who solves the problem first wins the right to create the next block. Provided that the information in the block is correct, he receives a fee in the network account unit. That would be one of the ways of creating passive income.
The cost generated by the resolution of this problem makes it possible to guarantee the reliability of the information included in the blockchain. In the case of bitcoin, the miner will get rewarded with 12.5 bitcoins per validated block. Note that compensation is a decreasing function of the “age” of the network. From May 2020, this reward will be only 6.25 bitcoins per block.
Unfortunately, it has been a long time since this activity is more profitable for ordinary users, as the network has become competitive.
Proof of Stakes
However, all hope is not lost, since most new cryptocurrencies operate on different consensus rules. One of the best-known alternatives is Proof-of-Stake. Contrary to the proof of work, which is very greedy in energy. The evidence of the stake is much more ecological.
It requires the user only to prove the possession of a certain quantity of cryptocurrency, which he puts then in the deposit. It becomes at this stage a validator. The underlying logic is that a user who holds this cryptocurrency does not make decisions that could negatively impact the value of his investment and, therefore, the network.
The more considerable the deposit amount, the higher the probability of being chosen to produce the next block. This model comes in many variations that I do not cover in this article, including MasterNodes, ServiceNodes, and others.
It means that the more Crypto you hold, the more chances you have to keep even more Crypto. Money brings money, and your passive income will grow accordingly.
The Cons
The generation of income via the proof of stake is nevertheless not without constraint. It will generally require to maintain a permanent connection between your wallet and the network.
The time factor is a decisive variable in the validator selection process for the next block. There are straightforward solutions to overcome this constraint, such as renting a server or using a nano-computer (Raspberry Pi type).
Finally, the selection of cryptocurrencies (Bitcoin or other digital currency) for which you want to become a validator. It will be critical as your yield will depend on the number of cryptocurrency units you have deposited as your average purchase price.
Many promising projects are more than affordable to create your very own passive income strategy; will you find them?