There are many excellent passive income ideas. A favorite is bitcoin arbitrage. It also provides diversification out of the dollar.
What is Passive Income?
Passive Income is great.
Passive Income means I’m not trading time for money and is a key to growing wealth.
This is one of my passive income ideas that does not require a lot of money. Naturally the more money you invest, the more potential to make (and lose) money, but one of the themes of HowIGrowMyWealth.com is that I’ve been able to do these things without a lot of money.
Now this method is somewhat high risk and while I’ve determined it makes sense for me I can’t advise anyone to invest using this tactic.
Do your research and make your own decisions with the help of your certified and licensed financial advisor.
Okay, let’s jump into what I do to generate Passive Monthly Income Outside of the Dollar.
One of my best Passive Income Ideas
Two key terms we’ll need to define first. One is Bitcoin and the other is arbitrage.
Bitcoin is a decentralized cryptocurrency and is defined as follows: “a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”.
That’s a lot of technical jargon but don’t get discouraged. Basically it is an online medium of exchange (like dollars) except it isn’t controlled by the government or a central authority like a bank.
While new Bitcoins are still being “mined” into existence on a regular basis the total number of Bitcoins that will ever exist is capped at 21 million. Bitcoin is a deflationary currency which benefits savers.
Bitcoin has a lot of potential as a technology to pay for things online.
The second term I mentioned is arbitrage, which is defined by Investopedia as: “the simultaneous purchase and sale of an asset in order to profit from a difference in the price.”
An example of arbitrage would be: you know someone wants to buy a specific make and model of car and is willing to pay $5,000 for it, and you know that exact make and model of car is for sale for $4,500, you could buy the car for $4,500 and turn around and sell it to the other buyer for $5,000 for a $500 profit.
There are a variety of bitcoin exchanges.
I personally use CoinBase to buy bitcoin and if you sign up for an account using this link and fund your account with at least $100, we’ll both get $10 worth of bitcoin bonus. Win-win.
But I don’t try to buy and sell bitcoin on a variety of exchanges myself, I utilize a bitcoin arbitrage service.
What is Bitcoin Arbitrage?
You may already have put two and two together, the prices of Bitcoin vary on different exchanges and by simultaneously buying and selling bitcoin on different exchanges one can take advantage of the price difference.
The price differences are generally small, so in order to be profitable one would need to make many trades per day in order for it to amount to a significant gain.
You can setup “bots” that perform the arbitrage for you, this isn’t something I’ve tried, but that is an option I’ve read about.
What I do is use a free arbitrage service offered at a bitcoin exchange that provides over a 10% yearly return, this arbitrage service is run by the founder of an exchange that I have personally interacted with and trust.
I didn’t understand why the founder of this exchange would offer a free arbitrage service.
But he does so in order to attract new accounts and he advised me that the arbitrage opportunity would probably not exist forever, so he is interested in getting people to sign up for accounts so that they will use his exchange to trade Bitcoins in the future.
Bitcoin is a risky and new technology. Bitcoin is volatile, meaning it makes large swings up and down. Since it’s inception in late 2011 it has gone from pennies to $1,200 and is now trading around $450. It has been more stable in 2016, trading roughly within a $100 range between $400 and $500.
Despite the volatility I like the arbitrage service because it allows me to win in several different ways.
1) If the price of bitcoin goes up, the value of the arbitrage service I’ve bought into goes up
2) If the price of bitcoin stays relatively stable, I still make money via arbitrage
3) It’s diversification outside of the dollar and legacy financial system
For me, Bitcoin and the arbitrage fund is very risky, so I’ve only allotted a small amount of my total assets and I assume there is a good chance I could lose all of it.
The arbitrage service I use does pay over a 10% return, has upside potential, and is fairly liquid, so I believe it has a place in my portfolio.
I think it is one of the better passive income ideas you’ll find.
I wrote a previous article about my Five Investment Goal Categories; bitcoin arbitrage hits on all five: Preservation of Purchasing Power, Capital Appreciation, Monthly Income, Geopolitical Risk Protection, and Liquidity.
I’ve recently increased my allocation to this arbitrage service to about 3% of my overall investment portfolio, which I believe is too high and would like to reduce that down to around 1%, because again, Bitcoin is risky.
On the whole I have about $145 in unrealized arbitrage earnings since I first started in July of 2015.
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Bitcoin Arbitrage is a way to generate monthly income, with over a 10% yield, you could invest $100 and have $110 in a year, with the added opportunity (and risk) of bitcoin appreciating in value (or depreciating).
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