If you’re looking to diversify your portfolio, buying crypto tech royalties could be a smart, if unconventional way to do so.
But what exactly are tech royalties? And are they really a good investment? In this article, we’re going to answer both of these questions, and more! Keep on reading for all the details…
What are royalties?
When we think of royalties, the first thing that probably comes to mind is the music industry – and for good reason. For big-name musicians, fees earned from royalties are likely to make up a significant proportion of their income.
Nowadays, the majority of music royalties are not earned through physical or digital song sales, but rather through royalties paid by popular streaming services, such as Spotify or Apple Music. That’s because every time you hit that ‘Feel Good Playlist’ on your smartphone, an artist – or the holder to the artist’s rights – will be rewarded in the form of a small sum.
This sum collected will, of course, vary massively between artists. Some smaller artists might only make a few pennies. Yet, collectively, music royalty payments are big business.
PRS for Music – an organisation that represents the rights of over 160,000 songwriters – reported that royalty payments from music played online generated a massive £267.8m for its clients in 2021.
Importantly, if you want to dabble in buying music royalties, you don’t need the song-writing ability of Elton John or Bob Dylan to get in on the action. We’ve put together a comprehensive article that explains how to make money by investing in royalties.
What are crypto tech royalties?
Cyrpto tech royalties are similar to music royalties in the way that they refer to earning an income from holding, or having the rights to, an underlying asset. In the case of crypto tech stocks, that asset is cryptocurrency.
When it comes to crypto tech royalties, the idea is that your crypto holdings will generate you a passive income over time.
There are essentially 5 ways to invest in crypto tech royalties, as we explain in the section below…
How can you buy tech royalties?
Yield farming, lending, staking, buying and renting out non-fungible tokens (NFTs) are all ways to invest in crypto tech royalties. Let’s take a closer look.
1. Yield farming (Liquidity mining)
Yield farming, or liquidity mining, refers to cryptocurrency holders pooling their digital assets in a swap exchange. These pooled funds can then be used to undertake ‘smart contracts’ which can generate a return.
In brief, smart contracts are software programs stored on a blockchain, and come into play when pre-established conditions are met. To learn more about yield farming, take a look at our article that highlights how to make money with decentralised finance.
2. LENDING
If you hold cryptocurrency you can lend it to borrowers through a lending platform. In return, you can hope to earn yourself a decent yield
It shouldn’t be forgotten that lending crypto to others isn’t without risk. For example, borrowers might not pay back what they owe. So, while potential returns may dwarf returns earned for lending traditional fiat currency via a peer-to-peer platform, or by stashing your cash in a savings account to earn interest, it isn’t a fair comparison.
Never lose sight of the fact that chasing higher rewards comes with higher risk.
3. staking
Staking refers to cryptocurrency holders using their digital assets to support a blockchain network, such as helping to certify digital transactions around the world. In other words, if you stake your crypto, your digital currency is effectively being put to work in order to support the wider network. Because of this, you can expect to earn a return – usually a percentage of the amount staked.
Not all cryprocurrencies support staking. That’s because it only applies to cyryptocurrencies that support the ‘Proof of Stake’ process for verifying transactions. Some cryptocurrencies use the ‘Proof of Work’ model instead, which relies on mining and a lot of computer power.
Cypytocurrencies that support staking include Ethereum, Cosmos, Solana, and Cardano.
4. create an NFT Royalty
A non-fungible token (NFT) is a unique, digital certificate that can’t be copied or divided. They’re recorded securely in a blockchain, so there’s no difficultly in determining who owns a particular NFT.
Digital artworks and Metaverse assets are two examples of NFTs, though they can really be anything. One of the most famous examples of an NFT was the first ever ‘Tweet’ by Twitter founder Jack Dorsey. (It sold for $2.9m if you were wondering…)
If you buy or create an NFT, it’s possible to receive a commission every time you sell your digital asset. Obviously if your NFT isn’t popular then it may not hold any value. However, if you get your hands on an NFT that manages to rise in value, a royalty on every future sale could deliver you a decent return.
5. renting out nft Royalties
It may seem bizarre, but if you own an NFT there’s nothing stopping you lending it out to others in exchange for a fee.
Think about it this way… if you owned a physical piece of artwork you’d have every right to lend it out to a museum, or art gallery. Lending out digital artworks is pretty much the same, only we’re talking about a digital, not physical, asset.
To rent out an NFT, you’ll need to find a rental platform which can create a NFT rental contract. Two popular NFT platforms include IQ Protocol and reNFT.
What are the risks?
If you’re interested in earning royalties from crypto it’s really important to understand the risks. For starters, earning royalties through more traditional methods, such as buying music rights, is a proven, established way of earning a few bob.
Crypto tech royalties, on the other hand, is a new concept. As a result, there are no guarantees whatsoever that earning royalties though lending, staking, or buying or renting NFTs will deliver you any sort of return. There’s also the risk that the value of any cryptocurrency you hold will fall, or even turn to zero. By nature, cryptocurrency is a highly volatile asset.
Cryptocurrency is also an unregulated asset class. This means that if your digital coins are stolen, an exchange fails, or the value of your investment plummets, you’d have little comeback.
To learn more about cryptocurrency, take a look at our article: A beginners guide to investing in cryptocurrency.
Should you add tech royalties to your portfolio?
Because of the risks highlighted above, if you’re interested in earning an income from tech royalties, it would be wise to avoid putting down more than you can afford to lose. In fact, the same goes for any type of cryptocurrency investing.
That being said, if you’re keen to dabble in royalties – tech royalties or otherwise – then it’s worth ensuring you have other types of investments in your portfolio to mix things up.
To learn why it’s important to avoid putting all of your eggs in one basket when it comes to investing, take a look at our article that highlights the importance of holding a diversified portfolio.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice.
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.
Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Tax on profits may apply.
