Why Staking your Crypto Is Probably a Good Idea!

Nowadays, thanks to all the advancements in cryptocurrency and Decentralized Finance (DeFi), it has become more obtainable than ever to multiply your passive income streams and improve the quality of your life by making every minute of your time more lucrative. Cryptocurrency offers a formidable way to do exactly that by-way-of staking. It’s the investment your future self will thank you for.

Approximately $200 billion worth of cryptocurrencies and tokens is currently being staked. Which is a considerable volume that indicates a strong belief in the utility and value of this process. It also points toward opportunity as it is generating considerable amounts of passive income for its participants.

But what is Cryptocurrency staking?

Our story starts with Crypto Mining. Which is, basically, a contest where powerful computers and algorithms try to find a solution to mathematical equations, or blocks, that are ever increasing in difficulty. Whatever computer finds the solution gets to claim his reward.

With this method, to increase your chances to win, you need more computing power. And by showing the right solution, miners prove that they put in the necessary work to obtain that. Which is the only way to secure and verify transactions in a decentralized network without the existence of a bank as a middleman.

The proof of work consensus mechanism is a reliable solution. However, it’s very resource intensive. For instance, according to the Digiconomist's Bitcoin Energy Consumption Index, a single Bitcoin transaction takes 1,709.93 kWh to complete. The equivalent of approximately 59 days of power for the average US household.

I have talked about this point when I tried to answer the question of why Ethereum is a better choice than Bitcoin.

Moreover, mining Bitcoin has a huge impact on the environment. The annualized total Bitcoin carbon footprint is measured at 73.10 Mt. Which is Comparable to the carbon footprint of Turkmenistan. For Ethereum it’s 31.44 Mt. Or, what the country of Cuba emits in a year. This created a lot of controversy around the subject and led to the search for other alternative consensus mechanisms.

The most popular alternative, nowadays, is proof of stake. This means that instead of using energy to mine cryptocurrency, people will stake their coins to do the same job.

Simply put, you stake your crypto-assets or tokens by depositing your funds on a network via a computer, which is called a Node. Then, Nodes start competing for the chance to forge blocks.

The factors taken into account to determine the winners of this competition are the amount of money being staked and the period of time the funds have been staked for among other factors.

How can I generate Passive income with staking?

There are many players on the market that adopted proof of stake as a consensus mechanism. Many crypto wallets offer a safe and easy way to stake your crypto-assets. The top 5 proof of stake tokens by market capitalization are:

Let’s take Cardano , for example. When you log on to the “Cardano dot org” website, go under “INDIVIDUALS” and choose between DAEDALUS wallet and YOROI wallet. Whichever one you prefer. Go through the process of downloading it and setting it up. Don’t forget to secure your keys well!

For our example, let’s go with the DAEDALUS wallet. Now, when downloading it, it’s going to take some time to transfer the entire Blockchain. A few hours at most.

Once that’s done, go ahead and log in. You’ll need to deposit funds in this wallet. A minimum of 10 ADA is required. Which is equivalent to 28 USD at the ADA’s current price. Then, you need to search for a staking pool that you feel comfortable with, and basically that’s it! That’s all you need to start staking.

Of course, I’m not giving this example so that you’ll go for Cardano precisely. No. You should go with whatever cryptocurrency you believe in. Staking is an investment. A serious one. It has potential to generate great return and rewards. But still, if you choose the wrong coin to stake your money, you could lose it.

Is staking risky?

Yes! As everything else. Where there’s opportunity, there’s risk. And the number one risk is of course price movement. When the price of the assets you’re participating with in the staking pool changes, it directly impacts your performance. So, in this situation, knowing the assets you’re holding really counts. That's why you need to check out The valuation of cryptocurrencies to maximize profit.

Also, staking rewards duration can change. The pay out isn’t always daily. This will reduce the opportunity of your reinvesting your staking rewards. To remedy this, try to choose to stake assets that pay staking rewards on a daily basis.

Moreover, you should keep an eye on the asset’s liquidity. Less liquidity means that you’ll find it difficult to sell the assets you’re staking when you want to, or to convert them into stablecoins.

And let’s not forget about the lockup periods. Where you can not access your staked assets. As they are in a locked state. During this time, what you’re staking can’t moved or traded. So, for example, if the price of the crypto-assets you’re staking changes drastically during this period, you won’t be able to unstake them. Therefor, this will affect your overall returns.

Finally, there’s also validator risk. Validators are node operators who store a copy of the blockchain and must perform certain functions to keep the system secure, as we’ve seen with the ADA example and the DAEDALUS wallet. So, a validator may become inactive or jailed if they fail to meet certain requirements. For instance, network uptime is crucial. A validator needs to be always operational. If the node goes down at a certain point, it will experience block loss. Also, validators need to have a collateral, or coins staked, in order to be recognized as active. If these requirements are not met, staking rewards will be locked and, in the worst-case scenario, the validator may incur a slashing penalty by taking some of their tokens staked.

This risk can be mitigated by delegating your stake to a third-party validator via a secure and reliable crypto wallet.

Managing your risk is crucial to be successful. You can read more about in my article: Risk management in trading: It's about time!

Is staking Profitable?

To determine staking profitability, you can look at the APY. Or, the Average Percentage Yield. It’s a rate that reflects the total amount of staking rewards to be earned over a yearly period. Some great examples here are Polkadot (DOT)  that offers a 13.47% reward rate, BINANCE (BNB) gives a 13.99% return and by staking Avalanche (AVAX) you can get up to 9.69% yield. Not bad, huh!

It’s safe to say that you can find tokens with APYs that exceed the returns you can get if you invest your money in any other financial asset. And it’s certainly better than the average 9% that the S&P 500 can give you.

The APY is usually displayed alongside the crypto-assets on any platform and is relatively easy to find.

So, in conclusion, what can we say?

We can say for certain that staking is profitable. It’s a relatively safe way to have very good returns and effectively generate passive income streams. It increases the utility of your tokens. HODLing crypto-assets reduces sudden dumps and price falls. However, it’s still risky. You should always do an extensive research before staking your coins. Don’t take what you read here, or anywhere else for that matter, as financial advice. You are the only one responsible for your own decisions. This article is just to provide you with a guide on what to look for and how to evaluate your situation. It’s only here to help give you insights that will, hopefully, improve the quality of your decisions.

Be careful and stake safely.