Should You Stake Your Crypto Portfolio To Earn Yield? 5 Things To Know About The Science Of Staking

Crypto investors have options when contemplating how to make money off their digital assets. They can buy and sell cryptocurrencies on a crypto exchange, or hold and mine them, or choose to profit via crypto staking, a relatively new addition to the financial lexicon.

Cryptocurrencies are built with blockchain technology which requires that transactions are secured and verified, achieving consensus or confirmation that all the transaction data adds up. The resulting data is stored on a blockchain and staking validates those transactions.

Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?

The Bitcoin network is secured by mining, known as proof-of-work validation. Mining requires powerful computers competing to solve cryptographic puzzles — an energy-intensive process that requires massive electricity consumption and has been accused of blowing up the planet. Bitcoin mining is inaccessible for most people and has been banned in China.

Many newer cryptocurrencies use an alternative consensus mechanism known as proof of stake. A growing number of crypto exchanges and platforms offer staking.

People are incentivized to hold onto their crypto by receiving staking rewards, often close to 13 percent of their holdings per year, according to Hacker Noon: “Compared to traditional savings account returns, staking rewards are a far more appealing option.”

Here are five things to know about the science of staking.

Crypto staking is a way to earn passive income

When a crypto investor stakes their holdings, they’re essentially leaving them in their wallet and letting their money work for them, aka passive income. The network can choose to use those holdings to forge new blocks on the blockchain. The more crypto staked, the better the odds are that your holdings will be selected, according to SoFi.

Most cryptocurrency exchanges run validators, allowing their customers to stake with them through the exchange’s user interface. They include Binance, Bitfinex, Coinbase, Kraken, KuCoin, Okcoin and OKEx. Instead of an exchange, you could opt for “staking-as-a-service” providers, which specialize in staking rather than exchanging. Examples include MyContainer, Stake Capital, and Staked, according to SoFi.

Some exchanges such as Kraken list staking on their main menu, so it’s easy to find. Others, like Binance, list staking under “Earn,” which also includes other ways of earning passive income from crypto, like lending, according to Decrypt.

Crypto staking is it is a safer and less risky way of generating passive revenue compared to traditional means, Hacker Noon reported. Traditional forms of passive income streams include cash flow from rental properties, dividend-yielding stocks, and royalties.

Pros and cons: what’s at stake

Because staking coins is a passive form of investment, there is little downside, according to SoFi. However, the cryptocurrency market is volatile. If the value of the coin drops, that will impact the value of your staking interest earned.

The great thing about staking is that it requires very little technical knowledge on the user’s part, despite being built on a foundation of complex mathematics, Decrypt reported.

Users can enjoy higher interest rates than savings accounts and traditional products with fewer intermediaries, and profit potential increases exponentially, according to Hacker Noon. Users also retain complete control over their funds, empowering participants.

Cryptos you can stake

As of July 2021, there was about $171 billion worth of assets locked in staking, according to a report on “The State of Staking” by Staked, a U.S. company that helps investors compound their cryptocurrency investments by participating in staking or lending.

Here are the current top five coins that can be staked with their nominal yield rates, ranked by market capitalization, according to Staked. The nominal yield rate equals the perceived rate of inflation plus the real interest rate, determined by the prevailing rate of inflation and the credit risk of the issuer, according to Investopedia.

Ethereum (ETH2.0) Nominal yield rate: 5.7 percent Percent staked: 5.1 percent Market Cap: $395.34 billion

Cardano (ADA)
Nominal yield rate: 4.6 percent Percent staked: 71.7 percent
Market Cap: $61.71 billion

Solana (SOL)
Nominal yield rate: 7.4 percent Percent staked: 67.7 percent
Market Cap: $40.75 billion

Polkadot (DOT)
Nominal yield rate: 14.0 Percent staked: 62 percent
Market Cap: $27.50 billion

USDC (USDC)
Nominal yield rate: 4.5 percent Percent staked: 97.9 percent
Market Cap: $27.05 billion

How to start staking crypto

Here’s a quick tutorial on how to start staking crypto, courtesy of SoFi, which makes it sound easy:

“To start crypto staking, an investor needs to decide where and what they want to stake. Here are four simple steps to get started.

1. Choose a crypto or coin to stake.
2. Choose and download a digital wallet in which to store your coins for staking. That may mean going directly to the specific crypto’s main website and downloading its corresponding wallet.
3. Purchase at least the minimum required number of coins. Some networks require that stakers have a minimum number of coins to participate (for example, Ethereum holders must have 32).
4. Make sure you have the necessary computing power and an uninterrupted internet connection.

“With everything in place, the staking process can begin in earnest. From here, most people will only need to check in on their crypto holdings every once in a while to make sure everything is humming along as it should.”

Taxes

The U.S. Internal Revenue Service decided in 2014 that crypto mining was a business and mining income would be treated as taxable gross income. Mined coins are immediately taxed as ordinary income upon their creation, Decrypt reported.

However, this only applies to mining, not staking. A lawsuit working its way through the federal court in Tennessee is challenging staking as a business. Plaintiff Joshua Jarrett argues that his Tezos staking rewards should be treated as property, and should be taxable only when they’re sold or exchanged.

Until that’s settled, “the best advice for would-be stakers is to find a tax advisor with experience of cryptocurrency accounting,” Ekin Genç wrote for Decrypt.

Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?