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While many individuals engage in buying and selling cryptocurrency for profit, there is a separate group of crypto holders who earn income through crypto staking rewards. Staking rewards are a form of income paid to crypto owners who assist in regulating and validating a cryptocurrency’s transactions. Essentially, staking rewards function similar to dividends or interest on a savings account, but with higher associated risks.
Here is an overview of how you can earn income through cryptocurrency staking and the potential risks involved.
Understanding Crypto Staking and Validation
Staking plays a crucial role in cryptocurrencies that operate using “proof-of-stake” validation. In a proof-of-stake system, investors who hold the cryptocurrency can contribute to validating transactions within the cryptocurrency’s blockchain database. Typically, they are required to own a minimum amount of coins to participate in transaction validation. These participants, known as validators, play a role in the decentralized network that verifies transactions and ensures the legitimacy of transactions recorded in a crypto’s blockchain. In return for their efforts, validators receive a certain amount of cryptocurrency. However, staking coins and becoming validators come with risks, as there is a possibility of losing part of the investment by approving potentially fraudulent transactions that do not adhere to the cryptocurrency’s rules.
Even individuals who do not possess enough coins to become validators themselves can pledge their coins with a validator and earn rewards. Therefore, even those with a small number of coins can earn staking rewards by collaborating with a crypto exchange or another crypto platform. The rewards earned can be directly deposited into their account.
While many popular cryptocurrencies, such as Ethereum, utilize proof-of-stake validation, some like Bitcoin, the most valuable cryptocurrency, use proof-of-work, which requires more computational power than proof-of-stake and involves a process known as mining to validate transactions and manage the coin’s blockchain.
Earning Potential through Crypto Staking
The amount of crypto staking rewards that can be earned varies significantly, depending on the staking platform, the cryptocurrency, and the number of individuals staking a specific coin.
“For more popular coins like Ethereum, Cardano, and Polkadot, rewards typically range from 5 to 20 percent,” stated Eddie Rajcevic, a former research team member at tastylive, a financial media network.
When staking coins through a crypto exchange, individuals may receive varying rewards depending on the platform. Some exchanges may deduct a portion of the staking reward, while others may pass on the entire reward to the user. Different trading platforms have distinct rules and reward systems.
“Some platforms offer a fixed yield for a specific lock-up term with a maximum reward per user, while others adjust their yield daily based on the remaining staking rewards within a specific pool,” explained Claudiu Minea, CEO and co-founder at SeedOn, a blockchain-based crowdfunding platform.
It is important to note that staking yields can fluctuate based on the level of participation and the total reward pool.
“Yields are subject to change due to the fixed nature of rewards over time and the fluctuation in the amount of capital involved in staking or lending,” said Ivan Zhang, CEO and co-founder of Pennyworks, a platform that offers rewards for decentralized finance (DeFi) lending. “More participants in staking or lending result in lower rewards, and vice versa.”
Some of the highest staking rewards are currently offered by Binance and Coinbase.
Getting Started with Crypto Staking
With numerous crypto exchanges providing staking rewards for various coins, experts suggest that an exchange is a convenient option for beginners looking to start staking. However, individuals have other alternatives, including staking-as-a-service platforms and DeFi lending platforms.
1. Select a Platform
Major exchanges like Coinbase, Binance, and Gemini offer staking, which can be initiated through the exchange’s app or web browser. Typically, the first step involves checking the tokens available for staking. For instance, the staking tokens offered on Coinbase include:
- Cardano
- Cosmos
- Ethereum
- Solana
- Tezos
The rewards rate varies for each token, and the offerings depend on the specific exchange. As of June 2024, Coinbase’s rewards ranged from 2.0 percent APY to 13 percent APY for the aforementioned tokens. Contrastingly, Binance lists over 20 tokens available for staking, with rewards exceeding 29 percent.
2. Choose the Token and Term
Once on a staking-enabled exchange, individuals can select the token they wish to stake and the desired amount, considering the staking term. Some exchanges offer “flexible” terms, allowing users to withdraw funds at any time, as opposed to locking assets for a specific term length, typically 30, 60, 90, or 120 days. Even with flexible terms, there may be a waiting period before funds become accessible again.
Platforms like Binance provide auto-staking for users seeking to maximize rewards and do not require immediate access to tokens. Auto-staking automatically renews the staking upon the completion of the original staking period.
Following the initiation of staking, individuals simply need to wait for rewards to be deposited directly into their account according to the exchange’s schedule.
3. Explore Alternatives
Many crypto owners find working with a DeFi lending platform more appealing due to the lower volatility of stablecoins used in such platforms, despite the accompanying risks. Minea mentioned that Binance offers services for proof-of-stake coins as well as DeFi lending, a similar service providing rewards on stablecoins like Tether.
“In these scenarios, you are lending stablecoins such as Tether,” explained Zhang.
Stablecoins are typically backed by tangible assets like U.S. dollars or bonds, providing a more stable valuation compared to most cryptocurrencies such as Bitcoin and Ethereum. These coins are lent to others, implying the possibility of non-repayment.
“Yields can also vary significantly and may be comparable to staking rewards, but with reduced volatility,” noted Zhang.
Understanding the Risks of Staking
While participating in crypto staking may appear to offer easy income, it is crucial to acknowledge the substantial risks involved:
Legal and Regulatory Risks
Recently, the SEC has taken action against exchanges providing staking services without proper registration. In February 2023, Kraken, a major crypto exchange, was penalized by the SEC and had to pay $30 million in fines, leading to the closure of its staking service for U.S. customers. Despite this, several large exchanges continue to offer staking services. However, increased scrutiny from regulatory bodies could result in changes in the future.
Volatility of the Underlying Cryptocurrency
“The primary risk is the price fluctuations of the crypto being staked,” highlighted Rajcevic. “While a 20 percent yield may seem attractive, a 50 percent drop in the crypto’s price could lead to losses.”
Earning staking rewards entails accepting the potential downside of the cryptocurrency’s value. In this aspect, the risks are higher compared to a savings account where the principal is insured, or even a dividend stock or ETF with lower volatility than cryptocurrency.
Unrealistic Reward Promises
Individuals should exercise caution when dealing with cryptocurrencies or platforms that promise exorbitant rewards.
“Smaller cryptos often offer higher rewards, but thorough research is necessary,” cautioned Rajcevic. “Many of these projects end up failing or experiencing hyperinflation. Therefore, even with a 150 percent yield, the decreasing value of the received crypto could render it worthless.”
Locking Up Cryptocurrency
Some staking platforms may mandate locking up cryptocurrency for a specified period, preventing users from unstaking and selling their coins. Rajcevic noted that certain exchanges may enforce a 180-day lock-up period, restricting individuals from accessing their funds for the duration.
“If the crypto’s value significantly drops during the lock-up period, you are obliged to wait until the period concludes to unstake,” he added.
Hacking
Hacking incidents could potentially impact a platform or a specific cryptocurrency, exposing users to associated risks if they continue to hold individual cryptocurrencies.
“Even staking platforms with millions of users that have been operational for an extended period are susceptible to hacking or cybersecurity threats,” remarked Minea. “This is why some crypto investors choose to stake their tokens using hardware wallets.”
While top crypto wallets can enhance asset security, the staking process may become more complex.
Fraudulent or Insecure Staking Platforms
Some crypto staking platforms may advertise high returns to lure users without adequately disclosing the risks involved. Therefore, it is crucial for crypto owners to thoroughly vet any platform before engaging in staking activities.
“Depositing and staking tokens on an untrustworthy platform could result in financial losses and missed rewards,” emphasized Minea.
Is Staking Your Cryptocurrency Holdings Advisable?
The key question to consider is whether staking aligns with your investment strategy. Are you aiming to trade crypto for short-term gains or to hold it long-term?
If your goal is quick trading, staking may not be suitable, especially if the platform enforces a lock-up period. However, if you believe in the long-term potential of cryptocurrency, agreeing to a lock-up where selling is restricted may be worthwhile. In that case, staking rewards could serve as additional benefits.
It is essential to assess the risks outlined above and any others specific to your chosen cryptocurrency or staking platform. When staking crypto assets, understanding the terms of the agreement is crucial, as highlighted by Minea.
These terms may include:
- Lock-up requirements and duration
- Potential rate of return
- Minimum staking amount, if applicable
- Maximum reward per user or staking limit
- Total reward pool size, if applicable
All these factors contribute to the decision of whether staking is suitable for you and ultimately determine the potential earnings. It is important to evaluate whether the potential returns outweigh the risks involved.
Conclusion
Cryptocurrency staking provides crypto owners with a means of earning income beyond solely trading the coins. While the additional income may seem enticing and risk-free, it is crucial to remember the challenges associated with owning and trading cryptocurrencies, which can sometimes outweigh the relatively small staking rewards.
— This article was updated with contributions from Bankrate writer Nina Semczuk.
Editorial Disclaimer: It is recommended that all investors conduct their own independent research on investment strategies before making any investment decisions. Additionally, investors are advised that past performance of investment products does not guarantee future price appreciation.