What is cryptocurrency staking?

HODLing your way to passive income.

Now, this is buy and hold.

You may have heard that cryptocurrency has its unique equivalent to fixed-income assets, making it an attractive option for investing. Instead of earning interest in euros, you earn a percentage of a batch of crypto coins you set aside and “stake.” This is what crypto staking is all about. But what’s involved, how does it work, and what are the pros and cons of locking up your coins for “yield”?

• Staking is how long-term crypto investors (“HODLers”) earn passive income in the crypto world.
• Staking cryptocurrency means agreeing not to trade or sell your tokens.
• Crypto staking creates opportunities to earn crypto rewards and diversify your crypto portfolio—but it’s inherently risky.

What is cryptocurrency staking?

Crypto staking is locking your digital tokens to a blockchain network to earn rewards—usually a percentage of the tokens staked. Staking cryptocurrency is also how token holders earn the right to participate in proof-of-stake blockchains.

Here’s a simple example: Suppose a blockchain network offers a 4% reward for a month’s staking period. You decide to lock up and stake 100 tokens in the network. After a month, you can access your staked tokens and receive 4 additional tokens as your reward.

How many ways can crypto investors stake their tokens?

Cryptocurrency staking can take many forms, but it generally falls into two categories: active and passive.

• Active crypto staking means locking your tokens to a network so that you can participate actively in it. Active participants may validate transactions and create new blocks to earn token rewards.
• Passive crypto staking involves simply locking your tokens to a blockchain network to help keep them secure and operating efficiently. Passively staking crypto is not time-consuming but generally yields lower token rewards than active participation.

Cryptocurrency staking is a relatively new innovation, but many specialised types of crypto staking already exist, including:

• Delegated staking. This form of staking enables crypto stakers to delegate their staking power to a validator node operated by someone else. The rewards earned are shared among validators and delegators. (Note: If these terms confuse you, watch the blockchain video below).
• Pool staking. Coin holders may combine their resources to compete more effectively for staking rewards. Any rewards earned are shared proportionally among the pool members.
• Exchange staking. Some cryptocurrency exchanges offer staking services, enabling users to stake their holdings directly on an exchange. The exchange handles the staking process on a blockchain network and distributes staking rewards to participants.
• Liquid staking. Users receive representative tokens in exchange for staking their crypto. The representative tokens can be traded or used, providing liquidity to the crypto staker.

Cryptocurrency staking can also be custodial or noncustodial. Custodial staking requires crypto holders to transfer their tokens to a staking platform, while noncustodial staking lets you keep your staked coins in your own digital wallet.

How does crypto staking work?

Suppose you want to add cryptocurrency to your portfolio to generate yield from staking. Staking can be a strategic part of your overall investing approach in the cryptocurrency market. Here are the steps to make that happen:

• Choose a cryptocurrency. Not all cryptocurrencies support staking, so your first step is to choose a relevant token. Cryptocurrencies that use proof of stake or a similar consensus mechanism support staking.
• Acquire the cryptocurrency. Your next step is to acquire your chosen cryptocurrency. You can use one of many crypto exchanges to complete the purchase.
• Select a staking platform. The most important part of this process is choosing a staking platform. Your selected platform determines the type of staking and whether the token storage is custodial or noncustodial.
• Stake your cryptocurrency. With the proper tokens in your digital wallet and a staking platform selected, you can follow the platform protocols to stake your crypto. Staking a token locks it to a blockchain network for a predefined period.
• Earn rewards. Your staked cryptocurrency may begin to generate rewards in the form of more crypto.

Note that staking rewards aren’t guaranteed to be delivered on time or delivered at all in some cases. The reasons may include:

• Network congestion can sometimes slow the process of generating your rewards.
• If you delegate staking to a validator who either makes a mistake or behaves maliciously, they may be subject to losing some or all of the tokens they staked. This is called a slashing penalty.
• Also, if blockchain protocol changes (e.g., “forks”) occur while your staked tokens are locked up, they may affect the value of your rewards.

Pros of crypto staking

The idea of earning interest on your digital assets can be enticing. Here’s what to love about staking your digital tokens:

• You can earn passive income on crypto assets you plan to hold for the long term (“HODL,” in crypto-speak).
• The potential for rewards to appreciate.
• Staking improves network security and efficiency.
• It may enable your active participation in the blockchain network.

Cons of crypto staking

Crypto staking comes with risks. There are several drawbacks to cryptocurrency staking:

• Your assets have limited or no liquidity during the staking lockup period.
• Staking rewards (as well as staked tokens) can lose value when prices are volatile.
• Your cryptocurrency can be slashed (partially confiscated) for violating network protocols.
• When many users receive staking rewards, there is a risk of cryptocurrency inflation.
• An attack on a blockchain network can impact your staked crypto.
• Cryptocurrency staking is not well-regulated.
• Successful staking may require advanced technical knowledge.

Your increased involvement with a staking platform or blockchain network makes cryptocurrency staking risky—more risky than simply holding your tokens in a secure digital wallet.

Beginner mistakes when staking crypto

You’re more likely to succeed with cryptocurrency staking if you learn from others’ mistakes. Understanding staking as part of your overall investing strategy can help mitigate these common errors. Here are some common errors beginners make:

• Conducting insufficient research. Some crypto holders are enticed by attractive yields and begin staking their digital assets without learning how staking works or understanding the associated risks.
• Ignoring price volatility. New crypto investors might not fully realise that the value of their staked tokens can fall while they’re locked up.
• Disregarding lockup periods. A novice crypto staker may not fully consider the lockup period before staking their crypto. Later, they may be unable to access their crypto in an emergency.
• Compromising asset security. Token holders eager to earn rewards may not consider the entire spectrum of security risks associated with their decisions. For example, they may participate in noncustodial staking without the necessary knowledge, security safeguards, or equipment.
• Underestimating slashing risk. Active crypto stakers with network nodes may miscalculate the risk of losing cryptocurrency by incurring slashing penalties.
• Ignoring tax implications. Staking rewards may be subject to taxation, but novice crypto stakers frequently overlook tax consequences.
• Staking too much crypto. Cryptocurrency staking is one way to potentially grow your investment portfolio; you shouldn’t rely on it for all your investment returns. In other words, staking is a way to diversify your crypto portfolio.

Staking cryptocurrency is potentially rewarding but inherently risky. The practice is becoming increasingly popular as platforms like Ethereum make it accessible and more blockchains adopt proof-of-stake consensus mechanisms. Learning about cryptocurrency staking is a great first step toward mastering this potentially lucrative strategy.

Getting Started with crypto staking and cryptocurrency trading

Staking and cryptocurrency trading are two popular ways to invest in the cryptocurrency market, offering potential returns and opportunities for growth. To start with staking and cryptocurrency trading, it’s essential to understand the basics of cryptocurrency and its underlying technology, blockchain.

Cryptocurrency trading involves buying and selling digital assets, such as Bitcoin, Ethereum, and other altcoins, intending to make a profit. Traders analyse market trends, use technical analysis, and employ various strategies to maximise returns. On the other hand, staking involves holding a certain amount of cryptocurrency in a wallet or exchange and earning rewards in the form of additional cryptocurrency. This process helps secure the network and can provide a steady stream of passive income.

Staking and cryptocurrency trading require a solid understanding of market trends, technical analysis, and risk management. Investors can use various tools and platforms to trade and stake cryptocurrencies, including online exchanges, wallets, and trading apps. Researching and choosing a reputable exchange or platform that offers secure and reliable services is crucial.

Before starting, investors should also consider their risk tolerance, investment goals, and potential returns on investment. Staking and cryptocurrency trading can be lucrative opportunities, but it’s essential to be aware of the risks involved, including market volatility and potential losses. By educating themselves and staying up-to-date with market news and trends, investors can make informed decisions and maximize their potential returns.

Cryptocurrency trading and staking can be done with a minimal investment, making it accessible to a wide range of investors. The cryptocurrency market is constantly evolving, with new technologies and innovations emerging, offering opportunities for growth and development. Investors can use various strategies, such as dollar-cost averaging and diversification, to manage risk and maximize returns.

It’s essential to stay informed about regulatory changes and government policies that may impact the cryptocurrency market. By following best practices and staying informed, investors can navigate the cryptocurrency market with confidence and achieve their investment goals.