September 11, 2023

What Is Crypto Staking? The Basics Explained

What Is Crypto Staking? The Basics Explained

Whether you’re a beginner or seasoned crypto investor, you’ll have at least seen the work staking. As a novice, you may be surprised to hear that there are more ways to make money in crypto than buying and selling, and one of the most popular is staking.

So, what is crypto staking? It’s a way of making passive income from the tokens you hold. In this article, you’ll learn the basics of cryptocurrency staking, how it works, the benefits and risks, and whether it’s worth it or not.

Staking cryptocurrency isn’t for everyone, but we’re here to help you decide if it’s the right investment model for you.

What Is Crypto Staking?

Staking cryptocurrency is when a holder of a cryptocurrency token locks their asset for a set period of time. This shows support for a particular project, enabling them to continue and further their operation on the blockchain.

As an incentive to encourage holders to stake crypto, they receive a % yield in return. The return is paid in the same cryptocurrency you staked.

In standard fiat terms, think of staking as an interesting-bearing savings account. You receive a percentage interest rate, and the amount you earn is based on how much cash you have in your account. The more your stake, the higher your return will be.

How Does Crypto Staking Work?

We’ve answered what crypto staking is. Now, let’s figure out how it actually works.

So, as you know, cryptocurrency and the blockchain are decentralized. They work on the premise that there is no middleman or financial institution needed to process a transaction. However, the complicated process blockchains go through to process cryptocurrency transactions requires staking.

Cryptos that offer staking use a process Proof of Stake. This consensus mechanism is how the validity and verification of a transaction are completed.

Can You Make Money Staking Crypto?

As with bank accounts, each cryptocurrency offers varying staking rewards. Depending on the platform you choose you can expect to receive between 4% - 7%. You’ll find Ethereum 2.0 and Kraken in this yield bracket.

However, there are alternative options that offer higher yields, some up to nearly 20%. However, as with most financial offerings, the higher the reward, the higher the risk.

Is Crypto Staking Worth It?

If you’re a novice investor with little capital to play with, staking might not be for you. Often, those with smaller amounts to invest are seeking quick returns, enabling them to compound the earnings to make larger investments.

Cryptocurrency staking is usually for a set and a prolonged period of time. This could be 3, 6, or 12 months. Once the staking period has elapsed, it’s at this point the staker will receive their rewards.

So, is crypto staking worth it? If you have a substantial number of tokens to stake and don’t require rapid returns, then yes, staking can be a fruitful way of earning passive income without trading.

However, if you only have a small investment to make, staking won’t bring substantial or recognizable returns.

Benefits Of Staking Crypto

The first major benefit of staking crypto is passive income. Once you’ve staked your crypto, you don’t need to do anything but wait for the set period of time to end to receive your initial stake and reward in return. Some investors who know they will be holding cryptocurrency for the long term prefer this method rather than leaving crypto in their wallets doing nothing.

Secondly, staking cryptocurrency gives individuals the ability to support projects they like. As discussed, some blockchain projects and cryptocurrencies require staking to process and verify transactions. Staking will help your favored project remain secure, enable it to handle malicious attacks, and maintain high transaction processing speeds.

Furthermore, crypto staking is incredibly easy, even for beginners. All you need is a crypto wallet with eligible staking currency.

When opening your wallet, you’ll be presented with the option to stake. Hit that button and select the amount of crypto you wish to stake.

Cryptocurrency Staking Risks

The cryptocurrency markets are volatile. Double-digit swings are incredibly common. While this can be fruitful for both stakers and traditional investors, it also has the potential to go the opposite way.

As a staker, if your chosen crypto drops dramatically in value, you could end up making a loss.

You already know that stakes are usually locked in for a period of weeks or months. So, during a market downturn, you’re unable to sell your crypto. As your initial investment is losing value, you still accumulate yield, but at the current market price. Therefore, incurring losses.

All of the risks of staking focus on potentially incurring losses, losing some of your stake, or a cryptocurrency losing value.

It can’t be stated enough to do thorough research before deciding whether staking a particular cryptocurrency is the best thing for you. Each crypto has different rules and rewards, so it’s not a one-size-fits-all practice.

The Difference Between Mining & Staking

Not every cryptocurrency offers staking. Ethereum 1.0 and Bitcoin are obvious examples of this.

As we’ve established, staked cryptocurrency is used to verify transactions securely. However, this hasn’t always been the case.

Traditionally, platforms used Proof of Work rather than Proof of Stake. The key difference here is how transactions are verified with these different processes.

Firstly, we already know that Proof of Stake uses staking. However, Proof of Work uses mining.

Validating a transaction is done by solving mathematical equations. To do this, mining uses processing power from miners around the world.

Every time a new transaction enters the blockchain, miners race to complete the equation. The first to do it is rewarded with cryptocurrency.

However, as cryptocurrency became more popular, its environmental impact became more obvious. This is why Proof of Stake has grown in popularity.

Furthermore, processing speeds can be incredibly slow when blockchain activity is higher. Proof of stake counteracts this.

Should You Stake Crypto?

It depends on your financial goals, currency circumstances, and the crypto you hold. Firstly, if you don’t hold any crypto that offers staking, you’ll need to buy some or swap tokens you are holding for stackable tokens.

Secondly, if you’re looking to make big gains quickly, you won’t want to be tied into a staking contract. This ties up capital you could be using to trade freely on a daily basis.

If you do decide staking is for you, be sure to take a look at how long it will take for you to get your original stake back at the end of the staking period.

Furthermore, a red flag to look out for is ridiculously high-interest rates – as the saying goes, if it sounds too good to be true, it probably is. Stick to trusted, well-reviewed staking options before you become acclimatized to the marketplace.

If you see yourself as a long-term investor looking to build a passive income rather than letting crypto gather dust in your wallet, then it’s definitely worth putting it to work.  

Crypto Staking Explained Summary

So, now you know what cryptocurrency staking is, how it works, the risks and rewards, and who it's suitable for. Now, it’s your turn to decide if it’s right for you.

Remember, anything you’ve read here isn’t financial advice. These are our thoughts on crypto staking and an insight into what it is.

As with any type of investment, staking comes with risks. It’s up to you to assess and mitigate these. It can be an easy way to make your cryptocurrency investments generate additional passive income, but it can also leave you incurring losses and without capital to trade with.

Due to the high energy consumption of mining and the Proof of Work model, it’s likely we'll see most cryptocurrencies moving towards a Proof of Stake consensus model. So, now is a great time to delve into understanding staking.

Overall, staking can be a fruitful and rewarding way of generating steady passive income while supporting the crypto and blockchain projects you believe in most. For consistent returns over a prolonged period of time, it is a great option. However, as always, don’t risk money you can’t afford to lose, and only stake when you’ve thoroughly reviewed the project, rewards, and length of stake period.

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