If you arrived at this article, you might be exploring ways to generate passive income or yield through cryptocurrency investments. As a provider of Staking-as-a-Service, we believe that staking is a valuable opportunity for earning extra cryptocurrency passively. However, it is essential to note that digital assets are highly volatile and may not be suitable for all investors. Therefore, we advise conducting thorough research before staking and note that this information should not be considered financial advice. That said, let’s look at staking as a holding strategy.
Before we continue, it is vital to know what should be considered under holding and staking. Holding or HODL’ing should be seen as buying and holding a cryptocurrency regardless of short-term market fluctuations. Holding is one of many cryptocurrency investment strategies, among which are short-term trading, dollar-cost averaging, lending, or arbitrage.
While it is possible to simply hold your assets and not do anything with them, it’s also interesting to look at staking a part of your digital assets. Staking is holding and locking up a certain amount of cryptocurrency to validate transactions on a blockchain network and earn a return on the investment. In a Proof of Stake (PoS) blockchain network, validators are chosen to validate transactions based on the amount of cryptocurrency delegated to them rather than the computational power they contribute, like in Proof of Work (PoW) systems. These validators are then rewarded with new cryptocurrency for their efforts in maintaining the security and integrity of the network, and these rewards are redistributed to their delegators.
The staking process is an alternative to mining in PoW systems. It requires less computational power and energy consumption, but it requires trust and a lock-up (and unlocking) period. To learn more about staking, have a look at our video below.
Benefits of Staking
There are many benefits to staking digital assets. As mentioned previously, holding is a long-term investment strategy and therefore supports capital preservation. While it can be scary to hold your assets, especially in less-fortunate moments in the market, to hold your assets, the combination of holding and staking your assets ensures that you continue to see rewards (in cryptocurrency) while waiting for the situation to improve. Thus, staking supports capital preservation and offers the opportunity to earn more rewards. It’s even the case that some blockchain networks provide higher rewards for stakers during bear markets to incentivize individuals to keep their assets staked and help secure the network.
Furthermore, staking offers the opportunity for consistent returns. Even in a bear market, stakers can earn consistent returns on their investment by validating transactions on the blockchain network. Other benefits of staking include:
- Reduced volatility: Staking can help reduce the volatility of an individual's overall portfolio, as staked assets are locked up for a certain period and cannot be quickly sold during market downturns.
- Network security: By participating in staking, individuals can help secure the blockchain network, benefiting the underlying cryptocurrency's long-term health and value.
- Diversification: Staking can be an excellent way to diversify an individual's portfolio and reduce the overall risk in a bear market.
Finally, there’s crypto-compounding which refers to earning interest or returns on an initial investment in a cryptocurrency and then using those returns to invest further in the same or another cryptocurrency. This process is similar to compounding in traditional finance, where interest earned on an investment is reinvested to generate additional returns. In the context of crypto, this can refer to earning returns through staking or lending and then using those returns to purchase more cryptocurrency or to invest in another crypto-related opportunity. Over time, the compounding effect can lead to significant growth in the value of the initial investment.
Risks
Staking digital assets can be a valuable investment opportunity, but it is essential to be aware of the risks involved. Here are a few things to consider:
- Blockchain networks and their decentralized applications (DApps) are based on cutting-edge technology that is still being developed and tested. These networks and DApps often rely on complex algorithms, consensus mechanisms, and cryptographic techniques that require a significant level of technical expertise to fully understand and maintain. Moreover, as blockchain technology is still relatively new, there are many unknowns and uncertainties about how it will evolve and be adopted in the future.
- Investing in low-quality assets or networks with artificially inflated return rates can be risky. Low-quality assets may include those that have weak fundamentals, lack a clear use case, or have a questionable team behind them. These assets are often promoted as having high returns with little to no risk, but in reality, they may not have a sustainable business model or a viable path to adoption. On the other hand, networks with artificially inflated return rates may be promoting unrealistic or unsustainable returns to attract investors.
- Many PoS blockchain networks have lock-up periods, which can make your holdings less liquid.
- Slashing is a penalty mechanism that can be applied to validators for certain behaviors in PoS blockchain networks, which can result in the loss of staked assets.
It's important to keep in mind that investing in digital assets may not be suitable for everyone. Additionally, there are no guarantees in any investment market, and it's important to conduct thorough research and consult a financial advisor before making any investment decisions.
Final Thoughts
Staking can be seen as an improved way of holding digital assets. When you stake, you not only hold your assets, but also earn rewards. This can be particularly beneficial for those looking to hold assets for the long term, accumulate a larger position, or simply believe in the potential of a particular coin or token.
It's important to remember that staking has risks, such as the possibility of "slashing" in certain Proof of Stake (PoS) networks. However, the risk of slashing is generally low, and the potential rewards can be significant, with average returns ranging from 5%-15% or more per year, depending on the network. Additionally, the compounding effect of earning rewards and reinvesting them can lead to significant growth in the value of your initial investment over time.
In summary, staking may be worth considering if you're looking for an improved way to hold your digital assets and potentially earn additional returns. However, as with any investment, it's important to conduct thorough research before making any decisions.
DISCLAIMER: This is not financial advice. Staking, delegation, and cryptocurrencies involve a high degree of risk, and there is always the possibility of loss, including the failure of all staked digital assets. Additionally, delegators are at risk of slashing in case of security or liveness faults on some protocols. We advise you to do your due diligence before choosing a validator.
