Crypto staking is a new concept that has been created with the rise of ‘Proof-Of-Stake’ cryptocurrencies. It’s the act of committing your crypto assets and essentially making them illiquid by locking them in a smart contract for a certain timeframe. This is done in order to help secure the blockchain and confirm transactions.
As the world is moving to greener and more sustainable energy pastures, Proof-Of-Stake assets crypto staking is gaining notoriety as the next stage in the evolotion of the cryptosphere, over the traditional PoW (Proof-Of-Work) model popularized by Bitcoin, and later on, Ethereum.
The question then becomes – Is now a good time to start staking? Is it really more profitable than the good old savings account?
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Does Crypto Staking Really Get You Better Returns Than A Bank?
The short answer is yes. The long answer is – It depends.
Currently, traditional financial institutions are offering interest rates of less than 1% and in some cases even negative interest rates (yes, you pay them!), the current APY rates in the crypto space go all the way from 4% in assets like ETH 2.0 up to 25% in smaller cap coins.
These returns can become significant, especially when you take compounding into account, and they’re starting to attract even the most risk-averse investors in the traditional financial sector.
However, due to the risks associated with crypto staking, it becomes a matter of risk vs. reward and your personal risk tolerance.
Some might feel comfortable with making 1% yearly on their savings while being 99% safe (hey, banks still sometimes go belly up!). Others want higher returns and don’t mind some scary moments.
Crypto Staking Has Risks, And They’re Not Insignificant
Because staking is a brand new space combining finance with technology, the potential profits are high. But risks are also present.
Some of the risks of staking crypto include, but not limited to:
- Hacks and Exploits: Exploits in cryptocurrency protocols are not as common as exchanges getting hacked, but they can still happen.
- Price Crashes: Some crypto assets require you to lock your coins, and have an ‘unfreeze’ period for you to withdraw them. During that time, negative price fluctuations could be painful.
- Taxes: You must be mindful of taxation laws on crypto staking in your country.
- Legislation: New laws in the space can negatively affect stakers.
The risks of staking crypto are not to be taken lightly, so one must weigh the pros and cons before making a decision of committing.
How To Minimize The Risks Of Crypto Staking
While crypto staking is a powerful way to create yield and generate what is practically passive income using your crypto assents (I mean.. What could be better than your crypto creating… more crypto?!), its still a very new and somewhat experimental technology when stacked up against traditional finance tools and models.
One strategy to minimize risks in staking is to only stake part of your coins.
Instead of going all-in with your whole portfolio, only stake 10% to 25%. If the unthinkable happens, or if you feel that you need to sell quick, the damage won’t be as bad.
Another is to only stake ‘blue chip’ assets.
Crypto assets such as Ethereum, Cardano, Polkadot and other Top 10 assets in terms of market capitalization are considered to be the equivalent of ‘Blue Chip’ stocks in the crypto world, which makes staking them a relatively safe and effective way to generate crypto yield.
Final Thoughts: Should You Stake Crypto In 2022?
It depends on your personal risk tolerance.
If you believe that crypto and Web 3.0 is the future of money in one way or another, then parking part of your portfolio in a safe PoS asset and staking your coins could not only be a way to accelerate the adoption of crypto by your very own participation, but to get some (very!) sweet returns. As you’ve seen, there are ways to make staking much safer.
Remember, the earlier you are, the higher the returns, and the more mainstream the field becomes, returns will naturally go down. Should you jump in? The choice is in your hands!