Is Cryptocurrency Staking Better Than A Savings Account?
You know what they say about money, make it work for you and you’ll never have to work a day in your life. With cryptocurrency bringing the financial space into a new frontier through Decentralized Finance (De-Fi), it’s never been a more perfect time to turn your money into an investment vehicle.
Staking is one of the financial protocols that was born out of De-Fi. It’s become a very common means of earning interest off cryptocurrencies, without banks and traditional financial institutions in the equation.
How do you do this and what should you know about it? Here we’ll discuss all the basics of staking and how it fares against traditional savings accounts.
What is staking?
Staking is a method of generating more tokens or cryptocurrency by locking or holding a cryptocurrency in a wallet, De-Fi platform, or exchange to participate in the operation of a Proof-of-Stake (PoS)-based blockchain system.
An asset that is used to mine or validate transactions in a blockchain system. Simply put, it’s the asset you use as a tool to participate in verifying transactions in the blockchain. It’s similar to cryptocurrency mining in a sense that you get more tokens through validation of transactions, but you use your crypto to mine not your computer and graphics card.
In simple terms, the staked cryptocurrency will be used to validate transactions, and in return, it gets rewarded with a transaction fee of the same currency.
It is similar to crypto mining in the sense that it assists the blockchain in processing a transaction, but it doesn’t require hardware to solve complicated blockchain algorithms.
With this in mind, staking has opened an additional investment opportunity for cryptocurrency owners. Rather than just let your cryptocurrency sit in a virtual wallet, staking lets you earn interest for holding it for locking it up for a period of time.
The principle is the same as putting your money in a savings account, but with the yield being much higher – and so is the risk!
Typically, staking offers an APR that ranges between 5% and 10% for more established cryptocurrencies. Some staking can go up to three-digit APR but they’re usually lesser-known tokens with much lower real world value. On top of that, due to the nature of cryptocurrency, these returns may not always be guaranteed.
Since cryptocurrencies are extremely volatile and holding on to them might significantly decrease the value of your money, staking will expose you to this risk. Staking on stablecoins instead is a more foolproof way to go about it.
How long are you required to stake?
While there are staking opportunities that require you to lock your crypto a year or more, they are less common. Typically most platforms will only require you to lock your crypto for 15 days up to three months, and you can leave it staked for as long as you desire.
There are flexible staking options but their yield is usually lower. If you want to make the most out of staking, go for those with longer hold periods because they’re the ones offering higher APRs.
What are stable coins?
Stablecoins are cryptocurrencies backed by a reserve asset which makes their price stable. The prominent Stablecoins are USDT (Tether), USDC (USD Coin), and BUSD (Binance USD); they’re pegged to the US dollars. While they’re cryptocurrencies, they’re made to provide a safe harbor for traders, reducing the risks from volatility without having to leave the whole cryptocurrency ecosystem.
In a nutshell, Stablecoins are created to serve as an asset where traders can park their money to avoid market volatility.
Stablecoins offer the best of both worlds— volatile-free valuations of fiat currencies and the innovations that come with cryptocurrencies but with a less promising price potential.
Staking stablecoins vs regular cryptocurrencies
As mentioned above, most stablecoins are simply the cryptocurrency counterpart of the US dollar. It’s not designed to have a tech-based utility like a regular cryptocurrency. While their value is tied to the US dollar reserve, cryptocurrencies’ values are based on market sentiment and demand.
Bitcoin – digital cash
Ethereum – smart contracts
XRP – faster cross-border payments
Despite its difference, stablecoin is still a cryptocurrency and various platforms offer staking opportunities for this type of cryptocurrency.
Two of the most prominent staking platforms (at least for Filipinos) right now are Binance and Pancakeswap. If you’re just starting to explore this new financial concept, these two platforms are the best places to start. There are other exchanges, de-fi platforms, and web3 powered wallets that offer staking, but they are less common at the moment.
Pros and cons of staking
Staking is a passive income opportunity if you’re holding a cryptocurrency that you aren’t planning to trade or sell in a long period of time. Should any of the platforms offer a staking opportunity for that cryptocurrency, then there’s much to gain and little to lose.
However, if you don’t have any idle cryptocurrency lying around in exchanges or wallets, there are a few things that you should ponder before considering this as a source of passive income.
- Prominent cryptocurrencies such as Bitcoin and Ethereum may be safer assets to stake, but their average yield is almost the same as a high yield savings account. The good thing though is that these cryptocurrencies have appreciating value based on historical data. Not only will you reap from the staking rewards but also from its value over time. Despite that, it’s not spared from volatility and could even nosedive again like how it has in the past years. You might end up at a loss should you need to liquidate it at the wrong time.
- Lesser-known cryptocurrencies or altcoins offer higher returns but they come with greater risk due to the fact that many of these projects are still in their early stages with less mainstream adoption. If you consider staking on new altcoins, make sure you’ve done enough research to have a conviction on its vision and long-term goal. Don’t just invest in it because it’s trending or pumping. This does not only apply to staking, but to crypto investment as a whole.
- Stablecoins are the safest staking option, but their yield is considerably lower and its value is fixed. On top of that, it has no potential to increase in value over time. Then again, if your risk tolerance is low or you simply want to park your money somewhere it’s easily accessible without exposure to the fluctuations of the cryptocurrency market, this should be a good alternative to a savings account.
- With all that said, make sure you’ve fully grasped the concept of owning cryptocurrencies. Learn how to transfer funds to and from your crypto wallet or exchange account, understand all the intricacies that come with it.
Where to stake your cryptocurrencies
Staking cryptocurrency is as simple as buying or trading them, but the process can be different depending on the staking platform you’re using.
Exchanges (Binance, CoinBase, and the likes)
Exchanges offer a more flexible way to stake your crypto because aside from the fact that you are free to buy thousands of cryptocurrencies from their platform, you can easily convert your existing crypto to another should you choose to stake a lesser-known cryptocurrency.
Entering this ecosystem is more complex than simply putting money into your Coins.ph or Binance account. First of all, you’ll install Metamask Wallet on your Google Chrome browser and connect it to the de-fin platform to sync your cryptocurrency.
One of the most common platforms for this is Pancake swap which can be accessed through the Binance Smart Chain (BSC) Network. For your Metamask wallet to work, you need to install (BSC) network in it and fund it with Binance coins (BNB). Binance coins can be bought from the Binance exchange and sent over to your wallet to get started. From there, exchange your BNB to Cake or any other tokens you like to stake through pancake swap.
It’s quite a complicated process that deserves a separate article on its own.