What Is Crypto Staking? One Way To Earn Passive Income (2024)

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Vault’s Viewpoint on Crypto Staking

• Crypto staking allows investors to make extra money with their cryptocurrency positions.
• Staking helps to support a blockchain, but your cryptocurrencies are locked up for a certain amount of time—similar to a certificate of deposit (CD).
• Staking isn’t available for every crypto, and the yield you receive varies for each cryptocurrency.

How Does Crypto Staking Work?

Proof of stake blockchains rely on staked cryptocurrencies to verify and secure transactions without the help of a central authority. Staking your cryptocurrencies strengthens the blockchain.

In return for staking your crypto, you will receive a reward. This reward is additional cryptocurrency, just as dividend investors receive cash for holding onto their positions. Staking Ethereum gives you extra Ethereum, while staking Solana will result in more Solana. Crypto investors can choose to stake their newly received crypto to increase their total returns.

What Is Proof of Stake?

Proof of stake (PoS) uses stakes to validate blockchain transactions instead of relying on crypto miners. It’s a more efficient and environmentally friendly way to secure the blockchain. Validators are randomly selected to verify transactions. These validators then receive additional crypto as their reward.

Some validators are individual investors who fulfill the requirement. However, most validators represent pooled capital from several investors. Each cryptocurrency has different requirements about the minimum size of a stake.

Why Do Only a Select Number of Cryptocurrencies Allow Staking?

Staking is the crypto investor’s version of dividend investing, but not every cryptocurrency supports staking. This option is only available for cryptocurrencies that use a proof of stake blockchain.

Some cryptocurrencies use a proof of work (PoW) blockchain that does not support crypto staking. The proof of work model is less efficient and requires more computational power than proof of stake. That extra computational power also has a negative impact on the environment due to the increase in crypto mining.

Bitcoin operates under a proof of work blockchain, so you cannot stake it. Some of the best crypto apps offer a feature similar to staking for Bitcoin, but in this relationship, you are temporarily lending your Bitcoin to a brokerage firm rather than directly staking it.

How You Can Earn Passive Income and Rewards With Staking

It’s possible to earn passive income on the crypto you accumulate. Investors can reinvest their rewards by staking them and receiving higher rewards in the future. Crypto staking starts with buying cryptocurrencies that operate under proof of stake blockchains.

Each blockchain has different rules about how much crypto you need to be a validator. If you do not have enough crypto, you can partner with stake pool operators and receive rewards that align with your percentage in the stake pool.

The Pros and Cons of Investing in Crypto Staking

Investors look for opportunities to generate higher returns. Having more money in your portfolio can assist with long-term financial goals. Cryptocurrencies are one asset class that can get you closer to your objectives.

Discovering what staking in crypto is can lead to more cash flow, but this investment route isn’t perfect. Before getting started, consider the pros and cons.

Pros

• Receive high yields: Crypto staking can generate yields that comfortably exceed what you can find with dividend stocks. Some cryptos yield more than 20% APY if you stake them.
• Grow your crypto holdings: Your reward arrives as cryptocurrency, which allows you to grow your crypto holdings. Investors can reinvest their rewards into a staking pool to maximize future rewards. Make sure you put your rewards into one of the best crypto wallets to keep them safe.
• Fortify the blockchain: Proof of stake blockchains require enough crypto staking to verify transactions and ensure the blockchain is secure. Staking your crypto improves the blockchain that your cryptocurrency uses.

Cons

• The vesting period: You may lose access to your crypto for several weeks or months, similar to stashing money away in a certificate of deposit (CD). However, you will have to commit to the vesting period. On the other hand, investors can make early CD withdrawals if they pay a penalty fee.
• Volatility of the assets: Cryptocurrency prices can fluctuate dramatically on any given day. Not every investor wants to have their crypto locked up for several weeks or months while seeking 5% price movements in either direction. They aren’t as stable as blue-chip dividend stocks.
• Fraudulent validators: Most crypto investors must pool their crypto with other investors to fulfill the minimum staking pool requirement. However, some validators are fraudulent or may prolong your access to your crypto. It’s possible to lose money if you entrust your crypto to the wrong staking pool.

Alternatives to Crypto Staking

Crypto staking can result in high yields while you hold onto your crypto. It’s often better than letting your crypto collect dust while storing it in a crypto wallet. However, investors have multiple ways to generate cash flow and grow their portfolios. These are some of the alternatives to consider.

Dividend Stocks

Dividend stocks typically do not have yields as high as crypto staking. However, these stocks are more liquid and less volatile. Investors can choose from dividend stocks based on their risk preferences, while crypto staking is only suitable for investors with high-risk tolerances.

Rental Properties

Rental properties require a significant cash investment and will require property management. These assets don’t have as much liquidity, similar to crypto staking. However, rental properties come with better tax advantages. Investors who want exposure to rental properties but don’t have a lot of capital can invest in REITs instead.

Certificates of Deposit

CD balances only grow based on interest. They don’t have the ability to significantly appreciate, but you also won’t lose money in a certificate of deposit. CDs are for risk-averse investors who want the ability to pull out their money if necessary. Some CDs, known as no-penalty CDs, don’t charge early withdrawal penalties, while you cannot take out staked crypto early.

Bitcoin ETFs

Bitcoin ETFs expose investors to the price movements of Bitcoin without worrying about crypto wallets. Investors can make more money by holding onto Bitcoin by avoiding ETF expense ratios. Bitcoin ETFs only offer exposure to Bitcoin, which doesn’t offer the level of diversification some crypto investors prefer. Crypto staking offers more options, but Bitcoin is not one of them.

Is Crypto Staking Worth It?

Staking cryptocurrencies can increase the size of your holdings and move you closer to long-term financial goals. While you can earn much higher yields with crypto staking than dividend investing, it comes with several risks. You will be locked out of your crypto for several weeks or months, and it is possible to get scammed in the process.

It’s important to do diligence research if you want to stake your crypto. Only work with reputable validators to ensure your holdings are safe. Crypto staking may be a good choice for crypto investors with high-risk tolerances who want to generate passive income from their crypto positions.