How to choose the best coins to stake and earn passive income

What is cryptocurrency staking?

Cryptocurrency staking involves locking one’s cryptocurrency holdings in order to earn interest or rewards. Technically, staking is how certain blockchain networks verify transactions.

From an investor perspective, cryptocurrency staking is a way to grow cryptocurrency holdings without having to buy more. Staking cryptocurrencies for maximum passive income is a legitimate way to generate returns from existing cryptocurrency holdings. Investors who participate in staking enjoy higher interest rates than a regular bank account.

If you’re interested in cryptocurrency staking but unfamiliar with the term, let us bring you up to speed. Before going there, it is important to understand the concept of blockchain technology. Cryptocurrencies are based on blockchain technology. Transactions using this type of cryptocurrency must be validated before the corresponding data can be stored on the blockchain. This validation process is known as staking.

How to choose the best coins to stake and earn passive income
How to choose the best coins to stake and earn passive income

Let’s break it down a bit more.

Because blockchain networks are decentralized, there are no middlemen. This is in contrast to traditional financial systems, which use banks, for example, as depositories for public funds.

Therefore, decentralization mandates a network-wide public access registry to ensure full transparency and validity of all transactions. Transactions are grouped into “blocks” and presented for inclusion in this immutable record.

Incidentally, this is the greatest security feature of blockchains. Since everything is accessible and auditable through a distributed public ledger (the ledger), it is very difficult to cheat or hack.

Once these blocks are accepted, users who own these blocks will receive a transaction fee as payment in the form of cryptocurrency.

What does staking have to do with it? you will wonder. Quite simply, staking is a safeguard against mistakes and fraud that may occur during the process.

Every time a user proposes a new block or votes to accept a proposed block, they are putting a portion of their cryptocurrency at risk. This process promotes compliance with the rules. In principle, the more cryptocurrency a user puts into play, the higher the chances of receiving rewards for the transaction.

However, if a user’s proposed block turns out to contain fraudulent or inaccurate data, they may lose what they put on the line. This process is called “slashing”.

How does cryptocurrency staking work?

There are many ways to start staking cryptocurrencies. For starters, you can choose to validate transactions using your own computer. You can also “assign” your crypto to someone you trust and ask them to validate you.

Please note that not all cryptocurrencies can be used for staking. We’ll talk about that later, so read on.

What is Proof of Stake?

Proof-of-Stake is a consensus mechanism that allows blockchains to validate transactions. In Proof-of-Stake (PoS), the number of coins (or stake amount) determines the chances of validating a new block.

PoS was created as an alternative consensus mechanism to the original Proof-of-Work (PoW). PoS is one of the most common consensus mechanisms and is constantly gaining importance due to its efficiency and ability to earn rewards for cryptocurrency staking.

Unlike PoW, which consumes a lot of energy and requires a lot of processing power, PoS does not require as much processing to verify transactions. Coin holders “stake” their coins as collateral to validate the blocks.

What are staking rewards?

Staking rewards are incentives offered to blockchain participants. A certain amount of crypto rewards are allocated on each blockchain for validating transactions. Therefore, cryptocurrency staking participants receive staking rewards when selected to validate transactions.

Basically, staking allows participants to earn more crypto. Interest rates vary by network, but participants can earn up to 20% or 30% annually. Many people stake cryptocurrencies for passive income or to invest their money.

Cryptocurrency staking methods

To stake cryptocurrencies, one needs to choose a cryptocurrency that uses the proof-of-stake model, such as E.g. Ethereum. There are several ways to stake cryptocurrencies:

Through an exchange

You can choose to use an exchange to stake your tokens on your behalf. An exchange is an online service specializing in crypto affairs. Most exchanges charge a fee in exchange for staking services. Some popular exchanges that offer staking are Binance.US, Coinbase, and eToro.

Joining a staking pool

Some investors don’t use exchanges simply because not all of these platforms support a wide range of tokens. Therefore, another alternative is to join what is known as a “staking pool”, which is usually run by another user.

You need to connect your tokens to the validator pool via your crypto wallet. To ensure the legitimacy of these validators, be sure to check the official proof-of-stake blockchain websites to understand how they are supposed to work.

be a validator

Validators are owners of staked coins. They are randomly selected to validate a block. It is the equivalent of “mining” when using a skill-based mechanism such as proof-of-work.

Of course, one of the most effective ways to stake cryptocurrencies is to become a validator yourself. Blocks are validated by more than one validator, and when a certain number of validators confirm that the block is correct, it is completed and closed.

However, it is a bit more complicated than using an exchange or joining a pool as you need to build your own staking infrastructure. You need to have the right equipment with the right computing power and software, and download the entire transaction history from the blockchain.

Becoming a validator also usually comes with a high entry cost. On the Ethereum network, you must have at least 32 Ether (ETH), which is roughly $140,000, give or take. Read more about staking and how to become a validator on the Ethereum network here.

Is cryptocurrency staking profitable?

So the burning question is how do you make money from cryptocurrency staking?

Let’s put it that way. If you’re already familiar with the practice of crypto mining and trading, then that’s a good place to start. Staking can be just as profitable without the risk that comes with mining and trading.

So yes, cryptocurrency staking is profitable. Basically you need to buy and hold some coins and add them to the mining pool. The benefits you usually get in the form of transaction fees depend on how much you wager and how long you wager.

Aspects to consider to increase the utility of staking

In general, if you continue to bet more, you will get more profit from the bet. However, there are other things to consider if you want to increase your profits:

  • coin value: Avoid betting on a currency with very high inflation rates. You could get big rewards at first, but since the value of the coin is volatile, you might be left with little or no profit.
  • fixed offer: Make sure the token or coin has a fixed supply. The limited supply of coins in the market ensures healthy demand and constant price increases.
  • real applications: The demand for cryptocurrencies largely depends on the actual applications of a currency. If it is for various real-world applications As digital payments become widespread, it will continue to do so with healthy demand and prices.

Which cryptocurrency is best for staking?

As mentioned above, not all cryptocurrencies are suitable for staking. Bitcoin (BTC), for example, doesn’t support staking as it uses a different method of validating transactions: proof-of-work. In general, if a cryptocurrency is linked to a blockchain that uses proof-of-stake as an incentive mechanism, it might be suitable for staking.

ether

Ethereum offers significant staking returns as it remains one of the most popular altcoins on the market to date. The average return for staking Ethereum is 5-17% per year.

Cardano

Like Ethereum, Cardano is a smart contract platform. Cardano (ADA) is the digital currency that powers the platform’s Proof-of-Stake network. Binance supports ADA staking and offers returns of up to 24%.

eo

EOS is also used to support decentralized programs, similar to Ethereum. EOS (EOS) can be used to earn rewards at an average of 3.2%.

cosmos

Dubbed the “Internet of Blockchains,” Cosmos allows different blockchains to interact with each other through interoperability. Several platforms support Cosmos (ATOM) staking, including Coinbase, Kraken, and Binance. ATOM staking returns an average of 7% per year.

Tezos

Tezos is an open source network with Tezos (XTZ) as its native currency. XTZ can be staked on various platforms such as Kraken, Binance and Coinbase. The average XTZ staking return is currently 6%.

Speckle

Like Cosmos, Polkadot promotes interoperability between different blockchains. Although Polkadot (DOT) is relatively new, multiple platforms support it, including Kraken, Fearless, and Binance. The current average polkadot staking return is 12% per year.

Can you lose money by staking cryptocurrencies?

When investing, the first and most important thing to consider is the risk involved. So is cryptocurrency staking safe?

Of course it is, but there are definitely some risks.

In general, you cannot “lose” money by staking cryptocurrencies per se. Things to look out for are things like inflation and illiquidity to name a few. Given the volatility of cryptocurrencies, there is a chance that the coin you are stake could go down. For example, if you stake your cryptocurrencies and they lose value, even after earning returns post-stake, you could technically still be losing money.

Even if you are a day trader, you may not use the coins for several weeks or months, thus missing the chance to bet on the lucrative ones. That’s why it’s important to be careful when choosing the coins you want to stake.

Check out the tips we outlined in the Is It Profitable To Stake Cryptocurrencies? section. to ensure you make the right decision before deploying.

Similar Posts