Contrary to mining of crypto-currencies which requires a substantial investment in equipment and significant technical knowledge, the staking is a mechanism that allows you to generate passive income by just holding cryptocurrencies in a wallet. Explanation.
What is staking?
Very simply, this concept means “stacking” or “staking”. The crypto-currency holder will participate in transaction validation operations within a network of blockchain. To do so, the investor will block a certain number of his crypto-currencies. In exchange he will receive reward in the form of percentage returns.
How does staking work?
Initially, you must select the cryptocurrency you want to stake. Therefore, it is necessary to study the conditions specific to this staking, potential return, reward payout frequency as well as the duration of blocking of funds.
This process must be done via an exchange platform, i.e. a ” exchange or a cryptocurrency staking provider. Each may offer different or additional services.
Illustration of the staking section of the Binance exchange platform
As shown above, the investor can choose to stake BNB (Binance’s cryptocurrency) for twenty-one days at an estimated return of 52.34%. It only requires 0.001 BNB minimum starting bet.
What is it used for ?
For some investors, staking is the ideal solution to generate passive income in the same way as the interest obtained for money placed in a bank account.
Cryptocurrencies are still a very risky asset class waiting to be regulated. Gold, staking offers the possibility of diversifying its assets by seeking profitability over the short/medium term on a multitude of crypto-currencies like Neo, Tezos, BNB, Cake, Zil…
To help the investor, there are internet sites that provide various data. This allows you to compare staking rates, expected profitability or even predict compound interest.
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Staking: pros and cons
Staking is one of the essential tools for the cryptocurrency investor. In fact, if this mechanism offers many advantages, it is however necessary to know the risks inherent in its use.
- The yields offered can be very substantial, disproportionate to a traditional financial investment (regulated savings account, life insurance, SCPI, etc.).
- Since these returns are not correlated to monetary policies, they can remain high even in periods of falling interest rates.
- Staking does not require any special IT resources or technical knowledge.
On the side of the disadvantages, we find mainly:
- The counterparty of the locking of funds. In times of very high volatility in the cryptocurrency market, it is difficult to recover your staked coins without a high cost or without a certain waiting period. On the other hand, if the cryptocurrency dips, the rewards offered can quickly become irrelevant.
- There may be a minimum deposit threshold, the blocking period may also last for months or even years.
- Gains resulting from staking are taxable as capital gains and therefore subject to income tax.
Cryptocurrency staking is a simple and secure method to make the different crypto-currencies held by the investor work. This mechanism can complement a more sustained trading activity or can simply be a solution to bet on the long term by regularly generating interest.
Today, more and more regulated platforms and benchmarks offer staking services. The staking options continue to multiply and by betting on staking, the investor contributes to the development of the cryptocurrency ecosystem.