What is cryptocurrency staking?

What is cryptocurrency staking?

January 20, 2022 0 By Maxim Hayden

You may have heard about the huge gains that can be made by hodling, I mean holding, cryptocurrency, rain or shine.  

However, this isn’t the only way to put your hard-earned, or not, money to work in the world of crypto. The lesser-known way of making money through your crypto investment is by ‘staking’ your coins. 

What is the purpose of staking?

Staking is to crypto, what fixed-term deposits are to banks, with one small difference… It gives you interest rates you could only dream of getting on the high street.  

Like a traditional fixed-term deposit, notice, or easy access deposit account, crypto coins can be locked in for length of time to gain interest. Although, in general, the term is much shorter than the 1, 2, 3, or 5-year terms you’d usually see in traditional banking. Be it with much higher rewards. APRs throughout the space is regularly in the double digits, compared to the measly less than 1% that is commonly seen on the high street. 

Can you lose money when staking crypto? 

The biggest risk in crypto staking is down to the volatility that the market is so well known for. With sudden increases and drops in value a regular occurrence, users may want to be able to sell their coins at the drop of a hat. However, if a coin is staked it will more than likely be locked in for a period, making it impossible to sell.  

As with the stock market, the price of a coin can go down, as it can go up, while it is being staked. With this said, if the price of a coin does go down while it’s still staked, this is only known as an unrealised loss at this point, and money is only lost once a coin is sold for a lower value than it was originally purchased for. 

However, not all cryptocurrencies are created equal, in terms of volatility. Outside of Bitcoin (BTC), and your alts, such as Ethereum (ETH), Binance Coin (BNB), or Litecoin (LTC), you have the category of coin known as the stable coin. 

Staking a stable coin reduces the volatility of an individual’s staked holdings to what is seen in forex, but still allows for huge double-digit interest rates to be received in some instances. A far cry from the sub 1% interest rates currently being offered by most high-street banks, for locking in your hard-earned funds. 

Is staking profitable? 

As aforementioned, if a coin is being held by an individual as a long-term investment, it can be a no brainer in this instance. As staking allows interest to be earned on an asset that would otherwise be idle. With the average staking rate being significantly more than what is offered by traditional savings accounts, it can be seen as a hugely profitable investment, especially with the APR in most instances being well above inflation rates. 

Does your crypto grow while staking? 

Once staked, the price and the volatility of a coin continues as it would if it was simply held in cold storage, or an exchange spot wallet. When a staking term has ended, the price of a coin would have the same market value of a coin that hadn’t been staked. However, the user would have also received any interest due, over the set staked period. 

As an example, a user staked 1x DOT at 10%, for a 30-day period, when it was priced at $20. The price of DOT had gone up to $30 over the next 30 days. This means that the user gets their 1x DOT back at the end of the staking period plus 10% of a DOT totalling 1.01 DOT. However, DOT has now increased in value, as well as the interest earned on their 1x DOT over the 30 days. 

In total, the user gets back 1.01 DOT, valued at $30.30.