There are few more attractive ways to make money than through passive income, and many savvy crypto investors enjoy substantial passive income by staking their digital assets. Income from staked crypto is very similar to interest or dividend income, and for an investor who is confident in the long-term success of a crypto, staking offers the opportunity to earn anywhere from 4% to 20% return. on top of any crypto price increase.
However, only certain cryptos – those that use a Proof of Stake (PoS) consensus mechanism to validate new network transactions – offer a staking option. In a nutshell, this is because the PoS consensus mechanism relies on participants having invested in the network to validate new transactions. In contrast, blockchains like Bitcoin (CRYPTO: BTC) rely on a different mechanism to validate new transactions: it uses proof-of-work (PoW), which validates new blocks by relying on miners with fast computing machines competing to solve mathematical equations. PoW mining is not practical for most investors, as it is more complicated and requires dedicated machines. Additionally, PoW mining is not necessarily profitable unless one lives in an area with low-cost renewable electricity. Staking is therefore accessible to more regular investors.
What does this mean for crypto investors?
The obvious question that remains for investors is whether it makes sense to invest in crypto assets like Bitcoin that do not offer staking rewards. It really depends on the goals of the investor. Cryptos that do not offer staking may be unattractive to those looking for the highest possible short-term returns. But other crypto investors are more interested in pursuing long-term appreciation in the value of crypto while keeping it in offline storage, rather than actively allowing it to be used for staking.
Crypto staking comes with some risks. Staking requires you to temporarily pledge your crypto for use by the underlying blockchain network or an exchange. If you allow a pooled resource to stake your crypto for you, and an illegitimate commit by that staking pool is detected by the network, it is possible that some of the staked crypto will be “reduced” as a penalty – you could lose some of your staked crypto even if it was not your fault. And when you join a staking pool, you can’t be sure if there are other people participating who might be trying to make invalid trades. Also, committing to staking your crypto usually puts some time on it, preventing you from unstaking it instantly. This committed “hold” duration for staked tokens could force you through sudden market declines that make you wish you could have reallocated your investment quickly!
Diversify your holdings
Let’s make an analogous investment decision: is physical gold a wise investment even if it doesn’t bear interest? Investors in gold would cite its unique financial characteristics to justify holding it. It does not compete with other assets in the portfolio for the highest return, although its value may increase significantly during certain periods. Rather, gold acts as a store of value and a hedge against inflation, and it can be part of a diversification strategy that adds value due to its unique, if sometimes unspectacular, financial characteristics.
Likewise, in my opinion, many crypto investors should take advantage of staking to earn passive income, and they should hold Bitcoin for crypto portfolio diversification. Although as an asset class all cryptos are subject to price volatility, owning Bitcoin adds value as the most capitalized digital asset, and the price of Bitcoin continues to climb in value at long term despite the inevitable price volatility. Amid an explosion of new blockchains and innovative tokens that offer a wide range of financial and social use cases, the Bitcoin blockchain has continued its momentum as an investment platform for institutions with all levels of risk appetite.
Diversifying across many high-quality assets is a proven investment strategy and, like any form of diversification, holding cryptos that are implemented in different technical ways and used for a variety of use cases , reduces the risk of losses within an investment class. . It makes sense to put your eggs in multiple types of crypto baskets, both staked and unstaked.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.