Staking crypto is the act of locking up your digital asset on a decentralized crypto network to act as a validator. A validator is a participant of a blockchain or crypto network that verifies the accuracy, security and authenticity of transactions on that network. Validators earn a reward in the form of newly minted cryptocurrency in proportion to the amount of crypto they stake and lock up to ensure the integrity of the network. Validators are also known as stakers.
Staking crypto to obtain rewards has been made possible by the introduction of the proof-of-stake (PoS) consensus mechanism, where users stake their share of the network’s token to secure the network and keep it functioning 24 hours a day. By doing that, these users earn a staking reward, as opposed to proof-of-work (PoW) where miners use computing hash power to maintain the integrity of the network and earn rewards.
Is Staking Crypto Profitable?
I am sure most of you have heard of people wanting to become validators or wanting to stake their crypto to earn rewards. This shows that staking crypto is hugely profitable. Cryptocurrency stakers earn much higher APYs than savers or investors in traditional financial market instruments and thus, staking has been attracting a lot of interest from crypto investors who want to earn consistent passive income with their crypto tokens. For instance, one can stake the BNB token on the trust wallet app and get to earn 23% APY, which is an unheard of rate of return in the traditional investing markets. There are a variety of cryptocurrencies that one can stake and earn a staking return, not just with BNB. Altcoins like Tron, Cardano, Solana, Ethereum, Cosmos, all have attractive opportunities for users to stake and earn. Thus, staking crypto allows a crypto investor the opportunity to earn a respectable passive yield just by holding their crypto investment, without having to trade it.
However attractive it may sound though, staking crypto is not without its associated risks, so readers are strongly advised to understand the risks of staking crypto before embarking on such a venture.
Can You Lose Crypto by Staking?
Yes, it is possible to lose your crypto by staking it. Cyber criminals can find vulnerabilities and hack into a staking pool to steal your crypto even when it is staked and in lockup. Hence, it is imperative to only stake on well-established platforms with a robust security protocol to actively prevent crypto theft.
To go a step further, readers who are more tech-savvy may wish to stake on platforms that allow you to hold the private keys to your wallet, compared with using a third-party staking platform. However, these users will still need to remember to back up their crypto wallet and store their private keys properly to prevent others from accessing it.
What's The Risk With Staking?
To help readers decide if staking crypto is suitable for them, let us go through each major risk of staking crypto below.
Crypto Market Risk
There is one risk that is associated with any investment, and that is market risk. Staking crypto does not make them free from market risk either. In fact, the biggest risk to a staker will be an adverse fall in the crypto market. Imagine your crypto staking earns you a yield of 25% APY, but your staked cryptocurrency drops 50% in value due to a market crash. You end up incurring a loss of 25%, correct? While some may argue that the losses are impermanent until you sell your cryptocurrency, it nonetheless could still be rather demoralizing to an investor. One way of countering this problem is to stake stablecoins instead, as their values are tied to a certain fiat currency and thus, do not experience the volatile price fluctuations of cryptocurrencies.
Liquidity and Lockup Period Risk
Liquidity risk is more apparent with smaller and less popular cryptos with less liquidity. Staking a relatively large amount of a micro-cap token could expose you to illiquidity issues as these smaller coins are much less liquid assets, compared with bigger names like Ethereum. Hence, when you decide to unstake your token to sell, you may find that it is difficult to sell or convert the coins into stablecoins or other large cap coins.
Lockup period risk is as straightforward as it sounds. When your crypto is being locked up, you are not able to utilize it to meet any unplanned financial need that may suddenly crop up. However, many platforms now offer staking without a lockup period so that users still have the flexibility of unlocking their tokens should an urgent need arise.
Rewards Duration
Some staking assets do not pay out their staking rewards as often as you wish. There are some staking contracts that only pay out the staking returns on a certain maturity date or at fixed intervals of the year. If you do not wait till the time of distribution to receive your rewards, you do not get paid any staking benefit. While holding right to the end may solve this problem, there is the market risk component that could cause you to lose out on opportunities to sell your crypto at a good price should volatility set in.
There are, however, staking programs that pay out rewards on a daily basis. Hence, investors can choose to stake on such platforms to mitigate the pitfall of long reward durations on your crypto investment portfolio.
Validator Risk
Next, there is validator risk, which is the possibility of mistakes during the staking process that can cause a staker his crypto. Running your own nodes to validate transactions on a network requires certain technical know-how and proper equipment management to ensure 100% uptime since validator nodes could lose their rewards if they do not meet the minimum disruption requirement. Worse still, if a validator node is deemed to have not acted in the best interest of the community, it could even incur penalties that may include having their staked cryptos deducted from them.
There are ways to prevent such unhappy incidents from happening though. Users who are not tech-savvy can opt to join a staking pool instead of running their own validator nodes. A staking pool is a professional service that allows the pooling of different investors together to operate one, or more validator nodes. Since it is managed by professionals, the risk of making a mistake is greatly reduced. However, since the staking pool will charge a fee out of the total staking rewards as compensation for their service, your staking returns received from a staking pool is less than what you will normally receive had you run the validator node yourself. It may be worthwhile checking out the rates different staking pools charge to get yourself the best deal since the fees vary from platform to platform. Regardless of the fees charged however, this is still an attractive option for the average investor that does not want to deal with the hassle of running their own node.
Loss or Theft
As we have mentioned before, the risk of cyber theft is there as a platform could get hacked. A centralized crypto platform may also become insolvent and put your crypto assets at risk. While we can mitigate this risk by using decentralized entities and safeguarding our own private keys, there is the other risk of forgetting our private keys or accidentally giving away our private keys to another person who may steal our crypto. Hence, one needs to take a certain amount of precaution and preventive measures when dealing with crypto assets.
Network Operation Risk
Last but not least, there is the network operation risk that a staker needs to consider. This involves the risks with the daily operation of a blockchain network itself. For instance, one possible problem is a validator node error.
In a proof-of-stake network, rewards are distributed to a validator node who gets to add a new block to the blockchain. The selection of this node is random and most crypto networks typically allow individual users to set up their own validator nodes by downloading a software. However, if your computer malfunctions or hangs, or does not run properly for some reason, you may be hit with penalties that could reduce your staking rewards, or your computer issue may even cost you chances of being selected to add new blocks and thus, while you may still be running the software, you may not necessarily get any reward for it.
Margex Staking vs Other Platforms Staking
Staking crypto at Margex is an innovative and hustle-free solution that allows both passive and active income earnings to take place at the same time so users can maximize their crypto profits.
The biggest benefit of staking crypto at Margex vs other platforms is that you can continue to use your staked crypto for trading even when they are staked. This feature may not be available at other platforms and Margex is able to offer this benefit due to their exclusive partnership with their liquidity providers.
Stakers on Margex can get between 8% - 13.5% annualized yield from staking crypto and on top of this, still be able to utilize their staked crypto to do trading at up to 100x leverage.
Benefits of staking crypto at Margex includes:
- No lockup period, no fixed-term staking period, coins can be withdrawn anytime
- Yields are not promotional and can be accessed anytime
- No individual user staking limits, stake as much as you want within a global coin limit
- Staking rewards are paid daily and automatically added to the staking balance
- No limits for withdrawals while staking
- Easy to use even for non tech-savvy individuals. Just deposit, click and start earning. No need to know programming or learn how to use DeFi.
- Stake Bitcoin, Ethereum, plus many other coins, even stablecoins USDT and USDC
- Users can use their staked funds as margin collaterals for leveraged trading on Margex to trade and earn variable income from day trading even as their staked crypto earns them regular income, using the same balances!
FAQ
Now that we have understood the benefits and risks of staking crypto, let us cover even more ground by answering some questions we have encountered regarding staking crypto.
Is Staking Crypto Safe?
While being relatively safe, staking crypto still has its risks just like every other type of investment. Hence, an investor should take into consideration the possible risks scenarios and assess if staking crypto is suitable for you before taking the plunge. That said, the risks of staking crypto can be easily mitigated to make it a safe venture. Please read our report above which has been carefully prepared to explain the risks and mitigation methods involved with staking crypto.
Is Staking Crypto Better Than Holding?
If an investor’s objective is to maximise investment returns while still keeping their crypto assets, then staking crypto is definitely better than merely just holding on to them since holding gives you no yield while staking crypto provides you with at least some yield income as you wait for your crypto investment to appreciate in value.
What's The Risk With Staking Crypto?
The risk with staking crypto is that your yields may not necessarily be guaranteed, or your staked crypto may fall in value due to adverse market events. Theft could also occur, which may cause you to lose some or all of your crypto in the unfortunate event that cyber criminals hack the staking platform or your crypto wallet. For a more detailed explanation of each type of risk, kindly refer to our article above in the respective sections which can give you a better insight.
Is Staking Crypto Taxable?
As staking crypto provides a regular income similar to a dividend payout in stock investment, staking returns could be taxable. However, due to the nascent state of the crypto market, as well as the difficulty in determining the monetary value of the staking returns, it is still murky as to which part of the investment cycle that staking returns should be taxed. For instance, most governments have not yet decided on whether the returns from staking crypto should be taxed at the point of receipt, or at the point of sale. Kindly contact your tax advisor should you have questions concerning taxation of crypto staking returns.
Is Staking Crypto Profitable?
Yes. Staking crypto is profitable. Please refer to our guide above to learn more about how staking crypto could be a profitable venture for you.
Is Staking More Profitable Than Mining?
Staking and mining are profitable in their own unique ways. While the hardware requirement for mining can be intensive, the system requirement for staking could be a lot less intensive than mining, which could make staking less capital intensive than mining. Furthermore, some tokens do give a very high APY, which can make staking in some cryptos more profitable than mining. Even if a staking reward is not outstandingly high, the cost of running a validator node could be lower than the cost of mining, which may eventually make staking more profitable than mining.
What's Better, Staking or Farming?
Staking and yield farming each have their own specific merits and drawbacks.
In general, yield farming could be riskier but provides higher short term returns. In yield farming, an individual lends out his crypto to a DeFi platform for use as exit liquidity for other users and gets paid a reward in return. A lot more mishaps could occur in such a situation. For instance, the platform could rug pull or there could be a program in the smart contract that makes it impossible to remove your funds.
Staking, on the other hand, is much more simplistic and is tied to a specific blockchain network instead of a platform. For instance, staking on Solana depends only on the integrity of the Solana blockchain, instead of another platform. The risks of staking is thus much lower than yield farming, especially if you are not good at reading computer programming codes.
Is Staking Crypto Good Passive Income?
Yes. Staking crypto is good passive income. Please refer to our guide above to learn more about how staking crypto could generate a consistent flow of passive income for you.
