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Cryptocurrency has been the craze for a while now, especially in 2021, when the crypto market hit new highs.
Now, if you own some crypto in a wallet or exchange, you probably make money from it through day trading, which takes advantage of daily swings to turn a profit, or HODL, a long-term strategy where you buy crypto and wait to sell in a bear market.
While day trading is far more intensive than HODL, both strategies can’t really be classified as passive income.
For one, they require constant market follow-up to know how the prices are doing and whether it is the right time to sell.
Two, you’ll need to sell your assets to make money.
So, even though you make money, your crypto actually reduces.
So, is there a way to make money passively without letting go of your crypto?
Yes, there are a few options out there.
But today, I will be talking about staking, the most practical- and profitable- in the market.
What Is Crypto Staking?
Simply put, staking is locking up your crypto assets for a time to earn interest (as money) or rewards (usually more coins/tokens).
Your staked crypto is put to work by the blockchain in verifying transactions.
The simplest way to understand it is to take how a bank’s fixed savings account works.
You essentially give money to your bank for a set period, maybe a year, after which you expect it to have earned you an interest.
During these 12 months that your money is locked away, the bank can use it however they deem fit as long as they meet their end of the deal.
Now, not all cryptocurrencies can be staked; only proof-of-stake coins or tokens can.
A bit technical?
Let me explain briefly.
Cryptocurrency is decentralized, which means, unlike traditional financial systems, there’s no central body to oversee transactions.
So, to make sure everything is honest, cryptos use consensus mechanisms.
And the two consensus mechanisms you’ll come across are proof-of-work (think Bitcoin and Ethereum 1.0) and proof-of-stake, which covers coins like Cardano, Tezos, Ethereum 2.0, Binance Coin, etc.
Staking is very similar to yield farming and is sometimes considered a part of yield farming.
How Much Can You Earn with Crypto Staking?
Now that you have a good idea of what staking is let’s talk numbers.
What are the earning margins?
Staking is potentially very profitable, but how much you can actually make will depend on the annual percentage yield (APY), how much crypto you stake, and how long your stake it.
Most coins will pay between 10 and 20% of your stake, but the figure could be as much as 1000%+ for new and smaller projects.
And, if you take the power of compounding interest into account, you can double or triple your crypto without lifting a finger. 🙂
So, Where Can You Stake Your Crypto?
Now, here is where you need to be careful.
There are probably hundreds of staking platforms in existence, so you have to be on the lookout for scammers.
That said, popular exchanges like Coinbase, Kraken, eToro, and Binance have staking programs, which is great if you don’t want to move your assets.
However, some crypto investors prefer joining staking pools because they have higher rewards and support more coins and tokens.
A staking pool involves several stakeholders combining their staking power to verify and validate new blocks to earn block rewards.
Cardano is considered a popular option for pool staking, with pools like Zetetic and Sunshine Stake holding over 50 million in staked ADA.
Now, Let’s Look at the Risks of Crypto Staking
1. Impermanent Loss
Basically, this is a situation where your crypto is losing value at a higher rate than the interest you are earning.
So, make sure when you are selecting crypto projects, you go for something solid and not just focus on high APY (think of stablecoins like USDT).
2. Rug Pulls
A rug pull is where developers launch a new crypto project and pump the price to the highest value possible.
Then unexpectedly, they sell and pull out of the project leading to a price crash and huge losses to investors.
Unfortunately, rug pulls are pretty common in crypto.
So, you want to be wary of projects where developers own a significant percentage of supply.
3. Smart Contract Hacking
Smart contracts are used in the DeFi industry to govern transactions and agreements.
However, they come with the risk of malicious hacking.
If hacked, you could lose your staked tokens.
As you can see, earning passively from crypto is pretty simple.
The important thing is to wisely pick your crypto and staking platform or pool.
If the reward exceeds the inflationary costs, you’ll multiply your investment year in and year out.