In 2018 I started working on my passive income streams. The first thing I did was buy a property that could generate stable rents for years to come. With the rental income I started investing in stocks and ETFs. I always made sure that I also generate additional passive income with dividends from the stocks and ETFs.
At the end of 2018 I bought my first cryptocurrency. However, it only became clear to me at the end of 2020 that you can also generate passive income with cryptocurrencies.
Passive income is a well-known solution for generating additional liquidity. In today’s times of low interest rates and high inflation, it is becoming more and more important to generate more sources of income. The inflation rate in the US was 5% in May 2021 (according to Statista). In the EU it was 2% (according to Eurostat). However, this is simply consumer price inflation, which is the price increase for an average basket of goods and services. In reality, however, every person has a different rate of inflation due to different consumption preferences. It is therefore very possible that your inflation is higher than that of the index.
The rise in consumer prices increases our cost of living. To cover these costs, everyone needs liquidity. Usually our salary is the source of liquidity, but according to Eurostat, labor costs in the EU (e.g. salaries) only increased 1.7% in the first quarter of 2021. So there is a big difference between the rise in inflation and the rise in salaries. The real wage is falling.
Owners of assets can generate passive income in a number of ways: for real estate this is rental income, for stocks it is dividends. There are also various ways of generating passive income with crypto investments; The article focuses on staking.
The staking options that are explained do not require any technical understanding, little effort to set up and almost no effort to manage. My strategy is to buy cryptocurrencies that I want to hold for the long term. Using the passive income opportunities of these cryptocurrencies is a bonus.
What is staking?
Put simply, staking is the transfer of cryptocurrencies for a certain period of time in exchange for interest. If you invest your money in a fixed-term deposit account for a certain period of time, you will receive your original money plus interest at the end of the period. The situation is similar with staking with cryptocurrencies.
For example, if you have 1000 ADA tokens and decide to stake them at 6.33% interest, here are the payouts you can expect on a daily, weekly, monthly, and yearly basis:
Only cryptocurrencies that use the Proof of Stake consensus mechanism can be staked. With the Proof of Stake (PoS), a decentralized blockchain network is secured in that people who are in possession of the coins on this blockchain can validate transactions and blocks.
Through this process, known as staking, the validators can earn additional coins (so-called block rewards), the amount of which depends on the amount wagered. Those who stake more coins usually validate more blocks and thus earn more block rewards.
How does pos work?
With PoS, crypto assets are held on a node (computer) connected to the blockchain network and used as security for participating in the consensus process of a blockchain network. At PoS, the nodes (also called validators) compete with their staking to generate the next block in the blockchain. Generation depends on several factors, such as the amount of assets deployed, the period of time for which they are deployed, and random selection so that no entity can have a monopoly on generation. The node that is allowed to generate the next block in the blockchain receives a reward in the form of the pegged cryptocurrency. Usually, the interest is not paid annually, as is the case with deposits of fiat money (e.g. euros, dollars), but much more frequently (daily, weekly, monthly), depending on the staking option and platform chosen.
Validator nodes are selected and are limited in number. In order to set up one of the limited validator nodes, one must have technical knowledge, a computer only intended for this purpose and a minimum amount of coins that can be used. Fortunately, there are third-party services out there that allow investors with just a few coins to delegate them and share the staking rewards.
The 5 Largest Staking Crypto Assets By Value Staked
The staking reward varies from one blockchain network to another. The longer you use your cryptocurrency, the higher the amount you will receive. You can use this calculator to get an overview of the possible interest rates:
This article will be three options describes how you can stake without holding a large amount of crypto assets or having technical knowledge.
- Staking-as-a-service platforms
- Digital asset exchanges that offer exchange staking
- Staking on a hardware wallet (cold staking)
1. Staking-as-a-service platforms
Staking-as-a-Service (StaaS) platforms are third-party providers that allow investors to wager even small amounts of crypto-assets. The owners of crypto assets delegate this to the staking-as-a-service provider. He takes over the staking for the owner of the coins. The staking-as-a-service provider takes a percentage of the expected rewards for their service.
The advantages of using a staking-as-a-service platform are:
- Participation in staking is possible without technical knowledge. SaaS offers the certainty that the return will be generated in a constant and reliable manner by experienced staking operators.
- SaaS providers are easy to use. Typically, staking requires a lot of research to select the right validator to delegate the coins to, understand the fees involved, and track whether the validator performs as promised. SaaS platforms manage the entire process and reduce complexity.
Popular staking-as-a-service platforms are:
- Figment Networks
- Stake capital
2. Digital Asset Exchanges That Offer Exchange Staking:
Another method of staking is exchange staking, in which the digital asset exchanges take care of all technical aspects and offer users a passive income channel in exchange for low fees. You earn interest in the form of new tokens by holding coins in your trading account.
The advantage is that you can use your assets in the same exchange on which you bought them. No additional registration on another platform or another transaction is required.
The main digital asset exchanges are:
For example, with the Binance crypto exchange, there are two options for staking:
- Flexible: the amount used can be paid out at any time
- “Locked”: Your credit will be blocked for a certain period of time (30 days, 60 days or 90 days). Compared to flexible staking, this variant offers a higher return against a time commitment. If you choose to stop staking before the end of this period, you will not receive any rewards for the entire staking period.
At Binance, the rewards are accumulated on a daily basis.
The following example shows how Rewards for Polkadot Staking are accumulated. I show my personal Binance account on which I stake 48.35 Polkadot tokens for 30 days and an expected annual return of 11.51%.
3. Staking with a hardware wallet (cold staking)
With this method, the coins are usually stored offline in a hardware wallet. The investor must transfer the coins from the exchange to the wallet with a transaction and then decide to stake on the wallet. This is a secure way of staking, as hardware wallets offer the highest level of protection for your assets.
Some of the leading cryptocurrency wallets that support staking include:
- Trust wallet
- CoolWallet S
Which staking option is right for you?
The decision whether you want to stake with a SaaS provider, a crypto exchange or a wallet depends on several factors:
- Which coins you want to stake
- What timeframe for the reward payout you want
- The staking fee you’re willing to pay
- The period of time for which you are ready to block your coins
The following table provides an overview of some of the staking platforms compared with the factors listed above.
As a practical example, let’s look at polkadot staking. You can compare staking options and terms on this website: https://www.stakingrewards.com/earn/polkadot
Estimated Profit Calculator (August 2021 data)
This calculator allows you to enter different dollar or polkadot amounts that you want to stake, as well as the time period and different price scenarios. The simulation of the price is particularly interesting to predict the returns for certain price movements: +/- 25%; +/- 50%, +/- 100%; +/- 500%; +/- 1000%.
Polkadot Staking Vendors Comparison (August 2021 data)
- Volatility of the underlying value! Cryptocurrencies are highly volatile. If you choose to stake a cryptocurrency that is currently priced at $ 10 and has a 10% reward for 30 days, you should be aware that it could be worth significantly less after 30 days. This means that while you will receive 10% more tokens, they may be worth less than the original $ 10.
- Don’t just choose the highest percentage return! Before buying a token, you should consider the quality of the business model, not just the staking return. Some tokens seem attractive with particularly high staking returns, but if they don’t have a solid business case, you run an enormous risk in the price development of the token.
- Know the time restrictions! Different networks have different payout schedules and time frames that you need to adhere to in order to receive rewards. Do some research so you know how long to commit your values.
It has become imperative to increase one’s income with additional sources of income. Staking is one of the ways to generate passive income with cryptocurrencies. Only cryptocurrencies based on the proof-of-stake consensus mechanism are eligible for staking. Staking-as-a-service providers, crypto exchanges and hardware wallets provide easy-to-use ways to stake tokens without the need for technical knowledge or a minimum staking amount. Before an investor considers staking, they should be aware of the risks and do adequate research to find the best staking option for themselves.
Disclaimer of liability
All information contained on our website has been researched to the best of our knowledge and belief. The journalistic contributions are for general informational purposes only. Any action that the reader takes based on the information found on our website is entirely at your own risk.