As of 2022, 21% of American adults have owned cryptocurrency. Seen as a new way to smartly invest money, cryptos like Bitcoin and Ethereum were snapped up by many of us.
In most cases, we only buy and sell our tokens. But did you know there’s another way to handle them?
Many crypto holders have gotten into staking, which is a way to earn rewards while helping a network validate transactions and support its security.
Are you now interested in crypto staking? Then here are some crucial things you need to know before you get started.
You Can’t Stake Every Crypto
If you already have some Bitcoin, then you might think you’re already one step ahead. However, you can’t jump into crypto staking with just any currency.
Staking can only be done with cryptos that use proof-of-stake (PoS) systems. This includes Ethereum, as well as Cardano, Cosmos, Solona, and Tezos.
Cryptocurrencies that use proof-of-work (PoW) systems can’t be staked. So, unfortunately, you can’t do crypto staking with Bitcoin.
It’s Easier Than Crypto Mining
Both crypto mining and staking are forms of passive income. The easier and more cost-effective choice is staking though, as you don’t need any specialized equipment. The exception is if you run your own validator node, but this should be reserved for expert stakers.
You can also potentially earn more with staking, plus it’s more environmentally friendly. You’ll support the crypto’s blockchain too, making it a win-win situation for everyone.
Exchange Staking Is Great for Beginners
The easiest way to get started is to use an exchange. Chances are, if you’ve bought crypto before, you’ve already familiarized yourself with one before.
If you haven’t, it’s easy to learn. Basically, you put in how much crypto you want, pay for it, and it’s yours.
The tokens are stored on the exchange itself, meaning there are no extra steps, like getting a crypto wallet (more on this later). This makes it easy to learn more on crypto staking while actively participating. Once you’re more familiar with the terms and processes, you can graduate and move on to other methods.
In fact, it’s recommended that you do this. While exchange staking is simple, it’s not as secure. Since you store your tokens on the exchange, you can easily lose them to hackers or government actions. And if the exchange goes bankrupt and shuts down, you’ll lose everything then too.
In addition, if you’re American, there are fewer choices for exchange staking. There are also lower yields, longer compounding periods, and longer payout periods.
You Never Have to Transfer Coins
There’s a misconception that to stake cryptos, you need to transfer your coins to another wallet. This is how scammers take advantage of newcomers and wipe out everything they have.
Delegating your coins is different from transferring. It’s a red flag if any project asks you to transfer your crypto to a different wallet.
Get a Cryptocurrency Wallet
Staking through a crypto exchange doesn’t require you to have a crypto wallet. However, you’ll need one if you want to expand your horizons.
Hot wallets are connected to the internet, and cold ones aren’t, making them more secure but less accessible. There are also hardware vs. software wallets.
There’s no “correct” answer as to which you should get. In fact, people usually have more than one type for better security and convenience.
There May Be Minimum Lockup Periods
When you stake your coins, you may be required to lock them for some time. This means you need to wait before you can unstake and then trade your crypto.
Always read the fine print, so you know exactly what to expect. Otherwise, you might have a tough time trading.
You Should Join a Pool
You won’t have to split the staking rewards with other people if you go solo. But the chances of even getting them are low, so it’s a safer bet to join a staking pool instead.
Larger pools have bigger chances of success. However, many are oversaturated, and you’ll barely get any rewards.
On the other hand, smaller pools will have much bigger returns. But again, like with solo staking, your chances aren’t so great. This makes medium-sized pools ideal.
Of course, you’ll have to hand over part of your staking rewards to enjoy the benefits of being a pool member. Expect to pay between 2% to 5% of your rewards as a fee.
Your Staking Rewards May Be Taxed
Crypto staking is a relatively new thing; many countries don’t have laws to address it just yet. That doesn’t necessarily mean you don’t have taxes to pay though.
You should consult with a tax accountant, as they’ll know your country’s laws and your personal financial situation. Don’t ignore the situation since you may be penalized heavily in the future.
Profits Aren’t Guaranteed
The concept of crypto staking is that you hold onto your tokens to benefit a network. Once they’ve unlocked a block, they’ll pass some of the rewards onto you.
This might sound like staking rewards are guaranteed. So why doesn’t everyone participate?
At first glance, people don’t realize that you can lose your entire stake. If you’ve delegated your crypto to a validator that can’t properly verify transactions, then all tokens bonded to them are forfeited (this is called slashing). This doesn’t happen often though.
You can also lose part of your stake. This occurs if a node has poor internet or bad equipment.
Even with a reputable and reliable validator node, it’s still possible to end up in the red. If you’re unlucky, the crypto value might fall rapidly before you get your staking rewards. This means you need to keep a close eye on crypto performance before investing.
Know the Facts Before Staking
Cryptocurrency staking can be profitable, but only if you do it right and know what you’re getting into. If you start staking blindly, it’s almost certain that you’ll lose all your money.
But now that you know some key things beforehand, you’ll make better-informed decisions. And before you know it, you’ll be raking in those staking rewards.
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