Is there anything more misunderstood than crypto? It’s hard to find the balance between “the hype” and “the dismissals.” 

Embracing digital assets doesn’t need to be an all-or-nothing investing choice. Anyone who invests in cryptocurrencies has a wide range of options for earning passive income using a combination of classic stocks and commodities investments while also embracing the blockchain network. 

One particular area of interest for investors is the idea of crypto staking. While investing in cryptocurrency doesn’t involve any interest or derivatives, crypto staking allows investors to earn interest by staking their crypto on an exchange. 

In this article, we’ll discuss what crypto staking is, the benefits, and some misconceptions about staking crypto. 

What Is Crypto Staking?

Staking cryptocurrency is the process of verifying transactions on a blockchain by using coins held in a wallet or exchange to forge new blocks. Essentially, when you stake coins in your wallet or exchange, the blockchain ledger uses these coins to authenticate or verify new transactions and form new blocks. 

These blocks comprise the open ledger of the blockchain network and allow for various processes, such as trading to occur.

As an investor, crypto staking is essentially the same thing as holding cash in a savings account. Since banks don’t hold all of their capital in vaults, they need to draw cash from elsewhere for withdrawals, such as your savings. The reward for keeping your money in a bank is the interest earned for your holdings. 

Similarly, blockchain staking rewards users who hold their coins in a verified wallet or exchange them with interest.

Crypostaking is a purely passive investment, with most of the legwork being performed upfront as due diligence. With generally higher yields, crypto staking makes investing in crypto vs. stocks favor crypto. 

What Are the Benefits of Crypto Staking?

Staking allows you to benefit from your digital assets by earning rewards without selling them. Most people compare staking to placing crypto in the digital equivalent of a high-yield savings account. 

Staking is a great way for investors to get in without the barrier to entry created by the large minimal investment needed to become a full validator. 

The main benefit of staking is that you can reasonably expect to earn 10% to 20% more crypto per year when using crypto on a proof of stake network. 

There are generally two types of staking, which we will discuss below. 

What’s the Difference Between Proof of Work and Proof of Stake?

  • Proof of Work (POW). POW is an algorithm used by Bitcoin, Ethereum, and other major cryptos to secure cryptocurrencies by validating transactions and mining tokens. 
  • Proof of Stake (POS). POS is an alternative to POW that enables cryptocurrency owners to stake their coins to get permission to check and add new blocks. 

POS has been eclipsing POW because it is a more energy-efficient process. You’ll need to use a cryptocurrency that uses the POS model if you want to participate in staking. 

Misconception 1: The Bubble on Crypto Staking Will Burst Any Minute

Bubble talk comes from the fact that many people presume that the extreme rise of crypto means that it’s all some kind of fluke or scam. 

A true bubble means that an asset sees a rapid rise in market value during a brief time window, even though there’s been no fundamental change to account for the rise in value. This essentially means that the cost of an asset greatly exceeds its intrinsic value to the point that the price isn’t aligned with the asset’s fundamentals. 

Yes, some smaller coins have shown some “bubble” characteristics due to rapid price escalations paired with pump-and-dump hype strategies. 

However, established cryptocurrencies have more than proven their intrinsic value while avoiding the volatility of smaller coins. One of the big value points of something like Bitcoin is that it is used for various transactions both at point-of-sale locations and online for a low cost. 

Furthermore, Bitcoin’s widespread adoption as a global medium of exchange has made it a strong store of value that many people compare to gold. However, with countries adopting Bitcoin as a pegged currency and early adopters hailing it as the future of money, Bitcoin’s price is difficult to discern. 

For this reason, there exists the real potential for Bitcoin to go even higher and plenty of opportunities in staking your Bitcoin.

Misconception 2: Staking Coins Doesn’t Have Any Drawbacks

Before investing, it’s important to know about the potential downsides. Keep these things in mind:

  • Some projects have minimum staking requirements that require you to lock away a minimum holding to get rewards. While this is not usually a problem, there’s a potential for big losses if you lock away more than you can afford.
  • Staking requires a lock-up period that prohibits your crypto from being transferred for a specific period. That means no trading staked tokens if prices shift. As a result, a large drop in a newly staked asset could eat up interest.
  • While high staking rewards may be appealing, some staking assets are awarded on a delayed basis instead of providing daily payouts. This is important because rates of return on staking rewards are subject to change because they aren’t guaranteed.
  • There are often “unstaking waiting periods” that can last more than a week.

Further, crypto networks can go bust just like any other type of business. Make sure you’re doing your homework on a network that’s enticing you with generous platform offers and staking rewards to avoid losing all of your staked coins.

Misconception 3: Gains Made From Cryptocurrency Staking Are Not Taxed

Yes, you need to report cryptocurrency activity on your tax returns. This is because the IRS actually classifies cryptocurrency as property. As a result, all cryptocurrency transactions are taxed as property transactions and come with a capital gains tax. 

Generally, your long-term gains will be taxed at a rate of 0%, 15%, or 20% based on your income and filing status.

Is Crypto Staking Worth It?

While some people still parrot the idea that crypto is some type of scam, I think that the widespread embracing of crypto by institutions worldwide disproves these claims pretty clearly. 

Crypto investing can be a great way to diversify your portfolio, especially if you have a self-directed IRA. However, unlike traditional crypto holdings, staking allows you to make money on your crypto while it sits in your wallet. 

The key here is to do your due diligence, especially when it comes to finding the right coin and exchanges to stake your coins. 

My takeaway? Everyone serious about investing and fascinated by cryptocurrency should give staking a chance to see if it fits with their investing strategy.