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What is Crypto Staking and How Profitable is It?

Learn about crypto staking, how to get started, and whether it is worth it.

Staking crypto is becoming increasingly popular for investors to earn passive income off their crypto holdings. As it’s gaining increasing traction, you’re likely to come across people asking, “Is staking crypto worth it?”

Staking crypto is an accessible way to gain rewards or interest. Unlike mining, you don’t need expensive hardware for staking crypto. Besides providing investors with financial gains, staking also enhances the security of a blockchain.

What Does Staking Mean in Crypto

Crypto staking refers to a process where investors lock up a specific cryptocurrency in their crypto wallets to earn interest or rewards. Staking enables the validation of blockchain transactions through “Proof of Staking” (PoS), where participants are required to validate a transaction through consensus.

This is the area where staking comes into play. Here, investors are the participants (stakers) who hold or lock up their cryptocurrency and perform the task of verifying transactions on a blockchain, and stakers are rewarded in terms of interest or rewards (additional tokens or coins).

What is Proof-of-Stake?

Proof-of-Stake helps blockchain networks to achieve consensus, where investors stake their crypto and become validators. The participants or validators can add new blocks to the blockchain through the Proof-of-Stake mechanism.

Proof-of-Stake is a consensus mechanism model, like Proof-of-Work. However, instead of competing for block rewards by being the first to solve a cryptography problem with the highest computational power, validators are decided by the size of their stake and they collect transaction fees as their reward. Generally, rewards are distributed in the shape of native cryptocurrency or tokens.

Here are the key advantages of Proof-of-Stake when compared against Proof-of-Work:

Proof-of-Stake vs Proof-of-Work
Table 1: Proof-of-Stake vs Proof-of-Work

On-Chain vs Off-Chain Staking

During on-chain staking, the blockchain’s Proof-of-Stake protocol is used to generate rewards. On the other hand, off-chain staking allows you to get rewards on specific cryptocurrencies within your account balance that you keep in your crypto wallet on supported platform when it is used as collateral in connection with validating transactions on applicable Proof-of-Stake networks. 

On-chain vs Off-chain staking
Table 2: On-chain vs Off-chain staking

Best Coins for Staking

You need to invest in specific crypto that uses Proof-of-Stake mechanism for validating the transactions if you’re planning to focus on staking as an investment strategy.

Listed below are a few of the most widely used cryptocurrencies for staking. This will give you an idea of how profitable is crypto staking:

USDT and USDC for Staking Stablecoins

When it comes to stablecoin staking, both USDT and USDC are considered as the most suitable options. One of the major benefits of staking these stable coins is the interest rate, as you can get up to 6% APY.

In addition, staking with USDT and USDC is safe too. As the names suggest, these stablecoins are pegged to the US dollar, rendering them less volatile than typical cryptocurrencies. If you’re looking for a safer way to stake crypto, stablecoins are the way to go. 

ETH for Staking On-Chain

Being one of the most renowned and trusted cryptocurrencies, Ether (ETH) is a viable choice for staking. Depending on the amount of ETH staked, you can earn interest up to 17% per year.

As a reward, you can earn anywhere between 2 and 5 ETH. However, the startup cost is relatively higher (requiring a minimum of 32 ETH). Besides, the interest rates vary depending on the number of validators.

The crypto staking rates might decrease with the increasing number of validators. Furthermore, you cannot withdraw your staked ETH until the Eth1.0 and Eth2.0 chains merge.

Cardano for Flexibility

Just like Ethereum, Cardano is another smart-contract platform. However, Cardano consists of multiple layers. One of these layers is used for buying and selling the ADA (native coin). Another layer is used to develop dApps.

Binance is a great choice for ADA staking. This platform offers up to 24% APY and the average annual return stays between 5-9%. ADA has a high market cap, and you are free to unlock your staked assets at any time.

Crypto Staking Misconceptions

If you are new to the cryptocurrency world, you may have come across a wide range of misconceptions, as most of it is hearsay on forums on the internet. 

We’ll address a couple of common crypto staking misconceptions below.

Going for the Highest Staking Rewards

Although high staking rewards look tempting, this shouldn’t be the only criteria when thinking about crypto staking. You have to be careful when choosing a crypto coin, as scam projects are mushrooming fast, where projects have poor token economics, offering an unlimited supply of coins that end up being of little value. 

Most of the highest APY crypto staking options are available on DeFi platforms, where you lend your crypto to the platform and receive incredible returns. However, staking coins from lesser-known projects can expose you to volatility risk, where while you may earn 100 times your original investment in interest, it may be in a coin that has no value. 

Staking Rewards are Not Taxable

On Feb. 2, The Internal Revenue Service (IRS) offered a refund of $3,200 to Joshua and Jessica Jarrett. This amount was previously paid by the Jarretts to IRS, as a tax on their staking rewards. The Jarretts earned these rewards in 2019 by staking their Tezos (XTZ) coins.

The refund was offered as the Jarretts filed a suit against the IRS in the U.S. District Court in the Middle District of Tennessee. IRS offered this refund to avoid a decision from District Court, but the Jarretts rejected it, and the case will move to trial in early 2023. 

According to Phil Gaudiano, a certified public accountant and co-founder of the Polygon Advisory Group, a Virginia-based provider of tax and accounting services, “The IRS has effectively bought itself time to either a) wait for guidance/legislation, or b) catch another taxpayer with unclaimed staking income and bring the case to Tax Court, where a decision would set a federal precedent. So, for the time being, the Jarrett case has done nothing to change the way staking rewards are taxed in the U.S.”

However, once crypto channels received news that the IRS agreed to refund the $3,200 in taxes paid on staking rewards, the Jarretts’ case was positioned as proof that staking rewards aren’t taxable.

In reality, the lack of clear legislation and regulations fuels such misconceptions. Once there is legal guidance or legislation on this matter, it seems likely that staking rewards will be treated as a taxable income.

Is Staking Cryptocurrency Safe?

What are the risks of staking crypto? We’ve outlined a few safety concerns to consider when staking your crypto:

  • The value of cryptocurrencies may drop abruptly due to their volatile nature. In case of a price drop, the loss can overshadow the interest you have earned so far. If you’re a more risk-averse investor, staking stablecoins offers a safer alternative to staking typical cryptocurrencies, as their value is pegged to the U.S. dollar.
  • You can’t access your staked coins after they are locked up for the specified time. This can be scary as you’ll be unable to withdraw your coins if the market conditions look unfavourable. You could choose plans with shorter lock-up periods, such as 7-Day, instead of monthly or longer time frames, or even opt for a flexible savings plan that lets you instantly withdraw your assets.  
  • You may invest in a scheme offering high rewards for a small token that promises 10x, or even 100x gains. However, finding these small tokens with high potential is tough. Instead, you could invest in established coins like BTC and ETH. While your interest earned may not be 1000% APY, you’ll have the reassurance that the coin is likely to survive, and you’ll still be able to enjoy interest rates that are significantly higher than a bank’s.

How Do I Start Staking Crypto?

Before going any further, make sure whether you are interested in on-chain or off-chain staking. This can help you choose the best staking option depending on the cryptocurrency you own.

Ready to start staking?

Step 1: Buy a Cryptocurrency

You can stake only a specific type of cryptocurrency that relies on the Proof-of-Stake mechanism. If you don’t have such crypto coins, it’s time to add it to your wallet! If you’re planning to stake ETH, you can buy ETH on Cabital at competitive rates if you’re based in Europe or have a multi-currency account that supports GBP and euros. 

Step 2: Start Staking

If you’re planning to stake on-chain, it’s time to move your crypto to a custodial staking system that will handle the staking process for you. They’ll set up, run and manage the node. If you prefer to fly solo, you’ll need to send 32 ETH to the Ethereum staking contract address, with a computer that can download both Ethereum blockchains and keep your node connected to the blockchain at all times.

If you’re planning to stake off-chain, you can check if your exchange shows off-chain staking as an option for your account. 

Another way to stake off-chain is by depositing your crypto with a wealth management platform like Cabital for a specific time frame. This is the easiest way to get started in earning a steady stream of passive income through cryptocurrency, as you’ll be able to earn up to 6% APY on your holdings while leaving the heavy lifting around maximising yield to our investment team. 

This article has been prepared by Cabital Fintech (LT) UAB  (the “Company”) and is general background information about some of the Company’s activities at the date of this presentation.

This article does not contain all the information that is or may be material to you and should not be considered as advice or a recommendation to you in respect of the holding, purchasing or selling of digital assets and does not take into account your particular objectives, financial situation or needs. This article has been made to you solely for information purposes. This presentation may be amended and supplemented as the Company sees fit, may not be relied upon for the purpose of entering into any transaction and should not be construed as, nor be relied on in connection with, any offer or invitation to purchase or subscribe for, underwrite or otherwise acquire, hold or dispose of any digital assets, and shall not be regarded as a recommendation in relation to any such transaction whatsoever. The contents of this presentation should not be considered to be legal, tax, investment or other advice, and you  should consult with your own counsel and advisers as to all legal, tax, regulatory, financial and related matters concerning an investment in or a disposal of such digital assets and as to their suitability for you.

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