Staking: How to earn a passive income from your cryptocurrencies

by Staking

Resource Guide

If you are bullish about cryptocurrencies (we are) and plan to sit on your favourite coins for the long term, then you might want to consider “staking”.

Staking is one of the most popular ways to earn money in crypto.

It can be a fantastic way to grow your long term holdings without doing any extra ‘work’.

In simple terms, when you stake your coins, you set aside a portion of your crypto assets to help support operations on a blockchain network.

Typically any assets you stake are then locked in for a fixed period of time: say 30… 60… 90 days+.

And while your coins are locked up, you are rewarded with a high interest APR as an incentive.

It’s not quite as safe as keeping your money in a bank. Your capital isn’t covered by the Financial Services Compensation Scheme (FSCS), which insures up to £85,000 of deposits in a bank or building society account.

Cryptocurrencies are high risk assets but the rewards for staking are very attractive.

On Binance, for example, you can stake a wide variety of coins and earn an annualised yield of 13%, 15%… even 30%+ in some cases.

We have undertaken a comprehensive review of the best ways to stake your coins and in this article we’d like to give a brief overview of our findings.

The best places to stake. The rewards. The risks.

This will help you develop a basic staking strategy: so you can earn a decent return on coins, no matter what stage we are at in the cycle.

This is a multi-part series which will include step-by-step “how to guides” on staking your cryptocurrencies using the different methods.

Who is staking for?

In general, staking tends to work best for long term holds which you have no intention of trading, no matter how much the market fluctuates.

So for example, if you intend to hold Ethereum for the next 12 months (regardless of whether the price shoots up or down), staking can be a great way to quickly grow your investment.

Why do they need your stake?

The simple answer is that they need ETH in order to validate transactions.

The reason your crypto earns rewards while staked is because the blockchain puts it to work.

Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of Stake, which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle.

You can read more about how this “proof of stake” system works in our coin profile for Ethereum.

Ultimately you can stake Ethereum for a month, two months or 12 months. There are a huge variety of options.

And in return, you earn a decent yield: 5-10% depending on the platform.

In general, the main decisions you will have to make are:

1. What coins to stake
2. How long do you want to lock up your coins
3. How much you want to stake
4. What platform you want to use

The best ways to stake

The super-technical option is to become a full validator on the ETH platform.

You’d need a substantial minimum investment to do this, a ton of technical know how and a giant computer rig (oh and your electricity bills will also be HUGE).

However, let’s put that one aside because there are far simpler ways to stake coins and earn rewards.

We’ve undertaken a review of each of these and think there are three reasonable options for members of the Crypto Traders’ Academy.

Option 1: Stake on an exchange

This is by far the simplest way to stake your coins.

Exchanges such as Coinbase and Binance offer staking. They are very user friendly, and if you have an account already, then this is probably your best option for getting started.

On Binance, for example, there are a wide range of coins that you can stake. You’ll find the staking section under Binance Earn on the homepage.

There are a few different durations – 30, 60 or 90 days. Once staked, you can’t withdraw your coins. Binance will hold those coins in a crypto wallet and stake the coins for you.

And at the end of the duration period, your coins will be returned, along with the rewards and interest that you’ve earned.

If you are willing to lock your coins up for 90s days, you’ll get a better return than 15 or 30.

Some coins are more popular than others and might be sold out.

The pros of using an exchange are:

1. It’s very simple
2. You can earn fixed and variable rates
3. It’s secure
4. There is very little ongoing effort

Option 2: DeFi staking

The setup for a number of staking programmes requires the use of Metamask as an intermediary.

So if you have a Metamask wallet, then this is another great option.

Take PERP for example. Michael plans to stake his PERP for 3 years and the returns on offer are very attractive.

The rate of interest oscillates wildly (it’s a variable rate on PERP) but at the time of writing it is sat at around 35% APR but has been as high as 110% at times.

It’s a question of connecting your Metamask wallet to the app. You can see our guide here.

The rewards are handsome. It’s easy to set up.

Unlike the exchanges, there is no lockdown period. You can keep your stake in there as long as you like BUT if you keep it in longer (and don’t release your stake early) you receive significantly greater gains under what they call their ‘vesting’ programme.

It’s worth pointing out once again though: there are risks with any investing and particularly with crypto and some of the smaller projects.

The rewards do vary and if trading collapses on these platforms then the staking rewards will fall with it. And because you are using your own wallet, you have no recourse in terms of security.

The beauty of crypto is that it’s open to all and not controlled by the bank BUT that can also be its downside. There is no KYC. No oversight. That means you have to be responsible for your own security: see the Metamask section of our Uniswap guide for more on this.

Option 3: Use a deposit account such as Blockfi, Celsius or Nexo

These are lending services that offer deposits and loans over a centralised platform.

The idea is that you stake on your crypto and these platforms will hold your crypto and then lend it out to generate interest.

This interest is then paid to you: allowing you to compound your returns week to week.

The most popular options are Celsuis, BlockFi and Nexo.

The set up is simple (and we’ll send you a step-by-step guide to this later in the series).

The returns on BlockFi vary, depending on the coin that you want to stake. You can earn about 4% on Bitcoin, 7.5% on USDC.

Stable Coins such as Tether earn a higher yield than you might get on BTC or ETH.

But you can earn higher returns on Celsius and Nexo: we’ll do a full review of the relative merits of each of the different platforms.

The pros of using a deposit account are:

1. You can earn much higher yields
2. It’s more secure
3. There is very little ongoing effort.

Cons: It’s slightly less secure than using one of the big exchanges.

BlockFi was hacked last year for example, exposing customer data in the process.

However, it has since secured its platform and both Celsius and Nexo have a good reputation for security.

What are the risks of staking?

There is the opportunity cost.

As you know by now coins can go up (or down) in value several hundred percent in a matter of weeks.

So if you’re an active trader this is something to consider. If your crypto is locked up in staking you won’t be able to (in most cases) release it instantly to make trades. For most people it makes sense to stake with a % of your portfolio rather than with everything at once so that you are diversifying your portfolio and spreading your risk.

Other risks around staking include:

The regulatory risk, which we keep a close eye on.

There’s the risk of the provider, which could be hacked or even dishonest.

Our most trusted exchanges are Kraken and Coinbase.

Metamask is sound but again you have no recourse if you lose your logins or if something goes wrong.

If you are chasing yield on obscure staking platforms, there is a risk that you are exposing yourself to security risk.

Perhaps the most serious risk is that the yield you earn could collapse during the period your stake is locked up.

You can mitigate this risk by choosing a fixed rate. However, if the rate is variable, there is a significant risk that your hefty stream of interest you earn could slow to a trickle.

Think of it like this: if trading on the PERP platform collapses, then there are less fees to pay out in rewards.

As we enter an interim bear market, it’s worth bearing this in mind.

With that said, though many DeFi coins have already collapsed in the last year platforms such as PERP have held up quite well during all the volatility.

In summary

There are some great returns to be made from staking, as long as you’re comfortable with the risk.

It can also a good way to keep yourself motivated and on course, mentally.

When there’s a burst of relentless gains crypto is easy. Everything is positive and exciting… the six and seven figure gains suddenly seem in reach… But even just a few weeks or months of sideways markets and dips can be hard, boring, frustrating… emotionally draining.

Having some of your long term assets working for you while we whether the storm and wait for the markets to bounce back can be a great focus (not to mention profitable!).

As you’ll discover, there are a multitude of other ways to earn income from your cryptocurrencies too.