In the early days of cryptocurrency, buying and holding or cryptocurrency mining were the two main ways to make money with the emerging asset class.
But these days, cryptocurrency investors have far more options. In fact, with cryptocurrency staking, you can now earn passive income just by holding various cryptocurrencies. Additionally, many coins and staking platforms pay a significantly higher interest rate than you can ever find with a high-yield savings account.
However, staking cryptocurrency still carries risk. It’s also important to understand the technology behind staking, which cryptocurrencies are best for generating income, and how to decide if staking crypto is right for you.
Pros And Cons Of Cryptocurrency Staking
What Is Cryptocurrency Staking?
Cryptocurrency staking is the process of earning rewards by using your cryptocurrency to help validate blockchain transactions. For new investors, this might sound like pure jargon, but cryptocurrency staking is possible because many cryptos operate using Proof of Stake (PoS.)
PoS is a consensus mechanism that many newer cryptocurrencies use to verify transactions and maintain blockchain integrity. With PoS, holders can stake their cryptocurrency, essentially locking it up so it can help validate new blockchain transactions. As validator nodes confirm transactions and add new blocks to the blockchain, stakers earn crypto rewards for their efforts.
How Crypto Staking Works
In layman’s terms, cryptocurrency staking basically means you’re locking up your crypto to help keep the blockchain running smoothly. In exchange, you earn extra cryptocurrency as rewards. This is different from cryptocurrency mining, which is how cryptocurrencies like Bitcoin validate new transactions and reward validators.
Typically, the rewards you earn from staking are the same as the cryptocurrency you’re staking. It’s also worth noting that your chances of being chosen as a validator increase the more crypto you stake, so having skin in the game yields higher rewards.
Cryptocurrency staking might sound complicated, but it’s easy for investors to start staking since this protocol is how PoS-based cryptocurrencies validate new transactions.
Many cryptocurrency exchanges let you buy PoS cryptocurrencies and stake them to start earning rewards. Depending on the exchange and cryptocurrency you’re staking, you might have to commit to a certain time period you’re locking your crypto up for. You can’t trade cryptocurrency during this time, but you still own what you’re staking.
The staking platform you use and the cryptocurrency you stake also impact how much you earn and when you actually get rewards. For example, on Coinbase, you can earn up to 5.0% APY by staking crypto. But some cryptocurrencies pay daily rewards while others pay weekly.
Popular Cryptocurrencies For Staking
Buying cryptocurrencies that use PoS is the first step in staking crypto to generate income. And, the good news is there are several popular cryptocurrencies people stake, including:
- Algorand (ALGO): A PoS cryptocurrency that focuses on decentralization and security. You only need 1 ALGO to begin staking. ALGO currently costs under $2 USD, making it a very beginner-friendly cryptocurrency to stake.
- Cosmos (ATOM): Cosmos is currently a top-30 cryptocurrency that’s popular for staking because of the payout. According to Cosmos’ website, you can typically earn 9.7% APY for staking ATOM.
- Ethereum (ETH): Since Ethereum is upgrading to Ethereum 2.0, some platforms like Coinbase let you stake ETH to earn ETH2. When Ethereum eventually upgrades, your ETH2 will revert to ETH. You need 32 ETH to stake with your own independent node. But platforms like Coinbase don’t require a minimum and let you lock your ETH in staking pools with other stakers.
- Cardano (ADA): As one of the more popular PoS cryptocurrencies, Cardano is also a common staking choice. You can use Cardano’s staking calculator to estimate your rewards, and you can stake independently or delegate your ADA to staking pools.
- Polkadot (DOT): Staking DOT, known as nominating, is slightly more complicated than other cryptocurrencies because minimum staking requirements change and there’s a limit to how many people can stake. But many cryptocurrency exchanges let you buy and stake DOT to keep things simple.
These are just a few popular cryptocurrencies you can stake, but you have more options. Investors also stake cryptocurrencies like Dai and Tezos. And you can even stake USD Coin, which is a stablecoin that’s value is pegged to the U.S. dollar.
How To Stake Cryptocurrencies - Popular Staking Exchanges And Wallets
Once you own a cryptocurrency that’s eligible for staking, you’re ready to actually stake it to begin earning rewards.
Setting up your own validator node is one way to begin staking. But this requires some technical knowledge and responsibility. As mentioned, some cryptocurrencies also have minimum requirements to run your own node, like Etereum’s 32 ETH requirement.
Because of these factors, many investors begin cryptocurrency staking by staking through a cryptocurrency wallet or exchange. This lets you earn passive rewards from your holdings without having to worry about prohibitively expensive staking minimums or the technology behind the scenes.
Several popular ways to stake crypto include:
- Binance: As one of the most popular global exchanges, Binance is a popular choice for staking cryptocurrencies like ALGO and ATOM.
- Coinbase: Coinbase is one of the largest and most beginner-friendly cryptocurrency exchanges. Additionally, you can earn up to 5.0% APY by staking through Coinbase and you only need $1 to start earning rewards. Read our Coinbase review >>
- Kraken: Kraken currently supports a dozen cryptocurrencies and stablecoins for staking, including ADA, ATOM, ETH, and SOL. You can also stake assets like Euros, USD, and Bitcon with “off chain” staking, which basically lets you earn interest on idle holdings.
- Ledger: Unlike cryptocurrency exchanges, Ledger is a hard wallet that’s one of the most popular ways to securely hold your crypto. You can stake up to seven coins simultaneously with Ledger through Ledger Live, including ALGO, ATOM, DOT, and XTZ. Check out our review of Ledger >>
- Yoroi Wallet: Yoroi is a cryptocurrency wallet for Cardano and Ergo that’s popular for ADA stakers because of its simplicity. You download the Yoroi Wallet as a browser extension, create a wallet, deposit your ADA, and then search for staking pools to join and earn rewards.
If you want simplicity, exchanges like Coinbase or Kraken are the fastest way to start staking. But as more exchanges and wallets add support for cryptocurrency staking, opportunities are only going to expand in this space.
Cryptocurrency Staking vs. Lending - What’s The Difference?
If you want to earn rewards with your cryptocurrency, you might have seen companies like BlockFi and Linus advertising that you can earn up to 9.5% APY from your holdings. This sounds similar to staking, but companies like BlockFi and Linus are more like banks than staking pools.
The reason you earn interest on BlockFi , for example, is because the platform lends out your cryptocurrency. In this case, the biggest risk of using lending platforms is that borrowers default, erasing investor’s gains altogether. BlockFi states this hasn’t happened to date, but it’s still a risk worth noting.
Despite this risk, cryptocurrency lending is still popular and often lucrative. Platforms like Celsius pay up to 17% on various cryptocurrencies and stablecoins. Plus, lending platforms let you earn interest on non-PoS cryptocurrencies and stablecoins, so you usually have more flexibility.
Ultimately, cryptocurrency staking and lending are similar in that you can earn passive rewards with cryptocurrency. But both methods carry risks like the cryptocurrency prices plummeting or, in the case of lending, borrowers defaulting. Before you go down either road, do your due diligence and decide how much cryptocurrency you’re comfortable lending or staking.
Cryptocurrency Staking FAQs
Cryptocurrency staking is a newer way to generate returns with this asset class, so there are naturally some common questions investors have.
Is staking crypto safe?
Cryptocurrency staking is safe if you stake through a reputable, secure platform like Coinbase or the Ledger wallet. When you stake crypto, you still own that cryptocurrency; it’s just locked up for a specific period of time to help validate transactions.
However, the main risk of staking is that you can’t sell the cryptocurrency you’re staking, even if prices drop or rise dramatically.
Is staking crypto profitable?
Various cryptocurrencies and platforms can pay 10% APY or more when you stake. In this sense, staking can be much more profitable than parking your money in a savings account or even more traditional investments.
Just note that staking rewards are typically paid out as the same cryptocurrency you’re staking. This means a sudden drop in coin price can reduce how profitable staking is.
Can I lose my cryptos by staking them?
It's highly unusual for cryptocurrencies to be lost due to staking. However, it's possible for validators to have their stake "slashed" due to misbehavior such as downtime and double signing.
Can you sell staked crypto?
It depends. In most cases, you'll need to agree to lock up your staked crypto for a minimum amount of time. Once you're past this initial lock-up period, you'll have the option to unstake your crypto. However, the unstaking process is rarely instantaneous and, in fact, can often take over a week.
Is Cryptocurrency Staking For You?
If you currently have a significant amount of PoS-based cryptocurrencies in your wallet, there’s a compelling argument you should be staking some of your crypto.
Like regular fiat, idle cryptocurrency is a missed opportunity to generate additional income. However, you need to understand the risks of staking and how much of your portfolio you’re comfortable locking up to yield rewards.
As mentioned, you also have options like lending out your crypto with companies like BlockFi and Celsius. As long as you understand your risk tolerance, you can find a buy-and-hold cryptocurrency investing strategy that’s right for you.
Tom Blake is a personal finance writer with a passion for making money online, cryptocurrency and NFTs, investing, and the gig economy.