Just What Is Crypto Staking… and Why You Should Care?

Uncategorized Mar 19, 2022

NOTE: With all of the changes and bad actors, we no longer recommend staking as a strategy nor do we recommend interest-earning crypto accounts. The original story will remain below for transparency. At this time, we recommend holding (known as HODLing) Bitcoin in a private hardware wallet.

 

 

With the S&P 500 and other traditional stock market indexes down so far in 2022, coupled with high inflation, many investors are beginning to look at different investment options. 

 

One interesting option that many are beginning to explore is in the crypto world is called "staking". Some offerings include using “stablecoins” (their value is tied to the US Dollar), and with staking or “earn” accounts, investors can enjoy 8-12% annual interest.

 

So, just what does this mean? And why should you care?

 

Let’s first quickly talk about a parallel from the traditional banking world.

 

So, when you put your money into a savings account with a bank, do you know what happens to that money?

 

Usually, banks create loan packages, like home loans, car loans and other products, and lend out the money you have put in your savings account. Banks make a higher percentage on this than they pay you. This means that your savings rate of 0.5% could be supporting a 3.9% home loan or 5% car loan for your bank.

 

Or, you perhaps put your money in a certificate of deposit (CD) for a 6-month term for slightly higher interest and better returns, like 1.1%. The bank does the same thing with those deposits from you. And, with the lock-in, this makes it easier for them.

 

Yes, there’s a long list of rules that apply to this - such as how much money banks have to keep in reserve - this allows the illusion of “your” money staying in this account. If something bad happens, the Federal Reserve backs things up (to a point).

 

So, in addition to making money and running a lucrative business, your capital with banks also allows them liquid resources to immediately use - instead of having to obtain this from another bank or source.

 

So what does it have to do with crypto staking?

 

Crypto Staking and Earning

 

What we just described has a very similar pattern in the crypto world, although the benefits to you as an individual are much better. At the same time, the FDIC isn’t there to guarantee things and provide security. This is riskier.

 

Let’s go with a simple case where you tell a crypto exchange like Gemini, Coinbase or Crypto.Com that you would like to earn interest on your crypto assets.

 

In some cases, exchanges will allow you to do this on demand - you can deposit and withdraw from your account at will (much like our bank savings account example). In other cases, they have a program that “locks up” your crypto for a 3 or 6 month term (like a CD in our banking example).

 

These interest rates vary from 3-15%, depending on the type of coin, the exchange, and the term it’s held.

 

Let’s look at a few simple examples:

 

Gemini Dollar (GUSD) with Gemini

  • You deposit $1000 into the Gemini Dollar Coin (GUSD) on the Gemini exchange.
  • You choose “Gemini Earn”.
  • In this case, you immediately earn 8.05% APY
  • Interest compounds daily - this means that the interest you earned is reinvested back on a daily basis into your account. For noting, while most bank accounts compound daily, they only pay back monthly.
  • After 365 days, your $1000 is now 1,083.82, and after two years, it’s $1175 (compounding daily makes this higher than just a multiple of 8.05%).
  • The Gemini Dollar is considered a “stablecoin” and is roughly tied to the US Dollar. It will not go considerably up and down in value like some other crypto currencies.
  • If you need access to your GUSD, you can make a transaction at any time with no penalty. 

 

USDC with Crypto.Com

  • You deposit $1000 into the US Dollar Coin (USDC) on the Crypto.Com exchange.
  • You choose to put it in an earning account, committing it for 3 months at a time.
  • You earn 12% per year.
  • Rewards are paid weekly, but not reinvested. You have to manually re-invest them if you want to do so.
  • After 365 days (if you invest 4 times), your $1000 is now $1120, and after two years, the value is $1255 (if you invest 8 times).  It will not go considerably up and down in value like some other crypto currencies.
  • The USDC is considered a “stablecoin” that is roughly tied in value to the US Dollar.
  • If you need access to your USDC earlier, you will pay a small penalty. Crypto.com does have “flexible” plans where you can deposit/withdraw as you like, and those plans earn a lower interest rate.



Ethereum 2 Staking with Coinbase

This example is a bit different than the last two. Ethereum, the second most popular cryptocurrency, is moving to something called proof of stake. This means, instead of making use of mining hardware, it will use an algorithm to validate transactions and mine coins. This also means that the ability to hold coins helps out the Ethereum network and exchanges. Ethereum is also not a stablecoin. Its value will go up and down, similar in some ways to a stock. Here’s how this transaction would look on Coinbase:

  • You buy $1000 of Ethereum
  • You choose to “stake” your Ethereum into Ethereum 2 (ETH2).
  • You earn 4.5% on your Ethereum 2. These rewards are not available until ETH2 is fully launched (later in 2022 is expected).
  • Rewards accrue daily, but do not compound. You have to manually re-invest them if you want.
  • You have access to your coins at any point in time through a simple transaction on Coinbase.
  • After 365 days, your $1000 has now gained $45 in rewards and ETH (simulated, not guaranteed) has potentially gone up by 30%, so you are now at $1345 at the end of the year. Again, this is speculating the growth of ETH2 and that it launches in 2022 - both are unknowns.

 

Here’s a quick comparison chart of our three crypto examples and two bank examples with this $1000 investment over one year (365 days):



Approach

Value After 365 days

Notes

GUSD With Gemini Earn

$1083

Interest is compounded and re-invested for you. Funds are available during this term.

USDC With Crypto.Com

$1120

Must re-invest manually 4 times in their 3 month program over a year. Funds are locked-up during this term.

ETH2 Staking With Coinbase

$1345**

** This figure is speculative and assumes ETH2 becomes available and gains value which is unknown.

Savings Account With Bank

$1006

0.5% APY

CD Account With Bank

$1012

1.1% APY




More Complex Staking

 

Now, while we provided three, relatively simple, examples, there are more complex staking options available on most exchanges. Usually these involve committing at least USD$200 and holding a stablecoin and another cryptocurrency together.

 

These are normally fluid arrangements (you can withdraw or deposit at any time) and often have payouts that don’t compound (your interest is not automatically reinvested).

 

These are more complex to set up, choose, and carry more risk overall. Done right, there can be exceptional returns.

 

Be very careful if you are new to this space. It can be exciting to see huge APY return figures, only to find out there are a lot of details that may mean you will quickly lose your entire investment faster than you can click. Be also careful of scams in this space. There are bad actors who claim they can beat the market and do it with your funds. Most of these are not likely legitimate options. Be careful.

 

How Big Is This?

 

While this method of investing is new to many, it’s already very sizable.

 

At the time of writing this article, popular stablecoins have a huge circulating supply with active volume. Here are rough numbers (at the time of this article being created):

 

  • USDT - $80B in supply and $50B in daily volume
  • USDC - $52.5B in supply and $3.5B in daily volume
  • GUSD - $335M in supply and 4M in daily volume

 

As a comparison, the USD money supply totals $21.8T (or $21800B per Trading Economics). So the USD money supply is currently about 272 times larger than any given stablecoin - at least today.

 

You can find today’s numbers on coinmarketcap.com and other sites.

 

And, while this investment is not backed by FDIC protections, the exchanges mentioned above all have considerable regulations and appropriate information security at play. They are certainly more risky, and many are comfortable with the increased rewards. Because stablecoins are tied to the USD value, many investors feel more “safe” with these sorts of investments.

 

Next Steps

 

If you keep it simple, most investors will find that, if they can accept the risk, an APY in a stablecoin can be very attractive. While it doesn’t have the security of a bank, earning 8-12% interest sure sounds better than 0.25%.

 

This can be a simple and relatively safe way to experience crypto earnings.

 

Again, please understand this is for educational and informational purposes only, and it is not financial advice. 

 

This author has accounts with all three exchanges mentioned in this article, and is not paid in any way by these exchanges. The author also has earning or staking arrangements at each of these exchanges. 

 

Enjoy your crypto investment journey!



Oh, and if you are looking for some more sophisticated options to invest into crypto mining, you can find out what we do here.

NOTE: With all of the changes and bad actors, we no longer recommend staking as a strategy nor do we recommend interest-earning crypto accounts. The original story will remain below for transparency.




Close

50% Complete

Stay In The Loop

We'll share our next learning opportunities with our email list. We don't share data with anyone.