If you are looking for a way to boost your crypto returns, here are three of the safest options for generating passive income in your crypto portfolio.
As a result of the upcoming Merge, Ethereum (ETH -1.65%) will become a full proof-of-stake blockchain. This has important consequences for investors, because it will soon become much easier to earn passive income on your Ether holdings via staking rewards. Depending on which crypto staking platform you use, the amount that you can earn will vary, but as a general rule of thumb you can expect to earn anywhere from 3% to 5% right now.
But Ether, which is the native token of the Ethereum blockchain, is hardly the only crypto that you can stake. On the top crypto staking platforms, you sometimes have the option of 40 or more different cryptos.That's a lot to choose from, and many investors make the mistake of simply chasing the highest-yielding cryptos. Given the recent volatility in the crypto market, though, the best coins for staking in 2022 are Ethereum, Cardano (ADA -0.61%), and Solana (SOL 6.45%). These cryptos are available for staking on every major staking platform, offer competitive yields, and provide the best protection against downside risk in a volatile crypto market.
Ethereum
Until recently, it was impossible to stake Etherdirectly because Ethereum was a proof-of-work blockchain.But now that it is converting into a proof-of-stake blockchain, Ethereum is also emerging as a top option for crypto staking.
There's a lot to unpack here. There is the blockchain (Ethereum) and there is the native token of the blockchain (Ether). You can think of Ether as the fuel that powers the blockchain. If you want to do anything on the blockchain, you need Ether. And that's especially true with a proof-of-stake blockchain, because Ether is needed to validate transactions. The way you prove you have a stake in the blockchain is by holding as much Ether as possible. So that's why people are now willing to pay you a reward for your Ether -- they need it for their own purposes. Think about the way a bank takes in deposits from customers, pays out a low rate, and then lends that money out to other customers, charging a much higher rate. As a bank customer, you don't really care what the bank does with its money, as long as you get your reward, right?
If you believe in the future of Ethereum, then staking could be a great way to earn passive income on your investment. As noted above, you can make an extra 3% to 5% on top of what you already make with your Ethereum investment. So if you are holding Ether for the long haul, why not stake it?
The only drawback to staking Ethereum is that the rewards you receive are not the highest that you will see on crypto staking platforms. This might sound counterintuitive at first: Why would you want to invest in a low-yielding crypto? But remember the trade-off between risk and reward. The highest yields right now are being offered by the riskiest, most volatile cryptos. Conversely, the lowest yields right now are being offered by the safest, least volatile cryptos. So don't be fooled by exotic cryptos offering sky-high yields -- they are typically offering those yields as a way to entice skeptical investors. For example, Terra (LUNA) was a popular staking coin until it blew up this year, losing 99% of its value.
Cardano and Solana
Cardano and Solana are two other relatively safe crypto staking options. Like Ethereum, they are both proof-of-stake blockchains with popular staking options. In most cases, you can stake them directly from your cryptocurrency exchange of choice, without any need to move them off-exchange to a new wallet or participate in any kind of financial alchemy.
What's important to point out here is that the best staking options for 2022 involve the core building blocks of the crypto world. Ethereum, Cardano, and Solana are all Layer 1 blockchains, meaning that developers are building on top of them and then adding value to them. In a crypto down market, these are the best options for staking because they have the highest likelihood of maintaining their value through any kind of market volatility.
Risk and volatility factors
Risk management is important because when you agree to stake crypto, you are also committing to a certain time frame. In some cases, you might be asked to lock up your crypto for months at a time, if not longer. During this time frame, you are still the owner of the crypto, but you can not sell it. This entails some risk because you will not be able to "unstake" your crypto and then sell it off it until the staking period is over.
During that time, who knows what will happen to the value of your crypto? If the bottom falls out of the market, you might get your crypto back at a very impaired value. Any passive income that you made (no matter how high the yield) will be outweighed by the loss of value of the underlying crypto. So, before you stake, make sure you understand the risks.
That's why the best staking options for 2022 -- a time of considerable volatility in the crypto market -- involve the safest, most liquid cryptos out there. Ethereum, Cardano, and Solana fit this description. They are involved in building the future of the blockchain world, and each of these is a top 10 cryptocurrency by market capitalization.If you are looking to add a little passive income on the side while participating in any upside move, staking could help you boost your portfolio returns. Just be aware of the risks involved.
Dominic Basulto has positions in Cardano and Ethereum. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.
