As the cryptocurrency industry continues to evolve, staking has become a popular and important part of the entire ecosystem. Staking is a way to earn crypto returns by providing your holdings to the Proof of Stake network.
Essentially, you are putting your crypto to work and getting rewarded for it.
Staking crypto is not generally viewed upon as extremely risky, however, during the time of staking, if you cannot move or trade your crypto and the value of it decreases, then you will experience impermanent loss.
Crypto staking is a great way in which these blockchain protocols incentivize traders to hold onto their crypto and earn rewards for doing so. But again, staking is not without its risks.
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Can You Lose Money Staking Crypto?
Absolutely! Even in the crypto world, there is rarely such a thing as risk-free money.
There are several risks you should know about before you commit to staking your crypto holdings. The first thing is that anything is possible in the crypto markets. And a black swan, a risk that no one sees coming, is completely possible.
We’ve all seen projects go to zero or get rug pulled overnight. So as I always advise on with crypto, only risk as much as you are willing to lose and don’t invest in sketchy coins. They rarely, rarely provide long term value or returns.
Another risk with crypto staking is a fall in value of the underlying asset.
For example, if you stake Ethereum on Coinbase at $3,500 per token and while you are staked the value of Ethereum falls to $2,500, then you’ve lost $1,000 while staking your ETH (on paper). Of course, the amount of ETH you have doesn’t change, so this risk depends on how much you value your crypto holdings against fiat currencies.
For example, if you have 1 ETH at $3,500 and the value of 1 ETH drops to $2,500 (whoof!) then you’ll only be able to trade that 1 ETH for $2,500 but it is still 1 ETH. So if you use ETH to buy something like an NFT, regardless of what the trade in value of 1 ETH is to your fiat currency (USD, CDN, etc), you’ll still be able to afford a NFT worth 1 ETH.
What Exactly is Staking Crypto?
You’ll notice that only a few different types of cryptocurrencies have the ability to be staked.
Bitcoin, for example, does not offer staking because it is built on a Proof of Work system. Proof of Stake is a different consensus mechanism altogether that relies on users to stake their crypto to add new blocks to the blockchain. Staking is an extremely important part of validating the network and ensuring the legitimacy of the blockchain.
Proof of Stake also solves a couple of problems that have recently arisen about cryptos. For one, it eliminates a lot of the power usage that comes from computers solving puzzles, or cryptos if you will, in a Proof of Work network. It also lowers the fees that take place every time you want to make a transaction on a network.
That is the technical definition of staking crypto. For crypto investors, it provides an opportunity to potentially make some rewards on crypto you already own, similar to a dividend return. The best part of it is that you earn back more crypto, which has the potential to offset some of the potential losses you might suffer while your crypto is staked.
Recommended Reading: Why the Heck is Bitcoin so Popular?
Is Staking Crypto Profitable?
Yes, staking is one of the best ways to earn a profit from cryptocurrencies. You can sometimes find staking returns of 10-20%, which is much higher than any returns you would see from a traditional banking system. It is the crypto equivalent of a high interest savings account, but with a much higher APY.
Crypto staking is a form of passive income, as you really don’t have to do much other than stake your original investment. Instead of just having your crypto sitting in a digital wallet, staking it provides utility to the broader blockchain network, and can really reward you with some handsome returns.
Which Cryptos Can I Stake?
Ethereum is going to be the big one in the staking world. The crypto has the second largest market cap, and is the crypto with the highest utility in terms of DeFi and dApps. Earning rewards when staking your ETH is a bonus to holding one of the blue-chip crypto tokens on the market.
There is a long list of other cryptos that you can stake including Terra, Polkadot, Polygon, Algorand, Solana or Avalanche. Check any staking offers on the major crypto exchanges as you should be able to shop around to find the best rate of returns for staking.
Can I Stake on Coinbase?
Yes! Coinbase offers staking for several Proof of Stake protocols including Ethereum, Tezos, and Cosmos. If you stake your crypto on Coinbase you can earn an APY of up to 5% on your staked investment. It’s not the highest APY in the industry, but given how many retail traders use Coinbase, it is an easy way to earn some additional returns.
As I talk about in my article here, Coinbase is a very safe platform and offers the ability to stake some stable coins, which are crypto tokens that are pegged to a particular asset or currency. Users can earn 0.15% on staked stable coins like USD Coin or DAI. These two stable coins are pegged to the US dollar and while the 0.15% isn’t much, it still beats a majority of traditional bank accounts (sad, I know).
UnFun Fact: Unfortunately, you can not stake Cardano on Coinbase.
Other Ways to Lose Money Staking Crypto
There are other ways where you can potentially lose some money while staking your crypto. One that we haven’t discussed yet is that with staking there is often a lockup period where you cannot access the crypto you have staked. If you unstake your crypto before the lockup period expires, the platform will likely penalize you for the rewards you already made.
The downfall with this is that if the value of your staked crypto plummets during this period, you don’t really have a way to liquidate your position. If you do, you can actually risk losing all of your staked rewards.
So if this does happen, you’ll probably want to balance which outcome results in the smallest amount of lost value to your crypto portfolio.
Conclusion: Can You Lose Money Staking Crypto?
Crypto staking is an awesome way to gain some passive income on your crypto investments. If you are looking to start staking, head to one of the larger, more trusted exchanges like Coinbase where you can earn up to 5.0%.
Of course, staking doesn’t come without its risks, but if you are serious about your crypto investing, it is certainly worth checking out!
Geek, out.
