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Crypto Staking: A Run Down
Investors are always looking to grow their portfolio and earn passive income. One innovative and unique option available to them is through Crypto staking.
An Overview on Staking
Crypto Staking is locking up a particular portion of your cryptocurrency and in turn receiving rewards, these rewards are usually in the form of but not limited to the ‘staked’ cryptocurrency coin.
Essentially both parties benefit from this, from the investors perspective they will see this like a bank, they will store money (cryptocurrency) and over time accumulate interest (receive rewards) for doing so.
From the side that’s paying out the rewards (usually the cryptocurrency itself) they will benefit as:
- The token value will go up with individuals locking up their coins as there will be a limited and reduced circulating supply in the market.
- The tokens being locked up can be used to govern the blockchain if the network uses a proof-of-stake (POS) system.
Staking has become far less complicated and is now made easy for the everyday person to participate. Generally, the rewards received from staking is proportional to the amount of cryptocurrency you lock up, the time frame and whether you select to lock up your tokens for a fixed period or have them unlocked to be flexible.
If you choose a flexible option, it means that at any point you can withdraw your amount being staked. It goes without saying that the rewards are much higher with a fixed or ‘lock up’ option. However, given the volatility of the crypto market and the price fluctuations of various crypto assets, fixed options may be riskier and in turn a bigger incentive is required to incentivise investors.
Which Cryptocurrency Tokens Can I Stake?
If you’re already planning on holding certain coins for the long term, it’s worth considering staking them so as to receive a reward during the timeframe that you are holding them. Regardless of the price change this could passively grow your portfolio. A few examples of coins that can be staked are Ethereum (ETH), Cardano (ADA) and Solana (SOL). Please note that when staking these coins each of them have a different process to follow with some of them requiring more technical knowledge on staking than others.
- Lock up periods
Not all staking gives you the flexible option, some are only fixed and given the general volatility of the market this is a huge factor to consider before staking.
- Rewards rate
There are some cryptocurrency coins with very high reward rates, however they state that these rewards will only be accessible in 12 months to 24 months. So essentially you will only receive the token rewards in a year or two. This could be problematic if the price of the coin falls at a higher rate than the rewards you will eventually receive. Additionally, rates may fluctuate along with the token price.
Some staking options on coins incur additional fees which the investor has to pay. Generally speaking the fee is a percentage of the rewards for staking however this may not always be the case.
Staking can be an effective way to passively grow your portfolio especially for investors who are already planning on holding the cryptocurrencies already and additionally ‘put them to work’ as some might say.
Crypto staking offers many opportunities, but comes with added complexity & tax considerations. At Fullstack, we have a seasoned team of experts that offer intricate tax advisory and crypto tax returns. Reach out to us here.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.