Staking: What it is and how it gets your crypto to work for you
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If central banks both in Australia and around the world are to be believed, we’re going to be in a low-yield environment for years to come.
A look at the Commonwealth Bank’s saver account rates show you’ll get a standard variable rate of just 0.05 per cent.
Historically low interest rates are the most cited reason for the strange economic times we live in: rising equities values, rising real estate and rising digital asset values too, despite the impact of the pandemic.
What’s clear is that right now there’s a drive to get out of cash and into assets that can create a return, even a modest one, whilst retaining their value over the long term. For houses, that’s a case of renting out the property; in equities this is dividends and a robust business plan. But what about those of us who have taken the plunge with cryptocurrency?
The vast majority of investors hold cryptocurrency as a ‘hedge’ against inflation – usually around 10% of a portfolio in the two largest digital assets: Bitcoin (BTC) and Ethereum (ETH).
The plan is often to ‘buy and hold’, to let crypto’s asset appreciation do its work over time, much like physical gold or a growth stock in the equities markets.
However, there are also ways to get your crypto investment actively working for you to grow your wealth without risking the principal investment. One of the safest, easiest options is a process called ‘staking’. It allows you to nominate your portfolio to be used by the exchange (in our case, Kraken) for staking in exchange for rewards. These rewards can go anywhere from 0.25% per year all the way up to 17% per year, depending on the cryptocurrency you are staking.
Compare that to 0.05% and even the worst staking rate is multiple times better than a cash savings account.
So what exactly is staking? In a nutshell, staking lets you utilise your crypto to help validate transactions and the rules of a cryptocurrency network; it does this by delegating the funds to ‘validator nodes’, which are similar to Bitcoin miners. However, these cryptocurrencies use an alternative mechanism to Bitcoin, proof-of-stake, for securing the network and creating valid blocks in the blockchain.
This mechanism doesn’t consume vast amounts of electricity in the same way that Bitcoin does. As a reward for this service, the network distributes newly created coins in each block to validators and the stakers they represent.
Kraken operates a world-class staking program with competitive reward rates as high as 17% and the ability to instantly stake/unstake for select cryptocurrencies.
The effect of safely earning 5% per annum on a popular digital asset like ETH is getting a serious amount of attention from investors, even those that don’t fully buy into the hype-machine.
In the low-yield environment we find ourselves in today, your money has to be out there doing work for you.
This article was developed in collaboration with Kraken, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.