The Top 6 Do's And Don'ts of Staking
Staking proof-of-stake (PoS) coins has become a popular way for crypto investors to earn investment income on their digital asset holdings. However, staking is not an easy feat for beginners due to the pitfalls that the uninformed could fall into.
In this guide, you will discover the most important do’s and dont’s of staking to help you get crypto staking right from the start.
What is staking?
In the cryptoasset markets, staking refers to providing a digital currency or token as a stake in a PoS network (Tezos, Cosmos, Decred, etc.) to play a role in the integrity and security of a blockchain. In exchange for this service, stakers are rewarded in newly minted coins.
Therefore, from an investor’s point of view, “HODLing” and staking PoS coins is somewhat akin to investing in fixed income securities, such as bonds. Stakers are effectively earning interest on their holdings in the form of more of the digital asset they are staking.
- Choose the right asset(s)
- Understand the technical requirements
- Understand that market risk affects your expected returns
Choose the right asset(s)
When making the decision to stake crypto, it is important to choose the right asset or assets to stake. Like with any other investment, you need to conduct thorough research on the assets you would like to hold to stake.
It is advisable to look at factors such as market capitalization and trading volume (to gauge liquidity), historic price development, size and quality of the developer team or community, track record in meeting roadmap milestones, how the project fares against competitors, etc.
As a general rule of thumb, should the asset you would like to stake not meet your standard digital asset investment criteria, then it is probably better not to stake the asset.
Understand the technical requirements
While the general concept of staking is the same for every PoS coin, the actual staking process differs from blockchain to blockchain. As a result, it is important to fully understand the technical requirements and process involved in the digital asset you would like to stake.
Should the technical requirements of the asset you would like to stake be too challenging for you, then maybe it would be a better option to choose an easier-to-stake asset.
Understand that market risk affects your expected returns
Looking at expected annual staking yields, you may assume that these annual returns are fixed. However, that is not the case (in dollar terms) as the value of non-pegged digital assets fluctuates quite substantially.
It is, therefore, imperative to have a strong long-term conviction on the asset that you intend to stake because you will lose money if the value of the asset drops significantly and struggles to recover - even if you are earning “interest” in the form of new coins.
- Don’t choose assets purely on expected ROI (return on investment)
- Don’t lock up coins in staking that you need to be able to sell quickly
- Don’t invest more in staking that you can afford to lose
Don’t choose assets purely on expected ROI
It is tempted to choose the asset you will stake by ranking coins by their expected annual percentage ROIs on platforms, such as StakingRewards.com or Combatnerd.com. However, by choosing assets to stake purely based on expected returns you are likely to end up losing money.
Many of the highest-yielding PoS coins have next to no liquidity and very small market capitalizations, which means it might be very difficult to sell your coins at a reasonable level once you decide to take profit. Moreover, these small capitalization coins are very susceptible to market manipulation.
It is, therefore, important to choose assets based on a number of factors and not purely on expected annual staking yield.
Don’t lock up coins in staking that you need to be able to sell quickly
Several stakable assets come with lock-up periods during which the staker cannot sell his or her coins. Therefore, it is advisable not to stake coins that you need to (or want to) be able to sell quickly.
Staking is really meant for asset that you intend to “HODL.” Therefore, you should be able to keep these coins or tokens locked up as your stake for a long period of time - ideally, several years.
Don’t invest more than you can afford to lose
Regardless of whether you are investing in bitcoin or stakable cryptoassets, you would never invest more than you can afford to lose. Cryptographic assets are a highly volatile asset class where it is not uncommon for a holding to drop by 50% in value or more in a matter of months (or even days).
Therefore, it is advisable only to put an amount of fund at risk that you would be comfortable to lose - if the worst case scenario would occur.
A word on “soft staking”
Staking generally involves running a machine 24 hours a day, 7 days a week. Since that can be challenging for small investors, many opt for exchange staking or the use of a specialist staking-as-a-service provider.
While so-called “soft staking” provides an easy entry to staking and alleviate any of the technicalities of staking cryptocurrency, fees (in most cases) will eat into your staking returns and there is always a risk of loss of funds as you are not holding the private keys to your assets. Third-party staking services, therefore, need to be used with care.