As more cryptocurrencies move to a proof of stake (PoS) method of verifying transactions, the term “staking” is thrown around more often. Many crypto investors have the option to stake their holdings for a chance to earn rewards, which could generate a source of passive income.
What exactly is staking though, and should you do it? While staking can be a smart opportunity to increase your earnings with crypto, it’s not right for everyone. Here’s what you need to know before you decide whether staking is a good move for you.
What is staking?
Under a PoS protocol, transactions are verified through the process of staking. Investors pledge their coins for a chance to become a validator, and the more coins you pledge, the more chances you have to win. Those are chosen as validators will win more coins to add to their portfolios.
When you stake your coins, they’re still in your possession. In other words, if you’re not chosen as a validator, you won’t lose your investment. You’re also free to un-stake your coins if you want to sell or trade them, but some cryptocurrencies do require that you stake your coins for a minimum amount of time first.
Staking can be an easy way to earn interest on your crypto investments, and you don’t need any expensive equipment to get started — unlike crypto mining under a proof of work (PoW) protocol, which requires a powerful computer.
How to get started
The first thing you’ll need to do is double-check that your crypto investments use a PoS protocol. Some of the most popular cryptocurrencies that allow staking include Ethereum (CRYPTO:ETH), Cardano (CRYPTO:ADA), and Solana (CRYPTO:SOL).
Some crypto exchanges, such as Coinbase (NASDAQ:COIN) and Gemini, have their own staking programs, which allow investors to stake their holdings through the exchange itself. This is the easiest way to get started, and you may be able to begin staking in just a few minutes.
If your exchange doesn’t have this type of program, you may need to transfer your funds to a blockchain wallet, or crypto wallet. From here, you can join a staking pool, where many users combine their coins to increase their chances of winning. This method results in smaller earnings than if you stake alone, since the earnings are split several ways, but you’re also more likely to win when you join forces with other stakers.
Is staking right for you?
Staking may sound complex and confusing, but it’s not as difficult as it might seem. If you have the option to stake through your crypto exchange, it’s similar to earning interest on your money in a savings account.
For long-term investors, staking can be a smart way to increase your earnings. If you’re planning on keeping your money invested for many years, you might as well put your investments to work during that time.
The key to successful staking, however, is to choose the right cryptocurrency. In order to generate passive income, the crypto itself needs to succeed. Rather than choosing your investment based on staking alone, then, focus on buying the cryptocurrency with the most long-term potential.
Of course, no cryptocurrency is guaranteed to succeed. But there are some investments, such as Ethereum, that are leaders in the crypto space and have the most potential to grow over time. Just keep in mind that there are no promises when it comes to crypto, so be careful not to invest more than you can afford to lose.
Staking can be a smart way to make the most of your crypto holdings, but be sure you’re choosing your investments carefully. With the right strategy, you could grow your portfolio and maximize your earnings.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.