The more we talk about cryptocurrency the more we come across unexplained terms. One such term is crypto staking. Have you caught yourself wondering what is staking in crypto? Continue reading to find out what crypto staking is and what are the basic rules and principles one should follow while doing it.
What Is Crypto Staking?
Proof-of-stake (PoS) coin staking has grown in popularity as a method for cryptocurrency investors to generate investment income from their ownership of digital assets. However, owing to the difficulties that the uninitiated might encounter, staking is not a simple task for newbies.
Staking in the context of the crypto asset markets refers to the placement of a stake in a PoS network to contribute to the integrity and security of a blockchain. Staker rewards come in the form of recently produced coins in return for their services. As a result, “HODLing” and staking PoS coins is comparable to investing in fixed income assets like bonds from the perspective of an investor. Stakers essentially get more of the digital asset they are staking as interest on their investment.
The Do’s And Don’ts Of Crypto Staking; For Beginners
Before you start making any investment decisions, here’s what you should do :
- Understand the market thoroughly, understand what will affect your expected returns and make decisions in accordance to that
- Understand the technical know how
- Choose the right type of asset
Consider market capitalization and trading volume (to evaluate liquidity), historical price development, the size and quality of the developer team or community, track record of reaching roadmap goals, how the project compares to rivals, and so on. As a general rule, if the asset you want to stake does not fit your typical digital asset investing criteria, it is usually best not to stake the asset.
While the underlying notion of staking is the same for all PoS coins, the actual staking mechanism varies for each blockchain. As a consequence, it is critical to comprehend the technical needs and procedures involved in the digital asset you want to stake. If the technical requirements of the asset you want to stake are too difficult for you, it would be a better idea to pick an easier-to-stake asset.
When looking at predicted yearly staking yields, you could think that these returns are fixed. However, this is not the case (in terms of dollars), since the value of non-pegged digital assets swings significantly. As a result, it is critical to have a strong long-term belief in the asset that you want to stake since you will lose money if the asset’s value declines dramatically and fails to recover – even if you are getting “interest” in the form of new coins.
What Not To Do :
- It is tempting to pick your asset by rating coins based on their predicted yearly % ROIs on services. However, if you choose assets to bet only on predicted returns, you are likely to lose money.
- Many of the highest-yielding PoS currencies have little liquidity and extremely modest market capitalizations, making it difficult to sell your coins at a fair price after you’ve decided to profit. Furthermore, these small-capitalization coins are very vulnerable to market manipulation.
- As a result, it is critical to choose assets based on a variety of characteristics rather than only on predicted annual staking yield.
- Several stackable assets have lock-up times when the staker is unable to sell their coins. It is thus advised to avoid staking coins that you need (or want) to be able to swiftly sell.
- Staking should only be done with assets that you plan to “HODL.” In light of this, you need to be able to store your stake of money or tokens securely for a long time—ideally, many years.
- You should never invest more than you can afford to lose, whether you’re buying bitcoin or other tradable crypto assets. In the extremely volatile asset class of cryptographic assets, it’s not unusual for a holding to lose 50% or more of its value in a matter of months (or even days). Therefore, it is advised to only risk an amount of money that, in the worst case situation, you would be willing to lose.
Cryptocurrency is a vast topic and the rules are constantly changing. It’s best to keep yourself up to date with crypto blogs so you can make the best decisions and grow your profits.