Generally speaking, staking cryptocurrencies is the process of locking up the crypto-assets you possess with the purpose to earn interest or receive other rewards (like voting rights, etc.). It allows you to earn these rewards depending on the amount you have staked, and how much and what kind of rewards are being distributed to the specific staking pool you joined. Most crypto exchanges and platforms, which offer to stake rewards typically distribute payments in the same cryptocurrency on a regular schedule, resulting in an annual interest rate from 3% to 15% (or even more).
The way staking your digital tokens can earn you the above-mentioned rewards is because the respective blockchain puts it to work by validating new transactions and increasing the security of its blockchain network. You must remember however that you will lose access to your staked assets during the staking period you will commit to.
Crypto-assets eligible for staking
Still, not all cryptocurrencies allow staking in a classical sense. In a nutshell – there are two “consensus mechanisms” for approving and recording transactions used in the crypto-universe: Proof of Work (PoW) or Proof of Stake (PoS). Only the latter allows for staking in the standard way we defined above. This group of cryptocurrencies consists of the “younger” generation digital tokens like ETH2, Tezos, Cardano, Solana, BNB, Cosmos, Polygon, etc. The reason here is that the PoS decision-making model ensures that all transactions are verified and secured without a bank or payment processor in the middle.
Now the PoW model is the traditional “old” model where it all started, which is based on mining. It is the “consensus mechanism” on which also the most famous crypto – Bitcoin (BTC) has been established. PoW requires solving complex problems by miners using high-powered computers. The first miner to complete the puzzle or cryptographic equation gets the authority to add new blocks to the blockchain for transactions. When the block is authenticated by a miner, the digital currency is then added to the blockchain. The miner also receives compensation in digital coins.
Related risks – Pros and Cons
Staking is a good option for investors interested in generating yields on their long-term investments, who are not bothered by short-term fluctuations in cryptocurrency prices. Still, if you might need your money back before the staking period ends, you should avoid locking it up for staking.
Additionally, while staking your digital tokens you should remember that like any other investment, staking crypto-assets carries a risk of partial or complete losses. Therefore, you should consider taking your holdings of cryptocurrencies up to an amount, which you can afford to lose.
Wrapping up the pros and cons of the staking:
- Additional and potentially high-interest rates earned on top of expected capital appreciation
- Further simulating long-term investors to keep their money in specific crypto assets by locking the amount for a specific time
- As the demand rises the expected interest earned on staked crypto assets may rise as well
- The high return always comes with a higher risk
- You have to lock the amount you stake and it can’t be liquidated
- Potential loss of the crypto value vanishing the additional interest earned
- Cyber security and risk of malicious attacks
How to stake Bitcoin though?
As discussed before, not all platforms are providing access for staking Bitcoin specifically, for the reasons discussed previously. Nevertheless, certain crypto brokerages are enabling users to earn interest on their Bitcoin holdings which is a kind of staking but not entirely the same. Some of these alternative platforms are:
You will need to open an account with these brokerages and transfer your BTC holdings, or purchase BTC directly in these platforms after funding your account. We will take the example of Crypto.com – one of the famous and large crypto brokerages worldwide to go through the account opening and staking process. Most of the crypto brokerages have similar procedures when it comes to opening up an account so this should not differ much for other platforms.
Crypto.com application is available both for IOS and Android devices so you will need to download the application on your smartphone to be able to open up an account. Once downloaded, open the app and click on the “Create New Account” button. You will be asked to enter your email address and verify that you are not a bot. You should then receive a verification email at the email address provided.
After that, you will be asked to provide further personal details which are usually required by regulators such as i.e. your first and last names. The app will then ask you to let it access your camera in order to take a picture of your passport or ID. Once you scan your ID then it will ask you to take a selfie to identify that the data provided is accurate and it belongs to you. Afterward, the app will take some time to verify your data provided which may take up to 24 hours but it usually takes less than that.
Once your details are verified, you will be asked to provide a passcode for using the application and confirm it by providing it for a second time. Then you will be prompted to choose the payment currency to fund your account. Afterward, you should see the home page of the application.
You will need to click on the deposit button to fund the account by either transferring from another crypto wallet or depositing from your traditional bank account. Once your account is financed you can go to the Account tab at the bottom of the page and click on the option “Crypto Earn”. Once there you can scroll down and at the bottom of the page, you will see a button that says “Start Earning Now” once you click on that a new option will pop up where you can choose from the list of crypto assets. Bitcoin is one of those so choose it from the list of available assets on which you can earn interest. Once there it will ask you to choose how long you want to hold your Bitcoin – the longer you choose usually the higher the interest per annum. You will be asked to accept the terms and agreement and will need to choose the amount of Bitcoin you are willing to lock to earn interest. Remember that during the period of the deposit you will not be able to withdraw your Bitcoin unless you choose a flexible term option which usually comes with lower interest per year.
Platforms for staking other crypto assets
According to the Forbes Advisor, other solid platforms (rated: up to down) for staking crypto-assets based on Proof of Stake are:
Bitcoin Staking Tax
Taxes on interest earned from Bitcoin may vary by country. Most of the tax jurisdictions have either applied the same rates as for capital gains and interest earned on traditional financial products to crypto assets or government and regulatory authorities in certain countries came up with specific tax rates for the crypto gains.
You will need to consult with a tax adviser or do your own research as the taxes may vary on a case-by-case basis, however, we can expect that taxes on the interest earned on Bitcoin should be more or less treated similarly as the interest-bearing assets such as bank deposits, bond investments or person to person lending platforms.
Usually, some large consulting companies provide presentations about the country’s taxes that may be publicly available. You can use this source to get a general understanding of the crypto tax environment. However, if you want to optimize your taxes and identify certain areas where you can reduce or defer the taxes then I would highly recommend consulting with a local tax adviser who will analyse your case and provide further recommendations on how to make your tax reporting more efficient.
Why do people like Staking Bitcoin
Bitcoin is also known as the “father” of crypto assets given it was one of the first cryptos that were introduced to the mass public. Many people believe that Bitcoin is the gold of crypto assets and hence they invest in it with the goal of long-term capital appreciation. But some people invest in it for daily trading with the hope of short-term gains.
Staking is not for people who are there to simulate on Bitcoin and earn on the short-term price increase. It is rather for those investors who have a goal of long-term capital appreciation who might use the staking or rather earning interest on Bitcoin with platforms mentioned above. This would increase the return on investment by providing further gains on top of potential capital appreciation which is why those long-term investors like to stake their Bitcoin holdings.
In this article, we covered the difference between proof of stake and proof of work, and the reasons why one enables investors to stake and the other fails to do so. Based on that explanation we explained why Bitcoin cannot be staked with major crypto brokerage platforms. However, we also covered alternative platforms where you can earn interest on your Bitcoin holdings which is quite similar to the staking concept. We also covered how to open an account with those alternative platforms.
Although the additional returns might be attractive, the process of staking crypto or earning additional interest still comes with high risk as does the overall investment in crypto assets. You might consider carefully the risks and understand whether you can bear such risk of losing the value of your entire investment in crypto before deciding to open an account with these brokerages.
Bitcoin Staking FAQ’s
- How can I stake Bitcoin?
As discussed before Bitcoin is not part of the proof of stake concept, but rather proof of work which makes it impossible to stake. However, you can still earn interest on your Bitcoin holdings through additional platforms covered in this article.
- How much interest can I earn on Bitcoin through these platforms?
The annual interest varies depending on the demand and supply of that crypto asset at a given time. You can expect to earn between 3-15% per year depending on the demand for the Bitcoin interest on the alternative platforms.
- What are the main benefits of earning interest on Bitcoin?
The main benefit of the interest earned on the Bitcoin is the additional yield received on top of potential capital gains or it might also work as a cover for part of your capital losses.
- What are the key risks associated with the interest accounts on Bitcoin?
As with any type of investment, putting your money in Bitcoin or BTC interest-bearing account comes with a significant risk of losing part or the entire value of your investment. Other risks that can be considered as well are the cyber security risk that may wipe out your investments in crypto assets.
- What are some of the alternative platforms that allow you to earn interest on Bitcoin?
In this article, we have covered three alternative brokerages that you can use to earn interest on your Bitcoin holdings. At the same time, the article goes through the process step by step on how to open an account with one of these alternative platforms.
- What are taxes applied on earning interest on Bitcoin?
Applicable taxes are different based on your tax residence and they can even diverge for people within the same tax jurisdiction since each individual may have certain tax thresholds applicable. Usually, taxes applied on interest earned through crypto are similar to the taxes earned on fixed-income instruments such as term deposits or bonds. However, you need to consult your tax adviser to gain further information about taxes that are applicable in your specific case.
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