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Cryptocurrencies are generally notorious for being volatile, i.e., prone to unpredictable changes in value. When crypto is too unstable, it is useless for anything other than speculation or daily transactions. To compromise for crypto instability, a new notion was introduced — stablecoins.
Stablecoins stand for a potentially fruitful fusion of the security and stability of conventional money with the adaptability and decentralization of cryptocurrencies. Though they lack price oscillations, stablecoins may be an equally good investment vehicle as assets such as Bitcoin or Ethereum.
Investors typically trade crypto in order to make money off the coin’s varying worth. However, stablecoins are usually utilized in the opposite manner. Crypto enthusiasts buy stablecoins to avoid the unstable nature typical of cryptocurrencies. Nevertheless, there are ways to profit from stablecoins too. One of them is staking stablecoins.
Table of contents
As mentioned above, the main idea behind stablecoins is to build a virtual currency that will have an unchangeable and stable value over time, much like any other fiat currency. With this in mind, we can define stablecoins as cryptocurrencies whose value is tied to another stable commodity.
Those could be precious metals such as gold or fiat currencies like USD. As the value of the asset changes, so does the value of the stablecoin. Some of the well-known stablecoins include Tether (USDT), TrueUSD (TUSD), Dai (DAI), and Gemini Dollar are some of the most well-known stablecoins (GUSD).
The fact that these “stable” coins, like USDC or USDT, are pegged to another currency, such as the USD or EUR, is one of their primary advantages. This gives you the option to implement stablecoins as a hedge if your assets depreciate and you need to withdraw cash fast. Additionally, they can trade in pairs with other cryptocurrencies like USTC/USDT and many others.
Due to the fact they are stable and unchangeable, their volatility is low. Thus, they are perfect for storing value and completing transactions because they maintain their worth over time.On the other hand, the low volatility of stablecoins makes them less suitable for staking for practical reasons — you won’t benefit from price fluctuations since they’re barely noticeable. While it’s not very common, staking stablecoins is still possible.
Staking is a term you may come across pretty frequently as a crypto enthusiast. In technical terms, staking refers to a consensus mechanism called Proof of Stake (PoS) that blockchains implement to verify crypto transactions. The way PoS is performed allows participants to reap rewards on their crypto holdings. Or, to put it simply, staking is one of the ways to make the most out of your crypto by earning rewards on it.
Staking cryptocurrencies entails using your crypto assets to validate transactions and support a blockchain network. It works with cryptocurrencies that verify transactions by implementing the PoS mechanism. Due to this, it is a great method to increase your investment because it enables you to receive rewards on the cryptocurrencies you already own.
Staking can be a great method to use your coins and tokens to reap passive rewards, particularly as some cryptocurrencies offer high interest rates for staking. But how does staking work?
Without going into technical details, to get into crypto staking you need to register at the best staking platform first. When you do so, you’ll get an opportunity to learn what coins are available for staking. Do note that not all crypto is stakeable. Only those that implement the PoS consensus mechanism are.
Each crypto that you stake has its own APY (annual percentage yield), i.e., the reward you can reap. The APY may vary from, say, 0.5% to 20%, depending on the crypto itself and a staking platform. This APY is added to your balance after a specific period of time determined by the platform — daily, weekly, monthly, etc.
When you stake your coins, you still have possession over them. These staked coins are being put to use, and you are free to unstake them whenever you decide to trade them. Certain cryptocurrencies mandate a minimum staking duration before you can unstake your coins, making the process potentially time-consuming.
Even though stablecoins aren’t prone to price oscillations, being linked to external assets like gold or the US dollar, they can be very advantageous for any trader, particularly during a recession. Such assets’ low volatility in comparison to other cryptocurrencies is their primary deterrent. The fluctuation rate of stablecoins is less than 1%, which makes the stablecoin price forecast very simple.
The primary advantages of stablecoins include:
But how does this apply to staking stablecoins, given that their price always remains the same?
We all love it when the price of our coins or tokens is growing. Unfortunately, as a relatively young asset, crypto is extremely sensitive to external events i.e., anything may and will affect its value and make it decline. This holds true for all cryptocurrencies, regardless of whether they remain idle in your wallet or if you’ve chosen to stake or save them.
Save for stablecoins. No matter what is happening in the market, their value will remain pretty much the same or experience aninsignificant drop. This way, in addition to stablecoin APY, you’ll benefit from an unchanged value of your stakes during a market downturn.
Stablecoin staking carries some intrinsic risks, just like staking any other cryptocurrency.
The first type of risk arises from the coin’s attachment to an underlying asset. Stablecoins are typically more resilient to value changes and less risky than other cryptocurrencies. However, declines in the value of the pegged asset can impact the profits you’ll get from staking the currency.
A second risk comes from the platform where you store and stake your coins. Thoroughly researching the platform beforehand is highly recommended, as there’s always a chance of security breaches like hacks. You should pay close attention to the platform’s security precautions and check to see if they are frequently reviewed.
Another significant factor is liquidity. It might be challenging to sell your accumulated assets if you are staking stablecoins that scarcely have any liquidity on the main exchanges. You might even be unsuccessful in investing your staking profits in well-known assets like Bitcoin or Ethereum. By staking cryptocurrencies that have high liquidity and are posted on well-known exchanges, you can reduce this risk.
To decide what the right stablecoin for you to stake is, you need to understand what makes a good stablecoin. The best stablecoins fundamentally need to be transparent in their holdings. Such stablecoins also need to have a high trading volume in order to function as a liquid means of exchange.
To assess a coin’s stability, you can examine its price history over time and compare it to assets like gold or other hedging options, which are generally considered relatively stable.
These factors collectively provide investors with a dependable basis for the stablecoin’s stability. Investors can trust that the stablecoin is backed by a solid reserve of assets and can be easily exchanged with others.
Last but not least, you would want to consider the annual percentage yield (APY). Logically, the higher it is, the more passive income you will earn.
Some of the stablecoins worth taking into consideration include:
The whole concept of staking is pretty straightforward. However, you should be careful with choosing a staking platform. You should stick to the tried and true platforms for staking crypto. This way you won’t risk your funds and credentials, and you’ll be able to earn a steady passive income.
Some of the platforms worth considering include Binance, Coinbase, Kraken, Gemini, etc. When you have found the one that fits your needs best, follow the steps below to start your staking journey.
You can do several things to increase your passive rewards when staking crypto. First and foremost, ensure that you selected the right stablecoins, that is, those that can be staked. Each type of stablecoin that is available provides a distinct set of benefits. Find the coins that give the best rewards for the level of risk you are willing to accept by doing some research.
Next, you need to be patient. Although it might take some time for your earnings to begin to accumulate, if you have patience and persevere, you will ultimately begin to see some nice passive income coming in.
Lastly, reinvest your profits into your stake placement. Long-term profits increase with the amount of reinvestment you make. You can increase your cryptocurrency staking earnings and benefit from a passive income stream by paying attention to these pointers.
Due to the various occurrences in the USA (the demise of the FTX crypto exchange and the fallout of Silicon Valley Bank, to name a few), the Securities and Exchange Commission (SEC) has been keeping its eye on stablecoins and crypto staking. Moreover, it’s been going after crypto staking by charging Kraken for breaking the law by offering lush rewards for institutional staking.
Regarding stablecoins, the SEC does not recognize the asset as a registered security. On February 13, Paxos Trust Company, which is responsible for issuing BUSD, was ordered to stop producing the BUSD stablecoin. This move raised a commotion within the crypto community.
These events might cast a shadow on staking stablecoins for the time being. For this reason, if you’re considering staking these coins soon, it’s recommended that you keep a watchful eye on how the situation is developing.
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