With market capitalization reaching a record $3-trillion last year, crypto investing rocketed closer to mass adoption. Now, more conservative investors are rushing to get involved with Crypto staking and lending, as it rides a multi-billion dollar wave.
While the early attraction of thrill-seeking investors in crypto stemmed from the chance to make millions off a sudden rise in some obscure coin’s value, these new, lower-risk crypto concepts have the potential to expand the pool to more conservative investors – if they don't wait!
With lending and staking, it’s possible to make money, regardless of appreciation. In just a few clicks, you can start earning 5%, 10%, 20%, or potentially even more on your crypto investments.
A Quick Primer
If you’re already well-versed in cryptocurrency, you can skip down to the next section. But because there is still so much confusion and misinformation, let’s define a few terms for the uninitiated.
Cryptocurrency is a virtual or digital currency. Until 2009, most of the world’s currency was what is referred to as ‘fiat money.’ At one time, currency was tied directly to physical assets, like gold.
Following the Great Depression, the value of the United States dollar has been defined by the nation’s economic outlook and of course, the promise that all U.S. currency is “backed by the full faith of the United States government.”
Cryptocurrency, or just Crypto, aims to avoid an institutional or governmental “middleman” by “decentralizing” money – giving the power back to the people. This decentralization can make the transfer of value between parties easier, reduce the costs of said transfers, and also reduce potential corruption by the middlemen.
Blockchain is the technology that allows Crypto to do all this. To put it simply, blockchain is the database that proves the value of Crypto by maintaining a record of transactions in the cloud, in a decentralized manner, accessible by all and alterable by none.
Bitcoin is almost synonymous with Crypto. Technically, bitcoin is just one form of virtual currency but has become a ubiquitous term for cryptocurrency in general.
Admittedly the whole concept can be very confusing because cryptocurrency can be both tradable assets while also simultaneously being a utility for keeping a record of its own value.
Additionally, in the last 10 years, as the value of blockchain technology has been recognized, new blockchains have been created to better facilitate a wide variety of activities. Ethereum, Cardano, and Solana are new versions of blockchain technology that have more functionality than bitcoin and are cheaper to operate.
Beyond that, companies are creating tradeable coins of their own organizations (similar to stock) which trade on these blockchains. And we are now turning artwork, collectibles, and other items into coins called NFTs(non-fungible tokens) that also trade on these blockchains.
The opportunities to utilize blockchain technology seem very far-reaching and will usher in a host of new companies, technology, and practices. Just like the dot com era of the late 90’s.
All that said, in this article, we refer to token rewards as a yield on the tokens you own – similar to getting a dividend on shares you own of a publicly-traded company. But it's not a profit share, it's a form of compensation you get for lending your tokens back to the blockchain administrators for use on the blockchain.
What Are Lending and Staking?
In short, crypto lending entails leasing out your crypto to human borrowers in exchange for interest.
In contrast, crypto staking leases out your crypto to the blockchain for token rewards.
Let’s look at just how well adopted this earning approach has become.
Last month Genesis, the largest institutional crypto lender in the industry, released their Q4 findings. According to the Genesis Q4 2021 Market Observations Report, loan originations reached $50 billion, up 40% over Q3 2021. Additionally, loan originations for 2021 totaled $131 billion, nearly 7x higher than 2020.
Furthermore, according to DeFi pulse, $39.92 billion is currently locked in lending, up from only $8.9 billion two years ago.
Over the past year, staking has gone gangbusters as well. The 2021 4th quarter report from Staked about the state of the staking market calibrates the growth.
Staked announced that the overall market cap of PoS protocols now accounts for over 30% of crypto’s total market cap, an increase of 127% over last year. Thanks to the growth of the more eco-friendly PoS coins, Staked reports, “Annualized staking rewards increased by a stunning 939% to $14.7 billion. Investors would need to buy $860 billion worth of 10-year treasury bills to earn a similar return.”
Of course, investments in the crypto market are risky, partly due to high price volatility. But, the recent rise of “stablecoins” could remedy that risk. This crypto category focuses on price stability by pegging the coins to a currency like the dollar and has made staking and lending much lower risk for investors.
Both crypto staking and crypto lending offer a way for crypto investors to profit off their holdings passively as well as generate cash flow.
More About Crypto Lending
Crypto lending involves leasing your cryptocurrency out to borrowers via specific platforms. The platforms charge interest on the amount lent and pay a portion of their earnings to you. These loans are secured using the borrower’s crypto.
Although crypto lending has inherent risk, the platforms reward you. For example, according to Barron's website, “Lending Bitcoin can generate annualized yields from 3% to 8%.” The return on smaller alt-coins can reach double digits.
You can also lend out stablecoins like USDC and USDT for attractive rates without the volatility of the currency itself. Sometimes as high as 12%. These returns are much more than the typical 0.5% that regular banks pay on savings accounts.
One advantage lending has over staking is choosing how long your coins are tied up. The term length for lending out your crypto generally ranges from one to ninety days.
More About Crypto Staking
Staking involves committing your tokens for use by the blockchain. Stakes are necessary for the network’s security infrastructure, and therefore participants are compensated with more of the coin they are staking.
Crypto staking usually happens in 30-day intervals, in which you commit your coins. You could compare it to earning interest from a CD (certificate of deposit), but with a more favorable rate!
An alternative called “liquid staking” is now coming online as well. This method, also known as “soft staking,” allows you to access your funds even while you're staking them. So it’s the best of both worlds.
Is It Safe To Lend or Stake Your Coins?
The dangers of crypto lending include loan default, coin volatility, exchange security, and changing crypto regulations. In addition, state regulators have been pressuring many crypto lending platforms over concerns that specific lending methods constitute “offering of unlicensed securities.”
While staking does not have as many regulatory concerns as lending, there is still the risk of volatility. For example, if a coin rises or drops severely while being staked, you don't have the power to make transactions with it.
For these reasons, it's essential to make sure the crypto platforms you utilize are well-established and centralized. It is also best to use a platform that carries a license in your country.
Platforms To Lend and Stake On
If you're interested in crypto lending or staking, you'll likely want to know some platforms where you can lend and stake. Here are some of them:
- Coinbase – On the main Coinbase app or through the Coinbase website, you can stake Tezos, Cosmos, or ETH and earn up to 5%. If you want to lend your crypto, you can also use their Coinbase Wallet to do so or earn 4% APY on your USDC.
- Gemini – By lending out your crypto to certain financial institutions, Gemini gives you the option to earn up to 8% APY on your crypto holdings. The feature is called Gemini Earn, and you receive interest daily (starting at 4 pm the next business day after you deposit your funds).
- Binance – With Binance Earn, you can lend, stake, or even pool your cryptocurrency holdings to earn passive income.
- KuCoin – Lending on KuCoin is built directly into the platform, allowing you to earn up to 25% APY on your coins. You can also do something called soft staking on KuCoin, where you receive staking rewards without ever needing to lock up your funds.
- Crypto.com – You can both stake and lend with Crypto.com. Crypto lending occurs through their Crypto Earn feature, and staking can be done directly from the app.
- Celsius – Since its founding in 2017, Celsius has grown to become one of the world's most extensive crypto borrowing, lending, and earning platforms.
- Kraken – Earn rewards on Kraken via crypto staking. As of now, Kraken offers crypto staking for over ten different cryptocurrencies.
Crypto as Part of the Financial Planning Process
Crypto lending and crypto staking are new ways to earn on your crypto holdings. These revenue streams offer a lot of potential for gain with the corresponding risk.
However, it should only be one element in your overall financial planning process.
Still, when approached with caution and reasonable expectations, both crypto lending and crypto staking can help make your money work for you.
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Featured Image Credit: Pexels.
Joe DiSanto is a fractional CFO and consultant for small businesses and high-income individuals. Throughout his career in Los Angeles, he built multi-million dollar businesses, produced critically acclaimed documentaries and an Emmy-winning TV show, invested millions in real estate, and was semi-retired at age 43. He now helps others achieve their career and wealth goals by sharing a lifetime of fiscal know-how via his website, Play Louder (https://www.playlouder.com/).