Where to Earn Interest in Crypto
Investors can stake crypto through a crypto exchange or their crypto wallets. The yield investors can expect from their staked cryptocurrency varies depending on which crypto they stake and which platform they use.
Gemini, KuCoin, Kraken and Coinbase (COIN) are among some of the most popular crypto exchanges for staking.
For example, Coinbase currently advertises an annual percentage yield (APY) of up to 5.75% for staking cryptocurrency, including 3.675% for Ethereum and 2.6% for Cardano.
Crypto investors also have various choices to earn interest on crypto lending, although the market is somewhat chaotic for crypto lending platforms at the moment.
According to current Crypto.com interest rates, investors can earn up to 14.5% APY in their Crypto Earn accounts, including 6% APY on Bitcoin (BTC) and Ethereum (ETH), as of this writing.
Unfortunately, popular crypto lending platforms like Voyager Digital, BlockFi and Celsius have recently been forced to freeze customers’ assets as they deal with liquidity crises associated with the recent crypto winter.
Some of the latest implosions include Voyager Digital, which recently filed for Chapter 11 bankruptcy protection, and BlockFi, which is in the hot seat after a large client failed to meet a margin call on an overcollateralized loan.
Is Staking Safer than Crypto Lending?
Dan Ashmore, cryptocurrency data analyst at CoinJournal, says many crypto lenders have acted more like high-risk hedge funds than banks by gambling with their deposits.
“With the lack of regulation in the space, it is difficult to quantify the risks involved in lending your crypto out via these third parties,” Ashmore says.
Ashmore says crypto lending may not be the best fit for investors with lower risk tolerances.
“Staking specifics vary from blockchain to blockchain, so while it is difficult to generalize and assert, which suits investors better overall (not to mention the fact that each investor will have their own risk tolerance, financial circumstances and investment goals), staking is generally considered a safer investment option,” he says.
Earning interest in crypto may be an attractive option for long-term cryptocurrency investors with a high-risk tolerance. But the 2022 turmoil in the crypto markets, particularly among crypto lenders, demonstrates that crypto interest income is far from a safe bet.
Read More:Best Defi Projects for Passive Income for 2022
How to earn yield on your cryptocurrency
Cryptocurrency earning methods vary — you can stake, lend, or yield farm. The difficulty level varies for each method, and each option may be better suited toward a specific type of investor. Here are the options you have to earn more with your cryptocurrency — and how simple or difficult each method is.
Staking on an exchange
Difficulty level: Beginner
Staking cryptocurrency is offering up your crypto to help validate transactions on a cryptocurrency’s blockchain network. Many forms of staking will not have a minimum time in which you must leave your tokens staked, and you can pull your tokens at any time. After you unstake your tokens, however, there is usually a waiting period — sometimes called a “cooling” period — before your tokens are returned to your wallet.
You can stake your cryptocurrency on a number of the best crypto exchange platforms by simply heading to its “Earn” section and exploring its crypto staking options. From there, you choose your favorite option and stake at least the minimum amount of crypto required by the platform. Then, you can sit back and watch your passive investment grow.
Pros
- It doesn’t require technical knowledge, making it easy for beginners to get started.
- You don’t need to set up a wallet separate from the exchange to collect staking rewards.
- Exchanges typically offer simple tax reporting for the staking rewards you earn.
Cons
- You temporarily give custody of your tokens to the exchange, which comes with a few different risks.
- Most exchanges charge a fee for staking your crypto for you — which is typically a percentage of your returns — and you may also have to pay gas fees to stake your tokens.
Delegating/staking pools
Difficulty level: Beginner/Intermediate
Delegating to a validator or staking pool is similar to staking on an exchange. The difference is that you are conducting your staking directly on the blockchain. In effect, investors are building an investment that is similar to what exchanges offer, but by cutting out the exchange, you may be able to pay lower fees.
By delegating your tokens to a validator, you keep custody of your tokens and they never leave your wallet. The validator uses your delegated tokens to increase its chances of being chosen to validate a new block on the chain. Once the validator receives rewards for validating a new block, the staking rewards are shared with the people who staked their tokens.
When you send your tokens to a staking pool, the token custody transfers to the platform that’s running the validator. For example, you can delegate Solana tokens to a validator and keep custody of your SOL, but if you send Ethereum tokens to a staking pool, the ETH custody is kept by the platform.
Validator pools like Stakefish offer up to 20% on a variety of cryptocurrencies. Solana and Ethereum, the most popular options, are advertised at 1% to 20% and 10% to 20% expected return rates, respectively. The actual rates for ETH are about 5% to 7%.
Stakefish also charges an 8% commission for SOL rewards, which will lower your returns for staking. For example, a 200 SOL reward amounts to 184 SOL paid back to the user when you factor in the 8% commission. Furthermore, you may be required to stake a certain number of tokens at minimum in order to join a validator pool.
Depending on the token you choose to stake, there generally isn’t a required time frame for how long you have to stake. In most cases, you can remove your tokens at any time. That said, there is usually an unbonding period after you unstake your tokens, which can range from a couple days to a couple of weeks. During this cooling off period, you typically can’t access your staking rewards or your tokens.
In addition, Ethereum is currently unavailable for withdrawal and unstaking. As such, your ETH will be locked up until the merge to Ethereum 2.0 is complete.
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Pros
- By cutting out the middleman — the exchanges — staking pool investors may pay lower fees on their rewards.
- Stakers do not have to run their own validators, which lowers the barrier to entry and allows more investors to stake on a blockchain.
Cons
- If the staking validator doesn’t perform well, it could be penalized — typically referred to as slashed — and your rewards could be deducted or lost.
- Some staking or validating pools have high minimums that may be unsuitable for beginner investors.
Exchange Lending
Difficulty level: Beginner
Crypto lending happens on social finance platforms that offer peer-to-peer lending. Tokens can be used for lending purposes on crypto borrowing and lending platforms. When you lend crypto, you do so on the lending platform. The lending platform then allows investors to borrow your tokens temporarily for trading or other purposes. After a period of time, the borrower returns the tokens they borrowed, plus interest.
Exchange lending is similar to traditional lending that’s done through banks and other financial institutions. The big difference here is that lenders are cryptocurrency lending platforms that sourcing “funds” via tokens from other investors.
Crypto lending terms are also similar. Investors can lend their tokens out on “open term,” meaning they can withdraw their tokens at any time. They can also lock in for a fixed term loan, which may span a few months or a few years, which may offer more lucrative yields.
Pros
- Traditional bank accounts are not required to lend or borrow, expanding the reach of crypto lending.
- Exchanges typically provide simple tax reporting forms for your lending income.
Cons
- There’s a risk that the borrower could default on their loan, negating your crypto earnings.
- You have to send your tokens to a centralized exchange, which means giving up custody of the tokens.
Yield farming
Difficulty level: Intermediate
Yield farming is a patchwork of different types of crypto-earning strategies to earn as much as possible across multiple platforms. In yield farming, investors move their tokens and coins to the platforms offering the highest APYs, typically on a weekly or even daily basis. Yield farming can also include an investor acting as a liquidity provider, which is when investors provide the tokens needed for an Automatic Market Maker (AMM) to offer crypto swaps to traders. This is similar to day trading in that you will need to monitor your positions, as well as the current yields of various strategies, at all times.
This can be difficult to pull off, as it requires a lot of time, energy, and research to make sure you’re staking, lending, and placing the right cryptocurrencies on the right platforms. However, some of the other strategies — like staking and lending — are beginner-level, so the concepts themselves are not difficult.
Pros
- By spreading your investment across multiple strategies, the losses from one strategy won’t affect your other investments.
- This strategy can result in higher rates of returns when compared to staking or lending.
Cons
- Yield farming requires time, energy, and research in order to stay on top of the various strategies and yields.
- When using liquidity pools, there’s a risk of smart contract vulnerabilities, which can lead to higher risks related to losses and scams.
- Tax reporting for yield farming is typically done manually and can be cumbersome.
Running a validator
Difficulty level: Advanced
Validating is a form of staking. The big difference between staking on a platform and running a validator is that with validators, you are required to set up a device to act as a node — usually a computer — in order to verify transactions before they are added to the blockchain.
Validating has a high initial investment cost because it requires sophisticated computing power and fast internet speeds to ensure 24/7 uptime and reliability. It’s a high-cost strategy for earning on your crypto, and can be even more costly due to the minimum token staking requirements, in addition to the costs associated with running the validator.
Furthermore, if you experience technical difficulties with your equipment or software while running a validator, you may be slashed, which is a penalty. This can cut into the potential profits you’d earn from running the validator.
Pros
- You don’t have to pay fees to an exchange or pool for staking your cryptocurrency, so all the rewards are your own. In fact, users can delegate their tokens to you, which means you can earn a commission on their staking rewards
- With a validator, you have more control over your own coins compared to a staking pool.
Cons
- Running a validator requires a high degree of technical expertise.
- Running a validator requires you to purchase the equipment and minimum number of tokens, which is expensive and may be out-of-reach for many investors.
- Slashing penalties that are a result of validating fraudulent blocks or technical difficulties could result in your rewards being revoked.
