Here’s Why You LOSE Money On Crypto Staking
Many coins offer unreal staking yields. The value of these coins decreases dramatically over time. Here’s everything explained in just five minutes.
Many coins offer unrealistic staking yields, and the value of these coins decreases dramatically over time. Why is that? And how can you spot successful proof-of-stake cryptocurrencies, such as Ethereum, that maintain value over the long run?
In just five minutes or less, you’ll learn:
- Inflation in cryptocurrencies.
- The actual APY of a cryptocurrency.
- How to stake cryptocurrency without getting ripped off.
So now, give me your close attention because what you are about to learn may change your view about cryptocurrency staking forever.
Cryptocurrency Inflation
Inflation happens in cryptocurrencies?! What the f**k. I have been holding crypto to beat inflation!
Just like any currency out there, inflation happens in cryptocurrencies. However, not every cryptocurrency is inflationary.
The inflation of a coin is simply the rate at which it is currently increasing its supply every year. I.e., If a token has a 2% inflation rate, then one year from now, 2% more tokens are available to buy.¹
Some cryptocurrencies give staking rewards by just minting new tokens out of thin air, which increases its circulating supply, thus, decreasing everyone’s tokens value.
Let’s suppose that the following stats are for a real cryptocurrency:
- Market cap: $1,000,000
- Total supply: 1,000,000
- Price per token: $1,000,000 ÷ 1,000,000 = $1 per token
Let’s increase its total supply now and see what happens:
- Market cap: $1,000,000
- Total supply: 1,500,000
- Price per token: $1,000,000 ÷ 1,500,000 = $0.67 per token
Or decrease its market cap:
- Market cap: $670,000
- Total supply: 1,000,000
- Price per token: $670,000 ÷ 1,000,000 = $0.67 per token
Look at the above statistics and try to spot any patterns.
Congratulations, you’ve just learned something new. A token’s value can decrease in two ways: the first is by reducing its market cap, and the second is by increasing its supply.
What is the one thing that all worthless proof-of-stake tokens have in common? They all give out rewards by minting new tokens which increases the circulating supply and causes inflation.
Most of the staking rewards should be transaction fees, not new tokens created out of thin air.
The Real APY
Now that we know inflation happens in cryptocurrencies, we can estimate the actual APY of almost any proof-of-stake token.
The real APY of a token is simply its rewards APY minus its inflation rate. To not lose your locked-up tokens’ value, it should be always positive.
The below example will help you understand this better:
- APY: 10.00%
- Inflation rate: 2.00%
- Real APY: 10.00%–2.00% = 8.00%
If you were to stake 100 of that token for a year:
- You will receive 10 tokens in total.
- 2 of the ten tokens you’ll receive will be created out of thin air.
- The remaining 8 tokens will come from transaction fees.
Did you know that the real APY can also be negative? This happens when the inflation rate is greater than the APY. In that case, inflation will eat up all of your original investment slowly.
Let’s increase the inflation rate and see what happens:
- APY: 10.00%
- Inflation rate: 11.00%
- Real APY: 10.00%–11.00% = -1.00%
In that case:
- You will receive 10 tokens in total for staking your tokens for a year.
- All of the ten tokens you’ll receive will be created out of thin air.
- Your locked-up tokens will be worth 1% less on top of any decrease in the token’s market cap because of inflation.
There’s actually a website that estimates the inflation rate and the actual APY for you. It only supports a few proof-of-stake tokens, but it is worth mentioning.
Inflation is the most important topic you should pay attention to when you are staking crypto. However, you will not make money on every cryptocurrency with a low inflation rate and high reward APY.
Stake And Don’t Lose Money
Here are some additional tips you should implement to avoid losing money when staking cryptocurrencies:
1. Restake to keep up with inflation
If you don’t, the value of your locked-up tokens will get eaten up slowly, even if your token’s rewards rate is greater than its inflation rate.
The percentage of rewards you should restake should be the difference between your token’s APY and its real APY.
- APY: 10.00%
- Actual APY: 8.00%
- Restaking percentage: 10.00% — 8.00% = 2.00%
The amount you restake will keep your original investment protected from inflation. I like to call them “Inflation Protection Fees”.
2. The basic requirements
Look for these when you’re searching for a token to buy and stake:
- It has a positive real APY.
- Its real APY is predictable.
- It’s old and well-known.
- Its price is not too volatile.
3. Try doing it yourself, if possible
When you stake ETH2 on Coinbase, you don’t actually stake it; you give your coins to Coinbase to stake on your behalf. Staking Ethereum on your own requires at least 32 ETH and a lot of technical information.
Staking on a 3rd-party can also be risky because your funds are not insured. If Coinbase goes bankrupt, your money is gone. Also, 3rd-parties take a cut from your APY. If you can stake your coins on your own, then do it.
Recap
- Inflation happens in cryptocurrencies.
- Staking rewards should come from transaction fees, not from thin air.
- Always make sure your token’s APY is greater than its inflation rate.
- Restake some of your rewards to protect your funds from inflation.
Conclusion
Cryptocurrency is very risky and only smart people will profit from it. If you don’t take care, your money may end up in someone’s else pocket.
Thank you, dear crypto addict, for taking the time to read this. If you find this article helpful, I think you’ll end up liking this one too:
