How to Live off Crypto by Staking

I primarily invest in the stock market and aim to live off dividends mostly from ETFs. However, the cryptocurrency market is hard to ignore. When you compare the total crypto market to the S&P500 (see chart below) you will notice that crypto makes holding stocks feel like holding cash. In the last five years, the S&P500 has gone up by 109 percent which is almost double. However, the total crypto market cap has gone up 18,942 percent.

Total crypto market cap (blue) vs VOO ETF, which tracks S&P500 (orange) over the past five years.

Institutions are starting to look into crypto. For example, Tesla invests in bitcoin, and the Commonwealth Bank has announced it will soon allow crypto to be used within its app. All this shows that crypto is going mainstream.

Recently ETF provider Betashares has released its Crypto Innovators ETF (CRYP). For those who are interested in exposure to crypto, I highly recommend this ETF, which doesn’t invest in crypto itself but in crypto companies (e.g. crypto miners, crypto exchanges, and companies that hold a lot of crypto). It is analogous to investing in a gold mining ETF rather than holding physical gold itself. What is reassuring about this ETF is that it roughly tracks the price of bitcoin and ether, the two largest cryptos.

The CRYP ETF (blue) is roughly correlated to bitcoin (orange) and ether (aqua) prices.

The benefit of buying CRYP rather than holding the actual cryptos itself is safety and security. ETFs are regulated by government, which is reassuring. The alternative way to securely hold crypto is via a paper wallet, which I do not recommend to beginners as it is complex. If you do not know what you are doing, one small error can cause all your crypto to be lost.

When buying and holding crypto investments such as bitcoin, ether or CRYP, you mainly profit from capital gains made when prices go up. Usually there is little income to be made from crypto. The CRYP ETF pays dividends, but it is likely to be very low. However, a recent innovation in the crypto market that has changed all that is staking, which allows you to earn income on crypto.

What is staking?

According to Binance, the term “staking” is defined as “holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. Simply put, staking is the act of locking cryptocurrencies to receive rewards.”

To put it simply, when you stake crypto, you are locking it up and allowing it to be used to earn more. The passive income earned via staking is termed “staking rewards.”

Why stake?

What is the purpose of staking? Why not just buy and hold the crypto or invest in dividend-paying stocks? Quite simply, the returns via staking are huge. My favourite place to stake crypto is the PancakeSwap Syrup Pools, and as of November 2021, the average APR from staking is about 60 to 70 percent. Earning 70% from crypto staking is far higher than what you’d earn from dividends. Furthermore, if you buy and hold crypto or CRYP, you are earning either zero or very little passive income.

The huge risks of staking crypto

Of course, if returns from staking are 70% or more, why not just go all in? The answer is that staking is very risky, so I do not recommend putting in too much, and any amount you put in should be an amount you are prepared to lose. When staking crypto, you are giving up control of your crypto and handing it to a protocol. Protocols are merely code, and code can have flaws that hackers can attack. There have been many hacks recently e.g. billionaire Mark Cuban lost a lot of money following the hack of Iron Finance. Other examples of major hacks of decentralised finance networks include PancakeHunny and Poly Network.

So then if crypto staking is so risky, what is the point of staking? Basically you will need to consider whether the high gains are greater than the risks. Everyone has different risk tolerance. Thankfully there are many ways you can reduce the risk of crypto staking. The first is to stake on more reputable networks e.g. PancakeSwap and ApeSwap are examples. Research whether these networks have been audited by reputable crypto audit organisations (e.g. Certik). Furthermore, it is always a good idea to spread your money across different networks just in case one gets hacked. I currently stake crypto on PancakeSwap, ApeSwap and BiSwap.

How exactly do you stake?

In terms of the nuts and bolts of how to stake, more detail can be found on YouTube. In terms of how I stake crypto on PancakeSwap, I deposit Australian dollars into Binance and then convert it into BNB (Binance Coin). Then I withdraw the BNB into a crypto address generated using the Trust Wallet app. Using the Trust Wallet browser, I go to PancakeSwap and convert the BNB into CAKE. I then go to the syrup pool and stake the CAKE. When the staking pool generates a reasonable amount of staking rewards, I harvest the staking rewards, convert it back to BNB, send it to Binance, and then convert it back to Australian dollars before withdrawing it into my bank account.

Conclusion

As mentioned, staking is very risky, so I am relying on both staking rewards from crypto and dividends from ETFs to fund my living expenses. The staking rewards provide high returns whereas the ETFs provide safety and lower risk. Indeed the staking rewards are taxed in full. There are no franking credits on staking rewards. Regardless, for argument’s sake, even if you pay 50% in tax, staking reward of 70% means you have 35% after tax. Dividend yields are about 5% and assuming franking credits completely offset income tax, 35% is higher than 5%, so it is better to simply pay the tax. Often investors are focused too much on tax or other aspects of an investment (such as how much leverage you can achieve). What matters is total return.

8 thoughts on “How to Live off Crypto by Staking”

  1. how the hell does something with no intrinsic value when held in an imaginary in the cloud wallet support something called a block chain and how on earth does this generate an income….

    sorry I can’t run away fast enough…

    old School investor

    Liked by 1 person

    1. I totally respect being wary of something like crypto staking 🙂 It is indeed risky. In terms of how it generates an income, with staking the crypto is used in some way to earn an income. There are many ways the crypto can be used to make income but one way is to provide liquidity on an exchange. PancakeSwap is a decentralised exchange, like a broker. You can go to PancakeSwap and convert one crypto to another eg BNB to CAKE. To be able to convert these, they need to hold both BNB and CAKE, so this is where staking comes in. When someone stakes CAKE they are letting PancakeSwap use that CAKE to convert to and from BNB and each time this happens a fee is charged, and this fee pays the income. There are many other examples eg on the Cardano network, staking is used to signify that you are trusted and can verify transactions. It is a “proof of stake” consensus algorithm used as a replacement to the “proof of work” consensus algorithm used on the bitcoin networth. The benefit of proof of stake over proof of work is that it is much less energy intensive and more environmentally friendly.

      I understand your wariness. There is no harm in being risk averse and doing what is tried and trusted, but I do find crypto to be very interesting. Regardless, I am aware it can be highly risky and so diversify accordingly.

      Like

  2. I’ve been staking for a while on a different platform, I treat it as essentially banking and earning interest on my crypto. Sure I’ve only got around $10k in it, but that’s about as much as I’m willing to sacrifice, I’m slowly pulling out my initial investment so I’m only staking my accrued “interest” which gives me more peace of mind. That said, much like the cash market, I’d rather my crypto work for me than just wait for capitol growth of the assets.

    Liked by 1 person

  3. I’ve been on a similar journey so just wanting to share my 2c on where my head is it with balancing our love of consistent passive income and the swings of crypto.

    https://app.anchorprotocol.com/earn is my go to for now, you deposit a stablecoin (UST) which is pegged to the US dollar (pretty low risk of it de-pegging as the LUNA token grows out). You then get a yield bearing token in return (aUST) that grows at 19.5% currently. There’s a big ecosystem in front of and behind Anchor that looks promising to keep this stable.

    From there you could sell whatever you want on whatever timeframe to feed you income, or just let it grow in the background – there’s no tax until you choose to sell any since the token just goes up in value vs earning an additional set of tokens.

    Liked by 1 person

  4. Hey man, thanks for this post. I have started dipping my toe into the crypto water with a Swyftx account, but didn’t know very much about decentralized exchanges. I thought RPY of 20% on one of the coins on Swyftx was good, but 70% on CAKE sounds pretty fun! This was really helpful. Of course, I’m only using my play money(of which there is a lot since I have spent zero dollars on overseas holidays in the last 2 years lol), and it’s separate from my emergency funds and index ETFs. Thanks again, and hope you had a great Christmas and a happy New Year!

    Liked by 1 person

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