Staking Strategies for a Crypto Bear Market

By Wolfgang Rückerl, founder and CEO, Entity and Istari Vision

While the recent crypto bear market has resulted in the value of cryptocurrencies plummeting, the future for holders of digital assets isn’t entirely bleak. A crypto bear market can be a golden opportunity for holders to start taking advantage of their ownership through crypto staking.

Staking is a financial instrument allowing an investor to generate passive income with their digital tokens. Investors, known as delegators, deposit their acquired tokens with a chosen validator. Validators are special nodes responsible for the provision of infrastructure as well as validating new blocks and appending them to the blockchain. This transaction constitutes a valuable contribution to securing and decentralizing the blockchain where the staking process is taking place. However, it should be noted that not every token is suitable for staking. The minimum requirement is a blockchain operating on a proof-of-stake (PoS) mechanism to verify transactions. 

The results of crypto staking over time can be quite valuable. In return for an investor’s deposit, they receive rewards in the form of tokens and token shares. Given the current economic environment of high inflation and low interest rates, crypto staking provides a needed tool for generating passive income and returns while riding out the crisis.

The bear market is the time to start staking

General enthusiasm and support for cryptocurrency is relatively low at the moment. That’s not surprising, given the bear market. As is the case with classic financial investments, a bear market provides an ideal time for buying (or staking) at the lowest possible market price. The valuation of crypto at a lower price means investors will be able to buy more tokens with their fiat currency. More tokens translates to more staking rewards, setting up their staking yields to increase substantially during a bear market. 

Experienced crypto investors are no strangers to bear markets, and they’ve seen the subsequent recovery periods. The economics have checked out every time: as long as one has the available assets at their disposal, a bear market is the smartest time to start staking. A prerequisite for success in crypto investments is both a long-term belief in the technology and the composure not to panic and make rash decisions during periods of market volatility.

Investors may be worried that their crypto staking will have worse yields if the valuation of cryptocurrency remains low, which is justified. Staking rewards, however, are paid in tokens and are independent of the current token value. An increase in token value will theoretically double the benefits for delegators, who will reap the rewards of the straightforward increase in token value plus the staking rewards in the form of additional tokens. Your return is calculated based on the number of tokens, not the fiat currency value. Consequently, in a situation where a token value decreases, your monetary returns may be viewed as lower. But, this difference in value will only come into play if you transform the token into fiat currency, the timing of which is up to each individual investor. Staking now and riding out the bear market will prove most fruitful for the prudent investor. 

Important factors for your staking decision

Timing, for once, isn’t everything. Another major aspect is deciding which token to actually stake. Remember that acquired tokens are only suitable for staking if they are functional for proof-of-stake blockchains. Among tokens that are suitable for staking, it is recommended to stake tokens that pay daily rewards. This will result in a better overall yield, especially as investors can immediately redelegate the rewards to benefit from the compound interest effect and maximize returns. 

Selecting your staking provider, or validator, is another crucial consideration. In order to improve staking returns, select a validator with skin in the game and 100% uptime for nodes to yield higher staking returns. Discrepancies on behalf of a validator node can impact the overall staking returns for an investor, so avoid those with a history of their stakes being reduced or slashed due to discrepancies. Take note of the commission fees they are charging to avoid getting ripped off. Learn the technical requirements and processes involved when choosing to stake a token with a specific validator. In order to reduce risks, investors can also choose to delegate tokens with multiple staking providers.

Awareness of your level of risk and timeline are further vital factors for your staking decision. Investors should be considering their long-term horizon when choosing to stake tokens as these funds won’t be quickly accessible when locked into the staking provider. Additionally, your staking strategy should directly align with the level or risk at which you are comfortable. Luckily, there are staking strategies to take advantage of no matter what this level of risk is. 

Staking strategies for all levels of risk 

There are terrific options for investors with low levels of risk who wish to begin staking some of their crypto assets. These investors should opt for direct staking with a reliable staking provider, using a secure hardware wallet. For the lowest amount of risk, refrain from going through intermediaries that promise additional yields. 

Investors with a medium risk level should proceed with the aforementioned intermediaries. Choose one that offers staking through a smart contract. This will allow the investor to have control of the principal at all times. While this strategy can offer higher returns, and even extra tokens in some cases, it also exposes the investor to risks associated with smart contracts.

Investors with a high risk level should look for intermediaries that can offer liquid staking, which can either be centralized or decentralized. With liquid staking, the investor not only benefits from the yield, but also has access to a liquid token. This liquid token can then be deposited into other DeFi products and has potential to earn even greater additional yield. The higher the risk level of an investor for staking, the higher the potential return. 

Understanding general risks

Due to the fact that staking is done with native tokens, not with non-volatile assets like stablecoins, there is always a risk of adverse price movement. This is why staking is recommended for investors who believe in a long-term increase in the value of their tokens and can stomach price fluctuations in the short term.

The lockup duration for an investor’s assets is a final risk to take note of for crypto staking. When an investor chooses to stake a cryptocurrency, it is subsequently configured to a ‘locked’ state. This means there are distinct lockup periods when investors will not have access to their staked tokens. Investors can only access their funds within predetermined timeframes, which means investors can’t quickly react to market changes. Assess your own comfort level there. 

Future of crypto staking  

While other options for generating passive crypto income exist, including yield farming and liquidity mining, staking is widely considered the safest option. The popularity of staking is also primed to increase as the more environmentally friendly proof-of-stake model gains traction as the consensus mechanism among blockchains.

Increasing difficulties in the traditional financial market will bolster DeFi’s overall appeal, resulting in more liquid staking, higher benefits for staking rewards and liquid transferable tokens. These are all exciting developments for those engaged in the staking process. The potential for blockchain technology remains immeasurable and the future for crypto staking, as a great source of generating passive income, is bright – even in a bear market.

About the author: 

Wolfgang Rückerl is the founder and CEO of Entity and Istari Vision. He has also spearheaded the development of the Entity Launchpad, which launches innovative Web3 projects and includes complementary tools for reward strategies, investment analytics, and crypto taxation compliance. Wolfgang prides himself on being an innovator and blockchain instructor, as well as a mentor for ascendant Web3 companies. Prior to co-founding Istari Vision, Wolfgang worked in the industry of ethical AI and data privacy as a regional sales director at Oosto (formerly Anyvision).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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