So you survived the most recent market crash, but you aren't yet feeling confident about any available positions. Maybe you also don't trust the stability of your default fiat currency. How do your protect your assets now?
Low trading volume and global economic uncertainty have a lot of new cryptocurrency traders feeling lost.
The crypto market is a unique ecosystem of deep entanglements. Though many altcoins can tend to move against the mainstream coins (like Bitcoin and Ethereum) on a small scale, when a larger crash of those major players kick in, you can find yourself out to sea without an anchor. Hopefully you have learned how to make use of stop loss or stop limit orders to reduce your risk. However, a lot of layperson traders often have not developed a solid strategy of what to do in the aftermath, while awaiting recovery signals. Many newer traders, especially those who may have taken losses, are looking for a way to limit risk in the future.
One potential solution that addresses both needs is cryptocurrency staking - if you know which types of coins are best suited for this strategy.
What is Cryptocurrency Staking?
Staking is the act of hodling or lending coins in order to accrue rewards or a set interest percentage. Whether you hodl the coins yourself or have to deposit coins into a separate account controlled by another party illustrates the key difference between decentralized and centralized staking.
Decentralized staking is progressively becoming the more popular form of staking as it is less risky. You hold onto the assets yourself, generally in your usual wallet or one that you set up independently of those with whom you are staking your currency. Often you will receive your interest or awards in the same account. These systems often rely upon Proof of Stake or Leased Proof of Stake algorithms to function. There are also models of this which utilize some of the same principles, essentially, but may not use the same terminology. BlockFi and Celsius Network have similar strategies across their platform, as they provide both interest earning accounts, as well as loans which use your cryptocurrency as collateral. As a larger model, this is also essentially how traditional banks function, where pooled liquid deposits (like savings accounts) provide the funds to offer consumer loans.
Centralized staking is a holdover from fiat financial products such as certificates of deposit (CDs) that are issued most often by traditional financial institutions, like banks and credit unions. In centralized staking schemes you hand over your funds to the party who will, either on an ongoing basis or at the end of the term of the investment, pay you interest plus your initial deposit.
The risk of centralized staking in any form is that your funds are taken out of your direct control, and often "frozen" or made inaccessible until maturation (the time period or duration for which you agree they can hold your funds). In fiat financial products there is sometimes a penalty for withdrawing your funds before the maturation date. I have not yet found this kind of term or restriction with current, reputable cryptocurrency products - if you have, please let me know in the comments below.
In the cryptocurrency community the main risk is not penalties, but scams and lack of regulation. When you invest in comparable fiat financial products, most institutions clearly state whether they have FDIC insurance and this measure is a reliable determination of the safety of investing your funds with that partner. In cryptocommunity spaces there aren't typically these kinds of assurances - so much of the time people rely on 1) a risk/reward analysis of the product or service 2) the reputation of the service and its backers 3) the lifespan of the brand and various signs of health, if able to ascertain and 4) word of mouth recommendations from reliable sources.
Please be aware, however, that a lot of suspect providers (as well as some perfectly legitimate ones) have partnership or affiliate agreements with independent individuals who are reimbursed to promote their product. Not everyone openly reports whether they are getting an incentive for promotion - don't be afraid to come right out and ask. I would also recommend that investors be wary of information which is taken from official documents and triple check everything before you invest any amount of funds anywhere. Also - never rely solely on one opinion or source of information when investing.
What Types of Cryptocurrencies are Appropriate for this Strategy?
The best cryptocurrencies for this strategy are those that openly offer a staking scheme as a built-in part of the coin's model. It doesn't matter whether you choose to participate in their venture or a third party staking venture. What is important is that a large number of people are staking the currency, which limits its liquidity, in turn reducing tradeable volume and volatility.
Novice traders accustom to hearing the term "low volume" used in a negative sense when referring to an exchange or the market as a whole, may find the positive use of this term confusing. However, low trading volume produced by staking (people who are being incentivized to hodl a currency) is very different than low volume due to a preponderance of whales who are waiting for the right moment to simultaneously swoop in and sell or buy. The former creates stability, proportionate to the amount that is tied up in staking. The latter creates a type of volatility that is hard to predict. This destructive trend would be better described as a very low baseline of trading volume punctuated by relatively high volume unilateral moves. Hodling a cryptocurrency in a hot wallet is far more liquid than incentivized staking of a currency. Depending on the asset, exchange, and other factors, it can take mere minutes to move funds in a hot wallet onto an exchange and then to execute a trade. In contrast, incentivized cryptocurrency staking creates a self-perpetuating tendency against high levels of liquidity. Stakers are incentivized by the accrual of rewards or "interest" to take no action, and thus are less liable to liquidate their stakes in favor of a potentially less profitable trade. This then softens potential shifts, which then do not materialize in a large enough scale to offset the tendency to inaction. The result is a buffer against larger market trends which often cause a cascade of calamity when the whales buy and sell in relatively high volume. The price of these currencies is also harder to manipulate if a large amount of that currency is locked up, particularly if in smaller amounts across numerous accounts or hodlers.
What are Some Cryptocurrencies that Follow this Model?
Some examples of cryptocurrencies which offer staking as part of their model at this time are the EDC Blockchain, Synthetix, Waves, and Kyber DAO. Maker DAO also uses a form of staking, but keep in mind that multi-collateral-DAI (the incentive for hodlers of Maker DAO), are much more liquid. Synthetix operates similarly to Maker DAO through the process of minting, in which weekly sUSD is "minted" in accordance with how much Synthetix you have staked. The major differences between the two is that Maker DAO has a tied in shareholder model, and that you can use other funds for collateral (Ethereum based tokens, for instance). DAI is also envisioned as a stablecoin, though it is not directly tied to any fiat currency. DAI is also traded on the exchanges fairly frequently, and along with Kyber, represents the more mainstream, market integrated end of this spectrum. Kyber, similar to DAI/Maker DAO, is now empowering stakers with voting privileges.
Synthetix doesn't have a multi-collateral model, and its native exchange does not truly allow for the trading of sUSD for other coins, but rather re-minting one currency into another at an exchange rate which approximates the current price. Synthetix seeks to emulate the markets, not just of cryptocurrencies but other assets as well. Its maintainers' aim seem to be to allow people to participate in these markets while limiting exposure.
The EDC Blockchain follows a similar "mining alternative" model to Synthetix, producing currency through a "leased-proof-of-stake" creation formula. It is also similar to DAI/Maker DAO in that EDC has recently announced a shift to a fixed value for its currency.
Do you know of other examples of stake-model currency? If so, leave your information in the comments below. I am not well versed in Waves, so if someone else wants to explain that model more thoroughly in the comments, I would welcome the contribution.
How can a Novice Trader or Investor Integrate Stake-Model Currencies into their Overall Strategy and Portfolio?
Exchanging some of your more liquid funds for stake-model currencies and then staking them (whether with the maintainers or a reputable alternative) is a good way to diversify your portfolio, particularly post-crash when the more volatile markets are sending mixed signals. It can yield a good, steady profit over time. It's a good long-term (or short-term, if you end up needing your funds for other investments and trades) alternative to hodling in a wallet. Of course, if there are coins you strongly support and have faith in the viability of, there is no need to abandon your longer term investments. But if you just exited a position and don't have a clear direction for some of your funds, staking coins like these, particularly those with independently fixed values, might net you some solid returns. Many coins that follow this model can earn double-digit percentage "interest" or staking rewards.
Please keep in mind - all decisions you make regarding investing and trading are your own. Trade and invest at your own risk. The above strategy analysis is not intended as financial advise, and I am not telling you how to invest or trade your funds. I am merely providing information and my own perspective so that readers like you can make an informed, independent choice. I am not currently being incentivized to promote any financial product, service, or asset discussed in the article above. I do practice what I preach, so I may have investments in some of the currencies, products, or services discussed.
