Negative Interest Rates: Staking – The New Way to Earn Interest

For many investors, income from interest, be it from overnight or fixed-term deposits or bonds, is the top priority. Life insurers and pension funds have also been calculating with fixed-interest investments for decades. But this is now more or less over. The increasingly popular staking of cryptocurrencies can provide a possible answer here, true to the motto: staking instead of government bonds and bank deposits.

Due to the zero interest rate policy of the central banks, it is becoming increasingly difficult to find bonds with a fundamentally good credit rating that still yield positive interest. The situation is particularly dramatic for government bonds from the Eurozone. Even countries with extremely high debt, such as Portugal or Greece, are trading in negative territory for Bitcoin Union short to medium-term maturities. Even balances on normal bank accounts are increasingly being charged negative interest rates. Institutional investors as well as private investors are increasingly desperate for assets that deliver regular, calculable returns.

Staking cryptocurrencies – what’s behind it?

Just as Bitcoin was in the hands of private investors for years, the year 2020 has brought the now definitive breakthrough for Bitcoin in institutional investing. Staking could undergo the same trajectory in the coming years. Finally, decentralised networks and infrastructures are becoming increasingly important. If you want to dispense with the energy-intensive Proof of Work (PoW) mechanism that Bitcoin has, you quickly end up with Proof of Stake (PoS).

With this consensus mechanism, the proportionate transaction processing is not based on the computing power fed into the system, but on one’s own crypto deposit. Greatly simplified, this means that an investor who owns one per cent of all cryptocurrencies is also allowed to confirm one per cent of all transactions that take place. In return for the staking cryptocurrencies deposited in the smart contract, investors can look forward to „crypto interest income“.

Also interesting for small investors

Due to its small size, the staking sector is still relatively uninteresting for institutional investors. So far, it is mainly the money of private investors that is invested either on their own or through service providers such as crypto exchanges or specialised staking pools. With increasing market size, however, this is likely to change, as institutional investors are just as interested in regular returns as retail investors.

Those who find it too complicated to set up their own node can turn to appropriate service providers. Besides the big crypto exchanges like Binance, Kraken, Coinbase or KuCoin, there are also specialised providers or staking pools that offer this service.

As with all forms of investment, one’s own risk affinity also determines the choice of asset. Do you go for established blockchain protocols with a relatively high proportion of cryptocurrencies in staking? Or on rather unknown, new projects, for which only a small part may be in the staking process?

To provide a little more orientation, we present our top staking cryptocurrencies – with which double-digit percentage returns per annum are possible in some cases – in our March issue of the Cryptocompass.