DeutschThere are several ways to profit from the rapid growth of the crypto world. Direct investment in Bitcoin and altcoins like Ethereum or Cardano is one way, but only one on the road to the desired profit. Crypto lending has been booming for some time. Staking and crypto mining are alternatives that are also popular with members of the community. Apart from technical differences between these approaches, the risks and disadvantages also vary.
Crypto Lending: High Interest Income without any Risk?
Crypto lending can be understood as the counterpart to private lending via brokerage portals. Only not in the form of fiat currencies, but cryptocurrencies. Lending providers advertise services for lending crypto coins with promising statements about achievable interest income. In fact, there are more and more “normal” investors who, due to historically low interest rates on the investment market (or penalty interest rates on the bank account), invest money in cryptocurrencies in order to specifically look for high returns in the lending sector. As I said: Lending in the crypto universe has many parallels to the popular peer-to-peer credit platforms. Anyone who borrows crypto money does not get it from other users. Similar to a bank loan, interest serves as a kind of risk compensation.
In German-speaking countries, the Berlin-based crypto fintech company Nuri can be mentioned as an example of a lending service provider. As tempting as interest promises sound, there are not only advantages. On the one hand, lent coins and tokens are not available to the owner during the agreed lending period. If the prices rise in the meantime, lenders “only” get the interest, while borrowers benefit from the increase. On the other hand, as with any loan, there is a risk that borrowers will not be able to meet their repayment obligations. For example, because they have speculated. Reimbursements via platform communities or deposit insurance are largely in vain when it comes to lending. In the event of success, however – and this is a significant advantage – lending attracts high returns without any activity of your own.
Nuri – based in Berlin – is a popular crypto lending provider for the German-speaking region: Review of Nuri. (New customers benefit from a €30 starting bonus when opening a savings plan until April 4th, 2022)
Staking – Passively Earn Money with Cryptos without Doing Anything?
Staking is often referred to as an opportunity for crypto fans who want to participate in the growth of the crypto market but do not want to constantly follow prices and make decisions. “Stakers” receive rewards for depositing (locking) coins in blockchains. These are used to generate new blocks. Owners get the right to add blocks as validators over time. The concept speaks for itself that users do not need expensive devices to use currencies. Your own assets are sufficient. An advantage presents itself with a view to energy consumption. Staking is less harmful to the environment than crypto mining, for example. A disadvantage for investors: The approach only works with coins whose systems are based on the so-called “Proof of Stake” process. Staking is therefore not suitable for every crypto owner. In addition, locked cryptocurrencies cannot be used for other purposes during the staking period.
Infographic: “Proof of Stake” and “Proof of Work” compared
In addition, the amount of coins used determines the chance to take over the validation of new blocks thanks to the random principle used. Small investors can therefore have little hope of high rewards. These, by the way, vary very significantly between providers, which makes it difficult for laypeople to choose the right service provider. In addition to currencies such as Cardano or Ethereum, there are already over 150 currencies that allow staking. Exchanges like Coinbase or Bitvavo have included staking in their portfolio. A risk of very high rewards: So many coins can be created that the risk of inflation increases massively.
Crypto-Mining – Actively Participate in the Creation of New Blocks
Behind the term mining (also “digging”) is the process by which coins and tokens are created. Similar to mining, raw materials – here cryptocurrencies – have to be mined. This work is done by so-called “miners”. They receive rewards for their work, but must have the necessary tools. The payout intervals vary. Bitcoin miners can hope for payouts every ten minutes. This time frame (the “Block Time”) is intended for the creation of new blocks. The algorithm specifies intervals and reward levels. Miners create new coins, but at the same time contribute to transaction verification in the network. A disadvantage: Mining requires the use of quite expensive hardware – for example a CPU processor, Application Specific Integrated Circuit Chips (ASICs) or certain graphics cards. Although high rewards often beckon, hardware costs and energy consumption reduce the return. In addition, miners are in competition with each other. “Lone wolves” have a hard time asserting themselves.
Pool mining increases the chances of finding new blocks in the chain together. Profits must be shared for this. In addition to acquisition costs and electricity consumption, cooling and storage costs as well as expenses for hardware maintenance and repair are to be mentioned as cost items. Cloud mining can be cheaper. Here, miners temporarily purchase the required computing power from service providers. The price is less control and flexibility as well as the costs for the service. Either way, the following applies: Anyone who gets into mining must know the costs and initially make advance payments. The price developments ultimately determine the profit. In addition, the Bitcoin mining example shows that rewards can decrease over time. In the BTC blockchain, for example, there is a halving every four years (or after the creation of 210,000 new blocks).
The reward is currently 12.5 Bitcoins. Criticism of mining often refers to the indeed high energy consumption. The increasing switch to renewable energies could lead to a significantly better environmental balance in the coming years.
Our Conclusion on Crypto Lending, Staking and Mining:
So we see that all three approaches have their justification. Here as there, there are certain disadvantages in addition to positive characteristics. Undecided crypto fans should not only define their own risk appetite. They should also put their personal return goals and willingness to invest to the test. Finally, especially with lending and staking, it is a question of whether owners of cryptocurrencies can live with not being able to constantly access their own crypto reserves.
