Earlier this month, I decided to try my hand at staking cryptocurrency for automatic income. I'll share a few things I learned diving kind of head-first into this project.
It's hard to miss the exposure that cryptocurrency has gotten this year, particularly the past couple of months in 2021. Literal fortunes have been made and lost with the attention and the market swings.
Since I had only earned a small amount of cryptocurrency at various endeavors, I got caught up in the excitement and decided to try my hand at staking cryptocurrency for some automatic income.
What is staking cryptocurrency?
Staking a cryptocurrency, in simplest terms, involves making the cryptocurrency available for the transaction system to work. In slightly more complicated terms, it involves usually a short-term contract to commit the cryptocurrency to a wallet and not spend it.
A cryptocurrency may have a minimum amount to stake, and also a length of time to commit the cryptocurrency to the staking.
Why would I want to stake cryptocurrency?
Because stakers are rewarded for staking. (I suppose people can believe in the cryptocurrency so much that they do it for free, but not often.)
The staking reward is basically a dividend that gets added to the staker's wallet at irregular intervals. The staking reward is paid in cryptocurrency rather than in dollars.
How do the staking rewards work?
Staking rewards come from staking a cryptocurrency that secures its blockchain with a proof of stake (PoS) mechanism as opposed to a proof of work (PoW) mechanism like Bitcoin uses. The main advantage of the PoS mechanism is that it's much more energy-friendly.
Based on the amount of cryptocurrency staked, this staking offers a chance, weighted by how much is staked, to validate a block in the blockchain each time one is created. In other words, each time a new block in the chain is created, there's essentially a little lottery that happens and the “winner” gets to validate the transactions in the block, receiving the staking reward for doing so. People with more cryptocurrency staked get more lottery tickets each time, and therefore have a better chance of “winning” each individual lottery.
How I got into cryptocurrency staking
Some friends started telling me about how they could buy a Jeep with the gains from Dogecoin.
I'm certainly happy for them but I wasn't going to jump in a cryptocurrency and hope that the price went up more. A bit like trying to catch a falling knife and all that.
Staking, though, has an income component to it as well, so the money to be made doesn't depend entirely on the rise of the coin price. That's something I could get behind a bit more.
I had been watching Drew Vosk's YouTube channel for some time and his videos on staking a token called Energi caught my attention and interest.
His tutorials on setting up the staking environment were really good and after an evening or two I was up and running with the staker. (I explain this below.)
I took the whole thing as a personal project to learn about dealing with cryptocurrency, contributing to the operation of a network, and possibly earn some money in the process without a whole lot of active management.
What I did to stake Energi
The usual premise of a cryptocurrency involves a distributed network that reaches consensus on what all of the transactions are, so there's both security and transparency.
As such, participating in the network involves running a computer program 24/7 so that it is available to validate the transactions, which happen all the time.
Here's what I did to start staking.
1. I acquired some Energi (NRG)
Energi doesn't have the same widespread use as, say, Bitcoin or Ethereum, so not all exchanges trade in Energi. I transferred a few dollars worth of BTC to Kucoin so that I could purchase the NRG.
2. I transferred the NRG to my wallet
I downloaded the Energi software wallet and transferred my NRG there.
I started out with about 2.9 NRG, which was enough to stake because it was more than 1 NRG. This allowed me to see that I did the next step correctly.
3. I set up the staking environment
So, per recommendation from Drew Vosk, I got an account with Digital Ocean, signed up for a $10/month droplet, and installed the Energi staking software on the server per his tutorial. (The referral link to Digital Ocean gives you a $100 credit to play with if you're a new customer!)
Over a couple of evenings I finally got the staking working, so I was ready for the next step.
4. I bought more NRG to improve the chance of getting staking rewards
At the time, 2.9 NRG was a miniscule amount so I would be waiting a long time to get a staking reward of 2.28 NRG.
So, I purchased some more and transferred the NRG to my wallet. When this was done I had 644.82061291 NRG in the wallet.
How I did this is probably another post in itself (!) but the big rocks were that (a) I found a crypto exchange that would accept a wire transfer, (b) I bought BTC on that exchange, (c) I transferred the BTC to Kucoin, (d) I bought the NRG with BTC on Kucoin, and finally (e) transferred the NRG to my wallet.
5. I check it once in a while but otherwise it just runs
There was quite a bit of learning and work to set it up, but once it's running, it kinda coasts along easily and just works.
Part of me is hoping that the work involved in setting up the staker is the “barrier to entry” that keeps anybody from doing it and provides the larger rewards later.
How much in staking rewards have I earned?
As mentioned above, I started staking (in earnest) with 644.82061291 NRG on 11 May 2021.
It's now 31 May 2021, and I've validated 11 blocks for a reward of 2.28 NRG apiece, or 25.08 NRG.
This represents a return of almost 3.9% (in NRG) over those three weeks, which isn't bad.
The rub at the moment though is that I bought at a bad time. The price of NRG in terms of dollars dropped a lot after I bought: about 40%. So in terms of dollars, I'm down.
If this kind of return continues, though, I can absorb the bad timing with the extra NRG I earn through staking.
What have I learned
So yeah, cryptocurrency investing is happening and here are a few things I’ve learned so far:
- Crypto is volatile. This isn’t a surprise but having money invested in something as volatile as cryptocurrency makes the volatility more “real.” Definitely not something you want to invest more than you can stand to lose.
- Some (all?) credit card companies restrict you from buying crypto with their cards. This was one of the only times my purchase with my credit card has been declined. I had to call up customer service at my credit card company to find this out.
- Some banks won’t do international wire transfers. I needed to find a cryptocurrency exchange that had wire transfer to an American bank since that was the only way I could wire money from any of my savings accounts.
- Transaction costs can be pretty steep. There was the wire transfer in, then there was a fee of about $20 each time to send BTC over to the exchange that had the token I wanted to stake.
- There are a lot more moving parts in these transactions, and they sound pretty unforgiving if you get them wrong. In particular, sending coins to the correct wallet address can be pretty unforgiving. The wallet has to be the correct type for the crypto you’re sending, and the address itself is a long string of characters that has to be captured perfectly. Not doing all of these things risks having the transaction fail and even having the funds lost. I was so concerned the first time I did this that I paid another transaction fee to not send all of the crypto at once and send a lesser amount first.
What do you think of this whole staking business?
Leave your thoughts in the comments!
