Many investors’ long-term goal is to build their portfolios to the point where they can support themselves solely off the interest and dividends they get. How fantastic would it be if your crypto holdings grew without any effort on your part?
Thanks to a relatively new practice known as crypto staking, this might just be possible. In this article, we tell you how to choose a platform that offers this option and earn passive income on your crypto savings in the form of an annual percentage yield or APY in crypto.
APY vs. APR vs. ROI
Opening a (crypto) savings account requires careful consideration of a number of metrics. One is the annual percentage yield or APY, which represents the percentage of your yearly investment gains.
In practice, you can use a cryptocurrency savings account to store your coins, receive a predetermined rate of return on those coins, and then see your balance gradually increase over time.
APY is a metric used to determine the amount of interest you can accumulate through your savings account on a yearly basis. To this end, a higher APY always translates to a real interest rate paid to your account balance, which considers the effect of compounding interest (explained below).
You can accrue APY through several deposit accounts, including savings accounts, crypto investment accounts, or certificates of deposits (CD).
Furthermore, to make an informed decision about whether to choose a lender, credit card, or financial product, clients can use the annual percentage rate (APR).
The APR is a way to indicate the true cost of borrowing money or earning interest on an investment over a given time period. In this case, compounding is not taken into consideration, yet there could be additional fees or charges related to the transaction.
Finally, the rate of return on investment (ROI) is a metric used in business and finance to gauge a financial commitment’s success. The return on investment is a way to figure out how much money you made from an investment compared to how much you put into it.
Types of Interest
Compound interest refers to the amount you earn from either the cryptocurrency deposits you put into your account (also known as the principal amount) or the interest you accumulate on your savings. Because the underlying asset’s value is increasing, you can think of compounding interest as ‘interest on the interest’.
Simple interest, on the other hand, refers only to the interest accrued only on the initial deposit.
Because of the way compounding works, it is feasible to generate fresh funds over time, which is one reason compounding interest is considered a powerful investment instrument in the world of finance.
In addition, the interest earned on the investment is compounded and added to the principal sum on a regular basis, which allows the balance to rise. As a result of the increased balance, every interest payment will be higher.
The Variable vs Fixed APY
The annual percentage yield on your investment may be either fixed or variable. To clarify, this indicates that the rate at which your savings will grow will either remain constant for a predetermined period (in the case of the fixed rate) or fluctuate according to market conditions (if the rate is variable).
How to Start Generating APY in Crypto?
Staking tokens, holding them in a crypto savings account, or engaging in yield farming by lending cryptocurrency to a liquidity pool are different ways in which you can earn interest on your crypto investments at a compounded rate.
Crypto trading platforms, decentralized finance (DeFi) protocols, and digital wallet apps are all places where you can engage in these interest-earning activities with your crypto holdings.
But before you decide on a platform, protocol, or wallet app where you think you could generate the highest APY on your cryptos, you should consider several other aspects:
- Customers’ deposits are typically rewarded with interest in the same cryptocurrency they originally deposited.
- There is great competition among the APY rates offered by various platforms. That’s why traders who are earning interest on their crypto through yield farming sometimes switch between different platforms’ liquidity pools based on better rates. This, of course, only pays off if the fees associated with the transactions are not too high.
- Some crypto initiatives might be flawed, so you should be extremely cautious about where you put your money.
How Does Staking Crypto Work?
When it comes to earning interest or other rewards, staking is the most common and straightforward approach.
Staking is a fee-free financial tool for generating interest on the coins stored in your digital wallet. The structure of the blockchain, combined with the Proof-of-Stake (PoS) consensus mechanism, makes it possible for crypto investors to take advantage of this unique chance to generate passive income and APY returns on their crypto savings.
Traders who rely on a blockchain that incorporates Proof-of-Stake to hold and safeguard their digital assets have the ability to “stake” their tokens by securing them in a smart contract. The blockchain validates each new transaction by using the tokens that have been staked in order to build consensus among the nodes that make up the blockchain network.
In turn, this safeguards the network and prevents any unlawful transactions from taking place. As a result, you earn APY for supporting the blockchain network with your staked coins. The passive income will be automatically transferred into your account balance and compounded with your staked cryptocurrency holdings.
How Safe Is Crypto Staking?
Price volatility is the most obvious sign of the risk that comes with staking cryptocurrency. This risk is prevalent, like the risk related to just about any investment. For instance, if the value of the coin you are staking declines while you are staking it, the profit you make through staking could fail to be sufficient to cover the loss.
Furthermore, there is a possibility that some of the more recent DeFi efforts, which brag about huge interest rates, could suddenly implode, leaving you with nothing. Checking the development roadmap of the coin you want to stake and making sure its creators have no plans to give up on their cryptocurrency project fairly soon is the most prudent thing you can do.
Earning APY by Staking Crypto on Binance
Here’s a list of passive income-generating options on the most prominent exchange in the industry, Binance. Through this platform, you can participate in crypto staking, and so boost the APY return on your cryptocurrency holdings.
Binance Earn
You can greatly expand your cryptocurrency portfolio with the help of Binance Earn‘s variety of tools. The platform offers numerous options, such as Guaranteed Earning, Savings, BNB Vault, Launchpool, and more.
At present, Binance Earn allows users to choose between two distinct types of earnings: Guaranteed and High Yield. Cryptocurrency investors can put their money into stablecoins, which offer guaranteed returns, or high-yield staking coins, which offer above-average returns, in exchange for a larger risk of losing their initial investment.
No matter how attractive the returns may seem, you should never risk more than you can comfortably afford to lose.
Guaranteed Earning
Any items labeled under the “Guaranteed” tab on the Binance Earn dashboard would be a good place to start if you’re new to the world of cryptocurrency. These products offer APY yields that are substantially more stable than average, and after the initial locking period, you are eligible to receive your principal investment back.
Savings
The Savings feature is the one that stands out the most among those options. Namely, Savings allows crypto investors to choose between two distinct product categories: Flexible Savings and Fixed Savings. You can deposit your cryptocurrency in a manner analogous to a demand deposit at a bank and earn daily interest on your inactive funds.
In contrast to Fixed Savings, where funds must be deposited for a specified amount of time in exchange for a higher rate of return, Flexible Savings can be withdrawn at any time. Please be aware that if you make an early withdrawal from your Fixed Savings account, you will also forfeit any interest that has accrued during that time.
Launchpool
If you’re looking for a place to source new assets, Launchpool is your best bet. Newly issued tokens are available as incentives for staking Bitcoin, Bitcoin Cash, Bitcoin USD, and other cryptocurrencies. You have unlimited access to any funds you contribute, plus hourly payouts are made to all contributors.
The users who stake their digital currencies in DeFi projects by contributing to the stability of a liquidity pool will earn a bonus for their participation. As investors reinvest their gains, they kick off a process known as yield farming.
BNB Vault is an investment solution that offers a guaranteed return on your capital and assists you in finding productive uses for your unused cryptocurrencies.
By putting their money in the Vault, BNB HODLers can diversify their holdings across a wide range of centralized and decentralized finance products in a single, streamlined process, maximizing their returns while taking advantage of a wide variety of opportunities inside the Binance ecosystem.
Locked Staking
Locked Staking is a method of earning rewards by staking cryptocurrency on the blockchain. Once your registration has been verified, you will have access to these assets for redemption, but there is a waiting period before you can do so. This lockout duration varies from product to product, depending on what coin you decide to acquire.
DeFi Staking
DeFi (Decentralized Finance) is an initiative that uses blockchain technology and smart contracts to offer decentralized financial services. Binance created this APY-yielding option to facilitate consumers’ participation in various decentralized initiatives linked to cryptocurrencies.
As a result, you can now effortlessly access the world of DeFi on Binance without worrying about managing private keys, acquiring resources, making trades, or performing any of the other difficult chores necessary for participating in DeFi staking.
Remember that DeFi products have mandatory lockout periods, so if you need to remove your funds in advance, you may lose your corresponding awards. Before engaging in DeFi staking for higher APY returns on Binance, you must familiarize yourself with the product guidelines containing further information.
Dual Investment
With a dual investment strategy, you can manage your exposure to risk in two distinct ways.
Binance’s Dual Investing functionality enables users to deposit a single coin while earning interest based on the performance of two different assets. By using this functionality, you can lock in a substantial interest on your savings by investing your crypto assets, and you’ll make much more if the value of your holdings rises in the market after you commit them.
The value of your funds after depositing them into Binance Dual Investing will be based on the performance of the cryptocurrency market. After the product’s term ends, you can cash out using either BTC or BUSD. Gains are not guaranteed, but they can go as high as you want them to go, and you can use them to control the risks associated with your digital assets.
When the contract comes to an end, the final settlement coin is decided by matching the settlement price to the spot price on that day. In the event that the market price of your cryptocurrency assets rises and your earnings are greater than the savings rate, you will receive the larger amount.
Even if the market value of your crypto assets drops or your earnings are lower than the rate you can save, you will still receive interest on your funds. Your profit will always go to you, so don’t worry about how it’s distributed.
Binance Liquid Swap
You can withdraw assets from the liquidity pool at any point or switch cryptos within it for low slippage and inexpensive handling fees. However, if you only want to swap one asset, you’ll have to pay a service charge.
Conclusion
If you’re a cryptocurrency enthusiast looking for a yield on your holdings, an APY-bearing savings account could be the way to go. There is a wide selection of crypto-yielding options available for you on some of the most prominent trading platforms.
To avoid losses, read up on the subject thoroughly before committing your trading efforts to this financial instrument. Pay special attention to the fees, entry requirements, the process of earning interest, and available digital assets, as they differ from platform to platform.