Passive Income Ideas #4: Staking Crypto
Here at Soldonhive, we are true passive income fans. But we are not blinded by our enthusiasm. Although we believe that factoring is the best asset class for investment, those preconceptions are there to be challenged. In that spirit, we’ve already checked out ebooks, bank accounts and earning interest on crypto. Now, in the fourth part of our series, we will focus on staking crypto as a form of passive income - and see how factoring compares!
Stake it to make it
Put very simply, staking describes the process where you are rewarded for depositing your crypto funds in a wallet to make its blockchain network more secure and efficient. Staking tokens is a well-known way for holders to earn a passive income. But as the number of Proof-of-Stake (PoS) coins increase, it’s becoming harder to work out which one would earn holders the highest yield.
There are now quite a few cryptocurrencies that have staking options. These include EOS, Factom, Cosmos, Decred, R-Chain, OmiseGO, Thunder, Ethereum, Dfinity and more. However, according to new data, Tezos (XTZ) offers the highest returns of any PoS cryptocurrency.
In 2017, the Tezos Foundation, a Switzerland based non-profit, raised $232 million in a fundraiser and became one of the biggest ICOs in history. Tezos is a technology that powers a distributed, peer-to-peer, permissionless network. No single entity owns, manages or controls Tezos. Understanding this paradigm is fundamental to understanding the tech.
Tezos is a smart contract proof-of-stake blockchain designed to allow holders of the coin to help power the network and earn rewards in return. Its native token XTZ is currently one of the top 10 crypto assets by market cap.
Unlike Bitcoin, a Tezos blockchain does not rely on mining (Proof of Work), but instead utilizes a Proof-of-Stake based consensus model. When staking XTC, you can earn passive income by participating in the Tezos network via delegation. After deducting validator’s fees, the current annual yield on Tezos is around 6%.
How to stake Tezos
After some diligent searching, we found this video by CryptoTube, which shows how to stake Tezos in the easiest and most cost efficient way
Tezos call staking “baking” - the rhyme makes it easier to remember. Here are step-by-step instructions on how to bake your Tezos on Ledger Live using your ledger hardware device and ensuring your coins never leave your hardware device. This means you keep control of your private keys and you can gain some staking rewards with Tezos.
Can I lose my money?
Yes, you can. This great article outlines the risks you would need to manage when staking. The first point to note is that cryptocurrency investing is high risk. There is a risk of losing all of your crypto capital, including all of your staked digital assets. You really should only invest what you can afford to lose, even if you are promised a guaranteed rate of return.
There are several ways to lose your crypto too. These include negligence, hacking and scams. It is absolutely critical you never give out your mnemonic and private keys to anyone and always ensure you have a secure backup (offline) in case you need to recover your wallet. Always encrypt your wallet with a strong unique password. Once that’s gone, you lose your money.
The value of the Tezos you hold could rise, but could also fall as well. You should always take care to offset any gains you make by staking against the value of the Tezos you hold. In a bear market, for example, it becomes obvious that there would come a point when staking your crypto would not be profitable.
If your validator makes an error, it is punished. In liquid Proof-of-Stake protocols like Tezos, only the baker is penalized. But in bonded proof-of-stake protocols like Cosmos or IRISnet, stakers would be penalized too.
Validators not paying their rewards
You really do need to check if you’re being paid your rewards. Sometimes these might be “forgotten” and you need to double check this. To make sure you’re getting what you’re owed, check out this handy website.
Pitfalls to avoid
Lastly, please check out these two biggest mistakes made by people when buying and staking Tezos. The first is fees. If you stake your Tezos on Coinbase, be warned. You’ll be charged a sizable fee for the privilege. The second is where you buy your Tezos. Coinbase Pro has a much better fee schedule than Coinbase. It’s worth shopping around to get the best deals.
Comparison with Hiveterminal
Staking is incredibly popular but not without its risks. That’s why many passive income enthusiasts are considering factoring too, where the risk versus reward varies depending on the invoice bought. At Hiveterminal, each discounted invoice is risk assessed and offered at a discount to investors, who then get paid the full amount by the debtor at the due date.
In a nutshell, Hiveterminal is a way for small businesses to sell their unpaid invoices at a discount to investors around the world. The investors make passive income when they are paid the full invoice amount at the due date.
Unlike staking, where you use crypto, Hiveterminal requires the use of fiat (EUR). However, you are required to hold HVN tokens to view the market and pay all fees.
Here’s a community inspired comic strip explaining how the Hiveterminal concept works. Here we use the example of a company called Sleep Tight, who make beds. They get a big order from a new client. But they don’t have the cash they need to get started - they’re waiting on a big invoice to be paid from QHotels, one of their happy customers. So they sign up to Hiveterminal, put their QHotels invoice up for sale, and wait for an investor who wants to make some passive income. Lucas is an investor. He sees the discounted invoice on Hiveterminal, checks the risk ratings and is happy with the deal proposed. He sends the money to Sleep Tight, and then waits for the full invoice amount to be paid to him from QHotels. That’s where Lucas makes his passive income. In the meantime, Sleep Tight gets on with fulfilling their new client’s order, keeping their business thriving.
The first key difference to address is that staking crypto is a completely different proposition to buying discounted invoices with fiat. Although both forms of passive income, there are very different factors involved.
With staking crypto, the risks are crypto volatility, slashing, losing your mnemonic or keys, and validators not paying your rewards. As this is crypto, your staked crypto is also not insured and there is no recourse to recovering your funds in a worst case scenario.
That’s not the case with buying discounted invoices, which is in essence what factoring is. When buying the invoice, you claim ownership of it and will in most cases collect without difficulty. However, you may in some situations have to resort to enforcement of your claim. In certain events, such as company liquidation, for example, it would become very difficult to recover your funds.
Hiveterminal is a platform where invoice sellers and invoice buyers can transact. They do provide assistance for issues of non-payment, and provide practical guidance on how to deal with late payments and defaults here and here.
Hiveterminal also takes steps to reduce this risk of non-payment by providing an algorithm to assess the risk associated with each invoice. A diverse portfolio of invoices also helps spread the risk of default by the debtor.
When staking crypto, such as Tezos, the returns are around 6% - it all depends on your preferred method and the fees involved.
However, the way that you make returns on Hiveterminal isn’t like that. Your returns depend on how much risk you are willing to take on the invoices you buy. The riskier an invoice is rated, the more money you can make from a bigger discount. However, the risk of default goes up too. This also works the other way, of course. If Hiveterminal’s invoice scoring algorithm deems an invoice to be less risky, the discount on offer will be less.
It’s probably easier reading an investor’s experiences first hand. While travelling around the world, Milan reports an IRR of 14% p.a. But the website states that even returns of up to 30% p.a. are achievable.
It’s also crucial to remember that the value of the crypto assets that you use to earn crypto interest can go up and down. To put it a different way, earning 6% is no good to you if the crypto you are holding is falling in value.
However, invoices are bought on Hiveterminal using fiat (EUR) and so crypto volatility does not factor into the returns on offer. In terms of fees, however, fewer HVN are required to pay your fees if the price goes up - and more if the price goes down. This is a crucial distinction.
Just like with a bank account, you don’t have to do any work when staking. Just sit back and wait for the interest to accumulate. Maybe you’ll have to check that you’re receiving our payments, but that’s pretty much all you need to do for your return.
With Hiveterminal, however, you would be earning income in a less passive way. Above all, you will need local taxation advice on how to account for your business activity. It is vital that you are operating in accordance with all relevant rules and regulations. That takes time to set up, but is worth it in the long-run if you are keen to diversify into P2P factoring long term.
The rest of the work is taken up by sending reminder letters to your debtors if they do not pay on time. To help with this, Hiveterminal has created some template letters which can be sent out, saving time.
However, the longer it takes for them to pay, the worse your return over the period would be. In the worst case scenario, you would need to instruct a collections agency to collect your money.
Needless to say, poor payment behaviour is recorded on Hiveterminal, with non-payment and delayed payment being punished for future platform activity.
Buying invoices comes with risk. There is a chance that a percentage of the invoices you buy will default. Nevertheless, Hiveterminal’s invoice risk algorithm and buying invoices in bulk both seem to mitigate this risk.
The returns on offer are potentially much higher than staking, but the risk and effort involved are typically higher too. The biggest difference is that crypto volatility has a far smaller effect with invoice factoring.
And that was what we found out about staking (baking) Tezos! If you know of any staking opportunities that are comparable in terms of risk and return to invoice factoring, please leave a comment below. We’re on a mission to find the best passive income opportunities out there, so let’s investigate together!
Published by @soldonhive on Friday 24th April 2020
*DISCLAIMER: This is not financial or investment advice. The above references an opinion and is for information purposes only. All investments involve a high degree of risk and there is always the possibility of loss. This information is general in nature and has not taken into account your personal financial position or objectives. Before proceeding please refer to a licensed adviser or tax agent and relevant PDS for product details before proceeding.