Crypto Staking: Passive Income Generator or Scam?

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You’d think that after Bitcoin’s stunning fall from grace, plummeting from $50,000 USD per BTC all the way down to $16,000 USD at the beginning of the year, we’d stop getting questions about cryptocurrencies. But as the price of BTC has recovered somewhat ($23,884 USD right now), interest is starting to return to the beleaguered crypto space. And with it, the questions.

I’ve been reading about crypto staking, and apparently I can make 10%+ in interest just by holding my money in crypto, like a savings account! Why would I invest when I can make this much guaranteed?

Anonymous reader

Now, you might be thinking “Oh, great. Here he goes with his anti-crypto ranting again.” But the thing is, I’m not anti-crypto. I’ve actually been following the crypto space for years. Personally, I think it’s really interesting technology and the technical details of it are endlessly fascinating to the computer nerd part of my brain. But the finance part of my brain then looks at it from an investing perspective, and it doesn’t even come close to passing the smell test.

Depending on who you ask, crypto is simultaneously a) a stable store of wealth, b) an inflation hedging asset akin to physical gold, and c) a high-flying tech stock that will rocket to the moon. It’s impossible for any single investment to be all 3 things, and as we’ve seen over the past year, crypto has done an abysmal job at doing any of these things.

In short, it’s cool code, but I don’t trust it with a nickel of my money.

But will that change when it comes to staking crypto? Is this a new way of earning passive income, or is just another scam? Well, let’s find out!

What is Staking?

First of all, let’s get one very important thing out of the way. “Staking” is not the same as a dividend or interest. A dividend is a redistribution of profit from a business, which crypto can’t do since it’s not attached to a business like a stock. It’s also not the same as interest, which is a redistribution of income that comes from lending the underlying asset out.

Instead, staking is an entirely new business model that the crypto world, essentially, recently made up.

Here’s how it works.

How “traditional” blockchains work is that lots of computers attempt to solve a very complex math problem. Successfully solving this problem allows new blocks, and therefore transactions, to be validated and added to the blockchain. This also grants the winner a reward, in the form of newly minted coins. The point of this is that because of the enormous amount of computing power necessary to solve this math problem, it’s very difficult for a bad actor to create fake transactions and steal everyone’s crypto. The downside is that it consumes a LOT of electricity. In 2022, the total energy consumed by crypto miners was more than the entire country of Australia.

In an attempt to fix this, some cryptocurrencies such as Ethereum changed over to a system of verifying transactions known as “staking.” In this system, instead of computers competing to see who can solve a complex math problem, users vote on which transactions are valid and put money down on the result, a process known as “staking” crypto. If the block turns out to be valid, they get a piece of the newly minted coins, and if the block turns out to be fraudulent, they could lose their stake.

This system, known as “Proof of Stake,” has the advantage of using way less electricity. After the switchover, known in crypto circles as “The Merge,” Ethereum energy consumption dropped by 99.99%.

For that reason alone, I am a huge proponent of Proof-of-Stake blockchains vs. the old Proof-of-Work system. Why we were wasting so much electricity and warming the globe to solve complex math problems with no purpose was the height of stupidity.

It also presents an interesting opportunity to make a yield on your crypto.

Not Your Keys, Not Your Coins

However, just like seemingly everything else in the crypto space, staking is rife with scam artists trying to steal your shit.

Here’s a simple way to tell if you’re about to be scammed: Do you have to deposit your coins into another wallet? Then it’s a scam.

There’s a saying in the crypto space: Not Your Keys, Not Your Coins. Because blockchain transactions aren’t regulated by any bank or government agency, if a transaction gets validated onto the chain, it’s irreversible. There’s no way to retrieve coins that have been stolen. That’s why the first step of every scam in the crypto space is to trick the victim into depositing (and keeping) their crypto in a wallet that the scammers control.

This is where the companies out there offering crypto staking really start ringing alarm bells. In order to stake your crypto, they claim, all you have to do is deposit your crypto with us! By just keeping your coins in an account, you can earn a return on your investment just like a savings account!

It’s all lies.

First of all, convincing customers to deposit their coins on an exchange is always the first step of an exit scam. Once the company accumulates enough money under their control, they execute what’s known as a “rug pull,” and disappear into the night, cackling. This is what happened to BitConnect.

Secondly, sometimes an attractive staking offer is used to lure people into a new coin that the exchange itself has created (or has a controlling stake in). The hope is to get people to buy and hold this new fancy coin, pumping up its value from all the buying activity. Once the value gets high enough, the scammers sell off their holdings, leaving everyone else holding the bag. This is a traditional pump-and-dump scheme, and I can easily find examples of it being perpetrated today. Here’s the current staking offers from a major crypto exchange that I won’t name since I don’t want to give them traffic.

I mean, a 65% APR for a coin named APE?!? They’re not even trying anymore. They even named it after that stupid Bored Ape NFT, which famously collapsed as a giant scam last year. Why don’t they just name the next coin SCAM? At least nobody will have to pretend that it’s anything else. And they’ll still find rubes to invest in it, I bet.

And finally, if you want to stake coins, you don’t actually need to give up control of your coins at all! Cryptocurrencies such as Ethereum and Solana were designed so that you can stake directly from your wallet. If you have the minimum balance (in Ethereum’s case, it’s 32 ETH) you can configure your wallet to stake however much you want, allowing you to earn staking rewards, all without the coins ever leaving your control.

And if you have less than that, the protocol allows you to join pools of other smaller investors to validate blocks together. Generally, any rewards earned are split proportionally depending on how much you staked, minus a pool fee, but this setup doesn’t require you to give up control over your coins either.

In other words, there’s never a good reason to stake your coins through a centralized exchange, yet this is how the vast majority of people do it. And then they wonder why they keep getting scammed.

Regulators Are Taking Notice

If you haven’t guessed already, everything to do in the crypto space is crawling with scams. I literally can’t read anything about crypto without seeing news of people who have been scammed, bad actors arrested for scamming, or seeing giant indicators of scams about to happen.

It’s a big reason why regulators are starting to step in. Just this month, the SEC fined one of the biggest crypto exchanges into the US, Kraken, for failing to properly disclose the risks of staking.

Crypto exchange Kraken agreed to shut down its U.S. cryptocurrency staking service and pay $30 million in penalties to settle U.S. Securities and Exchange Commission charges that it failed to register the program, the agency said on Thursday, in a move that could cause headaches for platforms with similar offerings.

U.S. SEC targets crypto ‘staking’ with Kraken crackdown, Reuters

Other exchanges like Coinbase and Binance reacted to the news by crying government overreach, of course, but here’s the thing. You don’t need exchanges to stake coins. So why were they so upset at the prospect of having securities regulators taking an interest in their activities? What were they planning on doing with those coins?

Conclusion

Watching the crypto space evolve over the past few years has been fascinating, to say the least. When I first heard about staking, especially the positive environmental impact, I was pretty excited. But when I started researching into how staking was being used by bad actors to separate people from their money, I had to throw up my hands and say “Again?!?”

Why is it that this space attracts so many scammers? Is it the promises of easy riches? Is it the nerdy futuristic appeal of money that only exists as code?

Who knows. But if you feel like you have the luck, smarts, and technical know-how to dive into this den of vipers and emerge with your shirt intact, be my guest. For everyone else, stick with ETFs.


Speaking of ETFs, we will be doing a Livestream on March 15, 2023 8pm EST with our friends at Passiv, where we will chat about how we use their tool to make investing easier, manage our dividends, and basically live our kick-ass nomadic retired life!

Here’s the link to the FB event page.

Be sure to go there and mark it as “Interested” so we know how many people will be attending. If you do, you will automatically be entered into a draw to win 5 t-shirts from Passiv, which is exactly the kind of nerd cred that you need in your life 🙂

Click here to add it to your calendars:

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Hope to see you there!


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20 thoughts on “Crypto Staking: Passive Income Generator or Scam?”

  1. “They’re not even trying anymore. ”

    They were actually never trying. This space is dumpster fire of scams, pseudo Ponzi schemes, joke coins, and the like because — as you mentioned — it’s unregulated and so many financially illiterate people attracted to its ‘get rich quick’ allure. Crypto has no instrinsic value as it’s not backed by anything real, is a terrible ‘storer of value’, and can’t be used as a medium of exchange except on the black market. You only make money if you succeed in selling it to someone else for more than you paid for it AND the company you transact with doesn’t steal it. If you care about building wealth and becoming financially independent, stay far, far away.

  2. “I’ve been reading about crypto staking, and apparently I can make 10% in interest just by holding my money in crypto, like a savings account! Why would I invest when I can make this much guaranteed?”

    Anonymous reader should learn Math 101. 10% times zero always gives zero.

    I don’t understand why anyone would want to put money on something that guarantees to end up with a zero. This is pure nonsense !

    I was also hoping that this crypto craze would be over by now. I guess we will have to wait a few more months, if not years, for that to happen. It will certainly end up that way. I have no doubt about it. Some things takes more time to unfold, but they always unfold sooner or later. It’s taking much more time than I anticipated …

  3. Bitcoin and maybe ethereum will survive. The rest are history. Bitcoin is tradeable and if bought at a low price like in the past few months it is no riskier than investing in Tesla. Would not put my life savings into it but spec or play money. Just my two cents.

  4. I was dabbling in crypto for a while. Not really doing much but holding it so I threw it into a custodial act to earn 12% interest with Blockfi. Well, Blockfi filed for bankruptcy and froze my assets. It could be years before I get back 1/10th of what I put in there. I don’t recommend buying crypto and I certainly don’t recommend holding it on an exchange. Cold storage is the only safe way to store it.

  5. On the point about electricity consumption, isn’t the issue more to do with how the energy is produced in the first place? i.e. if crypto uses electricity that is generated by greener sources then the consumption volume is not such an issue.

    I don’t know what the comparative energy consumption involved in supporting the existing “traditional” financial systems but I expect you’d need to know that to determine and assess which has the better overall credentials.

    As always, really value your blogs ands perspective.

    1. Think about what you are saying for a minute.

      Quote “how the energy is produced in the first place”
      Wasting green energy is still wasting energy. Wasting 1 kWh of hydroelectric energy on crypto is still a waste when that 1 kWh could have gone into displacing fossil fuel usage. Furthermore, that 1 kWh of hydro or wind or solar energy didn’t just magically appear, it used capital, land, concrete, steel, etc to have that in place.

      Quote “I don’t know what the comparative energy consumption involved in supporting the existing “traditional” financial systems”
      A Fermi estimate for you: in Canada, a debit card transaction costs a business about 6 cents. The network energy consumption therefore has to be much less than that. On the other hand, a bitcoin transaction is what, $50 or so? The difference in energy consumption is likely to be 2-3 orders of magnitude.

      I’m not trying to be a killjoy here. People have a right to pursue their happiness to a certain extent. No judgement on you for your CO2 emissions if fly off to Europe for a vacation instead of doing a cycling tour of your local region. No judgement on you for doing crypto. Just don’t be naive about it. Don’t hide behind “I don’t know…” when in fact it is easy to do some thinking and research and arrive at an answer close to the truth.

      1. Thanks Kelaa, fair points to consider. I’m no crypto fanboy but did some research (as suggested) to find some “truth” and found these summaries by CoinBureau very helpful:

        https://www.youtube.com/watch?v=UCwLIE62iWg&list=PLsYcMGOkdZRSz-8Nr5T1MwARbhd1WbZv_&index=23

        One of the pertinent comments is that: “The utility of the exchanges made possible by bitcoin will far exceed the cost of electricity used. Therefore not having bitcoin would be the net waste”.

        https://www.youtube.com/watch?v=DidAwxWaDKI&t=0s

        “The banking network (card transactions) also requires huge infrastructure investment (banks, merchants and middlemen that all use energy).”

        “If you were to compare the energy consumption of bitcoin mining to that of the current financial system it is estimated to be less than the power used by physical bank branches in the US. Note – this does not include the energy from corporate offices, ATMs, servers, secure vehicles and regulatory infrastructure used in legacy finance.” … much of this is not required in crypto currency so it is far more energy efficient.

        The debate will no doubt go on but for me, the analysis shared in these videos show the bigger picture and that bitcoin is a far more energy efficient system.

  6. Why is it that this space attracts so many scammers? Isn’t that obvious?
    NO REGULATION, NO OVERSIGHT, NO PUNISHMENT FOR CRIMES, ANONYMITY.
    While Crypto is not regulated, this is the rule of the land

  7. Human society is hierarchical, meaning, the smartest and strongest (the monkey with the most money and influence) gets to eat first.

    Crypto in true essence is the natural “INSURGENCE” to this hierarchical order.
    This war will wage on many years to come and if you are betting on a very weak “INSURGENCE”…

    Your great, great, great, great and very great grandchildren “MAY” only “MAY” see the benefits.

    Betting on Crypto now is like betting on North Korea, Iran, China and Russia…
    A group of ”Looney Tunes” in comparison to the current world order!

    Actually, Crypto is an odd bet worse than these Looney Tunes. Meaning, if you have a speculated disorder personality with regard to “INVESTING” in general, speculate the Chinese stocks!

  8. I was really hoping you would address where the yield does comes from. You mentioned that ““Staking” is not the same as a dividend or interest.” But unfortunately didn’t elaborate much further than that.

    Could you please update the article or write a follow up explaining more about the financial incentive mechanism and the variables that people need to look out for if they want to give it a try (inflation rate & staking ratio).

    Otherwise, nice article.

  9. considering dogecoin was literally started as a meme, I bet even the SCAM coin could go “to the moon”

  10. I have a small amount but only in Canadian ETFs themselves and both Ethereum. ETHX.B and ETHH.B.
    I believe this to be the safest way to hold them, and makes dealing with the taxes easier as well.

  11. In all seriousness, I would love to see someone actually go and start a crypto named SCAM coin.

    *Boycott Twitter
    *Boycott Tesla

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  13. my hard-earned Bitcoins were stolen after the use of public computer without a virtual private network (VPN), all sensitive information got exposed without my knowledge which had me lost $29,800 my financial stability was hanging by a thread. I was devastated and didn’t know where to turn. But since crypto is still new,There is also no protection or insurance for lost or stolen cryptocurrencies, during a research thoroughly for about four hours I came across a (website /Generationxweenie@gmail . Com ) that promise to recover my coins, out of curiosity I hired them and the result was amazingly wonderful.I am one of the few lucky who got my wallet retrieved under their watch. it’s not just their technical prowess that sets them apart; it’s their compassion and understanding. They stood by me through the entire process, answering my countless questions

  14. Staking is like planting seeds that grow into a passive income garden. 🌳 Unlike traditional investments, staking allows you to earn rewards by simply holding and supporting your favorite crypto projects. It’s the ecosystem’s way of saying, “Thanks for your commitment!”

    Now, imagine having a trusty gardener like OWNR Wallet. 🧑‍🌾 This multifunctional virtuoso not only tends to your crypto with utmost security but also offers a delightful variety of tools for your daily operations. It’s like having a Swiss Army knife for your digital assets. Plant your stakes wisely, and let OWNR Wallet be the watering can for your crypto garden. 🚿

    Explore the possibilities https://ownrwallet.com/affiliate – Where crypto meets simplicity and security.

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