Passive income: It's what many people would love to have. And there are multiple ways to make it, including investing in dividend stocks or real estate.
Another potential approach to generating passive income is gaining momentum, though. Staking allows investors to earn rewards on the cryptocurrencies that they own. You receive yields by committing your digital tokens to support the operation of the underlying blockchain.
How much passive income could you make from cryptocurrency staking? You might be surprised.
First, you'll only be able to stake cryptocurrencies that use the proof-of-stake (PoS) consensus mechanism. The good news is that there are plenty of options available.
For more-conservative investors, staking stablecoins will probably be more appealing. Stablecoins are pegged to assets such as fiat currencies. For example, the two stablecoins with the biggest market caps, Tether (USDT 0.40%) and USD Coin (USDC 0.61%), are linked to the U.S. dollar.
The prices of stablecoins tend to barely fluctuate over time. This makes sense, considering that the goal of the cryptocurrencies is to reduce volatility by tying them to stable underlying assets.
Currently, investors can receive an annualized yield as high as 12.3% by staking their Tether coins. The yield for USD Coin is only slightly lower: around 12%. An investment of $100,000 in either cryptocurrency could easily generate annual passive income of $12,000.
You don't have to stick with stablecoins, though. Other cryptocurrencies that use the PoS consensus mechanism offer attractive yields plus the opportunity for price appreciation.
Solana (SOL -4.86%) ranks as one of the most popular PoS cryptocurrencies. You can receive an annualized yield as high as 15% staking the digital tokens, although many crypto exchanges offer lower yields than that. Solana's price has also soared more than 120% over the past 12 months.
Another top-10 cryptocurrency based on market cap, Cardano (ADA -7.98%), can provide a staking yield of up to 11.2%. Again, though, some exchanges don't pay yields for staking Cardano that are that juicy.
Up-and-comer Avalanche (AVAX -0.85%) looks even more attractive. The maximum yield for the digital token available right now tops 21.6%. Terra's (LUNC -0.66%) yield can be as high as 24%.
Several of the metaverse cryptocurrencies also offer sky-high yields. For example, the Binance crypto exchange offers yields of more than 75% for staking Axie Infinity (AXS). The YouHodler exchange pays yields of up to 30% for staking The Sandbox (SAND -5.70%).
You'll have even more staking choices in the not-too-distant future. The highly anticipated Ethereum (ETH -1.12%) merge, although delayed beyond the June timeline investors were hoping for, will bring staking to the No. 2 cryptocurrency.
Be aware of the risks
Cryptocurrency staking definitely holds the potential to generate much higher levels of passive income than you'll find with several other top alternatives. But be aware of the risks involved.
Most importantly, the price of the cryptocurrency could plunge. A 15% or 30% yield doesn't look so great when the underlying token's price sinks twice as much. Even stablecoins aren't entirely protected from this risk.
Also, exchanges usually require you to lock up your digital tokens for a minimum period when you stake them. This restricts your flexibility when there's significant market volatility. Further muddying the waters, sometimes the unstaking process can take awhile -- potentially seven days or more.
However, investors who are confident about the long-term prospects of a given cryptocurrency might want to consider staking some of their coins. It's without question one of the most intriguing ways of generating passive income.