Bitcoin (BTC -0.64%), the world's oldest and most valuable cryptocurrency, no doubt has the potential to change how people digitally store and exchange wealth. While it's still a long way from achieving any meaningful adoption due to its volatility and lack of scalability, it has produced a stellar return of 450% over the past five years, trouncing the S&P 500.
Despite all of its attractive characteristics, however, Bitcoin doesn't allow for staking, which could turn away income seekers. But even without this feature, I think the top crypto is still worth buying today.
What is staking?
Many crypto followers believe that Bitcoin's consensus mechanism, or the way the network validates and adds transactions to the blockchain, is problematic. Known as a proof-of-work (PoW) system, it requires a large amount of electricity and computational power to solve complex math puzzles in order to confirm new transactions. Detractors argue that it's slow and energy-intensive.
Contrast this with a proof-of-stake (PoS) model, which lets token owners lock up (or stake) their holdings to earn yields while simultaneously securing the network by validating new transactions. Supporters of PoS argue that it's cheaper, faster, and allows crypto networks to scale better, not to mention far more environmentally friendly because it doesn't require so much electricity.
Staking is a good way to earn passive income on crypto holdings, especially if the intention is not to trade frequently. But there are risks. The particular blockchain's native cryptocurrency could drop in value, and it could be some time before the tokens could be unstaked and eventually sold.
What's more, because there are no laws protecting investor interests in cryptocurrencies like there are in other financial markets, stakers are vulnerable to losing their entire balances for whatever reason. Even with these risks in mind, staking could be appealing to dividend-focused investors.
Ethereum (CRYPTO: ETH), the second-most-valuable digital asset, with a market cap of $230 billion as of this writing, is transitioning to a PoS system known as The Merge. And right now, holders of its native ETH on Coinbase's exchange can stake their tokens until a to-be-determined date, earning an annual yield of 3.25%. With the 10-year Treasury note at 2.8% right now, this might not be an adequate return for some, especially when considering the risks.
Nonetheless, in addition to other blockchain networks like Cardano, Polkadot, and Solana, fans of staking are probably encouraged that a top crypto like Ethereum now has this feature, too.
The case for Bitcoin
Because Bitcoin operates on a PoW consensus model, it doesn't offer staking rewards. But that doesn't mean investors should completely write it off when allocating portfolio cash to crypto. Bitcoin has its own investment merits that warrant serious consideration.
For starters, it can be viewed as a digital store of value. Some might immediately argue that an asset as volatile as Bitcoin can't be a true store of value, but this is a shortsighted response. When it comes to protecting (and actually increasing) purchasing power, Bitcoin's performance speaks for itself, as its returns have crushed gold over the past decade. Additionally, Bitcoin is more divisible, portable, and easier to transact with than gold is.
And Bitcoin has potential to be a medium of exchange, especially in poorer countries with weak financial infrastructure and inflationary currencies, but only if two things are improved. To upgrade scalability, a layer-2 solution that runs on top of the Bitcoin network, known as the Lightning Network, is being developed to significantly speed up transactions and lower fees. And the hope is that over time, as its price continues rising and more individuals and institutions own it, Bitcoin will exhibit diminishing volatility. An improvement with these two factors would be beneficial for Bitcoin's utility.
Right now, however, Bitcoin can process only roughly five transactions per second, which seriously limits its ability to reach greater adoption. And even worse, the previously mentioned volatility can be a detriment for someone holding Bitcoin for near-term spending needs.
For investors interested in putting some money to work in the crypto market, Bitcoin is probably the safest bet, even without allowing staking. It's the oldest, most reliable, and most durable cryptocurrency, and the financial upside is still absolutely massive.