Stake or Trade Crypto for Better Long-Term Return?

Question

Ten years ago, this question would have drawn the most amusing looks from an audience. Today, it is a valid inquiry that shows how developed cryptocurrency has become. This article explores the peculiar opportunities and potential risks and deciphers which yield better long-term returns on investment.

What Does Crypto Staking Mean?

When you lock your digital assets in a blockchain network so that they are used to validate transactions and maintain the security of the protocol, you have ‘staked’ your crypto assets. As a reward, you will earn bits of crypto tokens, usually the type of tokens you locked in the network. Staking is a popular crypto investment strategy, and the rewards are often called Annual Percentage Yield or APY. The APY is both predictable and passive in most cases. Additionally, staking your crypto allows you to participate in proof-of-stake transactions, especially in networks like Ethereum, Solana, or Cardano.

For example, you are offered a 2% reward for four weeks when you can stake your digital token. So you decide to stake about 100 tokens in the blockchain network. In 4 weeks, you'd have access to 102 tokens, 100 original tokens, and the two tokens that are your rewards.

How many types of crypto staking are there?

Investors have several avenues to secure and stake their digital assets, but let's name a salient few.

Passive staking: This type only requires you to lock up your token to a blockchain network so that the network can keep its protocol secure while aiding its efficient operation. While this doesn't consume your time nor demand participation, it often comes with lower rewards.
Active staking: Unlike the passive option, active crypto staking requires investors to actively participate by validating crypto transactions or generating new blocks on the network before they can earn rewards. While this demands participation to an extent, it offers relatively higher token rewards.
Assigned staking: In this type of crypto staking, investors allow other operators to take control of the investor's validator node. The rewards are then shared between the investor and the assigned operator. It's just like giving someone my funds to invest on my behalf while we share the proceeds.

What Are the Advantages of Crypto Staking?

Because most people investing in crypto staking are seeking passive income opportunities, the forms of crypto staking that don't require the active participation of investors are favored. This makes it a viable passive income avenue. Secondly, this form of investment has fewer risks than high-frequency trading due to the predictability of returns. Thirdly, it can offer compound rewards if rewarded tokens are reinvested into networks.

What Are the Disadvantages of Staking?

Life can be dynamic, and locked-up funds may be needed when they're locked up, which presents the liquidity problem. Also, crypto prices often fluctuate, which may reduce the real value of the token after the lock-up period, thanks to token price volatility. It's worth noting that crypto staking offers lower potential ROI than bull market trading.

What Is Crypto Trading?

Like forex traders, crypto traders buy and sell currencies to benefit from price differences, but this time, they are cryptocurrencies. This buy-and-sell activity can be short-term, such as day trading, or medium-to-long-term, such as position trading or HODL. The significant difference between crypto trading and crypto staking is that trading is very active and speculative.

Popular Types of Crypto Trading

Spot crypto trading: This is the most common crypto trading strategy. It involves buying and selling crypto tokens at current market prices.
Futures trading: With futures trading, you enter financial contracts where you speculate how much a crypto would be worth at a future date, and the contract would entail a buy or sell action at the prespecified date or time.

What Are the Advantages of Crypto Trading?

Cryptocurrency trading is volatile, offering quicker profits than crypto staking. It also lets you respond to market events easily and access your funds instantly due to its high liquidity.

What Are the Disadvantages of Crypto Trading?

Due to the high volatility of crypto trading markets, there is a high risk of financial loss. A trader also requires time and skill to understand the technical and fundamental analysis needed for successful trades. Investors can fall into emotional stress or the temptation to chase losses.

When Is Crypto Staking More Effective?

Crypto staking is more effective when the markets are flat or bearish because trading your tokens during a downtrend offers little upside.
If you prefer passive income where you don't have to stay up every moment trying to make extra tokens, crypto staking is the best for you because you can literally “set and forget."
If you don't have the time and expertise needed to trade, this option works best for you. It keeps you from situations that cause errors due to emotional decision-making and technical analysis stress.
If you want to hold your assets long-term, crypto staking is the best option because idle assets can earn interest in your wallet.

When Is Crypto Trading More Effective?

When markets are bullish or volatile, the rapid price movements can create opportunities for fast gains.
You may consider this option if you have the market knowledge and discipline to perfect your timing, research, and strategy.
Crypto trading helps you maximize capital in the short term because higher risk brings potential rewards.
When you have access to specialized tools, bots, and indicators, the algorithms can help you reduce emotional errors.

Can You Combine Crypto Staking and Crypto Trading Strategies?

It is possible to blend both strategies, and the nature of the mix depends on the investor's risk tolerance and discretion. Depending on your discretion, you may decide to stake about 70% of your portfolio in Ethereum, Solana, or any other PoS network for passive income, while 30% can be actively traded in high-volatility altcoins or used as leverage.

So Which Is Better for Long-Term ROI?

It is tricky to state a one-size-fits-all response, but here's something that will help your decision-making. If you want safer, stable returns with minimal effort, go for crypto staking, but if you are experienced, disciplined, and have time to commit, then go for crypto trading. Alternatively, you can combine both to balance passive income and active growth. All of this depends on your risk appetite, financial goals, and how much time you have.