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dr_ed

An Examination of Staking as a Bear Market Strategy.

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I'm going to write something here about staking.....hopefully in a year or two or three, I can look back and see that I was right about some of my assumptions. I'd love to see this post start a long running discussion, but I'm not holding my breath....but here goes....fyi, fwiw.

The typical strategy I see working among crypto hodlrs goes something like this:

 Identify one or more crypto projects that look promising. Ones that have a decent use case....try to buy them while they're very cheap...DCA into a long term position and build a stash over time....in anticipation of a mooning event during a bull market rally.....with the intention of cashing out, perhaps in stages.....at predetermined price points that will deliver the return you were looking for.

Perhaps take enough profits off the table to then allow the rest to appreciate over time....playing with "house money". Hold on to a position in the great ones, like XRP, for a long time, maybe forever.

Sound about right? 

One particular bit of gospel among the hodlrs is...use 100% cold storage in a Nano or some similar device, to protect your digital assets from hackers.

I actually believe in this strategy, but I'd like to make a case for adding one decent addition this approach, that in no way negates the basic idea at all.

That is:

Preferentially select projects that meet the above criteria (cheap, good use case) that also currently have a decent staking reward and a track record of steady, good staking pay-outs.

The primary issue I see raised against staking is that it usually requires the coins you stake to be on an exchange or in a mobile staking wallet. The only coin I stake right now that I'm aware of being able to be staked from cold storage is VET. I do expect to see this feature become more available , since it overcomes a major (and reasonable) objection that hodlrs, who are all potential stakers, do have....It needs to happen so they feel safer. I will, before the thread is over, try to assess the real risks of staking online, vs. the safety of cold storage. I will however, cut to the chase, and say that the hacking risk of foundation approved and maintained online wallets looks fairly low to me at this point. Holding coins on exchanges poses more risk, imho.

Stakers can reduce risk by not staking all their assets in a single wallet or on a single exchange....this much is obvious.

Staking is different than putting coins on deposit for interest. The only coin I hodl now that does not pay rewards is XRP....and I do deposit 100% of my XRP with Celsius, something that many hodlrs no doubt consider dumb...but that's another discussion. This post is dedicated to coins that have staking as a feature of their design.

 

Edited by dr_ed

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Decided to write this in stages as it's apt to be long and I don't want to lose what I've written. You might want to come back later and read this, like tomorrow. It is a work in progress. TIA.

 

 

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Okay, now let's get into some specifics. I will talk about the coins I'm staking right now. I will probably add others going forward. To quickly ID coins that are possible choices, one good source is Staking Rewards dot com.

Be careful. They are not perfect.  I have found MAJOR errors there. But as a quick reference, they can't be beat.

I've been staking VeChain and TRX for about six months now. Long enough to start getting an idea about the potential. I just recently added KuCoin, which is my choice of the best new prospect. 

I choose my staking coins on a variety of criteria. I only buy ones with a real use case. I only buy ones that are still relatively cheap. I only buy ones that are easy to stake. Some coins (EOS is one) are NOT easy to set up in a wallet. Some of the best payouts are on coins I don't think have much of a future. I try to avoid those.

The idea with my approach is pretty simple. Build a large enough position, so that  the staking rewards start to grow the account in a meaningful way, without me putting anymore of my  cash into my position.

In this market, there are so many cheap stake-able coins that it feels like playing Monopoly to me. You create these income streams that might seem ridiculously small....but remember....you are buying valuable assets at a huge discount. The same mooning event that will make the asset worth a lot, will make the income stream go up proportionally, as the price goes up over time.

It is , as I see it, a sensible way of getting huge leverage on your investment, without a great deal of risk.  In the next segment, I will look at the  math, I'll be back.

 

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The only staking that I'm looking forward to is this one https://staking.cardano.org (Cardano — the first third generation blockchain to evolve out of a research-driven approach).  I think that Cardano is going to play a major role 5 years from now and if you're looking for something that's cheap right now then maybe ADA might be your thing.

From https://emurgo.io/en/blog/features-of-staking-in-cardano

A number of other cryptocurrency designers have attempted to implement various forms of Proof of Stake, but not all matching the grand vision of Cardano’s PoS system. Below we briefly highlight shortcomings of both Tezos and EOS.

Tezos

8,000 Tezos (XTZ) are required in order to participate in the staking protocol as a block producer; otherwise, without meeting the minimum requirement, you can delegate your stake.  Tezos allows up to 80,000 validators. One risk inherent in Tezos is that validators may not necessarily pay out rewards to stakeholders. This is because reward payouts are not automatically managed by the protocol, but rather by stake pool operators. With Tezos, as a stakeholder, you absolutely need to do your due diligence to ensure that you get paid. With Cardano, you naturally fit into an ecosystem that will be more secure and guaranteed to be more honest.

EOS

EOS, on the other hand, is highly centralized with only 21 block producers. They reserve the right to freeze accounts and create transactions unauthorized by users and have done so in the past in order to recover stolen funds. While this last point may have certain benefits it is not appropriate for a permissionless mainchain and should be relegated to specific, regulatory compliant, sidechains. Furthermore, such a system does not realistically allow for settlement of off-chain derivatives, or any kind of, legitimate, trade finalization.

Unlike Cardano, EOS uses stake as voting power necessary to elect representatives of equal power. Brünjes et al. says, "This type of scheme differs from ours in that (i) the incentives of voters are not taken into account thus issues of low voter participation are not addressed, (ii) elected representatives, despite getting equal power, are rewarded according to votes received; this inconsistency between representation and power may result in a relatively small fraction of stake controlling the system (e.g., currently EOS delegates representing just 2.2% of stakeholders are sufficient to halt the system, 2 which ideally could withstand a ratio less than 1/3), (iii) it may leave a large fraction of stakeholders without representation (e.g., in EOS, currently, only 8% of total stake is represented by the 21 delegates)."

Given these statistics, and the aforementioned fact about freezing accounts, we believe that Cardano’s PoS system and grand vision present large advantages over EOS’ technology.

Conclusion

Cryptocurrency is still in such a nascent phase that many institutions still do not truly understand the promise of a decentralized, permissionless, and trustless network. A recent article on asset tokenization by ING researcher Carlo Cocuzzo, sums up this sentiment quite succinctly. He says, "Even in a fully decentralised world where transactions take place on a public blockchain ledger, there needs to be trust in the algorithm, or the coder who designed it. It is difficult to see how a fully decentralised model might work given these issues, which then leaves the door open to trusted intermediaries such as banks and investment funds." The institutions clinging to what has worked in the past will likely face a very difficult transition into the trustless present and decentralized, peer-to-peer, future.

The fundamental conceptual decision comes down to whether to trust mathematics or the full faith and credit of legacy institutions. In this light, Cardano is truly upon the ever-evolving edge of the arc of history. The release of Shelley represents tremendous transformative potential coming to fruition. Proof of Stake is a core part of the puzzle; however, in order to truly be competitive, Cardano will offer significantly more advanced features such as smart contracts, user issued assets, and interoperability with foreign Proof of Work blockchains through NiPoPow.

Looking ahead to the future, it is important to ask yourself: what is your plan for staking? Will you operate a pool or delegate your stake? If you are a developer who is interested in integrating staking into your application or wallet then you will want to browse the js-chain-libs repository, which contains the WASM bindings for Jormungandr.

 

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6 minutes ago, crypto_deus said:

The only staking that I'm looking forward to is this one https://staking.cardano.org (Cardano — the first third generation blockchain to evolve out of a research-driven approach).  I think that Cardano is going to play a major role 5 years from now and if you're looking for something that's cheap right now then maybe ADA might be your thing.

 

I was excited about staking Cardano, but I unloaded my position as I consolidated my more  essential positions during the summer bear on alts. 

I really like Charles and the project, and I will stake it when it actually does become stake-able...if I still live and breathe at that point.

If I sound frustrated with ADA it's because I am.

Wen ADA staking?

Edited by dr_ed

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When Shelley? When done :-)!

The network testnet will launch in the middle of September and Shelly seems to be on track for Q4. A nice X-mas gift. Really, to me, Cardano is the only choice for staking unless I count XLM on Binance :-)...

Edited by crypto_deus

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Everyone has their favorite coin, and among stakers that's true too. But in this rant what I want to get at is the validity of using staking as a way to grow wealth, and more especially how it can work to your advantage at times like now, when the charts are not all mooning one after another, and we have week after week of watching our hodls grind lower.

Before I get into the arithmetic, which I hope will be the major takeaway of this thread........ I would like to talk about the psychology of crypto investing, and how staking changes it. 

People run hot and cold on various projects. They start what they intend to be a long term hodl....and then bail into something else....their former favorite loses its luster. Maybe the project has problems, or the leadership steps in dogsh!t a lot. Maybe the founders sell out the wazoo, and drive the price down.

I'm thinking about Justin Sun and TRON of course. Six months ago it was quite popular...now, not so much.But I still remain committed to staking TRX. I'm aware of every bit of the FUD. I subscribe to a news aggregator that tells me more than I want to know.

But at present, every night before bedtime I get 117 TRX dropped into my wallet....not so much money at present, but it amounts to 3500 TRX/month. I didn't notice the daily rewards that much when my stash was tiny......but once it hit the fairly modest level of about 750K ($11K at today's price) , I could see the growth on my screen. I usually ignore the dollar price now, and just look at my TRX numbers. Sure, I check price....but not like I used to....it's still a decent project. Justin Sun is a liability at times, but I don't think TRON is fundamentally flawed, and a certain amount of mismanagement and greed is to be expected from these Gods of Crypto. They mostly do have feet of clay. It's the long term outlook that matters.

Chasing whatever is hot right now can work at times....although I'd argue most people who do it lose money.

Here in the States though, we have onerous taxes that favor holding speculative assets for at least a year. So I lean toward making longer term decisions and letting  circumstances play out over years rather than weeks or months.

Which brings me to a point I would I would like to make.....I try to get to a position size that has a NOTICEABLE  cash flow, or reward flow, if you prefer. I'd rather hodl one coin and see my stash growing, than hodl a hundred decent coins with a tiny stake in each. This is pure psychology, nothing to do with  the math. Plant one fast growing tree rather than a forest of trees that won't mature until I'm dead. It keeps my morale up in these hard times.

I said I'd get to the math. Next, I'll put up some examples.

 

Edited by dr_ed

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I like to use TRX because I've been hodling it long enough to feel fairly confident in most of my guess-timates.  This IS  just an example though, of a coin that pays a fixed amount daily....and pays in the same coin. The take-away could apply to other coins as well.

And this will be an oversimplified estimate. I am just good enough at math to recognize that I can't personally define the  function that describes this kind of compound interest. I'm sure many of you CAN, and I invite your corrections of my crude approach. I think my math is an underestimate, but hopefully not way off over a short time frame.

Let's set up a couple of hypotheticals.

In the first scenario let's say we buy 1 million TRX today at a price of $ .015, which is roughly today's actual price. Puts our cost basis at 15K. Easy math. I picked a good day to make this example.

Let's make what I consider an optimistic but still fairly conservative price target of .25 .......This is much lower than many one year estimates, many of which are in the range of 20 cents to a dollar. Even skeptics think it might hit a nickel.  This is just for purposes of education anyway, and the example is to make a point about staking. But I see .25 as a rational target.

In a year, if you staked all your 1M TRX, you'd get 142 TRX/day, or 51830 extra TRX at the end of a year. If you hit your target in a year the staking would have raised your cash out balance by 5.2% 

I see you yawning. Pay attention, I'm not done. 

Okay...now......let's assume a more bearish outlook...what if it hits .25 but it takes 3 full years?

At the end of year two you'd be up to 1,106,361 TRX if you were staking. The reward would go up as you went along.....at the end of year one it'd be around 149.4  

By the beginning of year three it'd be at 157 or thereabouts (if current trends persist). 

You would cash out with your initial 1M investment plus 163666  additional TRX for an extra $40,419 on your original $15K investment. You'd net $235K on the 1M stack, but you'd make a net of $275,916.50 if you had staked.

So the main takeaway I'm trying to get to here...... is that the longer prices might stay down, the more staking is your friend.

 

Heading to the lake now. Skewer me if made errors. Ask questions. Smoke 'em if you got  'em.

(Don't tell me how if I just buy BTC I won't have to overwork my redneck backwoods East Texas brain, and I could have been drinking already.)

Cheers. Back for more later.

 

 

Edited by dr_ed

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 Well of course, your plan works as long as your coin appreciates in value and you don’t lose them on an exchange.

Edited by ringer2

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13 hours ago, ringer2 said:

 Well of course, your plan works as long as your coin appreciates in value and you don’t lose them on an exchange.

I wish people would read for comprehension. The coin in this example is not held on an exchange. It's held in a foundation sanctioned wallet with no history of being hacked. The security of these wallets is pretty good these days, from what I read.

The hacking risk with TRX in the iOS Mobile Tron Wallet, imho, is mostly that your own device might be hacked. There is risk, but there are ways to mitigate that kind of risk.

Hodling doesn't work for any coin if the coin price just goes down. I think we all get that.

The example is a comparison of staking vs not staking. It makes certain assumptions, which I laid out. One of them is that there is reasonable price appreciation over time.

The plan is already working for me, personally. And I expect it will continue to work. I'm just trying to look at the math here and give people an idea what the difference is in the actual returns.

Spare me the one-liners.

Edited by dr_ed

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One of my criteria for selecting coins to stake and places to stake them is security. That's a valid concern.  As I said in the beginning, I view exchange coins as having higher risk than most others.

The next example WILL  be an exchange coin....Kucoin. 

I really don't remember anyone worrying that much about hodling BNB when it was making awesome runs earlier this year. Plenty of people were piling into it, even though there were NO staking rewards and you had to hodl it on Binance.

 People bought it because it was making better gains than any other coin. Binance did get hacked, and hodlrs were lucky that CZ made them whole. He had no legal obligation to do that. 

Just thought I'd throw that in there for @ringer2 and that crowd.

BNB did well (until CZ started playing footsie with US regulators and cut off US customers) because exchange coins have one important thing most other coins don't....a revenue model that quants can use to value it. Binance was making money like a house afire. Exchanges are the best business to be in, in crypto in 2019.

I expect exchanges to continue to do well, and good exchanges with their own coin will likely give good returns. Kucoin has profit sharing for those who hold KCS that is paid out daily in KCS coin. So I chose KCS to stake because (a) I was able to buy it relatively cheap in a down market and (b) because it has decent staking rewards.

It should profit even more from Binance cutting off guys like me. US customers buy and sell a lotta crypto. Kucoin does have WD limits for US customers. I'm not a trader. I'm a long term hodlr. So no big deal, as far as I'm concerned.

On security:

Kucoin has a unique system. Customers have one wallet for trading on the exchange.......but you also can put your coin in a separate account that is not accessible to API's and is therefore much less exposed to hacking. Kucoin refers to this as your trading account and your main account. My KCS is always in my main account and I put my staking bonus into that account on a daily basis. FYI.

As I said, the thrust of this thread is meant to be about how staking builds wealth. You can do your own DD on security. I'm not an evangelist, I'm an investor. 

Next, I'll give another hypothetical and look at some numbers. 

 

 

 

 

Edited by dr_ed

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One thing you should know...is that Staking Rewards dot com (and all other current KCS calculators)  are spectacularly WRONG with their KCS rewards estimates,. The actual return here lately is in the 5% range, which is good by staking standards.

Rewards on anything......(and this also applies to coins held on deposit for interest  on various exchanges these days, like Bitrue and the new Binance programs)....... If it sounds too good to be true, then ultimately it WILL be too good to be true.  

If you want to get it while you can, that's fine. High payouts are not sustainable. Practically every new program now promises high returns. In my view, these rates are loss leaders and won't persist over time. If you wish to jump around (easier if there are no tax consequences, many of you Europeans are lucky in that respect) then perhaps it makes sense to chase every new deal.....but for me, I'm trying to pick reasonable reward programs that look stable. I'd love to be able to live off the cash flow from staking (my real hitherto unmentioned secret weapon)...and it could happen with any of the coins I stake now, or with all of them. More on that later. Back to number crunching.

 

Edited by dr_ed

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54 minutes ago, dr_ed said:

One of my criteria for selecting coins to stake and places to stake them is security. That's a valid concern.  As I said in the beginning, I view exchange coins as having higher risk than most others.

The next example WILL  be an exchange coin....Kucoin. 

I really don't remember anyone worrying that much about hodling BNB when it was making awesome runs earlier this year. Plenty of people were piling into it, even though there were NO staking rewards and you had to hodl it on Binance.

 People bought it because it was making better gains than any other coin. Binance did get hacked, and hodlrs were lucky that CZ made them whole. He had no legal obligation to do that. 

Just thought I'd throw that in there for @ringer2 and that crowd.

BNB did well (until CZ started playing footsie with US regulators and cut off US customers) because exchange coins have one important thing most other coins don't....a revenue model that quants can use to value it. Binance was making money like a house afire. Exchanges are the best business to be in, in crypto in 2019.

I expect exchanges to continue to do well, and good exchanges with their own coin will likely give good returns. Kucoin has profit sharing for those who hold KCS that is paid out daily in KCS coin. So I chose KCS to stake because (a) I was able to buy it relatively cheap in a down market and (b) because it has decent staking rewards.

It should profit even more from Binance cutting off guys like me. US customers buy and sell a lotta crypto. Kucoin does have WD limits for US customers. I'm not a trader. I'm a long term hodlr. So no big deal, as far as I'm concerned.

On security:

Kucoin has a unique system. Customers have one wallet for trading on the exchange.......but you also can put your coin in a separate account that is not accessible to API's and is therefore much less exposed to hacking. Kucoin refers to this as your trading account and your main account. My KCS is always in my main account and I put my staking bonus into that account on a daily basis. FYI.

As I said, the thrust of this thread is meant to be about how staking builds wealth. You can do your own DD on security. I'm not an evangelist, I'm an investor. 

Next, I'll give another hypothetical and look at some numbers. 

 

 

 

 

Not sure why you interpreted it so negatively. I said your plan works great as long as the price appreciates.  

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In the interest of being reality based in my estimates of returns on KCS, I have to admit I don't have the personal long term track record over many months that I have with TRX.  Since the calculators and estimators out there are deeply flawed ( we can talk about why, I figured that out)....I feel most confident basing my estimates on my own recent real numbers.

The real payout is based on Kucoin exchange volume, with the MM's share backed out of the equation (this is what SR dot come gets wrong) . Currently this appears to be about half the CMC reported volume. This is not reported anywhere. I worked backwards to get there.

I think it can be assumed that Kucoin and KCS will appreciate over time and that the rewards will also appreciate as Kucoin volume rises. It's newish, so I can only say that it's gotten up to 16M/day this year (CMC)  from nearly nothing, and I believe the real corrected volume is perhaps 8M....I expect that to continue to rise. Too soon to plot a chart on it...we'll have to wait and see. 

This example also assumes decent price appreciation. It does not not count on the rewards going up, which SHOULD happen with more real exchange volume.

Price predictions for KCS are all over the map these days. The ATH is about 20 bucks. All the utubers use ATH to calculate whether their coin can "really make you a millionaire"...this is a bad rule of thumb, of course........ but it could be viewed as a possible  limit for upside, I guess. My own conservative estimate is that a one year outlook might get KCS up to somewhere between 5 and 10 bucks. Perhaps a bit more.

It also might be worthwhile to look at what BNB did. It went from under 5 at the 2018 bottom to nearly 40 on it''s bull run...which I think would still be going if CZ hadn't changed course. An 8X, more or less. From today's KCS price of $1.44, an 8X gets us to around $11.50.  I will choose that for my target. It's a guess, but I think it's a believable number. Optimistic, but not crazy.

I'm going to choose 8000 KCS (cost today of roughly $11,500 USD) as the size stash we're going to stake,......because I know these days that pays a reward of roughly 1 KCS/day...and we'll assume as I said, that level of reward is fairly stable. I expect it to go up. But for purposes of this example, I won't count on that.

If you had 8000 KCS in cold storage and it hit the 11.50 price the cash out would be $92, 000 and the net would be $80,500. It could happen in a year or in ten years. Same pay-out.

If you staked 8000 KCS and hit the target in 12 months, you'd cash out with 8365 KCS and net $84697.50. That's better than cold storage by 5.8%

In the extended bear market scenario that took 3 full years to hit your target assuming a  (roughly) 5% ROI it gets better, as per my previous example.

At the end of year two your KCS stash would have added another 418 and the balance would be up to 8738....and at the end of year three.....add another 437  to make 9175 KCS and your cash-out would be $105512.50 for a net of $94012.50.......for a total additional gain of $13512.50...or a 16.8% better result from staking.

I will give one more example.......VET. It's the hardest to estimate, but we'll try to get some idea. Once that's done we'll look at another scenario......which is what the income stream might look like over time if you DIDN'T cash out, but merely started at some point to take out the cash flow as regular income. 

Stay tuned.

 

 

Edited by dr_ed

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