Bitcoin (BTC), 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 the proof-of-stake (PoS) model, which allows token holders to lock (or stake) their holdings to earn revenue while securing the network by verifying new transactions. Proponents of PoS say it’s cheaper, faster, and allows crypto networks to scale better, not to mention more environmentally friendly because it doesn’t require as much electricity.
Betting is a great way to get passive income from holding cryptocurrencies, especially if the intention is to trade infrequently. But there are risks. The native cryptocurrency of a particular blockchain may decline in value and it may take some time before tokens can be released 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 (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. However, in addition to other blockchain networks such as Cardano, Polkadot and Solana, staking fans are likely encouraged that a top cryptocurrency such as Ethereum now also has this feature.
The Case for Bitcoin
Since Bitcoin operates on a PoW consensus model, it does not offer stake rewards. But that doesn’t mean investors should write it off completely when allocating to a cryptocurrency portfolio. Bitcoin has its own investment advantages that require serious consideration.
To begin with, it can be viewed as a digital store of value. One may immediately argue that an asset as volatile as Bitcoin cannot be a true store of value, but that is a short-sighted answer. 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 more tradable than gold.
And Bitcoin has the potential to become a medium of exchange, especially in poor countries with weak financial infrastructure and inflationary currencies, but only if both things improve. To improve scalability, a layer 2 solution that runs on top of the Bitcoin network, known as the Lightning Network, was created to facilitate transactions and reduce 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 is the oldest, most reliable and stable cryptocurrency and its financial growth is enormous.
