If you are looking for new passive income streams, crypto staking is a new opportunity that is rapidly growing in popularity. Crypto staking -- which is simply a way of locking up your crypto in exchange for financial rewards -- is a surprisingly easy process. It's now possible to find top cryptos yielding anywhere from 4% to 12% per year, and it's all completely passive.
With that in mind, two cryptos particularly stand out. One is Avalanche (CRYPTO: AVAX), which is currently yielding 7.56% on Coinbase Global. The other is Polkadot (CRYPTO: DOT), which is yielding an even more attractive 9.77%. By way of comparison, Ethereum is yielding just 6%. Other popular cryptos like Solana and Cardano are only yielding 2% to 2.4%. On a relative basis, then, Avalanche and Polkadot appear to be passive income superstars.
Ethereum as the benchmark
Ethereum can function as a very useful market benchmark when it comes to staking. That's because Ethereum is the most staked crypto in the world. Since Ethereum is so popular, it means that nearly every major staking platform or cryptocurrency exchange is going to offer Ethereum as a staking option, so it's very easy to make head-to-head comparisons.
From my perspective, any crypto that is paying a significantly higher staking reward than Ethereum is doing so for one of two reasons: Either it is a much riskier or volatile investment, and the higher rate is needed to coax investors, or it is a crypto that is exploding in popularity, and the higher rates are a consequence of a new dynamic in supply and demand. Platforms are competing to offer you a higher rate so that they can get access to your crypto for a limited time.
Avalanche is one of the top Layer 1 blockchain networks in the world, and was once considered an "Ethereum killer." It is a faster, more scalable blockchain than Ethereum, and offers access to every aspect of the blockchain world that Ethereum does, from non-fungible tokens (NFTs) to decentralized finance. Currently, Avalanche has a $5 billion market capitalization, and ranks as one of the top 20 cryptos in the world. In January, Avalanche made headlines with news of a partnership deal with Amazon Web Services.
So far, so good, right? You could easily make the case that the higher staking rewards being paid for Avalanche reflect the higher demand for Avalanche tokens. Maybe the Amazon partnership is already starting to pay off for Avalanche. This hypothesis is borne out, to some degree, by recent metrics showing an explosion of transaction activity and user growth happening on the Avalanche blockchain.
However, you could just as easily make the case that the higher staking rewards are due to the higher riskiness of investing in Avalanche. In 2022, for example, Avalanche was one of the worst-performing cryptos in the world, losing more than 90% of its value. So if a market downturn hits, Avalanche will probably suffer steeper losses than more established cryptos.
Although Polkadot ranks as a top 20 crypto with a $6 billion market cap, chances are, most investors haven't heard of it. That's because Polkadot is a "Layer Zero" blockchain that primarily functions to connect smaller blockchains in order to make them interoperable. As such, Polkadot could play a major role in the so-called "multichain future" of crypto, in which all blockchains are interconnected and interoperable.
In terms of staking, one thing that appeals to me about Polkadot is that it is a crypto token that you would likely just buy and hold anyway. I wouldn't mind locking up all my Polkadot and letting it earn rewards in the background while I sleep. Contrast that to Ethereum, which has much greater utility. If you lock up all your Ethereum, for example, you won't have any left over to make NFT purchases.
Should you stake Avalanche or Polkadot?
It might sound obvious, but in order to stake a crypto, you first have to own it. Thus, before you can even start considering whether you should stake Avalanche or Polkadot, you need to be open to the idea of holding that crypto for weeks, if not months, at a time. This may not be a huge consideration if you are already a long-term buy-and-hold investor, but just remember: Once you've staked a crypto, it's "locked up," and you won't be able to get access to it until the end of the staking period.
In deciding whether or not to stake Avalanche and Polkadot, it really depends on where you think the market is headed in 2023. If you think the market is headed up, then both are interesting options, because there's less risk of losing money on your staked crypto. If the market is flat, then I think Polkadot is the best option because blockchain interoperability is still going to be a priority. And if the market is headed down, then I'll take my chances with Ethereum, which I think is much better suited to market downturns than either Avalanche or Polkadot.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dominic Basulto has positions in Amazon.com, Cardano, and Ethereum. The Motley Fool has positions in and recommends Amazon.com, Avalanche, Cardano, Coinbase Global, Ethereum, and Solana. The Motley Fool has a disclosure policy.