The impact of staking with CEX.IO
Quantifying the impact of generating yield adds color to its role in protecting investors through bear markets. The same analysis highlights the benefits it can have on investors who have conviction and hodl through bear markets.
Insulation through bear markets: the yield generated from staking during bear markets dampens losses. For example, an investor stakes 100 coins for a full year at an average annual percentage yield (APY) of 8%. The investor has 108 coins at the conclusion of the year. Over this period, the USD value of the token dropped 15% from $10 at the time of purchase to $8.50 at the end of the year. The yield generated from staking protected the investor from a 15% loss. Instead he or she would have lost 8.2% if he or she decided to sell at the end of the one-year period.
Benefiting investors with conviction: the investor had conviction in the bet he or she was making and decided to hodl and stake through the bear market, which lasted for two full years. Over the first year, they earned an average APY of 8% (end balance of 108 coins). In the second year, the average APY dropped to 5% as more users decided to stake on the network (end balance of 113.4 coins). As the bull cycle started, the coin he or she was staking appreciated from $10 at the initial buy-in to $15. A 50% increase. However, because the investor had conviction and decided to continue staking, they were able to realize a 70.1% gain.
CEX.IO’s automatic stake feature lets investors further dampen the impact of bear markets or accelerate their gains after hodling by staking the rewards they earned. It gives CEX.IO users an advantage over investors on other platforms. Staking rewards are typically not added to the investors’ staked balances and thus do not earn yield. This is important to keep in mind to maximize the impact of having conviction and staking through periods of uncertainty.
Staking also benefits the underlying network of the token and the composition of the token’s supply. It adds to the security of the blockchain as holders contribute coins to the nodes that validate on-chain transactions. Coins allocated to validating transactions are locked up, which disallows them from being spent or converted into fiat or other cryptocurrencies. This adds to supply illiquidity that can push prices up at a greater rate as demand increases.
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