In addition to death and taxes, inflation is the other unavoidable that everyone has to deal with in their lives. Arguably, the raison d’etre for a large swathe of the global asset management industry – the pension funds, the endowments, the sovereign wealth funds et al, is to beat inflation and preserve the purchasing power of money; Asset preservation, in other words.
In the case of cryptocurrencies, where inflation schedules are predetermined, in most cases, beating inflation essentially involves becoming a participant in the block reward mechanism. For PoW coins like Bitcoin, you essentially have to bet on becoming a miner to beat the inflation of the currency without having to accumulate more currency every year to maintain your share of the ownership. And of course hope that you have enough liquidity to tide out the particularly choppier parts of the market cycle where prices are falling faster than network hash rates (witness the recent crypto price crash of 2018 and what that has done to the mining industry) Also, PoW currencies require significant upfront capital investment to mine the currency.
This is where PoS (Proof-of-Stake) becomes more lucrative than PoW. With PoS, it is easier to stake your holdings and earn a yield on it in the form of block rewards without having to make expensive capital commitments beforehand. It might make sense to revisit our earlier note on governance mechanisms, in case you want to delve deeper into this topic.
In PoS, instead of investing in heavy CapEx/OpEx in terms of mining hardware, electricity, servers etc, you basically ‘stake’ your coins in a bound wallet or some such mechanism. There are startups that specifically focus on providing staking-as-a-service to HODLers (folks with large crypto holdings). The idea here is that individual holders by and large cannot move the needle in terms of having a say in PoS governance systems, so aggregation and clustering into pools gives everyone a better chance. Miners in PoS protocols are (at least theoretically, although EOS is facing some criticism) chosen randomly from a pool. Miners offer themselves up for selection by staking a certain number of coins, and will, if they get selected, be eligible to ‘mine’ a proportional amount of the PoS currency.
Other benefits of PoS – it is arguably more environmentally friendly, and the risk of a 51% attack is minimized here. Of course, while the benefits of staking coins in terms of zero upfront expenditure etc are clear, it is also important to note that the staked coins are always vulnerable to bear cycles. A crash in prices can quickly wipe out any interest earned from staking. It is a bit like your checking account in a bank. It the economy goes into a tail spin and if the bank crashes, you lose your shirt to the ‘black swan’ event, but until then you get some interest, which hopefully beats inflation.
We took a look at PoS cryptocurrencies which have varying yields and compared them against their current inflation rates to calculate the real yields (nominal yield – inflation) on an annualized basis. Once we reach the equilibrium, yields offered should ideally reflect the inherent riskiness of the particular currency’s ecosystem.
“Nuke-Proof Crypto Custody” Online banking and trading group Swissquote is launching a crypto custody service later this month. The Switzerland-based firm announced Friday that, starting March 21, retail and institutional customers will be able to transfer cryptocurrencies from external wallets to be stored in a Swissquote account. Swissquote has partnered with Zug-based Crypto Storage AG, a subsidiary of Crypto Finance AG, for the new offering. Crypto Storage AG offers a proprietary solution for managing cryptocurrency private keys using “highest grade hardware security modules” (HSMs), according to information on its website. Swissquote already offers cryptocurrency trading services, having launched bitcoin (BTC) trading in partnership with Bitstamp back in July 2017. It added support for bitcoin cash (BCH), ether (ETH), litecoin (LTC) and XRP later the same year.
“Fidelity’s Crypto Services Are Up and Running” An ongoing cryptocurrency bear market is not dampening interest for Fidelity’s new institutional cryptocurrency products. Fidelity Digital Assets, a new company created by the investing giant last year, has quietly rolled out its cryptocurrency custody and trade execution operations. In the past few months it has been up and running with institutional investors like hedge funds and family offices, according to its top executive.
“eToro Launches in the US” Exchange and social network for investors and traders eToro has launched its cryptocurrency trading services in the United States. The exchange, which has over 10 million registered users, will start facilitating the trade of 13 unspecified crypto assets and release a cryptocurrency multisignature wallet to customers in 32 U.S. states and territories. The wallet will support Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Litecoin (LTC), Stellar (XLM) and Ripple (XRP), and will enable users to send and receive the supported assets. According to the release, support for more cryptocurrencies will be added to the wallet in the future.
“Canadian Taxmen Cracking Down on Crypto Users”Canada’s tax agency is reportedly cracking down on cryptocurrency investors in the country. Multiple sources have confirmed that cryptocurrency holders have been targeted with audits by the Canada Revenue Agency (CRA). Due to the fact that they’re unregulated, governments have found it notoriously difficult to tax cryptocurrencies. In fact, Canada is not the first country to launch such a probe. The agency is thought to have sent questionnaires probing investors about their bitcoin-related activity over the past decade.
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