Should you bet on your cryptocurrency? This is what the data says

Important fast food

  • Based on CoinMarketCap and Staking Rewards data, most major Proof of Stake cryptocurrencies generate negative returns on real stocks when their token issuance schedules are taken into account.
  • BNB is currently generating the highest real return on investment of around 8.28%.
  • With an inflation rate of 73.34% and a nominal return on investment of 9.75%, NEAR provides a real return on investment of -63.59%.

Double digit staking returns may look good, but after taking the inflation rate of most of the first tier coins into account, the real returns aren’t always as attractive as they seem.

What is betting on cryptocurrency?

With Ethereum’s transition to proof-of-stake fast approaching, staking has emerged on the top of the minds of many investors as a way to earn passive income. Staking refers to the practice of locking cryptocurrency tokens for a specified period to secure and support the operation of blockchain networks that use a Proof-of-Stake consensus mechanism.

Unlike Proof of Work cryptocurrencies such as Bitcoin, where miners spend huge amounts of electricity to validate transactions and secure the network, validators in Proof of Stake systems lock coins as collateral to perform the same functions. In return, both Proof of Work miners and Proof of Stake players receive coins as a reward for their services.

Although both mining and mining can be profitable, many investors are considering a more desirable method of allocating capital as it allows them to earn a steady income without having to purchase, operate and maintain mining equipment. However, when deciding which cryptocurrency to bet on, many investors make the mistake of thinking only of the nominal return on the investment rather than digging deeper. Specifically, investors often forget to check the inflation rate of the cryptocurrencies they plan to invest, which affects the real return of the asset. In other words, if the issuance of a token produces double-digit returns per year but the token has an emission schedule that results in a high inflation rate, the real return may be lower than expected, or even negative.

ETH is back after the Ethereum merger

Using current and historical data from cryptocurrency prices and aggregators CoinMarketCap and Staking Rewards, investors can estimate the exact annual inflation rate of the top 10 Proof-of-Stake cryptocurrencies and find the current return for a stake. Using these metrics, it is possible to calculate the true return on investment for each asset

For example, according to CoinMarketCap data, the circulating supply of Ethereum on September 7, 2021 and September 7, 2022, respectively, was 117,431,297 and 122,274,059, putting the network’s inflation at approximately 4.12%. Data from staking Rewards shows that the annual reward rate for Ethereum balance indirectly through staking pools is 4.04%, giving the real return on staking to -0.08%. This means that anyone who thought they were getting a 4.04% return by staking has already mitigated their return from the network’s token emissions over the past year.

While Ethereum’s negative real yield looks bad on the surface, holders of most other Layer 1 Proof-of-Stake coins are worse off. Additionally, once the Ethereum “merger” is completed, the ETH issuance will drop from around 13,000 ETH to 1,600 ETH per day. This will bring Ethereum’s inflation rate down from around 4.12% to around 0.49%, not factoring in the EIP-1559 fee burn.

Based on data from ultrasound.money, if the price of Ethereum gas remains the same as last year’s average, ETH will become deflationary after the merger, reducing the overall supply by about 1.5% annually. In addition, Ethereum’s nominal return is expected to grow to around 7%, which – assuming educated guesses are correct – would put its real annual return after the merger at around 8.5%.

Is it always worth it?

Aside from the soon-to-be-largest Proof of Stake cryptocurrency, seven of the nine largest Proof of Stake coins have generated negative real returns for investors over the past year. Cardano, Solana, Polygon, TRON, Avalanche, Cosmos and NEAR all had negative real returns when taking into account the growth in circulating supply over the past year.

The worst of the group is NEAR, which has an inflation rate of 73.34% and a nominal return of 9.75%. This gives a real return of -63.59%. TRON’s real return comes in at -19.66% (inflation of 28.9% and bonus of 3.56%), Followed by Avalanche at -18.86% (inflation 33.78% and bonuses 8.55%) and then Polygon at -13.51% (inflation 31.36% and bonuses 13.61%). Solana’s real return is currently -12.01% (inflation 19.7%, bonuses 5.32%), Cosmos -9.03% (inflation 29.57%, bonuses 17.87%) and Cardanos at -2.89% (interest inflation at 6.73% and bonuses 3.64%).

Based on the data, instead of earning passive income, most of the Proof-of-Stake crypto players have lost income in real terms over the past year due to aggressive token issuance schedules.

The most profitable cryptocurrencies to bet on

Based on the same methodology, only two of the top 10 Proof of Stake cryptocurrencies (including Ethereum) have generated positive real returns for speculators over the past year.

BNB, which implements a transaction fee burning mechanism similar to Ethereum’s EIP-1559 as well as a virtual coin burning mechanism based on Binance’s earnings, generates by far the highest real return for players. BNB currently has a negative inflation rate of -4.04% – which means that circulating supply has diminished over the past year – and offers a nominal return of around 4.24%. This puts the real return for BNB players at around 8.28%, which is about the same as the expected return from Ethereum after the merger.

Polkadot also generates real returns for speculators. Its circulating supply has increased by 12.83% over the past year, while the annual return is currently around 13.9%. This puts its real return at 0.948%.

Taking into account the token issuance schedules, the real return rates for the top 10 Proof of Stake cryptocurrencies (including Ethereum) over the past year are as follows:

Bahrain National Bank (BNB): 8.28%

Polka dots (dots): 0.948%

Ethereum (ETH): -0.08% (expected to reach ~8.5% after merger)

Cardano (ADA): -2.89%

Cosmos (ATOM): -9.03%

Solana (SOL): -12.01%

Polygon (Matic): -13.51%

Avalanche (Afax): -18.86%

Tron (TRX): -19.66%

Close (close): -63.59%

The above data shows that high nominal risks do not necessarily lead to high real returns. This is why strike rates should not be the only factor for investors considering owning an asset. Equally important, volatility in the cryptocurrency market can affect real returns – even if an asset is generating returns through investing, it may not be beneficial if it suffers a 70% drop in a bear market. As a final note, readers should be aware that cryptocurrency prices are a factor of supply and demand, which means that if the supply of cryptocurrency grows by 30% annually, then the demand for it must also grow at the same rate in order for the price to remain. The same.

Disclosure: At the time of writing, the author of this article owns ETH and several other cryptocurrencies.

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