The Ethereum blockchain is planning to move from a so-called proof-of-work validation approach, to a proof-of-stake, where validators put their cryptocurrency at stake instead of mining to validate a block. Crypto exchanges offer programs where you can earn rewards from staking your balances. How strong a driver of purchaes and price the search for staking yield is, is hard to say.
But I was curious to see how staking yields compare to more traditional asset classes in terms of risk & reward, with staking returns in the single digit % range generally, up to low double-digit %age for tokens like polkadot for example (staking returns are not exactly guaranteed like a declared dividend or fixed coupon, though). While apparently high, these returns should also be adjusted for the volatility of the cryptocurrencies themselves. As a reference, Polkadot’s trading range in the last week was between ca $35 and $43, so roughly 20% vs. the middle of the range, which is over 100% on an annualised basis based on a simple squared-root approximation. This is also in line with a standard deviation calculated on daily prices, resulting in a yield-to-volatility ratio in the order of magnitude of ca 1:7 -1:10, depending on the approximation used.
Should or can we compare staking rewards to a bond’s yield? To a stock’s dividend yield? To a rental yield on a property? Staking rewards are different in concept and nature from dividends, but in the end result in an equivalent cash-flow dynamic. But let us reason as follows: take the stock of pharma giant Roche yielding ca 3% and a Swiss listed real estate stock, PSP, also yielding roughly 3%. Roche’s implied option volatility is ca 20%, just as PSP’s. This brings us to yield-to-volatility ratios of 1:7, interestingly close to that estimated above for Polkadot (despite the difficulty of estimating an appropriate and reasonable volatility measure for such a hugely volatile asset like a crypto asset these days).
Of course this does not mean an investment in Roche’s stock is comparable to Polkadot! They have instead radically different risk profiles, and each person needs to choose what fits to their risk profile. What is interesting here is also the following question: is risk estimated statistically, as standard deviation for example, really comparable between such radically different assets? Meaning: is 1 percentage point of volatility in polkadot as risky as 1 %age point volatility in a large cap stock?