What are the major crypto staking risks? Over the years, cryptocurrencies have attracted the attention and caught the fancy of several users all over the world.
The crypto coins are considered to be one of the novel financial instruments of the digital age to invest in and expect to make some money from it.
The crypto market offers a lot of avenues to the users to earn an income on investments and crypto staking is one of these ways which has emerged as one of the most popular ways to make a passive income.
However, needless to say, just like all other types of investments in crypto assets, crypto staking also comes with its fair share of risks in it.
You will need to know about these risks in the first place so that you do not end up on the losing side while staking your crypto.
Apart from that, you should also know how these risks are closely related with the working process of crypto staking.
This will ensure that you have a clear understanding of the crypto staking process and do away with the chances of landing up with irreparable financial consequences.
One of the most significant risks of staking crypto coins is its volatility.
This means that one particular crypto coin may be valued higher than the others at one moment but it can also become a coin with the least value in the next moment.
This article deals with all of those risks over and above that so that you have a detailed impression of them and also know the benefits of staking crypto coins together with the risks involved.
What are the Major Crypto Staking Risks?
Crypto staking can provide you with over the average returns on your investments if done correctly and cautiously.
It will allow you to have a much better control over your coins, security, as well as the performance of the protocol if only you take the setbacks into consideration and offset them.
Since the crypto markets and exchanges are known to be free from any clear regulatory inferences, it is most important that you know the general risks associated with crypto staking.
This way you will know exactly what you are getting into while staking your crypto coins.
Here are some of the major risks associated with crypto staking that are outlined for you for your better understanding.
As said earlier, probably one of the biggest risks of crypto staking experienced by the investors is the price swings of the coins staked by them which can potentially be high and adverse as well.
This means that when the price of a staked crypto coin is high you can earn a high income of as much as 15% in terms of the Annual Percentage Yield on it.
However, if and when the value of the coin falls down by 50% of what it was originally, which is a common occurrence mind you, you will incur a significant amount of loss on your investment.
It is for this reason you are advised that you choose the type of crypto asset you want to stake very carefully.
You should never make a choice simply relying on the APY figures.
Another significant risk of crypto staking which you should be wary of is the liquidity, or the illiquidity rather to be more precise, about the asset you wish to stake.
For example, if you decide to stake one of those Altcoins with a low cap, it will hardly offer any liquidity on the exchanges.
This means that you will find it quite difficult to find a buyer when you wish to sell your crypto asset or even when you wish to convert the returns you earned by staking your assets into Bitcoin or other stable coins.
If you want to mitigate the liquidity risks considerably then you should look for staking those coins that are pretty liquid and have a high trading volume.
This is very important because you will hardly have any control over the prices of the asset which is primarily based on the behavior of the crypto market.
You will come across a few assets that you can stake but these come with specific lockup periods.
This means that during this period you will not be able to access these coins if you stake them even if you need them badly.
In such a situation you are bound to incur some losses if the value of the coin falls dramatically during this lockup period.
You will not be able to un-stake them to mitigate the losses which will eventually have a strong adverse impact on the overall return on your investment.
The only way to mitigate such risks altogether is to stake those coins that do not come with any lockup requirements whatsoever.
This risk is pretty much similar to the lockup duration risk while staking crypto coins.
There may be a few specific types of crypto coins that may not offer any rewards for staking on a daily basis.
This means that you will have to wait for some time in order to receive the rewards that you may have gained while staking your crypto.
Once again, this will affect your overall income on investment or APY of crypto staking especially if you have to hold onto the coins for the whole year.
This will also reduce your yield since you will not be able to re-invest your staking rewards into other avenues such as in a DeFi protocol if you want to earn more.
If you want to mitigate this risk and earn rewards on the coins staked by you quickly you should choose to stake only those crypto coins that pay staking rewards on a daily basis.
Then there is a risk when you run a validator node to stake your crypto coins.
This will involve some solid technological knowledge on your part. Otherwise, you will not be able to do away with the disruptions that may be caused during the staking process.
As you may know that every validator node needs to have no less than 100% uptime. This will ensure that your chances to earn staking rewards are maximized.
Moreover, there is also a high chance of a validator node to misbehave mistakenly.
In such situations, you will be liable to pay penalties which will once again have an adverse effect on your staking rewards overall.
In the worst case scenario, you may also have your stake slashed if you fail to validate a transaction correctly.
This will mean that you will lose a portion of your staked coins.
If you want to mitigate these risks while running a validator node you must make sure that you use a trusted provider to pass on your stake to another third-party validator.
Apart from the risks of running a validator node yourself or via a third-party service, you will also have to pay the cost of staking crypto.
Typically, when you run a validator node you will need to use a lot of energy or electricity along with an efficient hardware. This can be quite a lot in dollar value.
Moreover, if you are using a third-party provider you will usually have to pay a percentage of your staking rewards, thereby reducing the returns on your investment.
Therefore, you must make sure that costs of crypto staking are not too high to eat up your profits easily and quickly.
Add to that, you should also be wary about the commission rates of the validators so that you can make necessary adjustments in your stakes if you find it is too low.
Loss of Private Keys or Stolen Funds
And then there is always the risk of losing the private keys to your wallet.
In this situation you will lose your coins altogether because in the crypto space there is a saying – if it is not your key it is not your crypto.
Moreover, the funds stored in the wallet can be stolen as well if you are not very attentive and adequately careful about the security aspects.
Therefore, if you do not want such things to happen to you while staking your crypto, make sure that you have a proper backup of your wallet.
You should also store the private keys to your wallet very safely.
Also, you will be better off in storing your digital assets safely if you stake your crypto coins by using apps where you are also allowed to hold your private keys.
This will be a much safer option in comparison to using any third-party custodial staking platforms.
Some Other Notable Risks
Here are a few other risks that are also worth knowing and considering when you stake your crypto coins on an exchange.
- Price – Make sure that you check the price of the crypto coins along with its future prospects before staking them, especially if you are going to lock them up for a specific period. Be very careful and do some research while choosing your asset.
- Demand and supply – Check the demand and supply of the particular crypto coin you wish to stake. A crypto coin with a desirable demand and supply curve will make it quite easy for you to sell it when needed or convert them into cash or other crypto coins.
- Project feasibility – Several crypto projects, especially the new and unproven ones, may fail much more easily and quickly than you expect. Therefore, before you put your money into and bet on it, make sure that you know about the future prospects and feasibility of the project so that it does not go out of business and into oblivion with the blocks stumbling down resulting in a loss for you.
- Minimum holdings – There may be a few specific types of assets to stake that will have some minimum holding requirements. According to the basic principle of crypto investment, you should never invest in it more than you can afford to lose because there is always a chance of losing them all. Therefore, read all the terms and conditions very carefully before you sign up.
- Scams – A lot of crypto projects may look good but may be purely scams. Check for these and avoid these new entrants in the market if you do not want to lose all that you have. It is best to go with those crypto coins that always have an established track record and a fairly long history to back it up.
Therefore, if you want to avoid all such risks, make sure that you do not stake crypto coins simply based on the anticipated reward potential but research well to have a solid knowledge about its basics as well as the technologies involved.
Also, when you are into the thick of matters make sure that you are most cautious from your end. This means that you should never share your personal details with any stranger.
In addition to that, you must also make sure that you protect your online wallet, in case you wish to use one, encrypting it with a pretty strong and unique password.
This password should be hard to guess by others and get access to your wallet and fortune that you may have gathered over time and stored there.
The true potential of cryptocurrencies has come to the fore now that the hype regarding it has faded away. If only you know the risks involved in crypto investments and staking, you can make a lot of money from it. Good luck!
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.