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In the Crypto asset markets, staking Crypto has become a common method for earning investment income. However, staking does have risks, just like all other forms of investment.
In this article, we have mentioned the top 7 risks that you should consider before staking your Crypto. Read till the end to make an informed decision.
But before we check the risks, let’s quickly understand Crypto staking.
What does Crypto staking mean?
In general, staking refers to committing one’s Crypto holdings in exchange for an incentive. By locking up tokens, users can contribute to the network’s security via staking. As a result, native tokens are awarded to users for helping secure the network.
Rewards increase in direct proportion to your pledged Crypto assets. Because the incentives are delivered on-chain, earning them is a completely automated procedure. All that’s required of you is that you stake them. In other words, your crypto-assets earn money when you’re not paying attention.
The main purpose behind staking is to protect the network. Because of this, the network becomes increasingly secure with each new wallet that joins the pool. Verifying a transaction earns you a reward that serves as a payment for your efforts in return for your time and effort. Consequently, the network now has an inherent “economic worth” because of the possibility of gaining more of the underlying asset.
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For detailed information on Crypto staking, click here.
How does Crypto staking work?
Crypto staking is a process where token owners can stake their money by helping validate blockchain transactions to earn a staking reward. You should lock up Proof-of-Stake (PoS) coins in a supported wallet to receive daily, weekly, or monthly payouts. The staking reward varies based on how users stake their tokens, the amount staked, and whether it’s being made to provide liquidity or validate transactions.
Are there any risks associated with Crypto staking? Let’s find out in the following section.
Is there a risk to Crypto staking?
The annualized returns for staking the most well-known Cryptos are enticing as a means of generating passive income, like dividends from shares. No investment, however, is ever completely risk-free. Since most governments do not regulate Cryptos, they carry greater risks than traditional markets. Market swings and crashes are among the main variables that can cause investors to lose money by staking. For instance, if a person stakes a coin to make 5% APY, but the market falls 20% during the same time, this will lead to capital loss.
Risks associated with Crypto staking
#1 Market Risk
When you stake Crypto, the biggest risk for investors is that the price of the asset you have invested in may fall. This could cause you to lose money even if you earned a good interest rate.
For example, if you were earning 15% APY for staking an asset and its value falls 50% in a year, this will lead to a significant loss of your money.
So, people who invest in Crypto should be careful while choosing which asset to stake. They should not choose an asset just because it has a high APY.
#2 Liquidity Risk
While staking your Crypto, the asset’s liquidity (or rather illiquidity) can be considered a major risk factor you must be aware of.
If you stake a micro-cap altcoin with little liquidity, it can be hard to sell or convert your staking rewards into bitcoin or stablecoins.
To mitigate this risk, it is better to stake assets that are more liquid and have high trading volumes on Crypto exchanges.
#3 Lockup Periods
Some stakable assets have a locked period during which you can’t use or access your staked assets. For example, Tron and Cosmos have locked periods.
If you stake an asset with a locked period and its price falls sharply, you won’t be able to withdraw your investment. This will reduce your overall earnings.
To avoid this lockup risk, it’s better to stake assets that don’t have a locked period. This way, you can withdraw your investment at any time if the price drops.
#4 Rewards Duration
Similar to lockup periods, some staking assets don’t pay out staking rewards every day. This means you have to wait to receive your rewards.
Your APY will not be affected much if you stake an asset or hold your investment for the whole year. But, it will reduce the time you have to reinvest your rewards and earn more.
To avoid this, it’s better to stake assets that pay out rewards every day. This way, you can reinvest your rewards immediately and earn more yield. This will help to increase your overall Crypto investment returns.
#5 Validator Risk
Running a validator node to stake a Crypto that requires technical knowledge to ensure that the staking process runs smoothly. The node needs to be operational 100% of the time to maximize staking returns.
If a validator node mistakenly misbehaves, it could lead to penalties and affect your staking returns. In the worst-case scenario, your stake could be “slashed,” which means you’ll lose a portion of your staked tokens.
To mitigate this risk, you could use a trusted provider to delegate your stake to a third-party validator. This way, you don’t have to worry about running your own validator node and can avoid the risks that come with it.
#6 Validator Costs
Crypto staking comes with costs. You’ll have to pay for hardware and electricity costs if you run your own validator node. If you use a third-party service to stake, you’ll usually have to pay a percentage of your staking rewards as fees.
It’s important for Crypto investors to keep an eye on these costs to make sure they don’t eat too much into their staking returns.
To maximize your staking returns, choosing a staking method that minimizes costs while still providing a good return on investment is important.
#7 Loss or Theft
There’s a risk of losing your wallet’s private keys or having your funds stolen if you don’t pay enough attention to security. This risk applies to staking and holding digital assets.
To ensure safe digital asset storage, it’s crucial to back up your wallet and store your private keys safely.
It’s recommended to stake using apps where you hold the private keys rather than custodial third-party staking platforms. This way, you have more control over your funds and can better ensure their safety.
Final words
Crypto staking gives users a way to use their holdings and generate income while retaining ownership of their assets. However, there are a number of risks associated with Crypto staking, including market risk, liquidity risk, lockup periods, and many more. Before participating, it’s crucial to understand and study the specific staking process fully. It’s also crucial to make sure the staking platform or validator is reliable and secure.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
