18 Apr 7 Crypto Staking Risks [Investors Beware]
Staking crypto can yield above-average returns and allows you to compound your crypto assets. However, there are crypto staking risks every investor needs to understand before diving in.
Staking crypto – and the asset you stake – boils down to knowing how much risk you are willing to take.
Before we dive into the 7 top crypto staking risks all investors should be aware of, let’s back it up and define staking crypto.
What Is Staking Crypto?
Simply put, staking crypto is leasing out your crypto assets for a specific period of time to the blockchain to earn rewards in the form of more crypto.
Staking rewards is similar to stock dividend payouts, in that both are a form of passive income. Or like a savings account that pays interest.
Staking generates income because you are rewarded for pledging your crypto assets to support the blockchain network. Staking is how new transactions are added to the blockchain.
Staking is similar to mining in this way — miners dedicate computing power to the blockchain, and stakers dedicate coins. Both are rewarded with more crypto.
You can only stake with cryptocurrencies that use the proof-of-stake model (POS) vs. proof-of-work model (like Bitcoin).
Check out this video for a deep dive on crypto staking.
Crypto Staking Risks
#1 Market Risk
The biggest potential risk, when staking crypto, is the negative price movement in the crypto asset staked.
For example, if you’re earning 15% APY a year, but the asset drops 25% over the year, you will have a pretty hefty loss.
This is why you should NOT pick based on APY alone. Focusing on APY alone can get you into big trouble if you aren’t careful.
#2 Lockup Periods
Some crypto assets have locking periods when you cannot access what you’ve staked for a specific duration.
Staking Cosmos (ATOM) is an example. If you stake ATOM, you have to wait 21 days to move your assets. When you unstake it, you don’t earn rewards for the 21-day unbonding period.
This can be risky if the price of a staked asset drops quickly and you can’t unstake it quickly in order to sell. In fact, you can incur significant losses in overall returns should the price plummet and you can’t get your assets moved fast enough.
An easy way to mitigate this is to plan ahead to sell. I stake ATOM and closely watch the price action. I also pulled out my initial investment, so the amount I’m staking is all profit.
If lockup periods make you too nervous, avoid staking crypto assets that require it.
#3 Liquidity Risk
If you stake a coin that has little liquidity on the exchanges, it may be difficult to sell or convert your returns into other cryptocurrencies.
To mitigate this risk, avoid obscure coins that may have a higher APY, and, instead, stake crypto assets with higher trading volume on the exchanges.
#4 Time to Receive Rewards
The rewards duration can be a risk if the rewards are paid out over a longer time period. Some staking pools offer daily staking rewards payouts. Others don’t. Some you have to wait 7 days or more.
While you won’t have any issues with the APY, if the asset you’re staking pays out every week instead of every day, you won’t be able to restake (or reinvest) your rewards to earn more yield faster.
A way to mitigate this risk is to stake crypto assets that offer daily payouts.
#5 Project Failure
Another reason NOT to focus on crypto assets with the highest staking rewards is the potential of project failure. If you stake a coin and the project hits a roadblock or goes out of business, you’re probably going to lose your staked assets.
Before staking, make sure you research the project fundamentals, the team, and the technology behind it.
Remember with staking you are helping grow the network. So select crypto assets you believe have value and have various applications in the real world. Those have a better chance of having a healthy demand and price – and hopefully will be around for years to come.
Don’t just stake something for the high return – you may end up losing it all.
#6 Tech Limitations
If you stake assets on an exchange, such as Binance or Kraken, it’s pretty simple to stake and earn rewards.
However, if you stake in DeFi or through a third-party wallet, it can take a bit of technical know-how to get your crypto assets staked.
I recently decided to stake my SAND on The Sandbox’s site. SAND is the utility and governance token used throughout The Sandbox’s metaverse.
They are leaving the Ethereum network and moving to the Polygon network. The issue is that SAND is currently an ERC token on the Ethereum network.
To encourage people to move to Polygon, holders must convert their SAND (the ERC20 token) to mSAND.
Figuring out how to do this – and do it with as little gas fees as possible – was no easy task. It took hours of YouTube tutorials and reading articles to figure it out.
If you aren’t confident in your technology skills, you either need to get help or avoid staking crypto assets where it takes planes, trains, and automobiles to stake.
In addition, if you accidentally send your crypto assets to a wrong address while attempting to stake, you run the risk of losing your crypto assets. There’s no centralized number you can call to get it back.
#7 Loss or Theft
As with any asset or investment, your crypto assets are vulnerable to theft or loss.
Make sure you remember your private keys. If you don’t, you won’t be able to access your crypto assets.
In addition, never store your passwords or recovery phrases on your computer or where others may find them.
Apps that allow you to hold your private keys are a better choice than staking on an exchange or other third-party staking platforms.
For example, I stake Cardano (ADA) on my Ledger wallet using a third-party wallet. I own the private keys, but am able to stake and earn rewards – and accumulate more ADA.