Top 7 Risks of Staking Crypto
Staking crypto has emerged as a highly popular way to earn investment income in the cryptoasset markets. However, like all types of investing, staking does not come without its risks.
In this guide, you will learn about the top risks of staking so that you know exactly what you are getting into should you decide to stake your crypto.
What is Staking Crypto?
Cryptocurrency staking refers to “locking up” a digital asset to act as a validator in a decentralized crypto network to ensure the integrity, security and continuity of the network. As an incentive for helping to secure the network, stakers (validators) are rewarded with newly minted cryptocurrency.
Staking has been made possible by the Proof of Stake (PoS) consensus algorithm, which emerged as an alternative to Bitcoin’s energy-intensive Proof of Work (PoW).
Unlike PoW networks that require miners to contribute computing power to secure the network, PoS crypto networks require users to stake a share (or all) of their holdings in the network’s token to secure the network and keep it running.
In the early days of cryptocurrency, most altcoins used a PoW protocol akin to Bitcoin’s. In recent years, however, most new blockchains have deployed PoS-based or inspired consensus protocols.
Crypto Staking Returns
Arguably the main reason why staking has become so popular is because it enables crypto holders to earn substantially higher APYs than traditional savings accounts or money market funds.
Using Trust Wallet, for example, you can currently earn 23%+ APY for staking Binance Coin (BNB).
What’s more, you can stake Algorand (ALGO), Kava (KAVA), Tezos (XTZ), Cosmos (ATOM), and Tron (TRX) to earn between ~6% to ~12% APY directly within your Trust Wallet app.
Staking Cryptocurrency — Risks
Crypto staking can generate above-average returns for crypto investors. However, there are also a number of risks involved in the process that you should be aware of. So, let’s discuss the risks.
Arguably, the biggest risk that investors face when staking cryptocurrency is a potential adverse price movement in the asset(s) they are staking.
If, for example, you are earning 15% APY for staking an asset but it drops 50% in value throughout the year, you will still have made a loss.
Crypto investors, therefore, need to choose carefully the assets they decide to stake and are advised not to choose their staking asset purely based on APY figures.
Liquidity — or rather the illiquidity — of the asset you are staking is another risk factor to be aware of.
If you are staking a micro-cap altcoin that barely has any liquidity on exchanges, you may find it difficult to sell your asset, or to convert your staking returns into bitcoin or stablecoins.
Staking liquid assets with high trading volumes on exchanges can mitigate liquidity risk.
Some stakable assets come with locked periods during which you cannot access your staked assets. Tron and Cosmos would be examples of this.
If the price of your staked asset drops substantially and you cannot unstake it, that will affect your overall returns.
Staking assets without a lockup period would be a way to mitigate lockup risk.
Similar to lockup periods, some staking assets don’t pay out staking rewards daily. As a result, stakers have to wait to receive their rewards.
This shouldn’t affect your APY if you “HODL” and stake the entire year. However, it will reduce the time that you can re-invest your staking rewards to earn more yield (either by staking or by deploying assets in DeFi protocols).
To mitigate the negative effects of long reward durations on your overall crypto investment returns, investors can choose to stake assets that pay daily staking rewards.
Running a validator node to stake a cryptocurrency involves technical know-how to ensure that there are no disruptions in the staking process. Nodes need to have 100% uptime to ensure that they maximize staking returns.
What’s more, in case a validator node (mistakenly) misbehaves, you could incur penalties that will affect your overall staking returns. In the worst-case scenario, validators could even have their stake “slashed,” at which point a share of the staked tokens would be lost.
To mitigate the risks that come with staking using your own validator node, you could use a provider such as Trust Wallet to delegate your stake to a third-party validator.
In addition to the risk of running a validator node or using a third-party service to stake, there are costs involved in staking cryptocurrency.
Running your own validator node will incur hardware and electricity costs while staking with a third-party provider typically costs a few percentage points of the staking rewards.
Costs are something that crypto investors need to keep an eye on to make sure that they don’t end up eating too much into staking returns.
Loss or Theft
Finally, there is always the potential that you lose your wallet’s private keys or that your funds are stolen if you don’t pay adequate attention to security.
Regardless of whether you are staking or simply “HODLing” your digital assets, making sure you backup your wallet and store your private keys safely is imperative for safe digital asset storage.
Moreover, it’s advisable to stake using apps where you hold the private keys as opposed to using custodial third-party staking platforms.
Trust Wallet: the Easiest and Safest Way to Stake Crypto
Trust Wallet enables anyone across the globe to securely buy and stake cryptocurrency to earn an investment income from crypto.
All it takes is downloading the Trust Wallet app, buying the asset you want to stake using a debit or credit card (or on the app’s built-in DEX), and then staking it directly within the app while keeping complete control over your wallet’s private keys.