Crypto staking is fast becoming a favorite among investors for its window to lucrative passive income. Who won’t sign up for an income opportunity that will enable him/her to earn a decent income for just pledging a bunch of coins? Crypto staking is a process where a staker pledges some coins to a blockchain network to help the network with verification of new blocks. As the staker supports the blockchain in the validation process through his/her holdings, the blockchain rewards him/her with staking rewards. But, this easy passive income opportunity is not without risks. Yes, just as crypto staking assures great rewards, the process begets certain crypto staking risks as well.
The post below outlines the top crypto staking risks that a staker should be wary of.
Volatility risks
This is one of the basic crypto staking risks you must keep in mind while staking cryptos.
Volatility for cryptos is like a double-edged sword. On one hand, the volatility aspect can shoot up a crypto price to the sky in just a matter of few days- on another, the same volatility factor can plummet the price of a coin to abyss in a short while.
High APY on a coin certainly looks lucrative.For example, some coins might offer up to 20% APY. That sounds great no doubt but if you receive the staking rewards when the coin price has plummeted to a serious 50% drop, that 20% APY would have little or no value.
Liquidity glitch
What would you do with the staking rewards? You will probably convert the rewards into USD (or any other fiat) or exchange them into another token. Most of the stakers trade or sell off the staking rewards for high ROI. But, to ensure high ROI from trading or selling your staking rewards, you will need to ensure a token with high liquidity. In other words, the token you choose to stake must assure healthy liquidity as otherwise you might face crypto staking risks.
To avoid such risks, the smarter option would be to look for cryptocurrencies that usually offer steady liquidity. One thing you should be aware of here- you will find a bunch of newbie altcoins offering stellar APY on staking rewards. But, behold! They might lack liquidity big time, thereby imposing devastating its risks on the staker. Please stake on major coins that have proved their mettle in the market. They might offer way lower APY than many new altcoins, but at least, they would promise lesser chances of risks.
The lock-in period
The lock-in time-period might range from 1 month to 6 months to even more. Bottom line is- you cannot take out those coins for any purpose during that period.
What if the coin price rises in the meantime, offering an excellent opportunity for investors to sell at a high price?
Now, some stakers might mention about the unstaking facility offered by crypto exchanges to reduce these crypto staking risks. Well, the unstaking part might take up to 7-21 days, depending on the chosen coin or the exchange. As crypto markets rise and fall in the blink of an eye, the coin might not be at the surge point after such a long time.
However, there is a smarter option to prevent these crypto staking risks. The strategy is to look for crypto exchanges that offer flexible staking periods. In this case, you will have the flexibility to pull out the pledged coins to utilize them for other purposes.
Crypto theft
The discussion about crypto staking risks would remain incomplete without the mention of crypto thefts.
Cryptocurrency thefts are rising at an alarming rate and have even infected some of the largest and most advanced crypto exchanges as well. Rise in crypto theft poses serious crypto-staking risks for the stakers and their pledged coins.
The core point that you must understand here is that crypto exchanges are one of the favorite targets of cyber criminals like hackers. They have stolen millions and millions from crypto exchanges in the past, thereby throwing severe staking risks for the locked-in coins.
So, how to mitigate these staking risks? Well, the first thing is to look for a crypto exchange that has deployed updated security measures. Then, make sure the exchange stores the pledged coins in a cold wallet only to avoid crypto staking risks like cyber theft.
Validator penalty
Validators might be penalized by blockchain networks. Yes, you heard it right.
As a validator, you are demanded to display 100% uptime. Your staking machine cannot switch to offline mode even for a nano second during the staking process. It’s because the network might get severely affected if the validator’s machine switches to offline mode even for an instant. And, if the network gets affected, the validator will be penalized. The penalty amount might vary between blockchains but it’s definitely one of the serious crypto staking risks to be aware of.
High cost of staying online 24/7
Your machine won’t be able to help but consume loads of power to ensure 100% uptime throughout the staking tenure. And that could mean a hole in your wallet.
Crypto is a risky market and there will be crypto staking risks- but if you can choose the right coin, the right staking platform, and the right staking plan, you can be assured of a promising return with staking.