While staking cryptocurrencies has provided investors a passive way to make money, this strategy is not without its risks. So before staking your cryptos, make sure you have considered the risks involved with going through the process.
Predicting future movements of cryptocurrencies is pretty challenging since the overall crypto market is highly volatile, with prices continuously gaining and losing.
So if you stake your crypto holdings and they end up falling, you’ll be left with a loss, even if the staking platform you chose can offer excellent annual returns. Note that a 15% return can still shrink when cryptocurrency prices are down 40% to 50%.
Liquidity is crucial to staking and the crypto platforms themselves. With staking, investors add tokens to the blockchain, providing liquidity to the network, which is an important factor in letting platforms run their trading operations and make money.
That said, liquidity is also vital to you, and you should be able to exchange your staking rewards for another cryptocurrency or a fiat currency. You only need to make sure that you have enough liquidity.
Staking with limited liquidity can give you a tough time selling or trading your crypto for another crypto, and it becomes more challenging to do either due to volatility. Such an issue can be avoided by staking more liquid crypto assets.
Staking often involves locking up your pledged cryptos for a certain period which can be a few days, a month, or years. By agreeing to lock up your holdings with the network, you’ll be unable to access them for a certain time.
Unstaking your coins is an option, although the process would not be immediate as it usually takes three weeks or more to make that happen. Moreover, if their prices decline during the lockup period, you might take out cryptocurrencies worth less than when you staked them.
Staking also has penalties that you should be aware of. As a validator, consistency is essential to your job. Therefore, you must ensure that your system is always online.
If you go offline, it could disrupt blockchain operations. If it does, your rewards will receive penalties from the network. Depending on the blockchain you’re in, the penalties you will have to deal with can either be light or heavy.
Theft is a serious risk in the cryptocurrency space, as hackers have found cryptos to be an easier catch compared to cash or electronic money kept in the banking system.
While you have staked your coins and locked them up in the network, they are still at risk of being stolen. Blockchains have proven to be vulnerable to hacking in certain situations. That is why it’s important for platforms dealing with cryptocurrencies to exercise solid security measures.
In March 2022, hackers managed to access Axie Infinity’s Ronin network, allowing them to steal non-fungible tokens (NFTs) worth around $625 million from the gaming firm and its users.
Considering the information mentioned above, it is necessary that you do your research about the security measures used by blockchains before you decide to stake your cryptos.