Risks of Crypto Staking and How to Avoid Them?

In the crypto asset markets, staking crypto has become a very popular technique to make cryptocurrency investment income. But is crypto staking safe? Staking, like other kinds of investing, comes with its own set of dangers. In this guide, we will learn about the risks of staking crypto and the possible ways to avoid them.

The Risks of Staking Crypto

If you are new to staking you should know that staking can have a high return on investment. However, there are plenty of hazards that you should be aware of.

Crypto Trading Fluctuations and Market Risk

The most significant risk that investors face is the crypto trading fluctuations in the crypto market risk, because of the possibility of a negative market cap crypto fluctuation in the asset(s) they are staking. If, for example, you get 15% APY for staking an asset but it loses 50% of its value over the course of the year, you will still have lost money. As a result, crypto investors must carefully select the assets they wish to stake and are recommended not to choose their staking asset only on the basis of APY statistics.

The Crypto-Liquidity Risk Factors

Traders and investors are encouraged to trade markets with increased liquidity levels. This guarantees that they are able to enter and exit deals without difficulty. Because the bitcoin market is known for its volatility, liquidity is a crucial consideration. But the illiquidity is caused by crypto exchange failures, large-scale crypto token holdings by major investors, and the immaturity of the crypto exchange market. The amount of price effect in a market and the possibility of selling without finding a matching bidder are both indicators of liquidity risk. In other words, when an investor, a firm, or a financial institution fails to pay short-term loan commitments, liquidity risks arise. Without giving up capital and revenue, the investor or business will most likely be unable to turn an asset into cash. This is mostly due to a visible lack of buyers or a market that is inefficient.

Assets Lockup Periods

Assets Lockup Periods

A lock-up period is a period of time set aside after a token sale during which token holders of a cryptocurrency project are restricted from selling their tokens. If the price of your staked asset falls significantly and you are unable to unstake it, your total returns will suffer. Staking assets with no lockup period might help to reduce lockup risk. However, the crypto lockup period can be risky, because when they expire, limited people are allowed to sell their stock, which can result in a dramatic decline in crypto stock price due to the massive increase in the supply of stock.

Validator Risks

Running a validator node to stake a cryptocurrency requires technical expertise to guarantee that the staking process runs well. To optimize staking profits, nodes must be completely up and running at all times. Furthermore, if a validator node misbehaves, it can get penalized. The most common penalties include the following:

  • Slashing: When a specific percentage of a validator’s shares are squandered, his or her share value decreases.
  • Loss of validating powers: In this situation, validators are limited in their ability to use their assigned abilities and lose some privileges, such as decision-making authority.
  • Loss of reputation: The validator’s overall reputation in the network is harmed, and his or her chances of getting voted two-thirds of the time are lowered. When a validator’s reputation deteriorates, his or her odds of getting picked as a proposer become nil.
  • When a validator misbehaves, the system moderators have the option of removing their voting privileges for a certain length of time or permanently, depending on the severity of the misbehavior.
  • Inability to propose blocks: The validator may be penalized, and his or her power to manage the system by voting on proposals may be revoked.
  • Permanent blocking: In the worst-case situation, the validator may be permanently barred from accessing the network and lose all of his stakes at the same time due to a misunderstanding or involvement in fraudulent activity (double signing).

How To Avoid Crypto Staking Risks?

Now we know some of the major risks of investing in cryptocurrency, but is there even a way out of the hazardous situation? Let’s explore the best ways to avoid losing your cryptos. 

Storing Coins in Crypto Cold Wallets

Cold wallets are the next type of wallet and the safest alternative for storage that can mitigate the risks of staking crypto. A cold crypto wallet is simply a wallet that is not linked to the internet and so has a lower chance of getting hacked. These wallets are also known as hardware wallets or offline wallets. 

Storing Coins in Crypto Paper Wallets

A paper crypto wallet is the most secure way to keep bitcoin offline. A paper wallet is a type of cold wallet that may be created using particular websites. It then generates both public and private keys, which you can print out on paper. Only if you have that piece of paper can you access the bitcoin at these addresses.

Storing Coins in Crypto Hardware Wallets

Storing Coins in Crypto Hardware Wallets

A hardware wallet is a USB drive device that securely holds a user’s private keys. This offers a number of advantages over hot wallets, including the fact that private keys never come into touch with a network-connected device or potentially susceptible software, making it immune to viruses. These gadgets are often open-source, enabling the community to evaluate their safety rather than a business pronouncing it safe to use.

Watch Out For The Legitimacy of The Staking Platform

If you are new to staking, make sure to stake on legit platforms.

  • A common technique scammers use to deceive cryptocurrency investors is by creating mobile applications accessible for downloading through Google Play and the Apple App Store. Despite the fact that stakeholders can usually get rid of these suspicious apps quickly, they haven’t gone away yet.
  • Don’t trust offers that come from Twitter or Facebook. There are a lot of scammy accounts, and it’s probable that you’ll never get your cryptocurrency back if someone on these sites asks for even a little amount of it. Just because others are replying to the offer doesn’t necessarily mean they are humans, the repliers can be bots as well. 

Stake on legit DEX platforms by choosing the cryptocurrencies you want to stake, then downloading a digital wallet, where you will store your coins. Do not forget to secure your account with a 2FA (two-factor authentication). 

Final Thoughts

Well, now we know the risks of staking crypto as well as some tips to avoid scams. However, in this digital era, you should always be on the lookout for anything suspicious. 

Disclaimer: 
The information on EGG.FI is for educational purposes only and should not be regarded as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by EGG.FI or its team members. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information provided above, then you do so entirely at your own risk.