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? While not completely, staking is considered to be one of the more secure options for earning passive income through crypto. Staking, like other kinds of investing, comes with its own set of risks. But don’t worry, because EGG has got your back! In this academy blog, we will discuss the main risk types and how you can avoid them!

Key Takeaways

  • Although staking is considerably more secure than other ways of earning passive income via crypto, it does have its risks.
  • These include risks associated with crypto fluctuations, liquidity, lock-up periods, and validator risks.
  • To minimize many of these risks, it is suggested to keep your assets in cold or non-custodial wallets and pay attention to the platforms and crypto you are staking.

The Risks of Staking Crypto

To newcomers especially, we suggest keeping in mind risks associated with fluctuation in the crypto trading market, crypto liquidity, assets lockup periods, and validator responsibilities:

Crypto Trading Fluctuations and Market Risk

The most significant one is the crypto market risk since there is a possibility of a negative market cap crypto fluctuation in the asset(s) that are staked. So we suggest carefully selecting the assets you wish to stake. Our EGG platform mitigates these risks by carefully choosing the staking coins we believe will have a bright future, such as Ethereum, Polkadot, and Algorand. Our academy also includes information on staking these crypto coins, so users can decide for themselves which one they would like to stake.

The Crypto-Liquidity Risk Factors

Traders and investors are encouraged to trade crypto markets with increased liquidity levels. This guarantees that they are able to enter and exit deals without difficulty. However, the price can fluctuate, like in any market (although it is less likely to have significant fluctuation with more prevalent coins). The amount of price effect in a market and the possibility of selling without finding a matching bidder are liquidity risk indicators.

Assets Lockup Periods

Assets Lockup Periods

A lockup 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 may decrease. As you may have read in our articles, some assets do not have a lockup period, which can help to reduce this risk. However, the crypto lockup period is somewhat risky because when the time ends, a limited number of people are allowed to sell their stock, which might result in a decline in crypto stock price due to the massive increase in the supply of stock.

Validator Risks

Some blockchains allow their users to delegate their stakes to β€œvalidators” who will be responsible for securing the network and creating blocks. Since they have such important tasks, they also have more benefits than those who put their stake in them. However, in turn, they also receive penalties if they misbehave. Some of the most common ones are slashing, loss of reputation/validating and/or voting power, inability to propose blocks, and even permanent blocking from the network.

How To Avoid Crypto Staking Risks?

Now that you know some of the major risks, let’s explore the best ways to avoid them! And the biggest help in this is the choice of a wallet.

Storing Coins in Crypto Cold Wallets

Cold wallets are considered to be the SAFEST alternative for storage that can mitigate the risks of staking crypto. A cold crypto wallet is a wallet that is not linked to the internet and so has a lower chance of getting hacked. They can be either hardware or paper-based.

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.

Using a Non-Custodial Wallet

All cold wallets are non-custodial, meaning that the private keys that help you access your funds are only controlled by you, the owner. However, although cold wallets are the safest, they are not very practical for everyday users, which is why hot wallets also have wide usage. These are wallets connected to the internet, making them somewhat vulnerable to attacks. That is why choosing a hot wallet that is non-custodial, such as Metamask or the Magic Wallet, helps mitigate this risk. As you may have noticed, the wallets that are available on the EGG platform are all non-custodial and secure.

Other things to consider

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

  • Be mindful of fake mobile applications that can be downloaded from the App Store or Google play, and always check if the link is provided by the official platform or blockchain. You can find EGG’s official links at the bottom of the page.
  • Social media is a place of anonymity, so be careful of offers from Twitter or Facebook that are made from unofficial accounts. Remember! Just because others are replying to the post doesn’t negate the possibility that they 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 you know the risks of staking crypto and some tips to avoid scams. However, considering its profitability, you do not need to ignore it completely. Use cold and non-custodial wallets to store your funds and help mitigate some risks. And, of course, be attentive and choose transparent platforms that provide you with all the information you need. If you want to ask about EGG’s features, consider joining our Telegram or Discord group!

Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.