Many staking platforms have come up to meet the growing demand of users who are looking to earn passive crypto income without involving in the conventional buying and selling of digital tokens. The staking platforms range from centralized exchanges such as Binance to decentralized platform (DeFi) platforms such as Hi.com.
It is important to understand some of the potential crypto staking risks to have a successful staking investment. You should also understand that the risks are closely related to the general risks associated with investing in cryptocurrency.
This article offers a detailed impression of the cryptocurrency staking risks. Additionally, you will also benefit from staking crypto alongside the risks.
However, before we delve deep into staking, let us first refresh our minds on the understanding of crypto staking and the rewards that come with locking your funds for reward.
What is Staking Crypto?
Cryptocurrency staking is the locking up of digital tokens to support a blockchain network’s security, integrity, and continuity. Stakers (validators) are rewarded with newly minted tokens as an incentive for offering their digital assets to keep the network running.
Staking is supported by the Proof-of-Stake (PoS) consensus mechanism algorithm, an alternative to Bitcoin’s resource-intensive Proof-of-Work (PoW). PoW requires miners to contribute powerful computing power to secure the network. PoS, on the other hand, requires validators to stake their crypto tokens to keep the network running safely.
Arguably, the primary reason staking has become so popular is the higher APY it offers the investors compared to traditional savings accounts or even money market funds. Using hi wallet, for example, you can earn up to 20% APY for staking HI. You can also stake USDT and earn 11%. Staking ETH will earn you 5.5% directly in your hi app.
General Risks Associated with Crypto
Cryptocurrency tokens are generally volatile. At one time, high-valued crypto could be the least valued within a short time. Therefore, it is important to understand the general risks associated with digital asset investment before we understand crypto staking risks. Here are some of the major risks:
- No consumer protection: Cryptocurrencies operate in decentralized environments, making it impossible for institutional oversight or regulation. Since crypto markets are highly unregulated, users may be exposed to more risks of scams and theft of crypto.
- High Transaction Charges: Some cryptocurrency exchange platforms and wallets may charge exorbitant fees for processing transactions associated with your wallet. Also, these fees are often higher than those charged on regulated investment products.
- Technical Knowledge Required: Cryptocurrencies are generally a complex topic for many beginners entering the crypto market. This complexity could make it difficult for users to assess the potential risks in trades they make, especially while staking crypto.
- Marketing Resources: Cryptocurrency projects would always put a high value on their tokens. You will never find any project telling you that their token can land you in losses. All projects would overstate the projected returns while undermining the risks associated with the same.
- Price Volatility: Cryptocurrency is highly volatile. Digital tokens in the market experience continuous rising and dropping in value. With such price instabilities, investors are likely to face the risk of losses.
What are the risks of staking crypto?
Now that you have a clear impression of the general risks associated with cryptocurrency, we can now move a step further and consider the specific risks associated with crypto staking. Cryptocurrency staking can provide a decent return on your investment. However, you should be aware of the possible notable setback that the investment strategy may present. Here is the outline of the top risks you can face with crypto staking.
1. Market Risk
The cryptocurrency market is highly volatile. The market sometimes experiences adverse movements of the assets. The reason is partly that the market is relatively new and battling with regulatory measures.
Any financial regulatory move by the reputable authority that affects the digital assets will likely shake the market. For example, in January 2022, the crypto market experienced a downward trend when the Russian Central Bank proposed a ban on cryptocurrency. The Federal reserve also maintained its hawkish stance, and the decision to hike interest rates by March is also believed to have affected the market’s bear run. The market also experiences a temporary reversal in broader acceptance for digital tokens. A downward trend usually follows an upward trend. After most tokens hit an all-time high in November 2021, a bear market that stretches into the new year followed.
You may earn a 20% APY for staking cryptocurrency and still incur losses when the value of your token drops by half throughout the year. Therefore, the market risk becomes one of the entries among staking cryptocurrency risks that investors must consider. You must select the asset for staking carefully.
2. Liquidity Risk
Liquidity also plays an important role as a prominent crypto staking risk. If you are staking a micro-cap that barely has any liquidity on the major exchanges, you may find it difficult to sell your accumulated assets. You may even fail to convert your staking returns into popular assets such as Bitcoin or stablecoins. You can address this risk by staking with tokens with high liquidity and are listed in popular exchanges.
3. Lockup Duration
Some stablecoins come with locked periods. Upon staking such assets, they are configured to a ‘locked’ stake; hence you cannot access the token during the staking period. Examples of such crypto-tokens include Tron and Cosmos.
If the token gets into a downward trend and the price is significantly falling, you cannot withdraw such assets to avoid further losses. You will continue earning interest at the initially agreed rate. The dip in the price of your token will affect your overall returns.
A good way to mitigate lockup risk is to stake assets without a lockup period.
4. Loss or Theft of Assets
Cryptocurrencies are vulnerable to risks of theft and loss. First, you may lose your wallet’s private keys, which may lead to losing digital tokens, especially when using Private wallets. Whether you are staking or HODLing, you should ensure you have backed up your digital wallets.
Even if you are using DeFi wallets (custodial wallets), which help you manage your wallet, need to look for safe platforms. The platforms may be vulnerable to cyberattacks, resulting in losses of funds. You should go for the most secure crypto-wallets.
5. Reward Duration
Similar to lockup periods, some staking assets do not pay out the investors staking reward daily. Instead, stakers have to wait longer to receive the rewards.
Such terms may not affect APY if you are HODLing, for example, for a whole year. However, it limits the opportunity to re-invest staking reward for more yield.
You can opt for tokens that pay out the rewards daily as a way of mitigating the risk.
Non-custodial wallets remain the most secure as long as you can keep the private keys safe.
6. Validator Risk
Running a validator node for staking crypto often involves technical knowledge to avoid any disruption during the staking process. Staking nodes should have 100% uptime to maximize the staking returns.
If the validator node goes down during the process, you could incur penalties that would affect your overall staking returns. In some cases, the stake could be slashed if your node misbehaves during the validation process. In such a case, a share of the staked assets would be lost.
You may opt for the nodes provided by third-party platforms over your own validator node. Providers such as hi Wallet enable you to stake tokens without the hustle of running your validator node. You simply delegate your stake to the platform, and you are done.
7. Validator Cost
Besides the risk of running a validator node, you will incur other costs when staking digital assets.
Running a node involves hardware and electricity costs, which may cost many resources, especially if you are a beginner investor. Staking through third-party investors is not free either. You will pay a few percentage points of the staking rewards.
You must keep your eye on cost as a risk factor. Otherwise, you may end up eating too much, if not all, of the staking returns.
Value of Crypto Staking
Despite the risks associated with crypto staking, the investment still has its advantages that any investor may want to enjoy. No wonder the investment strategy has gained popularity for the few years it has been in existence.
Staking allows investors to earn considerably higher APY than money market funds and traditional savings accounts. For example, hi Wallet allows users to stake and earn up to 40% APY on a specific token. Consequently, the earning potential serves as a formidable factor to overshadow the risks of staking cryptocurrency.
The second main advantages of staking is that it is not as resource intensive as mining. You do not need advanced equipment and expensive computing resources to participate in staking for a reward. It becomes even cheaper when staking with third-party wallets such as hi wallets, which takes care of setting up and running the validation node. As a result, you do not need any technical knowledge to participate in staking.
Additionally, staking is more eco-friendly compared to mining. Mining involves high computing effort, which requires powerful computers and other hardware. These resources consume a lot of energy, which massively contributes to the industry’s high carbon footprint. Contrary, staking involves proof-of-stake, which only requires validators to lock in their funds to get the chance of confirming transactions.
Another advantage of staking is allowing the participants’ involvement in maintaining the security and performance of the blockchain network.
Stake crypto safely with hi
hi Wallet offers easy and secure staking for multiple tokens Hi.com Wallet enables anyone across the world to securely buy and stake cryptocurrencies to earn an investment income from digital assets. It offers some of the highest APY in the market, which includes 20% APY for staking hi dollar, the native token.
- You can download hi Wallet from the Web, App Store, Google Play, or Web App and sign up. You can also initiate signing up through WhatsApp or Telegram.
- Deposit your crypto funds through any of the supported payment methods and earn on any supported cryptocurrency.
- Select the option that best suits you between Flexible deposit and term options.
hi Wallet allows you to stake funds within the app while maintaining total control over your wallet’s private keys. As such, you eliminate the risk that comes with giving up the control of your private keys to a third-party service provider for staking.
Finally, the platform has an intuitive user interface suitable for everyone. Newbies can maneuver through the interface stake assets with ease.
Staking crypto involves several risks, including market risk, liquidity risk and loss of assets – just like investing in other assets such as shares and stocks,. However, some may consider the reward of cryptocurrency staking outperforms risks because cryptocurrency staking can earn you above-average returns.
APY, annual percentage yield, can vary a lot depending on the platform, lockup period and token. The APY in crypto staking typically falls between 5% to 20%.
Annual Percentage Rate (APR) is a commonly used to calculate the (potential) earnings from staking crypto. In contrast to APY, APR doesn’t take compound interest into account and it shows the expected return you can earn as interest on your initial investment.