Thinking about staking cryptos? Here are some risk factors you should know about (2024)

Cryptocurrency prices have dropped significantly in the last six months. As such, it is the perfect opportunity to expand your crypto holdings or jump into the market if you haven't already. And once you have a good amount of tokens piled up in your wallet, staking them is a great way to establish a secondary revenue stream.

You don't have to commit any more funds to purchase additional assets. You can just let your current holdings do the work for you. Sounds great, right? However, one must remember that staking is not all sunshine and roses. Before you pledge your cryptocurrency to a blockchain network, you should know about the associated risks. Let's take a look at some of the possible pitfalls:

Market Risk:

Crypto markets are generally very volatile; prices are constantly rising and falling. The staking platform you choose could offer lucrative annual returns, but if the price of your staked token falls, you could still end up incurring losses. This is likely to have happened with stakers during the ongoing crypto rout. Even returns of 15 percent get dwarfed when token prices themselves drop by 40-50 percent.

Liquidity Risk:

This could be a problem if you decide to stake smaller, less popular cryptocurrencies. The liquidity of your crypto asset plays a vital role in the staking process. When you stake cryptocurrency, you effectively provide the network with your tokens and add to its liquidity. Crypto platforms rely on this liquidity to facilitate trading and generate profits.

However, liquidity is also crucial for you. You should also be able to convert your staking rewards into fiat currency or swap them for a different token. If you are staking a cryptocurrency with limited liquidity, selling or trading it for other cryptocurrencies could be difficult. This is complicated further as volatility influences market trades too. One should, therefore, stake assets that are more liquid.

Lock-in Duration:

When you stake cryptocurrency, you must agree to a minimum lock-in period. During this period, you cannot touch your pledged cryptocurrency, which remains locked with the network. Moreover, un-staking the currency usually takes a very long time (up to three weeks or more), and if the prices drop during that period, you could be withdrawing tokens worth much less than when you staked them.

Theft:

Crypto thefts have escalated over the years. And just because your staked currency is locked in with the network doesn't mean it is safe from harm. Platforms get hacked and attacked by cyber criminals quite often, and a robust security protocol is extremely important. For example, hackers recently stole $600 million from the gaming platform Axie Infinity. Therefore, it is prudent you look into the blockchain's security protocols before staking your tokens.

Penalties:

Whether you stake your crypto independently or in a pool, it comes with a responsibility as you become a validator on the network. You must always have your machine online as blockchain operations rely on the consistency of its validators. If your system goes offline, it could impact the network. And if it does, the network could impose penalties on your rewards. The extent of these penalties could be very minimal or very significant, depending on the blockchain.

Costs:

If you want to avoid these downtime penalties, your system must be online 24*7. This means that your machine consumes a lot of power which translates into a significant overhead cost for you. Therefore, as an investor, you must weigh the costs against the rewards and ensure that the staking process is profitable and sustainable.