Before you stake, you must understand the risk of staking cryptocurrency to help manage your staking period well.
Cryptocurrency has brought an audacious change into the financial sector which majority of financial experts had high doubts on decades ago.
Some of the glaring changes has to do with how you earn passive income by holding crypto through staking.
This is by far better than the traditional way of keeping money with banks and earning pennies.
The risks that is involved in staking cryptocurrency has to be well understood to benefit more from staking crypto.
Staking crypto can be very rewarding when done well.
Doing it well comes from having an understanding of the risks involved too.
This will help you in overcoming some mistakes and also in choosing the right coin to stake.
In one of our guides, you will learn in details how to stake cardano and earn passive income.
In this guide, you will learn of the major risks of staking crypto.
- Risks Of Staking Cryptocurrency
- 1) Market Valuation Of Staked Crypto
- 2) Failure Of Staking Pool
- 3) Loss of Crypto Assets When You Redeem Early
- 4) Stake Duration
- 5) Fluctuating Interest Rate
- 6) Liquidity Imbalance
- 7) Delayed Return Of Crypto Assets
- 8) Validator Risk
- 9) Inavailability Of Staking Plan
- 10) Validator Fees
- 11) Loss Of Stake Rewards When Redeeming Early
Risks Of Staking Cryptocurrency
1) Market Valuation Of Staked Crypto
This is by far the greatest risk that is involved when staking crypto.
In every cryptocurrency staking pool, there is a percentage of stake rewards that is paid to active validators.
The stake rewards earned makes the staking process worth it and fruitful.
The bad side is when the value of the staked crypto asset falls in value.
When it falls in value, it becomes lower in valuation as compared to when it was staked.
An example of this is in one of the crypto assets I staked as shown below.
- As at the starting date when I staked ADA, the price of ADA was $1.25
- Price of ADA when stake period was over was $2.97
- stake rewards I earned was 3.5 ADA
- number of ADA that I staked was 160 ADA
From the information above, it is clear that we made some profit while staking ADA both in ADA quantity and in ADA valuation.
This is clearly shown below;
- Value of ADA before staking was $(160×1.25) = $200
- Quantity of ADA after staking was (160+3.5) = 163.5 ADA
- Value of ADA after staking was $(163.5×2.97) = $484.11
From the calculation above, you can see that the value of ADA when the stake period was complete was more than double its value.
This is clearly seen as the value of ADA moved from $200 to $484.11
To a crypto user that also stakes his or her ADA this period, its worth a celebration.
This is not just due to the stake rewards that was earned during the stake duration.
The highly increased value is directly influenced by the increase in the value of ADA after the stake period.
In a lot of instances, the reverse may be the case as we also staked ripple but the value was poor after the stake period.
This is where the risks of staking cryptocurrency begins to show itself.
Instead of the final valuation of the crypto asset to increase after staking, we had a fall as compared to its value before staking.
2) Failure Of Staking Pool
To carry out staking of a cryptocurrency, users have a better chance of earning well when they connect to a staking pool.
These staking pools are available in a lot of medium.
Some are in exchanges like binance staking pools while others are individually or jointly owned.
Over the past few years, we have witnessed how a lot of crypto exchanges have been brutally hacked.
This has posed a serious risk of staking cryptocurrency and fear in the heart of people going into cryptocurrency staking.
This is as a result of the loss of funds when the exchanges are hacked.
Most of the exchanges that are hacked had large staking pools in which lots of validators were staking huge amount of crypto assets.
Due to hacks, it poses a threat on how they can get their money back.
Regardless of the custodial staking, people still lose money when staking on cold wallet.
This happens when you lose your private keys.
That is why it is good to be extra careful with security when using cryptocurrency for anything.
3) Loss of Crypto Assets When You Redeem Early
Losing the quantity of your staked crypto assets is a common risk of staking cryptocurrency that you face when you redeem your crypto stake before the due date.
Sometimes you can be faced with an urgent need for funds which might not be available apart from your staked crypto.
This need might be greater than what your earned stake rewards cater for.
When this happens, pressure starts developing for you to redeem your locked staking before the due date.
This is where a little challenge comes in when staking crypto.
The challenge that you will face here is that you will lose part of your crypto assets.
The amount of crypto assets you will lose depends on the amount of stake rewards that you earned.
All the earned stake rewards that you accumulated over the stake period will be deducted from your stake capital.
After the deduction of stake reward from stake capital, the remaining will be returned to your spot wallet.
This means that you lose all the stake rewards you accumulated and also lose that same quantity of accumulated stake rewards in your stake capital.
This is clearly shown below as we initiate an early release for 10 pieces of ADA that we staked.
After completing the early redeem, we incurred two loses which are;
- Loss of all accumulated stake rewards being
- Loss of part of our stake capital making our returned funds $.
This is the risk of staking cryptocurrency you have to consider before using the early redeem option to retrieve your staked cryptocurrency.
4) Stake Duration
Another risks of staking cryptocurrency has to do with the stake duration.
Cryptocurrency staking pools have a way of making you stake for long.
This has to do with interest rate on various stake durations.
In our guide on how to stake ADA on binance, you can see how the interest rate fluctuates.
This fluctuation of interest rate varies across stake duration.
The longer the duration you choose, the longer your crypto is locked without your access to them but the higher the interest you earn in stake rewards.
This makes it hard for you to easily access your crypto assets that are staked.
This risks of staking cryptocurrency has made a lot of people to think twice before choosing a stake duration or period when staking.
This makes it difficult for you to easily sell off your crypto assets when the price falls thereby running into some loss of funds.
5) Fluctuating Interest Rate
The rate of staking on exchanges like binance and crypto.com always fluctuate.
The rate at which the interest rate of stake durations fluctuate reduces the enthusiasm of so many people that stake cryptocurrency.
This is due to the constant fluctuation of stake rewards on renewal of staking plan.
This has happened to me in a lot of cryptocurrencies that I have staked over the years.
A typical example of this is with Tron that I staked on binance staking pool.
Tron staking on binance was very enticing to a lot of crypto staking fans due to the high annualized interest rate it had.
At some point, the APY of staking Tron on a locked stake duration of 90 days on binance was as high as 18%.
This endeared a lot of crypto staking enthusiast to stake Tron on binance.
After some months, the APY reduced by more than half to 8.17% for the 90 days locked stake period.
This fluctuating interest rate risk of staking cryptocurrency made some Tron staking fans lose enthusiast.
But even with the 8.17 APY, it is still far better as compared to what other crypto staking pools and crypto assets are offering.
6) Liquidity Imbalance
Another risk of staking cryptocurrency has to do with the liquidity level of a crypto asset.
Liquidity of a cryptocurrency affects how easily you can buy or sell a crypto asset effortlessly.
When the liquidity is high for a sell order, it shows that sellers are readily available to sell to you.
When the liquidity is high for the buy order, it shows that buyers are readily available to buy from you.
An example of this is on the image below
This makes crypto staking enjoyable as you can easily buy coins to stake.
This also makes it easy to sell stake rewards and convert to other cryptocurrencies or to a stable coin.
But this is not so for a lot of cryptocurrencies that are staked.
Some cryptocurrencies have a very low level of liquidity.
This low liquidity makes it hard for people who want to stake that cryptocurrency.
This is because it will be hard for them to buy a large volume of the crypto for staking.
Another problem comes in when they want to sell their stake rewards in that crypto and convert to stable coin or to other crypto assets.
An example of a low liquidity crypto asset is shown on the image below
7) Delayed Return Of Crypto Assets
Instantly receiving your crypto asset very fast after staking or when staking is canceled is not very fast.
This is because the return of the crypto asset will take some hours before it reflects in your spot wallet.
This is another risk of staking cryptocurrency which is minimal for who do not have urgent need for their crypto asset.
For people that have a need that comes as an emergency, this will really affect them.
This is because they will not instantly receive their crypto assets back.
This is seen in cases like when using the early redeem option to retrieve your staked crypto assets before the end of the locked stake period.
Using the early redeem for staked crypto takes between 24 hours to 48 hours for the staked crypto to return to your spot wallet account in the case of binance crypto exchange.
This risk of staking cryptocurrency poses a high inconveniences in times of emergency where funds are needed urgently.
8) Validator Risk
Being a validator is a great way of making money from cryptocurrency.
What some people forget when carried away by the joy of earning stake rewards is that being a crypto validator comes with some risks attached to it.
Successfully running validator nodes while staking cryptocurrency entails a high concentration towards the validator nodes.
Being care free about this can lead to a lot of penalties.
This leads to a reduction of the amount of stake rewards that you receive when you are served with penalties for making mistakes as a node validator.
Being a node validator also means you have to monitor your nodes and make sure that they perform at an optimal level.
This means you have to ensure that the nodes have a consistent uptime to continue receiving stake rewards.
Violation of this leads to loses when you are served with penalties.
If you do not have the discipline or want to avoid this risk of staking cryptocurrency, you can join a good staking pool.
Some of the good and reliable staking pools you can join is the binance staking pools which are well managed.
9) Inavailability Of Staking Plan
Most of the times, you will get hit by the sold out caution when you want to choose a stake duration for staking cryptocurrency.
This has happened to me a lot of times.
This is common in crypto staking pools that have high APY values for a particular stake duration.
When a crypto asset has a good and high APY for a particular stake duration, the competition for staking on the staking pool for that duration gets very high.
This high level of competition for that stake duration gets the stake duration filled up quickly and you get hit with the sold out caution when you are late.
This risk of staking cryptocurrency ends up forcing you to choose a stake duration you would not have chosen.
This is so that you can still have the chance to stake your cryptocurrency which is better than just leaving them in the spot wallet without earning anything.
10) Validator Fees
Validator fees is what you can never avoid no matter the method that you use for staking cryptocurrency.
If you run your own nodes, you will have to pay some fees which ranges from the data you subscribe to the electric bill you pay to keep your node running.
Even when you are joining a third party staking pool, you will still pay some staking pool fees which will be deducted from your earned stake rewards.
Validator fees is one of the risk of staking cryptocurrency that is not easily avoided.
Irrespective of the fees that you pay while staking, it can be reduced when you research well.
The fees you pay in the staking pool if you are performing crypto staking with a third party can be reduced.
One of the ways of reducing such fee is by checking out for a reliable staking pool that has lower staking pool fees.
11) Loss Of Stake Rewards When Redeeming Early
Just like you lose your crypto asset as explained above when you redeem early before the due date of the locked staking, you lose your stake rewards too.
This is one option you have to deeply consider before you use the early redeem option like the binance early redeem.
This applies to a lot of scenarios when you are staking cryptocurrency.
If you are just few days into the staking of a particular cryptocurrency, you can use the early redeem as the loss incured will not be much.
But if you have gone far in the stake duration and have like one or two days left for your stake duration to finish, you can wait and receive your crypto assets without using the early redeem option.
Why I say this is because if you early redeem when you are two days to the end of your locked stake period, you lose all your stake rewards and part of your stake capital.
The staked crypto you early redeemed will still take about 24 to 48 hours before it reflects in your spot wallet.
This is almost the same time of waiting if you had one or two days left to complete your stake duration and still earn all your stake rewards without losing any of your stake capital.
Why I really emphasize on this is because I see some people early redeem even with few hours to completing their stake duration.
Often due to the fact that they do not know of the consequences involved as they lose all their stake rewards and part of their stake capital with delay before the funds reflect in their spot wallet.
Do not make this mistake as others do.
Always look at how far you have gone on the stake durations and weigh your options well before using the early redeem option.
Just like the presence of so many benefits that come along when cryptocurrency staking is used, some risks also follow too.
In the course of this guide on top 11 risk involved in staking cryptocurrency, a lot of possible risks faced when staking crypto has been comprehensively explained.
This is not to scare you from staking cryptocurrency but it is aimed to help you grow well while staking.
So many people use the early redeem option without knowing of the charges they incure in the process.
I was once a victim of this ignorance.
When I got to know about the charges, I had to think deeply anytime the urge to redeem early comes.
This is the same way you should apply the knowledge you have learnt here anytime you are staking cryptocurrency.
Have a fruitful cryptocurrency staking period ahead.
If you have any question concerning the risk of staking cryptocurrency, notify by using the comment box.