What are the risks of staking cryptocurrencies?

Kyle Turnbull

February 15, 2021 · 5 min read

What are the risks of staking crypto?

Cryptocurrency staking: What are the risks?

What are the risks of staking cryptocurrencies?

So far, our blogs have painted a rosy picture of staking, and we stand by it. Staking is awesome. It’s a fantastic way to get involved in cryptocurrency, help to secure a network, and earn some rewards at the same time. However, there are risks posed by any investment, and staking is no different.

We’re detailing how staking can be risky, and how you can take steps to minimize them, so you can safely navigate the space! In this blog, we’re asking the big question: Is staking crypto safe?

To answer that question, we've developed a list of staking risks to consider:

  1. Locking up your coins
  2. Ability to trade the coin
  3. Custodial solutions
  4. Bad actors on the network
  5. Phishing

Locking up your coins

Some blockchains require your staking coins to be ‘locked up’ for a significant amount of time. During this time, validators cannot freely move their coins. There’s no greater risk of you losing your coins, but it can present issues for people. If the price drops rapidly, or you need to sell for some unforeseen reason, you will not be able to. If the coin you are looking to stake has long lockup periods, consider what this means for you and your investment.

Your ability to trade the coin

Liquidity and volatility both play a large part in your ability to sell your holdings, if you should so require. Let’s start with a couple of definitions:

  1. Liquidity: How easily an asset to be converted into cash, without affecting the market price. Low liquidity means sales can affect the price greatly.
  2. Volatility: How the price changes over time. A highly volatile stock may see wild swings in price in a short amount of time.

If you’re choosing a coin, it’s essential to understand what these two factors mean for you. A low-liquidity asset can be difficult to sell if you want, as it’s tougher to find buyers. A highly-volatile stock can mean you sell at a loss if the price is down when you are required to sell. The best way to negate these issues is to hold for longer periods. The effect that this has on your decision is all down to personal preference. Many cryptocurrency investors are ok with volatility, as they are confident the asset will be worth much more in the future, and weekly fluctuations are just part of the crypto-sphere at the moment.

Custodial solutions

Often, it’s easier for users to choose a third-party solution to stake for them. This can be either a staking pool or an exchange. These are known as custodial solutions, as they take custody of your coins. This means they have complete control over them, should anything go wrong. Coinbase staking is an example of a custodial solution. Not all custodial solutions are bad, and many have good reputations, however, this presents a risk to investors. If that third party were to be hacked, you would be unable to get your coins back, as you have given up security for convenience.

If you are looking for an easy staking solution, try to find one which you can delegate your coins to another person, whilst maintaining control of your coins. The Divi Project has developed a dual-key system, which means your coins have a staking key (which you can delegate to any wallet), and a spending key. This enables you to pass on your staking responsibility, without the coins leaving your wallet. All of the security, all of the convenience. You can read about the Divi Wallet here.

Do your research when choosing custodial solutions

Bad actors on the network

Someone taking over a blockchain network is a tiny but ever-present concern. This is technically possible with any cryptocurrency, and proof of stake cryptocurrencies are no different. From a 51% attack to forking, there are some ways a cryptocurrency network can theoretically be overrun. Whilst the likelihood of this is incredibly low and is an issue for all cryptocurrencies, it’s important to know. This is why choosing a healthy, decentralized coin is so important. The more decentralized the currency, the more resistant they are to suck attacks.

Phishing

Not directly related to staking, but always an important message. Never download unknown applications, or accept DMs from people you don’t know. The crypto space is rife with scammers, who will part you with your coins before you can blink. We have a quick list of ways you can avoid being phished. Pass these on, so we can all stay safe!

  • Computer Hygiene: Don’t download applications from unknown and untrustworthy sites. Don’t visit illicit sites.
  • Social Media: Don’t reply to unsolicited private messages or emails.
  • Use a dedicated device: If you’re able to, we suggest using a dedicated computer for staking, and another as your daily runner. This can greatly reduce your risk!
  • Do not publicize what you own: This is fairly straightforward, but if people know you own a lot, you’re a bigger target. Keep your balances to yourself, and those you trust.

So, is staking crypto worth it?

Cryptocurrency is an incredibly new space. With all emerging technologies, there are steep learning curves that must be navigated. With every year, cryptocurrency becomes a safer and more inclusive space, but that doesn’t mean it’s risk-free. This list is not exhaustive but contains some of the key considerations for would-be stakers. If you’re interested in staking, understanding these key issues can help you make a more informed decision, and put your mind at ease! If you’re interested in learning more about staking, please read our blog on staking profitability!

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Kyle Turnbull

February 15, 2021 · 5 min read

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