This post was adapted from my answer to the question What is the risk in staking my cryptocurrency? on Quora.
There are various risks associated with staking your crypto assets on either staking platforms, centralized exchanges, or through non-custodial staking wallets and protocols.
Chief among these risks are:
The risk of losing value due to negative price movements
The risk of being scammed by the staking platform
You risk of the staking platform being hacked
The risk of missing great trading opportunities
I will briefly explain each of the above risks, and how to deal with them in the rest of this article.
1. Risk of losing value due to negative price movements
The cryptocurrency market is extremely volatile. And it's not uncommon to see prices drop by over 90% or rise by 1000% within a few days, weeks, or months.
Whereas, this extreme volatility is a blessing for some (e.g, traders who know what they're doing) it could easily become the bane of many (e.g, HODLers, stakers, etc.), especially when it moves against your expectation.
And this is the first risk that you face when you stake your crypto assets.
Except you're staking a stablecoin, the price of the coin or token that you have staked could drop while in staking and whatever you earned as a staking reward may not be sufficient to cover for the loss in value.
In this case, after the staking period, you may discover that the value of your investment is worth less than it was when you started.
Since you don't lose until you sell at a loss if you believe in the future of the coin or token, you may continue HODLing (staking) hoping to recover with future price appreciation and earning more staking reward.
However, if you have done your research and feel that the project does not have a bright future, you may want to cut your losses and move on with whatever value is left of your investment.
2. Risk of being scammed by the staking platform
The cryptocurrency industry entirely lacks adequate regulation and participants have limited legal protection when things go wrong.
And you and I know things easily go wrong in this space with all the smart contract exploits, hacks, and outright scams happening almost every other week with near-zero chances of recovering your money when they do.
One of the major risks of staking, especially on centralized exchanges and staking platforms is that the founders could easily disappear into thin air with everyone's money and you will have very limited hope of ever getting a recovery.
However, if you have done your due diligence and used a reliable, trusted exchange or staking platform the risk will be significantly minimized.
For example:
Avoid using centralized staking platforms with an anonymous team
Avoid being among the first to use a brand new staking platform
Be doubtful of staking platforms that offer insane rewards, except they're the Fed.
Always DYOR and read users reviews before you hand them your hard-earned crypto
etcetera, etcetera...
However, be aware that even a known team can still scam you, and not all new, high-reward platforms are scams.
But don't trust, verify.
The only way to potentially eliminate this particular risk is by using decentralized, non-custodial staking wallets, and protocols.
3. Risk of the staking platform being hacked
You could do everything right, the staking platform or exchange could be over legit and you will still lose your staked coins because the platform can be hacked.
One of the latest major hacks was that of the KuCoin exchange that led to the loss of over $200 million.
Thankfully, most of that money was recovered and investors were insured from losses by the KuCoin team, but you can't be that lucky all the time.
Even though some of these exchanges and staking platforms have implemented some of the best security practices, as is the case with any software, the could be exploitable bugs, the workers could be socially engineered to divulge access credentials, and bad actors with superior skills could create their own backdoor using to steal users money from these platforms.
Even decentralized and non-custodial staking protocols are not entirely free from security issues and code exploits by bad actors or hackers.
You could get lucky to be invested with a platform like KuCoin that offers some form of insurance but don't expect this from every staking platform or exchange out there.
There’s very little you can do to avoid this risk entirely other than to always DYOR (do your own research) and use only trusted platforms with solid track records.
4. Risk of missing great trading opportunities
Staking is the act of locking up your crypto assets for the benefit of earning rewards.
Except you're staking your crypto assets on an exchange or platform that supports soft staking where you can unstake and withdraw your funds at any time you could easily miss some of those once in a lifetime pumps because you have locked up your cryptocurrency in a staking contract.
Imagine the coin you have staked just did a 500% in 24 hours, wouldn’t you want to cash out and book some of that profit knowing fully well that the price will eventually retrace at some point and you can buy more of the coin back?
I definitely will if I were the one.
In fact, I will sell off at least 25% of my holdings when I catch even a 50% pump in a single day.
Because staking wouldn’t even give you 32% in a whole year, why wouldn't I take 50% in a day?
But when you have your coin locked up on some staking contract, you wouldn't be able to take advantage of these rare pumps when or if they happen during the period of your staking.
This is an opportunity cost of staking generally. You don’t lose any part of your existing investment but you could miss potentially big profit opportunities from random pumps that happen in crypto every so often.
Conclusion
Is staking for you?
What are the other options and opportunities for passive income that are there for you with limited downsides?
Are the risks and opportunity costs worth it?
These are some of the questions you need to ask yourself before taking the step to put your coins in staking or anything else for that matter.
For me, I will rather HODL (hold) my coins in my wallet or exchange account and wait for those random pumps, sell into USDT, or flip for other coins yet to pump and wait out for the dip that always comes after every pump.
You will find out the idea behind this trading and HODLing strategy in my previous posts: This Crypto Trading Strategy Will Help You Remain Profitable At All Times, and The smart way to trade, HODL, and grow your crypto wealth effortlessly.
So over to you!
What are other risks associated with staking do you know? Please share with us in the comments section below.
Nice article and all of these are very valid points to make. I've staked coins in the past but always with the coin's wallet and never using another service. That doesn't mean I consider all of them extremely dangerous but I prefer to have a more hands-on approach.