Know the Risks of Staking Cryptocurrency

Find out more about how crypto staking works and what are its associated risks, and save money by choosing reliable staking platforms. 

Staking cryptocurrency is becoming a popular approach to making a passive income by pledging a portion of your assets as collateral. Many investors see it as an opportunity to earn some money instead of leaving their assets sitting on crypto wallets. 

However, some governments, such as the UK and China, have been alarming their citizens about the dangers of investing in cryptocurrencies. The unpredictable and uncontrolled nature of the crypto-verse means that investors need to comprehend the risks involved in staking before diving in. 

Here, you’ll find all the relevant information regarding what staking is, how it works, and its risks. Learn more!

What is staking?

Staking is the process of depositing assets in a pool and locking them there for some time to gain incentives. Much like many other passive income investments, the longer an investor keeps the coins staked, the higher the profits will be. 

It works like a savings account, in which the bank rewards you with some interest after using your money for their benefit. However, while a traditional bank may use your savings to provide loans for other people, blockchains will use your staked coins to enhance their security when processing transactions and creating new blocks, with a technique called Proof-of-Stake.

What is Proof-of-Stake?

Blockchains use consensus mechanisms to guarantee that the blocks will only register legitimate transactions with correct data. Bitcoin introduced Proof-of-Work as the first permissionless consensus protocol, in which users conduct the process of mining to solve cryptographic puzzles and earn the right to create new blocks. This method requires advanced technical knowledge and high computational power, also presenting serious security breaches. 

The Proof-of-Stake protocol came soon after and has shown to be a more energy-efficient and secure consensus mechanism. In this system, a validator is chosen between those who have staked a minimum amount of coins and then earns the right to create a new block. Later, this validator will receive a reward for creating a new block and contributing to the blockchain’s overall security.

How does staking work?

Trying to be a validator on your own can be a challenging and highly technical task. But staking can be an easier endeavor when done collectively through crypto exchanges and staking pools. 

  • Staking on cryptocurrency exchanges: in this approach, the exchange will find a node for the investor to join and be in charge of the administrative tasks. 
  • Staking on a pool: in a pool, an investor can combine their resources with people who have the technical knowledge to act as validators. When the rewards arrive, they are slip between the operators and the stakers. 

Top 5 staking risks

Although staking can offer higher profits than traditional passive income investment strategies, it also comes with associated risks. It is wise to familiarise yourself with the dangers of staking, so we have gathered the most significant ones to keep an eye on. Check it out!

1. Impermanent loss

The crypto market is inherently highly volatile, meaning that the value of tokens can fluctuate dramatically in a matter of hours. A staker provides liquidity to the pool, so it can be concerning if you’re staking a coin and its value declines during the staking period, as you can lose lots of money.  

2. Lockup periods

For the duration of your staking term, your staked funds will be frozen and consequently unreachable. So, if you regret staking your coins, need them for anything, or identify a rise in value that would make trading them a better move, it won’t be quick nor easy — retrieving them before the lockup period ends can actually come with penalties. 

3. Potential illiquidity

A crypto platform’s liquidity is determined by an asset’s capacity to be converted into fiat money or other cryptocurrencies. If the investor stakes a token with small market capitalization, there can be a lack of liquidity, affecting the trade of the staking rewards afterward. 

4. Crypto theft 

Crypto theft has increased alongside blockchain technology’s popularity. Although some exchanges might claim that staked coins are secured in cold storage, sometimes that isn’t the case. Technical faults and breaches can leave staked assets vulnerable, and investors can lose their funds and rewards. 

5. Validator mistakes

As mentioned before, becoming a validator on your own is a highly technical and challenging task but also offers higher returns compared to staking pools and exchanges. However, if solo validators make mistakes during the validating process, they might not be rewarded at all, and staking won’t be worth the labor. 

Staking on BullPerks

BullPerks offers staking pools on the BullStarter platform to provide yet another investment modality for our community. We are determined to present pools with attractive annual percentage yield rates and low fees while ensuring financial and data-wise security for your investments. 

When staking with BullPerks, you give a profitable purpose for the coins that would otherwise be sitting with no use in your crypto wallet. By locking them up, you also become eligible to participate in any of our IDO deals. Here’s how you can get started with staking on the BullStarter platform:

  1. Go to your account and look for the Staking Pools page. 
  2. On this page, you’ll be able to see the Deposit option and check relevant information, such as the APY rate of the pool. Click on Deposit. 

  1. Soon after, you’ll be shown a window to write down the number of tokens you wish to stake. Click on Approve and Confirm. 
  2. After confirming the transaction on the platform, your connected wallet might ask for double confirmation. Confirm again. 
  3. Great! You have staked your tokens on the selected pool, and your rewards will be available after the lockup period. 

Read more about staking on BullPerks here

Final Thoughts

Staking provides a stable passive income for thousands of people worldwide, but it requires patience and is not without danger. Thinking about each of its associated risks stated above before staking your crypto might wind up saving you a lot of money. 

Would you like to start investing in the most promising crypto projects? Learn how to invest with BullPerks, the fairest and most community-oriented decentralized VC and multichain launchpad!

Disclaimer. This material should not be construed as a basis for making investment decisions or as a recommendation to participate in investment transactions. Trading digital assets may involve significant risks and can result in the loss of invested capital. Therefore, you must ensure that you fully understand the risk involved, consider your level of experience, investment objectives, and seek independent financial advice if necessary.