Cryptocurrency: what are the risks associated with staking?

In matter of cryptocurrencies, the staking has a reputation for fostering easy-to-practice passive income with predictable returns. We immobilize a crypto-asset for a certain period, and at the end of this period, we recover a predefined reward. This reward is not without logic: the currency that we stake thus improves its capitalization and therefore investor confidence. Similarly, an exchange (platform) on which one stake crypto-assets will gain from it at various levels, in particular by the fact that it has these assets for the management of transactions. So the staking appears at first glance to be a win-win operation. Does this mean that there is no risk in doing so? Far from there.

Here are the main risks associated with such an operation:

1. the currency we have staked may see its course collapse;
2. opportunities can be missed;
3. the platform chosen for the staking can be hacked;
4. the  » unstaking is not always immediate.

Let’s look at each of these cases in detail.

The price of a currency can collapse

Sometimes the interest offered for the staking are particularly high. Let’s take the example of a cryptocurrency listed by the reference site Staking Rewards, Siftchain’s Rowan. This currency offers a reward of a huge amount: 117.26% per year. In other words: if we stake a Rowan, after one year, we recover 117.6! However, be careful, in the end, what we recover are Rowans. How can we know what the situation of this currency will be one year later?

At the time of writing these lines, if we stake 100 Rowans (an investment of $0.14 * 100 and therefore 14 dollars), we are supposed to recover 11,700 Rowans at the end of the year. Theoretically, if the Rowan price does not move, it would represent 1,638 dollars. We therefore obtain a substantial added value. If the Rowan sees its value double, we even get $3,276. Yes, but… If the value of the Rowan were to divide by 100 a year later, the amount recovered would only be 16.38 dollars, or 2 dollars of capital gain in all.

What to remember? It is better to operate the staking » on a currency in which you have full confidence, even if it means favoring a lower return. Thereby, Solana only offers a reward of around 6%. However, throughout 2021, this currency has experienced enormous growth and it can reasonably be estimated that this trend is solid on the long term.

Of course, some people recommend staker from stablecoins such as the UDST, theUST or the DAI because the value of these is always equal to 1 dollar. Thereby, Staking Rewards tells us that if we stake of USDT, the reward after one year is 8.78%. Yes, but… Let’s imagine that the dollar sees its value depreciate sharply against the euro over a year. In this circumstance, the capital gain realized in number of dollars could be neutralized by the fall in the price of this currency.

Opportunities can be missed

The property of staking, is that one immobilizes one’s assets during a certain datum. Imagine for example that an Internet user stake Rowans in January. In April, this currency sees its value multiply by 100. Then, from the month of May, it falls to return to its January rate. If the Rowans have been staked for a duration than a year, the Internet user will not have been able to take advantage of the rise in April.

The platform chosen for the staking can be hacked

If you have chosen an exchange to host the staking of cryptocurrencies, this platform could do object of hacking and the risk could exist of seeing its crypto-assets disappear.

In December 2021, two exchanges were thus hacked: AscendEX which saw the equivalent of 77.7 million dollars fly away while BitMart for its part lost around 200 million dollars. In both cases, these platforms claimed that they would fully compensate the customers impacted by this attack. However, there have been infamous cases such as the Canadian site QuadrigaCX or the New Zealander Cryptopia where exchange customers were robbed of the crypto-assets they had placed.

Note that this risk is low on platforms that have proven themselves over the years such as Coinbase, Nexo, Swissborg or Coinloan. Of course, such platforms charge for this reliability by charging commissions for the staking often higher than if one operates directly, for example, on a wallet dedicated to a token given.

The  » unstaking » is not always immediate

When you want to unlock your assets, there may be a period of “ unstaking which can amount to 7 days or more.

Here are some examples of durations of unstaking – January 2022 figures:

• 7 days for Fantom FTM;
• 10 days for the EGLD of Elrond;
• 21 days for the Atom of Cosmos ;
• 28 days for Polkadot DOT.

If you had planned to use your funds at a given time, you must take this possible delay into account.