Cryptocurrency staking is the process of lending your cryptocurrency to a 3rd party to help them verify transactions on the block chain. In return, you are rewarded with additional cryptocurrency or interest.
SoFi.com specifically posted on their site that “because staking coins is a passive form of investment, there is little downside”. Coinbase makes a comparison stating that a staking pool is “similar to an interest bearing savings account”. A staking pool does indeed seem similar to how savings accounts work in that a group of people deposit money into a bank and the bank then takes this combined money to lend out to others. However, with how often other people make an equal comparison between staking and a savings account, it seems Coinbase is being careful with their wording. There are also many online discussions (here’s one) making direct comparisons to how staking cryptocurrency is like having bank accounts earning 5-10% APY each year.
The conflation between crypto staking and traditional savings accounts appears to be so great that a large percentage of people believe the two are similar enough that staking must be better because it provides a much higher interest rate with the same risk as a traditional savings account.
This is not the case.
Risks of Cryptocurrency Staking
Market Risk
The cryptocurrency you are staking is a high risk investment that are unregulated and can have large fluctuations which could result in any interest/rewards being less than the lost value of your staked assets. It could completely fail making your assets worthless. When putting money into a US bank, if you deposit $100, you can safely expect to be able to withdraw that $100.
Liquidity Risk
Depending on how your staking your cryptocurrency assets, you run the risk that it could become difficult to sell or convert your assets when you want and/or during volatile periods. US banks offer high liquidity for their deposits.
Risks from Being Unregulated
The cryptocurrency industry doesn’t have nearly the same sort of regulations as other financial products. It doesn’t have the same consumer protections for losses, marketing tactics/language or scams. These had been put in place in other financial industries, such as personal banking, over many decades to protect investors from unscrupulous practices and destabilizing market volatility.
Lockup Duration
Many cryptocurrency staking options require a lockup duration period in which you won’t be able to access your assets during this period. A savings account at a US bank doesn’t have any lockup duration.
Reward Pay Period
Some staking assets don’t pay your rewards immediately after they are earned and delay when they are provided to you. This means that you are not able to reinvest the rewards as fast as you may want. Most banks pay based on the amount in your account each day.
Exchange Risks
When using an exchange that offers you the ability to stake your cryptocurrency holdings, you have the underlying risk that the exchange fails or gets hacked. There is protection against losing your assets if a bank fails through federal insurance programs.
Fees / Taxes
An exchange may charge you fees for being able to stake your cryptocurrency which reduces the interest or reward you receive. For example, Coinbase currently charges 25% so when they state you can earn up to 5%, you end up getting 3.75% after their fee. You may also be responsible for taxes on any interest/rewards that are earned. With a savings account, you may also need to pay taxes on earned interest but aren’t charged a fee for keeping your money in the account.
Validator Risks
Issues with the 3rd party validator that is borrowing the staked cryptocurrencies could result in lower rewards than expected. The costs incurred by the validator also reduce the rewards earned from staking. The validator could also just not pay anything back, although some platforms offer insurance for this type of occurrence. When putting money into a savings account, you do not have to worry about the places the bank is lending that money out to.
Loss / Theft of Assets
Cryptocurrencies carry a risk that they can be stolen or, in the case of a misplaced private key, lost. With a bank, it can be robbed, but your money is safe.
Credit Critics Conclusion:
Fact Check: “Staking cryptocurrency is similar to a savings account”
Mostly False
Fact Check: “There is little downside”
False