What Is The Risk Of Staking Ethereum
Staking cryptocurrencies is becoming a popular way to profit from crypto holdings.
With over 5,000 listed cryptocurrencies, there are still relatively few cryptos available for staking. Now, investors are eager to buy cryptocurrencies that offer staking rewards, and Ethereum is proving to be of great interest.
In the past, crypto investors bought and held cryptocurrencies. Known as Hodling, investors hoped to make a profit from the rising prices of their crypto portfolio. It didn't always work out, though, because of the volatility of the crypto market.
When Bitcoin hit $64k in April 2021, no one anticipated a drop to $30k in a short period. For this reason, all cryptocurrency investing or trading is risky, but how about staking cryptocurrencies? Is it worth staking Ethereum? Or is it too risky?
Ethereum is the #2 cryptocurrency listed by market capitalisation. Over the last year, Ethereum experienced 400% growth. More investors wanted to add Ethereum to their crypto holdings, but now they can benefit from staking rewards.
But, what is the risk of staking Ethereum? What are the benefits of staking Ethereum, and is it any riskier than staking other cryptocurrencies? Do the risks outweigh the rewards for staking Ethereum?
Let's find out.
In December 2020, Ethereum launched the first phase of the Ethereum 2.0 upgrade, initiating a transition from proof of work (PoW) protocol to proof of stake (PoS) protocol. What this meant for Ethereum followers is the availability of staking Ethereum as an Ethereum network validator.
For a 32 ETH stake, you can help to secure the network and earn ETH token rewards in the region of 8% per year.
Not everyone can afford 32 ETH ($64k at today's price of $2000), but there are more affordable options for staking Ethereum. You can join an Ethereum mining pool and split the rewards for sharing resources. Or you can purchase Ethereum from an exchange, and they will take care of the staking process for you.
So, that all sounds easy enough. But what are the risks of staking Ethereum?
During the Ethereum 2.0 upgrade, the risks of staking Ethereum are higher than usual. In this guide, we will find out why it is risky to stake Ethereum in 2021.
In conclusion, you will know how to stake Ethereum, the risks, and whether you want to stake Ethereum.
- What Is Staking Cryptocurrencies?
- Potential Returns From Staking Ethereum
- What Are The Risks Of Staking Cryptocurrencies?
- Recap Of What Is The Risk Of Staking Ethereum
What Is Staking Cryptocurrencies?
Before crypto staking opportunities, you bought cryptocurrencies, stored them in a secure wallet and forgot about them until you were ready to sell. The only gains were from a price increase. This form of crypto investing was random and speculative. You had no idea whether you might make a fortune or watch your crypto holdings shrink to nothing if crypto prices plummeted.
When you stake a cryptocurrency, you lock up your digital assets and work as a network validator for the specific crypto network. You have no choice but to commit to a long-term process if you want to gain staking rewards. But, in most cases, if you're going to stop staking and withdraw your crypto and rewards, you can do so.
In this case, with staking Ethereum, you lock in your ETH with the Ethereum network. Validators play a vital role in helping to secure the network. As an incentive, the network rewards validators with newly minted cryptos such as ETH tokens.
Cryptocurrencies such as Bitcoin cannot yet provide staking opportunities because they run on proof of work (PoW) protocols, a complex and energy-intensive process. Many cryptos are lagging and limited with scalability. Some are working towards improving efficiency by shifting from proof of work (PoW) protocols to proof of stake (PoS) protocols.
Initially, Ethereum ran on PoW protocols. But in December 2020, they started the first phase of the Ethereum 2.0 upgrade by launching the first component, called the Beacon chain. The next stage of the ETH2 upgrade is due 2021/2022, and the final phase completes in 2022.
Most altcoins used a PoW protocol but are realising the need for scalability. Ethereum is leading the way with innovation for the future of the network. Now, most new blockchains are deploying PoS protocols.
Potential Returns From Staking Ethereum
Interest rates for traditional, centralised currencies are negligible. Returns for investing in fiat currencies are hardly worth the effort. But, crypto holders can now earn much higher returns from their cryptos than from a conventional savings account.
Ethereum network validators can gain up to 8% APY rewards, which is above average by any standards.
Crypto industry experts predict that the potential rewards for staking Ethereum could increase. Some are suggesting that ETH rewards could be as high as 25%. These predictions are just possible forecasts, of course. But belief in the future of Ethereum is strong amongst investors and loyal fans of Ethereum.
Read More: Is Ethereum Staking Profitable?
What Are The Risks Of Staking Cryptocurrencies?
Before discussing the risks of staking Ethereum, let's look at the general risk of staking cryptocurrencies and how they apply to Ethereum staking.
Market Risk of Ethereum
Cryptocurrencies are volatile and unpredictable. Potential adverse price movements may present one of the biggest risks when investing in cryptocurrencies.
In May 2021, the price of Ethereum was $4,300, a new high. But, in June, the price slithered down to below $2000. A 50% drop isn't typical if you are trading stocks or Forex. But, with cryptocurrencies, such as Ethereum and Bitcoin, it's not at all unusual.
If you bought Ethereum at a high price, you could face weeks, months or even years before your investment returns to profit.
Market risk is something to assess before staking Ethereum. If you plan to do it, wait for the market to stabilise before buying a stake in Ethereum.
Check Out: Ethereum Price Predictions
Liquidity Risk for Ethereum
Liquidity for Ethereum is not an issue. Micro-cap altcoins have a much greater risk factor for lack of liquidity.
Ethereum has many loyal followers and investors. Listed #2 by market cap, you're unlikely to encounter liquidity risks with Ethereum. Cryptocurrencies listed in the top ten or twenty by market capitalisation likely have good liquidity.
Lockup Periods for Ethereum
OK, now we are entering into the territory of concern for Ethereum investors.
The Ethereum 2.0 upgrade began six months earlier with the release of the Beacon chain component.
There are two more stages. Phase 1.5 will merge with the Ethereum mainnet. At this stage, all PoW mining stops, and it precedes the rollout of shard chains. The Ethereum website suggests this phase will be 2021/2022, with no fixed date as yet.
The final phase introduces shard chains, and the Ethereum network becomes a fully operational PoS consensus network, transferring away from PoW.
With the completion of the final phase, the Ethereum network expands capacity and scalability. The timeline for phase 2 is 2022.
So, how do these phases affect your Ethereum holdings?
If you are staking Ethereum, your ETH is locked until at least the completion of phase 1.5, meaning you cannot sell, transfer or withdraw your ETH. Your ETH stake will continue to generate ETH token rewards, but these too are locked.
It's not uncommon for cryptocurrencies to have a lock-in period. But, for you, it means that if you stake Ethereum right now, you are investing for the long term.
If the price of Ethereum drops, there is nothing you can do. You continue to gain rewards from staking Ethereum, but your rewards will be smaller with a lesser amount of ETH.
If the price of Ethereum rises, you continue to gain rewards on the increased amount.
The Risks of Becoming an Ethereum Network Validator
To run a node as an Ethereum network validator, you need a level of technical expertise. You must ensure no disruptions because nodes must have 100% uptime to maximise the staking returns.
That's a lot of pressure on one person.
If you make a mistake, you could be penalised, which will affect your staking returns.
Ethereum introduced something called slashing, which means you could lose all or some of your ETH stake. On the Ethereum website, on the risk section, it says, 'Although you can earn rewards for doing work that benefits the network, you can lose ETH for malicious actions, going offline, and failing to validate.'
Mistakes happen, but the risk of losing your ETH is a significant concern. If you run your own validator mode, it may be better to delegate your stake to a third-party validator or join an Ethereum mining pool and share the risks and rewards.
There are also running costs involved for staking Ethereum, such as hardware and energy costs. These expenses are not as hefty as PoW but can still add up.
The Risks of Cryptocurrencies Becoming Centralised
Right now, cryptocurrencies are decentralised, which means governments have no influence or control. There are two possible scenarios for the future of cryptocurrencies:
- Governments realise the income potential of cryptocurrencies for their country and utilise the benefits
- Governments force centralisation of cryptocurrencies and stamp down rules and regulations
In some countries, cryptocurrencies are already banned. Governments dislike the lack of control. With fiat currencies, the Central Banks have the power and means to influence their country's currency. They regulate prices to improve international trade and the economy. But, they can't yet do this with cryptocurrencies.
We can continue to hope that governments do not get involved in influencing cryptos.
Recap Of What Is The Risk Of Staking Ethereum
You need 32 ETH to become an independent Ethereum network validator. Today, that's $64,000 to tie up until at least 2022.
You need technical know-how and decent hardware systems to ensure no downtime or mistakes when you are staking Ethereum.
If there are any mistakes or perceived malicious activities, the Ethereum network could slash your account. That means you could lose some or all of your ETH stake. The worst-case scenario for slashing is to lose your entire ETH stake and be removed from the Ethereum network.
You could instead choose to pool your resources with an Ethereum mining pool. It's a way to minimise risk, and it means you don't need 32 ETH. Ethereum mining pools have different entry requirements, but you can shop around to find one to suit your ETH holdings.
But, even working as part of an Ethereum mining pool, you still cannot access your Ethereum until the upgrade completes. However, it may be possible after phase 1.5 when the Ethereum network merges with the Ethereum mainnet. But that could be 2022 before that happens.
As crypto prices are volatile, even if your stake is tied up, the price of Ethereum still reflects the market. But you earn ETH token rewards regardless of your Ethereum balance.
The main risk is whether you are comfortable with locking in your ETH until 2022. If there are delays to the upgrade, it could be longer. The secondary risk is deciding whether to become an independent Ethereum network validator or join an Ethereum mining pool.
It's a big decision when the prospects for Ethereum are uncertain.
Indeed, the future of cryptocurrencies is fundamentally ambiguous. If digital currencies became the norm, it would turn the crypto industry upside down. Some prices could rocket, or the crypto market might stabilise. Whatever future scenario, no one can predict how it will play out. Uncertainty equals risk, and there's no way of measuring potential outcomes.
Governments dislike the lack of control over decentralised currencies. Today, it isn't a problem, and we can only hope that cryptos remain decentralised.
There are many improvements planned for the Ethereum 2.0 upgrade, but how will that impact the growth of Ethereum? Crypto industry experts suggest that the price of Ethereum could be as high as $20,000 by 2025. They're also saying that Bitcoin could be $500,000 by 2030, and Ethereum prices do seem to reflect a similar pattern to Bitcoin prices.
You can keep up to date with upgrade developments by checking Ethereum 2.0 progress updates
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading, staking or investing in cryptocurrencies may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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Virtual currencies are highly volatile. Your capital is at risk.
What's the least amount to stake Ethereum?
The 32 ETH requirement to become an independent Ethereum network validator is a significant financial risk. The vast majority of people interested in staking Ethereum can't afford the price tag.
Cryptocurrency staking is profitable for the exchanges, and there are many offering staking options for Ethereum. They do all the hard work, which reduces some of the risks, and there are no minimum requirements.
The rewards may be slightly less than staking directly, but there's nothing for you to do other than buy Ethereum.
You can earn from 5% - 6.25% by staking your ETH with eToro.
How do I Join an Ethereum Mining Pool?
If you decide to join an Ethereum mining pool, apply online by visiting the website.
The current top three Ethereum mining pools are-
- Ethpool – an established Ethereum mining pool
- Nanopool – a huge, established Ethereum mining pool
- F2pool - F2pool are the third performing Ethereum mining pool
How do I Stake Ethereum?
To find out how to stake Ethereum, you can read our in-depth article, how to stake Ethereum.
Can you withdraw staked Ethereum?
No, once you have staked ETH, you cannot withdraw or trade your ETH or your ETH staking rewards. It's a non-negotiable aspect of staking Ethereum until the Ethereum 2.00 upgrade completes.
Is Ethereum 2.0 a new coin?
There won't be a new coin for ETH2. The main criteria for the Ethereum 2.0 upgrade is to introduce sharding.
What is sharding?
Sharding enables everyday users to operate Ethereum on a personal device. It will increase network participants, making the Ethereum network more secure and more decentralised.
Sharding shifts the need for PoW protocols to the more energy-efficient and faster PoS protocols.
There could potentially be a derivative token of ETH, but we have no further information.