Things to Avoid When Staking Crypto

This guide is part of the “Guide to Staking Crypto” series.

Staking crypto is one of the simplest ways to put your digital assets to work for you, but it is also an area full of avoidable traps. New stakers often chase high yields without understanding the mechanics of the blockchain network and the tokenomics behind them. Others underestimate lock up periods, validator charges, or the impact of inflation on actual earnings. 

The aim of this guide is not to scare you away from staking, but to help you see where most people go wrong so you can avoid those costly mistakes and get better at staking crypto.

Mistake 1: Skipping in-depth research on the project

The single biggest mistake in staking crypto is doing so without understanding the fundamentals of the project. Doing research is not just about reading about the returns on staking platforms. It is about knowing how the blockchain network issues their tokens and whether the project has any real utility. 

Without understanding these basics, many stakers end up with disappointing returns even if the validator performance is solid.

Ignoring tokenomics and inflation rate

High-staking rewards are less impressive if the token supply is inflating at the same pace. For example, a 12% APY combined with a 10% inflation rate means the real yield is closer to 2%.

Token price also matters. Even steady rewards can lose value quickly if the underlying asset is dropping. Smart stakers measure rewards against both inflation and market conditions before choosing a staking option.

Failing to assess utility and roadmap

Another common mistake is trusting a project with no clear use case or one that is not in active development. If the blockchain network does not solve a problem, or if its team has gone quiet, the staking rewards will not matter for long. 

Projects with strong communities, regular updates, and clear goals are far more likely to deliver consistent actual earnings and stay competitive over the long haul.

Mistake 2: Choosing the wrong validator

Validators are the backbone of any proof-of-stake blockchain network. They process transactions, maintain uptime, and distribute rewards to their delegators. 

Choosing the wrong validator is one of the most common mistakes and can lead to slashing penalties, low performance, or excessive commissions that quietly reduce your returns. 

Choosing the right validator means looking for consistent uptime (above 99%), fair commission rates (up to 5%), and a solid reputation.

The dangers of slashing

Slashing happens when a validator behaves maliciously or fails to stay online. A portion of both the validator’s stake and the delegator’s stake is destroyed. On many networks, a double sign event can cut 5% of your invested tokens. 

Downtime slashing may be smaller but it is still painful. On most proof-of-stake networks that use slashing, average downtime penalties are small, usually around 0.01% of your staked tokens.

Overlooking validator performance metrics

Not all validators are made equal. High uptime is a non-negotiable must. Validators with low performance or frequent downtime put your rewards at risk. 

High commission fees will also erode your actual earnings. Avoid both extremes: very high commission can eat your yield, but very low or zero fees can signal an unstable operation. 

A good validator has a fair commission, logs of their operations, and has proven themselves to the community. Splitting your stake across different validators helps reduce the risk of one operator’s failure.

Mistake 3: Ignoring lock up and unbonding periods

Many new stakers forget that once you delegate tokens, they are often locked for a set period. This lock up period, also called an unbonding period, prevents you from selling or moving your tokens.

How this impacts your liquidity

This problem arises when markets turn on you quickly. If the token price crashes during your lock up period, you cannot react until the unbonding period ends. Depending on the blockchain, this period can range from a few days to several weeks. 

For example, Polkadot has a 28-day unbonding period, Cosmos 21 days, and Ethereum follows a queue system that can extend withdrawals when many stakers exit at once.

Strategies for managing illiquidity

The safest move is to stake funds you will not need in the short term. Keep a liquid balance separate for trading emergencies. 

Liquid staking options, where you receive a derivative token that can be traded while your funds are staked, are also worth exploring, though they come with their own risks.

Mistake 4: Chasing unsustainably high APYs

Of course it will be tempting to pick the staking option that shows you the highest reward. Many new stakers accept high yield numbers as guaranteed profits without considering what drives them. This is one of the most common mistakes because it mixes up marketing with sustainable earnings.

The relationship between high reward and high risk

The correlation is direct. When a blockchain network or staking platform advertises unusually high APYs, it is usually a sign that the project is trying to attract liquidity quickly. To do this, they often rely on unaudited code, aggressive token issuance, or unstable economic models. 

At first glance the rewards may look impressive, but the reality is that actual earnings can collapse once inflation rises or the token price falls.

Staking and high risk yield farming

Traditional staking is validator based and relatively predictable. Yield farming, on the other hand, often involves providing liquidity to automated market makers or DeFi protocols. This exposes you to impermanent loss, smart contract bugs, and market swings. 

Many investors make the mistake of treating these different products as the same. Don’t fall into this trap and research yield farming strategies separately. 

Mistake 5: Neglecting security and custody

Staking directly from an exchange or a hot wallet may feel simple, but it adds a layer of risk that most people overlook. The golden rule is still the same: not your keys, not your coins.

Risks of staking from an exchange

When you allow an exchange to hold your tokens, you are trusting a third party with both custody and validator management. 

If regulators step in, as they did with Kraken’s US staking program in 2023, your staking option can be shut down overnight. Hot wallets have their own risks. Since they stay online, you’re always leaving your funds exposed to attacks.

Staking with a hardware wallet

For long-term positions, using a hardware wallet such as Ledger or Trezor is the professionals choice. It lets you delegate crypto to validators while keeping your private keys offline. 

This reduces attack options and gives you full control even if staking platforms or exchanges change policies or go down.

Mistake 6: Forgetting about tax

Another one of the most overlooked areas in crypto staking is tax. Many people enjoy the flow of rewards as they come in, without realizing that in most countries those rewards are taxable income. Ignoring this can create expensive problems with tax collectors.

Staking rewards as taxable income

In the United States for example, staking rewards are considered income the moment you have control over them. The same applies in the UK and many other jurisdictions. 

This means your tax liability starts when you earn the reward, not when you sell it. Selling later is treated as a separate taxable event.

The importance of meticulous record keeping

To simplify things for yourself later, get started today by tracking: dates, token amounts, token price when receiving them, and eventual sales. Crypto tax software can make this so much easier, but even a simple spreadsheet works fine if maintained consistently. 

Consulting a tax professional is strongly recommended since rules differ across countries.

Mistake 7: Putting all your eggs in one basket

Diversification matters in staking just as it does in traditional investing. Over committing to a single chain or a single validator is one of the most easily avoidable mistakes. It leaves you vulnerable to issues that are specific to one blockchain network or to one validator’s performance.

By spreading your staked funds across multiple assets, you reduce the chance that a single network’s inflation rate, governance issue, or token crash will drag down your entire position.

Diversifying across different validators

Even within one blockchain, splitting your stake across different validators lowers the impact of slashing, downtime, or high commission changes from a single operator. This makes your staking crypto strategy more stable over time.

Final thoughts on staking mistakes

Staking crypto is not about chasing the highest number, it is about making informed choices. Most common mistakes come from acting without understanding. People delegate to low reputation validators, overlook basic inflation, ignore lock up periods, and underestimate penalties for tax laws. Each of these avoidable mistakes reduces actual earnings and creates unnecessary headaches later on.

The good news is that avoiding these mistakes is pretty straightforward as outlined above. Do proper research before committing to any blockchain network. Check validator charges, performance, and community trust. Diversify across different validators and assets instead of putting everything into one staking option. And above all, remember that high yield almost always equals high risk.

Staking can be a powerful way to build long-term returns if approached with discipline and proper risk management. By avoiding these common mistakes you can turn staking from a guessing game into a predictable strategy that adds to your overall portfolio’s income.