> 0.3% of the Iron-oxide becomes nanoparticles which cannot be converted back into Iron. At that rate, 50% of the initial iron will be gone in 333 cycles of iron -> iron oxide -> iron. This a hard type of energy source to reason about: 1. It's not a pure fuel and acts like a battery most of the time, but it's also not renewable 2. Iron is extremely abundant on Earth, but it requires mining and processing to extract 3…
I'm also somewhat concerned about the nanoparticle's effect on living things. It is likely that it is only a question of local exposure, as in general once they get out they should still rust in some relatively short period of time, and as Earth is the aforementioned big ball of iron, a bit of rust in the environment is quite unlikely to hurt anything because if it could hurt a thing that thing would already be dead, but locally nanoparticles would be something weird and I could see breathing them could be problematic. It is also entirely possible that it is safe up to surprisingly absurd levels too (your body is familiar with iron, and while there are toxic doses of iron you're not getting to them with nanoparticle exposure any time soon), it would just be something that would need some study.