How to Earn Interest on Crypto Savings Accounts

The cryptocurrency industry has provided developers and investors with the opportunity to introduce new financial instruments that offer numerous opportunities to generate passive income. Simply holding crypto has offered patient investors a chance to make profits over the years. However, there are various other ways to increase crypto asset stacks, even in bear markets.

Aside from staking, crypto savings accounts allow retail investors to accumulate their funds by earning interest on the crypto assets they deposit on certain cryptocurrency platforms when they agree to lend their coins or tokens. Crypto interest accounts are particularly attractive because they pay out much higher returns than traditional bank savings accounts, considering the average interest rate applied by a crypto savings account can be as high as 7.5% versus the average 0.06 % of bank savings accounts.

Related: DeFi Staking: A Beginner’s Guide to Proof-of-Stake (PoS) Coins

The interest rate differential between crypto and traditional savings accounts is somewhat significant, but it comes with higher risks associated with the service. Here you can find out how to get access to crypto savings accounts, what crypto interest rates and deposit periods are and what risks are associated with this type of financial instrument.

What is a crypto savings account?

A crypto interest account is generally a service provided by a DeFi platform that allows you to earn interest on digital assets that you have deposited and agreed to lend them for a return. This service is similar to a bank savings account, which lends your money to other customers or financial institutions for a period of time and gives you interest for the service.

By definition, blockchain technology encourages users to become self-sovereign and independent of third parties. However, intermediaries have become a necessary part of the industry, providing crypto savings accounts for those who want to enjoy the benefits of technology without straining too much to learn complicated and arduous processes.

Aside from the convenience, these companies also bear some of the risks involved, ensuring depositors get paid first if adverse events such as an insolvency occur. Some companies are backed by insurance and work with established trustees to protect their customers.

How does a crypto savings account work?

Once you deposit your crypto assets into a savings account, interest begins accruing from day one. Most major cryptocurrencies can be used in a crypto savings account, with bitcoin (BTC), ether (ETH) and litecoin (LTC) being the most common choices, while many interest rates for stablecoins such as tether (USDT), USD Coin (USDC) and Pax dollars (USDP).

By depositing your crypto assets into a savings account, you are officially granting the platform the right to use your money for any purpose, from lending to investing to using it on your behalf. It is primarily used for lending to generate high returns, some of which are paid out to you as periodic interest payments.

Crypto savings accounts can offer you cheaper interest rates if you agree to lock your crypto for a while or hold a platform-specific token. Nexo, for example, is increasing interest rates for holders of the platform’s governance token by up to 4%.

How to invest in a crypto savings plan?

If you are looking to invest in a crypto savings plan, the first step is to choose the right account for you and get started as follows:

  1. Choose a cryptocurrency platform that you trust and that offers realistic interest rates;
  2. transfer cryptocurrency to that selected platform;
  3. Follow the few simple steps to deposit your crypto assets into a savings account. Usually these steps are straightforward and the platform will guide you through the process;
  4. Choose to deposit your funds for a limited time, or choose a flexible time that allows you to withdraw your crypto at any time;
  5. Earn interest from day one.

As mentioned, there are numerous platforms to choose from, including well-established cryptocurrency exchanges such as Coinbase, with the following details of fixed savings interest rates:

Binance is the other globally popular crypto platform that offers interest rates on many cryptocurrencies with flexible savings and locked savings options:

A growing number of other financial services companies and cryptocurrency platforms offer these types of accounts. Nexo and Crypto.com are among the companies offering higher interest rates to cryptocurrency holders who lock away their assets for weeks or months. However, the downside to this type of savings account is that you cannot withdraw or sell your crypto during this time.

How much interest you can earn from a crypto savings account largely depends on the platform and cryptocurrency you are depositing. The interest rate offered by the service also depends on market conditions and is usually paid in the cryptocurrency you have deposited.

While their high interest rates may tempt you, consider how safe your investment is with them. Choosing the best crypto interest account isn’t just about comparing the interest rates paid, it’s also about making sure your investment is as safe as possible.

Remember that they are custodians of your crypto assets, which means that by holding your funds, they may even prevent you from withdrawing them or delay the withdrawal process, which could result in a loss for you if the value changes of the crypto asset in the meantime changes . When choosing the best interest rates, make sure you understand the difference between Annual Percentage Rate (APR) and Annual Percentage Yield (APY), as these could mislead you when calculating your annual returns.

In short, APY involves compound interest – ie the addition of interest to the principal of a loan or deposit (the interest on accrued interest). On the other hand, the APR does not include compound interest. Due to the compound interest factor, APY offers a higher return than APR. However, it’s always worth reading the fine print of the savings account, as certain services only pay simple interest and do not generate compound interest over time.

Risks of Crypto Savings Accounts

The crypto industry is largely unregulated, so investors may not have coverage in case something goes wrong with their assets. Within this framework, operate crypto savings accounts that do not offer government-backed deposit insurance, such as the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

These savings accounts offer higher returns because they are riskier. For example, they might limit how quickly you can withdraw your assets, and during tough times, they might not let clients withdraw their assets at all.

In return for these restrictions and the risk involved, these savings accounts are much more attractive to an investor than a typical bank account. However, because these accounts earn such high interest rates, sometimes exceeding 20%, you should ask yourself how your money is being used behind the scenes.

Just as regular banks operate under a “top reserve” banking service, so do most crypto companies. They lend more than necessary to financial institutions, with the difference that there is no deposit insurance as with traditional banks.

Crypto savings accounts vs. crypto wallets

Crypto wallets simply won’t accumulate your cryptocurrency holdings, unlike crypto savings accounts which are designed to allow you to increase the number of coins you own over time.

This However, this could come at the cost of key ownership, as the private keys that allow you to access your coins are managed by the crypto platform. On the other hand, most crypto wallets ensure you retain full ownership of your private keys.

Security is another concern that should be addressed very well. There are security risks in the centralized platform that holds your private keys as it could potentially become insolvent, bankrupt or hacked and you could lose your funds.

In the same way, you should choose a wallet carefully to avoid choosing a service with low security and vulnerability to hackers. You also need to ensure that you can easily access your wallet’s private keys if you lose your working device and need to restore your assets to a different digital location.

Cryptocurrency is still a work in progress and is likely to change constantly over the years, particularly in terms of regulation, which will also impact how crypto savings accounts are managed. In June 2022, the troubles of leading crypto lending platforms like Block.Fi and Celsius raised further concerns about the future of crypto savings accounts and similar related cryptocurrency services.

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