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Cryptocurrency continues to make waves in the financial world, and many consumers already own or are thinking about investing in these digital coins. If you fall into one of these two categories, then it might be worth reading up on crypto savings accounts.
A relatively new type of savings account, a crypto-based account offers more alluring rates of return compared to a traditional bank account. But these accounts also come with their fair share of risks.
Here’s everything you should know about a crypto savings account before you invest in one.
What Is a Crypto Interest Account?
A crypto savings account, or crypto interest account, generally functions the same way a traditional savings account does at a bank or credit union. You deposit money into the account, and you earn interest to help your savings grow. Unlike a traditional savings account, which deals with physical money, a crypto savings account deals with digital money in the form of cryptocurrency.
Crypto savings accounts are built to accept and store crypto deposits, including bitcoin, ethereum, USDC (USD coin), and other cryptocurrencies. In a crypto savings account, your crypto assets are lent out to borrowers for a certain amount of time. In exchange, the borrowers have to repay their crypto loans with interest.
The big draw toward crypto interest accounts is that they offer much higher rates of return than traditional savings accounts and even that of a high-yield savings account. The average interest rate earned by a crypto savings account is around 7.5%, which is much higher than the average 0.06% interest rate for traditional savings accounts and the average .50% of a high-yield savings account.
While the differences in rates between crypto savings accounts and traditional savings accounts are significant, so are the risks (which will be discussed in more detail later on.)
Examples of Crypto Savings Accounts
There are a handful of crypto savings account platforms out there that you can take advantage of. Some will offer better yields than others, and some will only support a specific type of cryptocurrency. When comparing crypto savings accounts, make sure to choose a platform that supports the crypto you own (or are interested in) and look for the best interest rates.
Other factors to consider are withdrawal terms, fees, and safety. Make sure to research each platform before making a decision.
Some popular crypto savings accounts include:
BlockFi
BlockFi is a platform that allows you to buy, sell, and trade a variety of cryptocurrencies and store them in one place. With a BlockFi account, you can open a BlockFi Rewards Credit Card that includes bonuses, such as an intro bonus and spend bonus.
Outlet Finance
Unlike other platforms, Outlet Finance deals with U.S. dollars, which could be beneficial to users without a ton of crypto knowledge. Users deposit USD and earn dollar-based interest. Outlet Finance converts investments into stablecoin and then connects users with a network of overcollateralized lending partners, so they can match you with the highest yield.
Gemini
Gemini is a crypto finance platform that helps individuals and institutions buy, sell, and store crypto. When you open a Gemini account, you have access to Gemini Earn, where you can get interest on your crypto holdings.
Coinbase
Both a crypto savings account and a crypto wallet, Coinbase allows users to buy, sell, manage, and store a variety of crypto assets. With the Coinbase Card, you can earn crypto rewards of up to 4% on every purchase you make.
Nexo
Nexo is a crypto lending institution that pays out interest payments to users daily. Nexo supports all top-performing cryptocurrencies and offers a cash-back incentive for loyalty members. Nexo also has a referral program that allows users to earn free bitcoin when they invite friends to join the platform.
How to Earn Interest on Crypto
How much interest you can earn with a crypto savings account will depend on the platform you use and the type of cryptocurrency you deposit. The interest is driven by market conditions and is usually paid out in cryptocurrency.
To recognize the potential earning power of a crypto savings account, you’ll need to understand the difference between APR and APY returns when it comes to cryptocurrency.
What Is APR in Crypto?
Annual percentage rate (APR) is the monetary value that crypto owners can earn by making their crypto assets accessible to lenders in the form of loans. Taking into consideration the interest rates and any other fees that borrowers must pay, the profit you’ll earn through the APR will depend directly on the original investment.
Once you make a deposit into your chosen crypto savings account, the provider will use those assets to fund crypto loans, which will get paid back to you plus interest. In the event a borrower defaults on their crypto loan, many savings accounts require a borrower to transfer a minimum amount of crypto as a security deposit.
What Is APY in Crypto?
Annual percentage yield (APY) is the monetary value that crypto owners can earn on their crypto savings account. While the APR earns you money through lending, the APY calculates your return on your investment, taking into account compound interest. Compound interest is calculated by taking interest on the initial amount invested as well as on the interest accrued on that amount. In other words, you are earning interest on interest.
Due to compounding, APY will provide a higher yield profit than APR. But it’s worth noting that certain crypto-based savings accounts pay simple interest only, meaning your deposits won’t build compound interest over time. Your deposits will still grow, but not compound. With that being said, the high APYs offered by crypto interest accounts may still be worth pursuing.
Potential Risks of Crypto Savings Accounts
While a crypto savings account could significantly increase your rate of return, these types of accounts come with a level of risk that a more traditional account may not. When you open a savings account with a bank, credit union, or online financial institution, there are typically more security measures in place to keep your money safe.
Before you decide to invest in a crypto-based account, it’s important to evaluate the unique qualities and potential risks associated with one.
No FDIC Insurance
The vast majority of traditional bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC protects customers on up to $250,000 per account in the event of a bank failure or bankruptcy. Because cryptocurrency is not yet considered legal tender in the U.S., crypto interest accounts don’t offer FDIC insurance. So if something were to happen, there’s no government guarantee that you can get your funds back.
Price Volatility
Cryptocurrency can be very volatile. The value of these digital dollars is constantly going up or down, and this turbulence can drastically affect the money in your account. Since you’re investing with cryptocurrency and your returns will also typically be in cryptocurrency, your balance and interest can heavily fluctuate based on the market. And if the value of your asset drops or goes extinct completely, your initial investment and returns can be entirely wiped out.
Withdrawal Limits
While more of an inconvenience than a risk, some crypto savings accounts impose withdrawal limits on account holders that cap the amount you can take from your account over a specific period of time. In addition to withdrawal limits, you may also have to pay fees to withdraw money. These restrictions can put your money out of reach when you need it most. If this is concerning to you, you should look for a more liquid option, such as a crypto-based account with flexible withdrawals and no lock-up periods.
Loan Defaults
Because the crypto you deposit into your account is being lent out to borrowers, you run the risk of losing all or some of your assets if the borrower isn’t able to pay back the administrator of your crypto savings account. If the crypto platform suffers a wave of defaults on their loans that they can’t cover, this could negatively affect your money. That being said, most crypto loans tend to be overcollateralized, giving enough cushion to support the loan, which greatly reduces the risk.
FAQs
Are there high-yield crypto savings accounts?
Some crypto savings accounts can be referred to as high-yield because they offer a high APY. Shop around to find the best returns with the highest yield interest rates.
What’s cryptocurrency backed by?
Cryptocurrencies aren’t backed by any banks, the government, or anything physical. Crypto has an inherent monetary value, which is “backed” primarily by the trust of the consumer. You can also argue that cryptocurrency is supported by the blockchain ledger — a secure network that operates independently without human involvement.
Is crypto interest taxed?
Similar to interest from a bank account or other investments, crypto interest is also taxed in the U.S. You’re required to report any income from crypto interest on your federal tax return.
Final Thoughts: Are Crypto Savings Accounts Worth It?
Whether you already own cryptocurrency or are thinking about buying some, opening a crypto savings account can yield high returns on your investments. But it’s important that you do your due diligence when considering a crypto savings account. Consider all the risks associated with cryptocurrency, such as volatility and lack of financial protections, and weigh that against the possibility for a high return.
If you do decide to invest in a crypto savings account, it’s a good idea to treat it as a supplemental investment account rather than a replacement for a more traditional checking or savings account. That way you’ll have accounts that can easily be liquidated in the case of an emergency or the unexpected.
