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Cryptocurrency continues to make waves in the financial world. Many consumers already own or are thinking about investing in these digital “coins.” It might be worth learning about crypto savings accounts if you fall into one of these two categories.
A relatively new type of savings account, a crypto-based account offers more alluring return rates than 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.
Crypto savings accounts explained
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 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 (BTC), Ethereum (ETH), USDC (USD coin), Tether (USDT), and other cryptocurrencies. In a crypto savings account, your crypto assets are lent to borrowers for some 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. Crypto savings accounts can potentially earn interest in excess of 7-10%, which is much higher than the average 0.46% interest rate for traditional savings accounts and even the average of a high-yield savings account.1
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.)
Types of crypto savings accounts
Crypto savings accounts come in several forms. Each type offers unique features and benefits when it comes to withdrawal terms, fees, and yields. Here’s a quick look at the most common types of crypto savings accounts:
- Flexible accounts: Flexible accounts offer high liquidity, allowing for easy deposits and withdrawals. Interest is calculated daily and paid frequently, but rates are usually lower due to this flexibility. Some platforms may charge fees for withdrawals beyond a certain limit.
- Fixed accounts: Similar to certificates of deposit, fixed accounts lock funds for a set period, like 90 days, offering higher interest rates. After the term, funds and interest can be redeemed or reinvested.
- Tiered interest accounts: In a tiered interest account, interest rates vary with the deposit amount, with larger deposits earning higher rates. This benefits anyone making a larger investment, offering higher returns for more significant deposits.
- Token-specific accounts: Tailored for specific cryptocurrencies, token-specific accounts provide customized services and rates for particular digital assets. They offer more favorable terms for those specific tokens.
3 popular crypto savings accounts
There are several places you can earn interest on your crypto, so take time to research the organization’s reputation where you open an account to help keep your crypto secure. Some popular crypto savings accounts include:
YouHodler
YouHodler currently pays up to 8% APY and supports over 50+ cryptocurrencies and stablecoins. Interest is compounded weekly, and you can even earn 8% on stablecoins like USDC and USDT.
Coinbase
Both a crypto savings account and a crypto wallet, Coinbase allows users to buy, sell, manage, and store various crypto assets. With the Coinbase Card, you can earn crypto rewards on every purchase.
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.
Benefits of crypto savings accounts
Crypto savings accounts offer a variety of benefits to meet your needs. Here are the top benefits of crypto savings accounts and how they can enhance your investment strategy.
Investment diversification
Crypto savings accounts offer an opportunity to diversify your investments. Adding cryptocurrencies to your portfolio can reduce your reliance on traditional financial assets and potentially mitigate some of the risks associated with fluctuations in the traditional markets.
Crypto assets often move independently of stocks and bonds, providing a hedge against market declines.
Flexibility
Unlike traditional savings accounts, which may restrict withdrawals or limited transaction types, crypto savings accounts often allow for more fluid deposit and withdrawal options.
This flexibility is particularly helpful in the fast-paced crypto market, where access to funds for timely investments or trades can be crucial.
Higher interest rates
One of the most attractive features of crypto savings accounts is the higher interest rates they offer compared to traditional savings accounts. These rates are often significantly higher, providing a lucrative opportunity for earning passive income on your crypto holdings.
Benefits from the investment platform
Many crypto savings platforms offer additional benefits like bonuses, referral incentives, and access to advanced trading tools. These perks can enhance the overall investment experience and increase your returns.
Earning opportunities
Beyond earning interest, crypto savings accounts can offer additional earning opportunities like “staking” or “yield farming,” which are decentralized finance (DeFi) methods of providing additional income streams for crypto investors.
Staking, for example, involves holding funds in a crypto wallet to support the operations of a blockchain network, and investors earn rewards in return.
Enhanced security
Cryptocurrency savings accounts often employ advanced security measures, leveraging the inherent features of blockchain technology. These measures can include two-factor authentication, encryption, and cold storage of assets.
Potential risks of crypto savings accounts
While a crypto savings account could 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 have FDIC insurance through the Federal Deposit Insurance Corporation. The FDIC protects up to $250,000 per account in the event of a bank failure or bankruptcy.
Crypto interest accounts are not covered under FDIC insurance. So if something happens, there’s no government guarantee that you can get your funds back.
Price volatility
Cryptocurrency can be very volatile. The value 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, 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, you should look for a more liquid option, like 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 risk losing all or some of your assets if the borrower can’t 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 balance. That’s why it’s important to choose a crypto savings account with a strong track record over the course of years.
Regulatory action
If a regulatory body like the Securities and Exchange Commission (SEC) decided to implement new rules or enforce existing rules more strictly, it could change how crypto savings accounts are managed and used.
For example, the SEC could require more transparency from account providers, impose limits on certain types of transactions, or even halt the operation of crypto savings accounts altogether if they find that they’re not compliant with regulatory standards.
Choosing the best crypto savings account for you
When considering a crypto savings account, you’ll want to make the decision that best aligns with your financial goals and risk tolerance. Let’s look at some of the key factors to consider, from security measures to fee structures.
Do your research
Begin by exploring and understanding the different platforms available. Look into their reputation, user reviews, and the cryptocurrencies they support.
Consider the security checks
Evaluate each platform’s security measures, including encryption and authentication methods, and their track record in handling security breaches.
Review and compare interest rates
Assess the interest rates provided by different platforms and get familiar with the conditions attached to these rates.
Check the terms and conditions
Read the fine print for any hidden fees, withdrawal restrictions, and other significant clauses.
Look into withdrawal and transfer fees
Understand the cost of moving your funds, including any limits on transactions.
Are crypto savings accounts worth it?
Whether you own cryptocurrency or are considering buying some, opening a crypto savings account can potentially yield high returns on your investments. But you must do your due diligence when considering a crypto savings account.
Consider all the risks associated with cryptocurrency, like volatility and lack of financial protections, and weigh that against the possibility of a high return.
If you do decide to invest in a crypto savings account, it’s a smart 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.
If you’re interested in investing in crypto but need a broader knowledge base before diving in, learn the basics of cryptocurrency.
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 physical collateral like gold. Crypto has an inherent monetary value, which is “backed” primarily by the consumer’s trust. 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 must report any income from crypto interest on your federal tax return.