Investors looking to make a profit on their long-term crypto investments are increasingly turning to cryptocurrency savings accounts. These investment vehicles can be risky, but they offer investors the opportunity to get higher yields than average, which makes them attractive to many investors.
This guide will show you how crypto savings accounts work, and why you might consider opening one.
What is a crypto savings account?
You can deposit your crypto assets in a crypto savings account and earn interest. Interest is paid out in a similar fashion to regular savings accounts. You can also withdraw your assets, depending on which type of crypto you have.
Many blockchain networks offer a staking reward (technically it is not yield as staking yields mostly derive from network issues), which pays something similar to native token holders. Many centralized crypto exchanges offer interest-bearing accounts. They use a variety of methods to generate returns in addition to holding your crypto.
Other options include depositing crypto in CeFi lending pool or providing liquidity for trading pools that power decentralized exchanges (DEXs) like DeFi protocols.
These activities generate returns that can be used to pay regular interest on crypto deposits.
How do Crypto Savings Accounts Work
Crypto savings accounts offer a better user experience than complicated blockchain protocols. They are a simple way to get into the crypto ecosystem and earn interest through central platforms. This is in contrast to the complex onboarding process found in DeFi protocols or native stake strategies that allow users to directly interact with the blockchain.
Although most DeFi protocols offer higher returns than crypto savings accounts, many users find them cumbersome as interacting with them is not an easy process. With crypto savings accounts, you can access the DeFi protocol via an app or the CeFi platform. This makes it seem a lot simpler.
Crypto savings accounts are more convenient than DeFi protocols. Companies that offer crypto savings accounts have the advantage of reducing some of the risk associated with placing funds in DeFi protocols or public blockchains for stake.
These companies may have agreements to pay customers first in the event of insolvency. Other companies will insure deposits and work with trusted custodians.
As we’ve seen in 2022, there are companies that will take user money in the event of insolvency. This is the biggest risk for crypto savings account holders.
As mentioned in the first section of this article, crypto savings accounts will be used to deposit funds and participate in the staking tokens. They will also provide liquidity for automated market maker protocols, or lend. In exchange for crypto savings being locked, the interest is paid in crypto. It is usually subject to a variable rate. Although the interest earned can be variable, you will usually receive a fixed minimum rate of return.
Different types of Crypto Savings Accounts: From Where Does the Yield Come?
There are two types of crypto savings accounts available: flexible or fixed rate accounts.
Flexible cryptocurrency savings accounts
These flexible (or variable rate) crypto savings accounts allow you to withdraw or deposit your crypto assets at any time. These accounts do not have a lock-up period. Interest is usually calculated weekly or daily. These accounts have lower interest rates, but this is a tradeoff.
Fixed Cryptocurrency Savings accounts
Your funds are locked in fixed crypto savings accounts for a period of time. The vesting period for savings that are locked usually lasts between 7 and 120 days. You can either redeem the principal and interest, or reinvest them for additional fixed-interest periods.
Are Crypto Savings Accounts worth the risk?
You can earn as much as 8% APY on some crypto savings accounts. These accounts come with risks.
These accounts are not necessarily a bad product. However, before you open a savings account and start using it, you should be aware of all the risks involved.
The obvious risk with crypto savings accounts is that they don’t usually come with state-regulated deposit insurance. Customers’ deposits are protected in traditional savings accounts. In the event that a financial provider becomes insolvent, regulators will take over to ensure that a portion of the customer’s losses are covered. The Federal Deposit Insurance Corporation (FDIC), for example, protects US customers up to $250,000 in case of bank failure.
These safeguards are not available for crypto assets at the moment. You run the risk that your funds could be lost if the company you are dealing with doesn’t give you the keys to the wallet you have saved.
As recent incidents in the crypto world show, giving up control of your crypto assets is a serious concern. You are effectively giving up your private keys. You could lose all or part of your digital assets if the party managing your crypto savings account lends money to other counterparties.
Another concern that could affect your crypto savings account is price volatility. If you have deposited digital currency such as bitcoin (BTC), or ether (ETH), in your crypto savings account the price could fluctuate as well. It is possible to track interest payments if the balance and interest were paid in a USD-denominated steadycoin.
Most traditional savings accounts allow you the freedom to withdraw your money at any time. Some crypto-savings accounts may limit your withdrawals. You can only withdraw money at a certain time. Some crypto savings accounts may charge for withdrawals. If a provider of crypto savings accounts gets into trouble, withdrawals may be permanently stopped.
What does this all mean for you, as an individual investor?
Crypto savings accounts can offer you returns, despite the risk. This is particularly true if your crypto assets are locked up or you choose a native token from a crypto exchange provider or crypto savings account provider.
Nexo, for example, offers a 4% APY increase to holders who want to receive the returns from their NEXO token. Crypto exchanges such as Crypto.com and Binance offer higher interest rates if tokens are locked away in savings accounts. You can also denominate the token’s returns with their token.
Despite the potential benefits, it is wise to only open a crypto savings account with a platform that you feel comfortable with, has been around for some time, and has a solid reputation. To determine if there is insurance available for your deposits, you should read the terms and conditions. Also, you should only invest what your finances can bear and consider the crypto savings accounts risks.