There is a pool of opportunities surrounding the cryptocurrency industry which makes it possible for developers and crypto holders to earn passive income from their crypto portfolio.
No matter the market trend, having any amount of crypto in one’s possession has presented the chance to earn more income from them. In fact, it is even interesting to accumulate cryptocurrency in a bear market if you are familiar with the numerous ways you can play around it with your crypto portfolio.
Many subscribed to the idea of crypto staking but lending out crypto assets through a crypto savings account is yet another way crypto retail investors can earn passive income from interest on the crypto assets they have lent out to others through some specific cryptocurrency platforms.
Crypto savings accounts are much more attractive than traditional bank savings account because it pays higher interest rate than the banks. The average interest rate on assets deposited in crypto savings accounts is up to 7.5% but bank savings accounts pay less than 3% for the deposits in their possession.
The difference crypto savings account and the conventional bank savings account is substantial but the risks involved in the crypto savings account are higher.
In this article, we will discuss the meaning of a crypto savings account, the terms of deposit, how to access the crypto savings account and the risks involved in it.
What Is A Crypto Savings Account?
A crypto savings account is very similar to a bank savings account, except that crypto and not fiat money is saved in the crypto savings account.
A crypto savings account is a service built on the Decentralized Finance (DeFi) platform which allows people to earn interest on digital assets deposited and have been agreed to lend out for a certain period.
Since blockchain technology eliminates the need for third parties, it makes users self-sufficient and independent, creating space for them to utilize the full purpose of the technology.
However, intermediate companies have sprung up to be a key part of the technology by creating crypto savings accounts for all who want to tap into the wealth of blockchain technology without the burden of learning complicated programmes.
These companies also bear the risk involved by paying depositors first in the case of bankruptcy. Though, the majority of them are insured with good insurance policies and also have well-established custodians to protect their customers.
How Does A Crypto Savings Account Work?
In the normal bank savings account, you deposit a certain amount of money which will yield interest over the certain time the money stays in the bank. The same process applies when you deposit your crypto assets into a savings account. The crypto assets deposited have been lent out to the exchange platform for business which will yield more returns. The platform can either lend it out again, stake it or invest it. However, a certain percentage of the profit is paid to you on a regular agreed period as interest on your crypto.
However, locking up your crypto for a time (longer period) or holding the platform-specific token will attract a higher interest rate. For example, Nexo increases the interest rate of the platform’s governance token holders by up to 4%.
Some of the famous cryptocurrencies used in the crypto sayings account are Bitcoin (BTC), Ether (ETH) and Litecoin (LTC), but stablecoins like USD Coin (USDC) Tether (USDT), and Pax Dollar (USDP) have a more favourable interest rate.
How To Invest In A Crypto Savings Account?
The first step to take when you finally decide to invest in a crypto savings account is to evaluate and choose the right account you consider the best for you, when you have done that, you can get started as follows:
- Discover a trustworthy cryptocurrency platform that offers rational interest rates and sign up.
- Transfer your cryptocurrency to the chosen platform.
- Read and follow the instructions on how to deposit your crypto assets into a savings account on the platform. It’s always a straightforward process and the platform will also guide you through the process.
- Choose the timeframe in which you want your asset to be lent out. You can choose if you want it deposited for a limited time or choose a flexible time that will enable you to withdraw your crypto at any time;
- Start earning interest from the first day.
Many well-established platforms like Coinbase, are accepting crypto assets from crypto investors and as well, pay interest on the crypto assets deposited in their crypto savings account.
Furthermore, Nexo and Crypto.com platforms pay even higher interest rates on crypto assets locked for a longer period (months or years). The only problem with this type of saving plan is that a depositor can never assess the crypto until the timeframe has elapsed.
Again, exchange platforms and the type of cryptocurrency deposited greatly affect the amount of interest earned on the crypto savings account. Also, the interest rate offered by the exchange will be driven by market conditions and its paid out in the cryptocurrency you have deposited, at its market rate at the time of payment.
Do not be blown away by the euphoria of the high-interest rate because the security of the investment is more important.
Choosing a good crypto savings plan goes beyond the interest rates but more importantly, ensures the security of your crypto asset.
Risks Involved In Crypto Savings Account
One of the major features of the cryptocurrency ecosystem is that it is not regulated by any central government entity, hence, investors’ assets are largely unprotected in case of any unforeseen blow in the industry.
Operating crypto savings accounts that do not offer government-backed deposit insurance like the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) is riskier but it has a higher reward.
The exchange platforms without government-backed deposit insurance offer higher interest rates due to their rigorous mode of operation. For example, they can stall the time of asset withdrawals and in some severe problems, they can restrict customers from withdrawing their assets.
However, given all these risks and restrictions which may occur in most cases, investors holding crypto savings accounts are compensated with more interest rates which may exceed 20% in some cases. So, many crypto investors find the crypto savings account more interesting than the traditional bank savings account.
Most crypto companies operate under the same “fractional reserve” policy as regular banks do, hence they are lending out more than they have at hand and there’s no deposit insurance to back them.
It is true that the cryptocurrency ecosystem has not reached its peak in terms of advancement and will surely continue to evolve over the years. The further evolution of the crypto industry will spawn better terms of regulation in the industry which will also influence the management of the crypto savings accounts.
Though, the cases of the leading crypto lending platforms like Block.Fi and Celsius in June 2022 have stirred the air of doubts over the future of crypto savings accounts and crypto in general but the future looks brighter with improved innovations surfacing daily.