Cryptocurrency savings accounts have grown in popularity among investors looking to earn a yield on their long-term crypto holdings. While these investment vehicles are not without risk, they enable investors to earn above-average yields, making them attractive to a variety of investors.
In this guide, we’ll explain how crypto savings accounts work and why you might want to consider setting up one.
What is a crypto savings account?
A crypto savings account is a savings offering that allows you to deposit your crypto assets and earn interest. Similar to regular savings accounts, interest is paid periodically, and you can withdraw your assets depending on the platform’s rules and the type of crypto you deposited.
Most blockchain networks provide a staking return (technically, this is not a yield since staking yield is derived primarily from network issuance), thereby paying something akin to interest to the original token holders. Many centralized crypto exchanges (CEX) take advantage of this by offering interest bearing accounts. To generate returns, they use a variety of methods other than staking your crypto.
Alternative strategies include depositing your crypto into a CeFi lending pool or providing liquidity to a trading pool that powers defi protocol Like Decentralized Exchanges (DEX).
Crypto savings accounts use the returns from these activities to pay you regular interest on your crypto deposits.
How do crypto savings accounts work
A crypto savings account provides a better user experience as opposed to complex blockchain protocols. Thus, they provide an easy way for you to enter the crypto ecosystem and earn interest through centralized platforms, which are much more complex than DeFi protocols or native staking strategies allowing users to interact directly with the blockchain. The opposite is the onboarding process.
While most DeFi protocols offer higher returns than crypto savings accounts, many users find them cumbersome as interacting with them is an unfamiliar practice. In contrast, crypto savings accounts enable you to interface with DeFi protocols via an app or CeFi platform, making it look much easier.
The advantage of using crypto savings accounts over DeFi protocols is the convenience offered by the former. The major advantage offered by the companies behind crypto savings accounts is that they take over some of the risk of holding your funds for staking in DeFi protocols or public blockchains.
Some of these companies have agreements to pay customers first in the event of bankruptcy, while others insure customer deposits and work with reputable custodians.
However, as we see in 2022, There are also companies that will take user funds in the event of bankruptcy, which is the main risk for crypto savings account holders.,
As we mentioned in the first section, crypto savings accounts will use deposited funds to participate in token staking, provide liquidity to automated market maker protocols or engage in lending activities. The interest payable in exchange for locking up your crypto savings is in crypto and is usually subject to a variable rate. While the interest earned is variable, you are usually assured of a fixed minimum percentage rate of return.
Types of Crypto Savings Accounts: Where Does the Return Come From?
There are two main types of crypto savings accounts: flexible And fixed rate Accounts.
Flexible Cryptocurrency Savings Account
Flexible (or Variable-Rate) Crypto Savings Accounts are flexible and allow you to deposit or withdraw your crypto assets at any time. There is no lock-up period for these accounts. Interest is often calculated daily or weekly. However, the trade-off for these types of accounts is the fact that the interest rates are usually lower.
fixed cryptocurrency savings account
Fixed Crypto Savings Account Lock up your funds for a period of time. Locked Savings usually have a vesting period ranging from 7 to 120 days. After the lock-up period is over, you can redeem your funds (principal) and interest or go ahead to reinvest for an additional fixed-interest period.
Are Crypto Savings Accounts Worth the Risk?
Some crypto savings accounts allow you to earn up to 8% APY or more on your savings. However, these types of accounts are not without their risks.
while the level of Risk associated with these accounts They are not necessarily a bad product, you are advised to be aware of all the risks involved before opening and using a savings account.
One obvious risk is that crypto savings accounts typically do not come with state-regulated deposit insurance. With traditional savings accounts, customers’ deposits are safe, and should a financial provider become insolvent, regulators will step in to ensure that a portion of the loss is covered on behalf of customers. For example, the Federal Deposit Insurance Corporation (FDIC) protects US customers up to $250,000 in the event of a bank collapse.
Such guardrails do not currently exist for crypto assets. If the Company does not provide you with the private keys to your savings wallet, you risk losing your funds if the Company becomes subject to them.
Giving up control of your crypto assets to third parties is a major concern, as shown by recent events across the crypto world. Essentially you are handing over your private keys to another party. If the party managing your crypto savings account lends funds to other counterparties and then defaults on payments, you lose a part or all of your digital assets.
Another concern is the price volatility that can affect your crypto holdings in savings accounts. If you have deposited digital currency such as bitcoin (BTC) and ether (ETH) in your crypto savings accounts, the total principal amount, as well as the return payout, will fluctuate according to market conditions. On the other hand, if the balance amount and interest paid a dollar-denominated stablecoinSo keeping track of interest payments is easy.
Typically, traditional savings accounts allow you to withdraw your money at your discretion. From time to time, some crypto-savings accounts limit your withdrawals, allowing you to take money from your accounts only at specified intervals. Furthermore, some crypto savings accounts will charge you a fee for withdrawals. And should a crypto savings account provider have trouble, they can permanently block withdrawals.
So what does all this mean for you as an individual investor?
Despite the risks, crypto savings accounts offer you the ability to earn returns on your crypto assets. This is especially true if you lock up your crypto or choose the native token of a crypto exchange or crypto savings account provider.
For example, Nexo extends interest up to 4% APY to holders who wish to receive returns in their NEXO tokens. Crypto exchanges like Binance and Crypto.com also offer you higher interest rates if you lock tokens in your savings accounts and denominate the returns in their tokens.
Regardless of the possibilities, you should really only open a crypto savings account on a platform that you are comfortable with, that has been around for a while, and that has a solid reputation. You should also read the terms and conditions to see whether the provider may have insurance for your deposit. More importantly, only invest what you can afford to lose because crypto savings accounts are risk-free.
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