A growing number of investors are seeking to diversify their portfolios with crypto investments. This expansion of alternative assets is being driven by the increasing Bitcoin adoption rate and the developing cryptocurrency market. One of the increasingly popular investment strategies is having crypto assets deposited into savings or savings-like accounts.
Traditional savings accounts have negligible interest rates. The national average rate is 0.06%. Meanwhile, Bitcoin savings accounts offer yields that often vary between 2% and 6%, and it’s not uncommon to find crypto banks with rates higher than 10%.
So what’s the catch? Well, there is a substantial degree of risk involved when dealing with crypto savings accounts because cryptocurrencies are known for their volatility. Moreover, any earnings from a cryptocurrency savings account are paid in the same cryptocurrency. And if you’re conducting your yield analysis based solely on the dollar value of cryptocurrencies, you can experience significant losses in a bear market.
Cryptocurrency accounts aren’t offered the same government protections that the Federal Deposit Insurance Corporation or FDIC provides for traditional bank accounts.
But some fintech companies that offer lending services and savings accounts in crypto use other means to ensure their users’ assets. Nexo is one such company that has a $375 million insurance policy in custodial assets that protect users from commercial crimes such as theft and physical and cybersecurity breaches.
Traditionally, crypto users are wary of entrusting their assets to third parties, adhering to the “not your keys, not your crypto” sentiment. But despite the aforementioned risks and the reservations about these services, the potential for much higher returns on your crypto investments is impossible to ignore. That’s why there is an evolving crypto market for lending, financial derivatives, liquidity, savings, and many other options.
Your Bitcoin savings earn you high yields because the deposits are used for further financial trades. For example, a fintech company may use them to lend assets to institutional or renowned clients. Short and long market positions that traders want to set up can also be based and created with funds held in savings accounts.
As the cryptocurrency market is active 24/7 and prices fluctuate, traders want to take advantage of changing prices. As such, some cryptocurrency exchanges and businesses borrow Bitcoin, Ether, or other cryptos to ensure liquidity and cover trades. In these instances, lenders are financially incentivized by earning a percentage from each transaction.
Proof of Stake
Another way to earn interest on your cryptocurrency assets is to exchange them for crypto that verifies transactions by using proof of stake or PoS consensus. Currently, the most well-known cryptocurrency that’s on its way to shifting completely to PoS is Ethereum.
So what is staking exactly? It’s a method of verifying cryptocurrency transactions with minimal use of electricity by using your digital assets as a guarantee to ensure the trustworthiness of your verification. For example, Coinbase, one of the largest cryptocurrency exchanges in the US, offers a staking service that can earn you a 6% annual return.
Are crypto savings accounts a good idea? It depends on the trustworthiness of the institution holding your cryptocurrency. That said, the market has matured, and it’s come a long way from the days of Mt. Gox. Today’s cryptocurrency exchanges operate under more regulatory scrutiny security measures and have insurance policies similar to those in traditional financial institutions.
It’s also important to remember that setting aside your Bitcoin or Ether for long-term savings will deny you access to your crypto for a predetermined period. So you won’t be able to use it for trading or covering any other expenses. Therefore, the smartest move is to set aside a part of your portfolio for staking or savings and have some assets available if you find a lucrative trade in the meantime.