When you have a decent amount of cryptocurrency in your crypto wallet, you might set your sights on a new goal: finding ways to make the most of that investment. One direction this goal is leading more and more crypto investors today? Into the new financial territory of crypto savings accounts.
Crypto savings accounts are attractive for a variety of reasons. They can help you leverage the value of your cryptocurrency investments to earn passive income — and they present an enticing opportunity to earn interest much faster than a typical savings account at your bank. But it’s also common to wonder whether these savings accounts are safe. After all, they’re a relatively new investment product, and they don’t work exactly like traditional bank accounts.
If you’re curious about cryptocurrency savings accounts or want to figure out if they’re right for you, here’s everything you need to know.
What Are Crypto Savings Accounts, and How Do They Work?
On the surface, crypto savings accounts work like traditional savings accounts — they’re financial accounts that you deposit cryptocurrency into so you can begin earning interest on its value. You deposit whatever amount of cryptocurrency you’d like; whether you choose to deposit some or all of your holdings is up to you. You simply use crypto instead of a fiat currency, like dollars, to fund this type of account.
Functionally speaking, cryptocurrency savings accounts are pretty straightforward. Once you open an account with a provider, you’ll deposit your desired amount of cryptocurrency by sending it to a new crypto wallet that’s associated with your account. Once there, other platforms can borrow those crypto assets. Whenever those digital coins are borrowed, you earn interest.
The amount of interest you’ll earn is determined before other platforms borrow your crypto, giving you clear insights into the earning potential of your digital currency. However, the interest rates can change over time, meaning they can fluctuate in response to financial market conditions or adjust based on other factors. For example, when demand for cryptocurrency is high, interest rates typically rise. When demand declines, interest rates fall.
While market conditions play a big role in the equation, other elements also come into play. For instance, the provider you select matters, as some offer more competitive interest rates than others. Additionally, like all financial accounts, you could encounter savings platforms that charge fees or have other costs associated with the service, even though not all do.
It’s also important to note that the type of currency you receive as your interest payments may vary. The same goes for interest schedules, with some platforms paying interest out on a daily basis and others making monthly payments. Whether or not the interest is compounding may also change depending on the provider platform.
How Do Crypto Savings Accounts Compare to Traditional Bank Accounts?
Traditional and crypto-backed savings accounts have quite a bit in common. Both require you to deposit funds, and both pay interest based on the amount of currency you’ve deposited. You also have the ability to deposit or withdraw funds for each type of account, though some of the rules relating to that access can vary.
One of the major differences between the two kinds of savings accounts — and the driving force behind much of the interest in crypto-backed variety — is the interest rate. The average interest rate on a traditional savings account is just 0.06%. Even with high-yield savings accounts, interest rates still often fall below 1%, barring a few outliers.
Crypto savings accounts provide far better yields. While the amount can vary depending on the provider, timing and the digital currency involved, you may find some cryptocurrency-based accounts offering double-digit returns.
When it comes to withdrawing funds, traditional savings accounts usually let you withdraw what you’ve deposited at any time, as long as you make no more than six withdrawals monthly. With crypto-backed accounts, the rules vary between providers. Some may prevent you from withdrawing the cryptocurrency for a certain length of time after depositing it. You may also encounter withdrawal fees, something you don’t see with traditional accounts in most cases.
Another big difference involves federal account protection. Traditional bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC), an agency that protects accountholders and ensures they can recoup money they’ve deposited — up to a limit of $250,000 — if the bank somehow fails. The same goes for credit union savings accounts through National Credit Union Administration (NCUA) insurance.
With cryptocurrency savings accounts, there’s no guarantee that any kind of insurance is in place. If the provider or platform fails and you’re cut off from access to the wallet holding your deposits, you might never be able to recover that digital currency. While some platforms are securing private insurance, it isn’t universal.
What Are the Risks of Using Crypto Savings Accounts?
Figuring out how to safely invest in cryptocurrency is a goal for most investors, and it’s wise to apply the same mindset when you’re dealing with crypto savings accounts. In the end, there are risks associated with them, so you need to act wisely to keep your investment secure.
As mentioned above, many cryptocurrency savings accounts aren’t insured. If you have an account with an uninsured provider, your digital assets could evaporate if something happens to the company controlling the wallet with your deposits in it, and you’ll have little recourse.
Crypto-based accounts also lack a degree of liquidity. While the length of time that you have to maintain a specific balance in your account can vary by platform and provider, you’re almost guaranteed to be subject to a period during which you can’t make a withdrawal or will face a significant financial penalty if you do. Even when that time passes, you could still face fees for making withdrawals, which will ultimately eat into the value of your investment.
Finally, as with all cryptocurrency-related financial products, there’s the impact of volatility. The prices of digital assets can swing dramatically with essentially no notice. In mid-February of 2022, Bitcoin lost 6.6% of its value in a single day. In January of 2022, there was a day with a 12% loss.
While price declines may rebound, there are no guarantees. Since volatility is a big part of the equation, this makes any crypto-backed account a riskier venture than a traditional one. Interest rates may plummet due to falls in demand without much warning, too. The value of any interest payments may also decline, depending on the currency in which they’re issued.
Should You Use a Crypto Savings Account?
Whether a crypto savings account is the right choice for you depends on your personal financial situation. While riskier than bank or credit union savings accounts, they create opportunities to earn interest off of digital assets — something that isn’t possible using traditional accounts.
However, crypto-backed accounts can come with restrictions and fees. Plus, they may not be insured, providing you with no protection against the potential collapse of the provider due to unforeseen circumstances.
If you’re comfortable with the risks and drawbacks, a cryptocurrency savings account could be a solid fit. But if you’re not, you may be better off using another approach to earn money from your investment activities.