Savings accounts are a must for those taking care about the future, but is it worth opening one in crypto?
At present, you won’t find crypto savings account options on the service list offered by traditional banks. This unique feature is enabled by crypto exchanges and other fintech players.
Similar to ordinary savings accounts, crypto ones allow you to put a sum of digital coins aside and earn some interest. Most offers concentrate on predictable stablecoins, but many companies accept more volatile assets such as Bitcoin as well.
Unlike your usual savings, crypto stored within such accounts is not FDIC- or otherwise insured. Accessing your digital money will also require encryption keys. However, with a crypto savings account, you don’t have full control over your e-wallet.
You transfer Bitcoin into a wallet administered by the financial institution that provides the savings account service. The wallet keys are used by the account administrators to lend your tokens to other people, cryptocurrency marketplaces and brokers. Some Bitcoin savings account providers also invest deposited Bitcoin in Bitcoin mining pools. That’s exactly how your interest is earned, but it also brings additional risks.
To begin with, crypto savings accounts are extremely profitable. They offer more perks than traditional high-yield accounts. On average, you can get about 4-8% interest on your deposit, but some companies raise the stakes even to 12%. In comparison, high-yield savings in traditional banks can bring you about 0.45%-0.55% APR.
Many Bitcoin savings accounts begin to pay out interest from the very first day when you make a deposit – typically within minutes of the transaction being processed.
In addition, crypto savings let you earn with innovative assets without having to master trading. Crypto exchanges are simple to use, but learning when it’s best to buy or sell may be complicated. Besides, it’s quite stressful for many people.
As we’ve already pointed out, crypto savings accounts are not FDIC-insured and don’t give you full control. Thus, you need to choose the financial services provider very carefully. If the platform shuts down, you’re not going to get your money back.
The account providers also acknowledge the risks of crypto savings accounts. Thus, if you choose a reputable company, like Coinbase that has undergone its IPO, it has only one savings option. USDC Rewards allows eligible US customers to earn rewards for holding USDC in Coinbase. Since June 3rd, 2020, the APY for USDC Rewards has been only 0.15% which is an interest rate comparable to traditional fiat savings. The bottom line is the less risk you are ready to accept with crypto savings, the less profitable it may be.
Another issue is the absence of proper regulation. Some countries are still uncertain about the future of crypto. In the wake of recent national bans, it seems hard to predict whether such accounts can function long-term.
In addition, some cryptocurrency savings accounts have withdrawal limits, so you may not access all your funds right away, even if you spot a brilliant trading opportunity. Other limits apply too. Many account providers place a maximum cap on the amount of deposited crypto you earn interest on, especially when you deal with costly Bitcoin. Some providers also limit the amount of Bitcoin which can be placed in a single account.
Finally, there’s always volatility to consider if you load your savings account with Bitcoin or Ether. You may either win big, or start losing money depending on the market trends. Bigger potential gains are associated with higher risks. Since your crypto deposit has withdrawal limits, you may not be able to prevent money loss in case of a sudden bearish trajectory. Stablecoins may be more reliable in the longer term, plus they usually go along with the most promising yields.
Account providers take their own precautions in regard to highly volatile assets. Thus, Bitcoin savings accounts generally use a dynamic interest model. That means the interest rate can be adjusted monthly, or daily, based on the profits generated by the account provider, the market price of Bitcoin, and the amount of Bitcoin invested. Therefore, your actual yields are not predictable as in case with traditional savings accounts where you can easily calculate how much you’ll get at the end of the deposit period.