Cryptocurrencies are becoming increasingly mainstream and recognized as viable financial investments. When you hold crypto investments, much like you can with cash, you have the opportunity to earn interest on it
There are different ways you can earn on your holdings. For example, you can lend it out to a borrower and earn money through the interest on the loan. This option offers the potential for high returns, but it can also be somewhat risky.
Another option is opening something like a BlockFi savings account or a savings account on another platform
Below, we talk more about earning interest on your crypto and what you should know.
Options for Earning Crypto Rewards
As the crypto-economy continues to evolve and grow, so do the options for earning rewards when you hold crypto.
To start earning, of course, you need a crypto account. You can look for a platform that lets you earn interest on your holdings to simplify the process.
If you decide you want to go with a low-risk option, which we talk about more below, you can use a savings account.
If you want something that’s more high risk but could earn passive income, there are a couple of key options.
One is staking, and the other is lending.
Staking means that you lease your crypto to the blockchain for a period of time to generate passive income. Staking crypto is a little bit like opening up a certificate of deposit. It’s not liquid, but it’s a pretty safe way to earn interest.
Most staking is in 30-day intervals. You generate income because it’s a reward for using your crypto to support the blockchain network. That’s how it’s similar to mining, at least a bit. You dedicate coins while miners are dedicating their computing power. Both get the reward of crypto.
When you lend your crypto, you’re pledging it to a certain platform to earn more.
When you lend crypto, you’re letting the platform essentially lease it out to borrowers. The platform charges borrowers interest, and then they share the earnings with you.
The loans are secured using the crypto of the borrower as collateral.
Interest rates on crypto lending can reach double-digits.
There are limitations to both of the above options.
For example, you can’t stake bitcoin. A bitcoin transaction is verified with proof work, which is computing power. You can stake coins only if they’re proof of stake, which means that only newer coins use proof of stake, and then they’re the only ones that can be staked.
Both staking and lending have risks.
Staking tends to be fairly low risk. You’re mostly just giving up your liquidity, which is the biggest downside. For example, if the price of the crypto you’ve staked starts to go down, you can’t cash out to limit your losses. If you have crypto as an emergency fund, staking might not be ideal.
With lending, your holdings are still tied up, and then there are some other risks too.
There’s always the risk that someone won’t pay back their loan, even with the loss of collateral they’d have to endure. There’s incoming regulatory scrutiny on crypto lending too.
This all brings us to another option to earn interest on your holdings—a savings account.
What Is a Crypto Interest Account?
Some platforms, including BlockFi, have started offering users a way to earn interest on their crypto. The ideas are similar to a traditional savings account, but sometimes, rates can be much higher.
What you’re doing is lending out your digital asset in exchange for interest. This is the same as a savings account at a bank. When you deposit money into an interest-earning savings account at a bank, the bank is lending that money out to other people and paying you back plus interest.
Savings accounts are usually very liquid, meaning you can take your money out at any time.
What Should You Know About a Crypto Interest Account?
Key things to know about a crypto interest account include:
- The rates can potentially be very high. For example, you’ll see BlockFi advertise rates reaching nearly 10%, and Celsius has a yield that’s almost 14%. When you compare that to high-yield savings account for cash, it’s astounding. The best rates currently for these accounts are around a 0.50% APY. For a regular savings account, the average rate is hovering around 0.06%.
- While that can sound great, you have to remember that with a traditional savings account, since everything is in USDs, you can estimate your interest earnings over a year if the rate doesn’t change. On the other hand, if you’re looking at the rates for a crypto platform, you have to realize there are different levels of volatility and dozens of digital assets.
- There may be fees for withdrawing your money, so check the terms before you open an account. There are also fixed terms. With fixed terms, you can’t access your crypto for a period of time which is usually months. This option is like a CD.
- Crypto has big risks. These interest accounts aren’t insured by the FDIC, for example. If you were to deposit your money with a firm that then ends up going bankrupt, there’s no guarantee you’re going to get your funds back. Also, digital assets lose value, and some go extinct altogether.
- Not all crypto firms and platforms can operate in all states.
Finally, the regulation of crypto interest accounts is in the process of happening right now.
Recently, Coinbase, which is the largest exchange for cryptocurrency, canceled the launch of a lending product that was set to earn interest for customers. The cancellation occurred after Coinbase received notice that the SEC was threatening to sue. Coinbase says it doesn’t know why, but there have also been actions by securities regulators in a couple of states to stop some platforms from opening new interest accounts.
If you want to invest in crypto or earn interest on your holdings, it’s a good idea to keep your eye on regulations, so you know what to expect.