What is a crypto interest account?
A crypto interest account is a type of financial product that pays you interest for depositing your crypto. These accounts are offered by companies operating in the crypto industry.
It's like a savings account at a traditional bank. The exception is that crypto interest account deposits are often not federally insured (like FDIC insurance in the U.S), and instead of depositing a fiat currency (like USD, EUR, CAD, or JPY), you deposit a cryptocurrency.
Crypto interest accounts allow you to grow your crypto holdings passively. Most crypto interest accounts pay out interest in the same cryptocurrency you deposited. For example, many Bitcoin interest accounts pay out interest payments in Bitcoin.
Some crypto interest accounts might also pay out interest in a different cryptocurrency than what you deposited. When signing up for a crypto interest account, be sure to check what cryptocurrency your interest gets paid out in.
What is Staking?
Blockchains are what most cryptocurrencies and digital assets operate on. There are two main types of blockchains. “Proof-of-work” is what Bitcoin runs on, and “Proof-of-stake” is what Ethereum uses.
With proof-of-work, the blockchain is secured by using physical computers. Proof-of-stake, on the other hand, is secured by people “staking” their cryptocurrency.
When you stake a crypto asset, you're taking part in the economic security of the underlying blockchain. By staking a crypto asset, you're bonding your asset to help the blockchain function.
The incentive for bonding your asset to secure the network is known as a staking reward. You're free to remove your initial staked asset whenever you want, but when you remove it, you stop receiving these staking rewards.
In effect, you earn a yield for staking. Not all cryptocurrencies have staking. Bitcoin, for example, does not have on-chain staking. Blockchains like Ethereum and Polkadot do.
What is the difference between a crypto interest account and staking?
On the surface, a crypto interest account and staking look similar. This is because crypto interest accounts and staking are ways to earn a passive yield on your crypto. Behind the scenes, however, they operate differently.
A crypto interest account is a type of account offered by a company/institution where you deposit your crypto assets, and the company pays you an interest rate for doing so.
Similar to depositing funds into a traditional bank savings account, companies that offer crypto interest accounts use the funds deposited to make loans to borrowers. The interest rate spread between what a company pays to depositors and what they earn from borrowers is how these companies profit.
Staking is a process where you get rewarded for helping secure a blockchain network. You "deposit" your crypto asset into a staking system, and in return, you receive rewards for doing so. When you withdraw your staked asset, you stop receiving rewards.
The custody of your digital assets is another key difference between interest accounts and staking. With an interest account, the company you deposited with holds your digital assets on your behalf. With staking, you hold the private keys for your digital assets directly. It’s like holding physical cash yourself vs depositing that cash in a bank account.
Both crypto interest accounts and staking pay the depositor a yield for their deposited assets. Crypto interest accounts pay a yield because of financial design. Staking pays a yield because of crypto-economic design.
What is a stablecoin?
A stablecoin is a type of cryptocurrency that is pegged to a fiat currency (Such as U.S dollars or Euros). The mechanism in which a stablecoin maintains its peg can vary from one stablecoin to another. The safest stablecoin mechanism is reserve backed. Each stablecoin issued is backed by actual dollars or euros in the bank.
USDC is one of the most popular stablecoins. It maintains a 1:1 peg with the U.S dollar via audited USD reserves it has to back each USDC in circulation. You can redeem your USDC for U.S dollars or use your U.S dollars to mint USDC at any time.
Many crypto interest account providers offer yield products for stablecoins. Stablecoin interest accounts provide price stability to grow your USD or Euro balances while also giving you all the benefits of blockchain technology, such as fast transactions, security and transparency.
Why are savings interest rates in crypto so high? What's the catch?
Interest rates in crypto are generally much higher than more traditional assets because cryptocurrencies are volatile assets. As a result, they carry more risk to hold. Even dollar-backed stablecoins have risk because they are not, in themselves, legal tender as backed by a national government.
Like a traditional bank, the companies that offer crypto interest accounts take your deposits and lend them to borrowers. The difference between what a company earns from lending and the interest paid to depositors is how they make money.
These companies that lend out crypto charge high-interest rates to borrowers because of the higher volatility risk in cryptocurrency markets. The higher interest rate charged to borrowers translates to these companies being able to pay high-interest rates to depositors into crypto interest accounts.
You should also note that since many of these crypto interest accounts are not federally insured (like being FDIC insurance in the United States), the companies that offer crypto interest accounts need to pay higher interest to attract depositors.
Are my funds safe in a crypto interest account?
Most crypto interest accounts don't have any federally mandated deposit insurance. This means that if the company offering the crypto interest account becomes insolvent, you could lose your deposit.
However, more reputable crypto interest account providers have private insurance to cover depositor funds if the company faces financial difficulty. Be sure to check with the interest account provider to see what sort of guarantees they have.
It's also important to note where the company offering the crypto interest account is located. For example, companies in the United States and Europe are far more heavily regulated than in other countries. This means they are less likely to mishandle customer deposits. Also, check to ensure they have the proper money service business licenses and credentials to operate a crypto business in your jurisdiction.
Lastly, companies offering crypto interest accounts will use their deposits to lend to borrowers at a higher interest rate. Like a traditional bank, the lender takes a loss if a borrower cannot repay their loan. If losses pile up too quickly from borrowers who cannot repay their loans, the lender could become financially insolvent.
To counteract this insolvency risk, many companies that offer crypto interest accounts require borrowers that they lend out to, to over-collateralize their loan.
For example, if someone wants to borrow $1000 worth of crypto from one of these companies, the company may require the borrower to place $2000 worth of crypto collateral. If the borrower cannot repay their loan, the company making the loan can use the $2000 collateral to recoup their losses. Depositor funds remain safe and whole.
Your crypto deposits are likely to be safe if they are deposited with a company that requires borrowers to over-collateralize their loan. Make a note of this when you're researching which crypto interest accounts to deposit into.
Why should I earn interest on my Crypto?
Quite a number of crypto assets have inflationary mechanisms designed into them. For example, every year, new Bitcoin gets created and released into circulation. Over time, if you hold your Bitcoin, you'll be diluted down in terms of the total percentage of Bitcoins you own in the network. Earning interest on your Bitcoin allows you to stay ahead of the inflation and accumulate more BTC.
The same can be said for other crypto assets such as Ethereum, Chainlink, and others. By earning yield on your crypto assets, you'll be able to maintain or even grow your percentage ownership of all coins in circulation.
Crypto economics aside, if you're a long-term hodler (holder) of a crypto asset, why not use it to earn more crypto on top of what you already own? Earning yield on your digital assets is a great way to grow your investment portfolio passively.
We always advise you to do your research on yield-earning products and services in crypto. Always use reputable companies and services with the proper regulatory licenses to operate with cryptocurrencies.
What are the risks associated with a crypto interest account?
While crypto interest accounts offer an attractive way to grow your crypto portfolio passively, there are some risks you should be mindful of. The biggest risk is that you're no longer in direct custody of your assets when you deposit your digital assets into a crypto exchange platform. You risk losing your digital assets if the platform goes bankrupt or insolvent.
Digital assets are volatile and risky. Crypto interest account providers aren’t regulated and insured like traditional banks. There’s always a chance that even the top crypto interest account providers could become insolvent and unable to give their customer's funds back.
Never put all your assets on one platform. It’s always best to spread your digital assets across multiple platforms and wallets for security and redundancy.
What should I look for in a crypto interest account?
When looking to sign up for a crypto interest account, it’s essential to consider a number of factors:
- Security - The security of a crypto platform is one of the first things you should consider before depositing assets there. Look into how long the platform has been around, where they’re located, have there been any security issues in the past, and what security features they offer customers.
- The management and investors - The quality of the management and investors behind a crypto platform indicates how well the platform is run. You’ll want to deposit your crypto on platforms with a professional approach to running their businesses.
- Regulated - Depending on where you live, crypto exchanges and interest account providers may need regulatory licenses and financial compliance requirements to offer their services in your jurisdiction. Check that the crypto interest account provider can legally do business in your country/state/province.
- Interest rates - If you’re looking to sign up for a crypto interest account, the yield offered will be an essential consideration. The higher the interest rate, the better, but don’t always default to the platform with the highest interest rates. You’ll want to consider the interest rate, along with other factors. It all depends on your specific needs and what you’re comfortable depositing into a crypto platform.
- Fees - It’s also important to consider a crypto interest account provider's fees. Especially if your portfolio size is small, fees can eat into your overall ROI. Most account providers don’t charge fees to deposit funds into their platforms, but they charge for making a withdrawal—some charge for making trades, while others don’t. Go through the fee structure of prospective crypto interest account platforms and see if they make sense for you.
- Assets offered - Most crypto interest account providers will provide accounts for Bitcoin and Ethereum. If you hold another digital asset you wish to earn a yield on, check if the platform supports the asset.
- Customer support - Sometimes, when using a crypto exchange platform, you may have questions or need help with something. See what sort of customer support the platform offers. Some offer only email support, while others provide direct support over the phone. Depending on your level of experience with crypto, you may opt to sign up for a platform that offers better customer support.
- Read reviews - To get a broader sense of what being a customer of a crypto platform would be like, read reviews of others who have used the platform. Reviews go beyond the general information you find on a crypto interest account provider’s website. They provide more context into customer support, security, and overall user satisfaction with using the platform.