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What Are They & Are They Worth It?

What Are They & Are They Worth It?

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Cryptocurrency savings accounts have grown in popularity among investors looking to earn a return on their long-term crypto holdings. Although these investment vehicles are not risk-free, they allow investors to earn above-average returns, making them attractive to a wide variety of investors.

In this guide, we explain how crypto savings accounts work and why you should consider setting one up.

What is a crypto savings account?

A crypto savings account is a savings offer that allows you to deposit your crypto assets and earn interest. As with regular savings accounts, interest is paid regularly, and you can withdraw your funds depending on the rules of the platform and the type of crypto you deposit.

Most blockchain networks offer a return on investment (technically not a return, as the return on investment mainly comes from the issuance of the network), where they pay some interest-like interest to the original token holders. Several centralized crypto exchanges (CEX) take advantage of this by offering interest-bearing accounts. They use several methods to generate returns in addition to crypto betting.

Alternative strategies include depositing your crypto into CeFi lending pools or providing liquidity to trading pools that have power. DeFi protocols such as decentralized exchanges (DEX).

Crypto savings accounts use the proceeds from these activities to pay regular interest on your crypto deposits.

How crypto savings accounts work

A crypto savings account offers a superior user experience compared to complex blockchain protocols. As such, they provide you with an easy way to enter the crypto ecosystem and earn interest through centralized platforms, as opposed to the complex onboarding process common in DeFi protocols or initial staking strategies to have users directly interact with the blockchain itself.

Although most DeFi protocols offer higher returns compared to crypto savings accounts, many users find them cumbersome because interacting with them is a rather unfamiliar practice. In contrast, crypto savings accounts allow you to interface with DeFi protocols through an app or CeFi platform, which makes it seem much easier.

The advantage of using crypto savings accounts over the DeFi protocol is the convenience offered by the former. A key advantage of the companies behind crypto savings accounts is that they manage some of the risks associated with placing funds for staking within DeFi protocols or public blockchains.

Some of these firms have agreements to pay customers first if they become insolvent, while others insure client deposits and work with reputable custodians.

However, as we have seen in 2022, there are also companies that take funds from users in the event of default, which poses the biggest risk to crypto savings account holders.

As we mentioned in the first section, Crypto Savings Accounts use Deposited Funds to participate in token staking, provide liquidity to automated market makers, or participate in lending activities. The interest paid to lock in your crypto savings is in crypto form and typically has a floating rate. Although the interest earned varies, you are usually guaranteed a fixed minimum percentage return.

Types of Crypto Savings Accounts: Where does the return come from?

There are two main types of crypto savings accounts: flexible and fixed rate account.

Flexible cryptocurrency savings accounts

Flexible (or floating rate) crypto savings accounts are flexible and allow you to deposit or withdraw your crypto assets at any time. These accounts have no lock-in period. Interest is often calculated daily or weekly. However, the trade-off for such accounts is that interest rates tend to be lower.

Fixed cryptocurrency savings accounts

Fixed crypto savings accounts lock up your money for a while. The earning period for locked savings is usually 7-120 days. At the end of the lock-in period, you can redeem the funds (principal) and interest or continue investing again for additional fixed interest periods.

Are crypto savings accounts worth the risk?

Some crypto savings accounts allow you to earn up to 8% APY or more on your savings. However, these types of accounts are not without risk.

Although the level risk associated with these accounts doesn’t necessarily make them a bad product, you should be aware of all the risks before setting up a savings account and starting to use it.

The obvious risk is that crypto savings accounts generally do not have government-regulated deposit insurance. In traditional savings accounts, customer deposits are protected, and if a financial services provider becomes insolvent, regulators step in to ensure that some of the losses are covered on behalf of customers. For example, the Federal Deposit Insurance Corporation (FDIC) protects US customers up to $250,000 in the event of a bank failure.

There are currently no such guardrails for crypto-assets. If the company doesn’t give you the private keys to the wallet containing your savings, you risk losing your funds if that company goes under.

Handing over control of crypto assets to a third party is a major concern, as recent incidents across the crypto world have shown. In essence, you are handing over your private keys to another party. If the party managing your crypto savings account lends money to other counterparties and then defaults on payments, you will lose some or all of your digital assets.

Another concern is price volatility, which can affect crypto holdings in savings accounts. If you deposited digital currency such as bitcoin (BTC) and ether (ETH) into your crypto savings accounts, the total capital and withdrawal fees will vary depending on market conditions. On the other hand, if the balance and interest are paid a a dollar-denominated stablecoinso it’s easy to track interest payments.

In general, with traditional savings accounts, you can withdraw your money at your own discretion. From time to time, some crypto savings accounts limit your withdrawals, allowing you to withdraw money from your accounts only at certain intervals. Also, some crypto savings accounts charge you for withdrawals. And if a crypto savings account provider gets into trouble, they can stop withdrawals permanently.

So what does all this mean for you as an individual investor?

Despite the risks, crypto savings accounts offer you the opportunity to earn a return on your crypto assets. This is especially true if you lock your crypto or choose the original ID of a crypto exchange or crypto savings account provider.

For example, Nexo will increase the interest rate up to 4% APY for holders who want to earn income with their NEXO token. Crypto exchanges such as Binance and Crypto.com also offer higher interest rates if you lock tokens in your savings accounts and determine the return in their tokens.

Despite these prospects, you should only open a crypto savings account with a platform that you are comfortable with, that has been around for a while and has a solid reputation. You should also read the terms and conditions and see if the provider has insurance for your deposits. More importantly, invest only what you can afford to lose, as crypto savings accounts are far from risk-free.

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