Fri. Dec 4th, 2020

Investing in cryptocurrency may seem like a huge gamble, but the bet has paid off tremendously for those who invested in the right type of crypto at the right time.In November of 2015, you could buy a single Bitcoin for a little over $300, yet a single coin now trades for over $12,900 (as of this writing). If you remember, a single Bitcoin traded at close to $20,000 in December 2017, which makes it easy to see why investors young and old remain eager to get involved regardless of the risk involved.The reality is that, whether you want to admit it or not, many have gotten rich with cryptocurrency, and others still see it as a way to diversify their investment portfolio outside of traditional stocks and bonds. And if you have cryptocurrency for the purpose of building wealth or diversifying, you should know that cryptocurrency savings accounts can help boost your investment yield even more.

A cryptocurrency savings account works like it sounds like it would. With this type of account, you can deposit your cryptocurrency (or another asset in some cases) and earn a standard rate of return over time. With a BlockFi cryptocurrency savings account, for example, your cryptocurrency can earn up to 8.6% APY, which accrues daily and is paid out on a monthly basis. However, your rate of return will vary depending on the type of cryptocurrency you have, whether that’s Bitcoin, Ethereum, Litecoin, or something else. Depending on the type of crypto savings account you have, you may even be able to choose the type of cryptocurrency your interest is paid in. 

You may be wondering how these accounts earn money, and that’s easy to understand. Like other financial institutions, companies that offer cryptocurrency savings accounts usually loan out your cryptocurrency to other investors. In the case of BlockFi, they say they generate interest on assets held in interest accounts “by lending them to trusted institutional and corporate borrowers.”At the end of the day, the purpose of cryptocurrency savings accounts is helping investors earn money on their asset while they hold it. That sounds good in theory, but it’s a little risky in practice.

Crypto Savings Accounts: What To Watch Out For

The first thing to know about cryptocurrency savings accounts, which you probably know already, is that cryptocurrency in general can be incredibly volatile. Since you’re investing with cryptocurrency and your returns will also be in cryptocurrency in most cases, there’s a chance your initial investment and returns will be wiped out if the value of your asset drops. Another major downside with cryptocurrency savings accounts is the fact that you cannot just take your money out when you want. Where you can withdraw money fee-free from a traditional savings account up to six times per month, cryptocurrency savings accounts have their own rules and may not make it easy to access your money at the drop of a hat.

Further, cryptocurrency savings accounts (and crypto wallets for that matter) require you to give up access to your keys. This is based on the fact that your crypto must be made available to lend to investors, but a lot of cryptocurrency investors are not comfortable with this at all. As if that wasn’t bad enough, cryptocurrency savings accounts are not FDIC-insured. This means that, if the cryptocurrency savings account provider goes under, there’s no guarantee you’ll get any of your assets back. Finally, you should know that many cryptocurrency savings accounts pay simple interest only, which means your deposits will not be able to build compound interest over time. The high APY you can achieve may still be attractive and worth pursuing, but you should know this going in.

Are Cryptocurrency Savings Accounts Worth It?

Once you know that cryptocurrency savings accounts aren’t as safe as traditional savings accounts, it’s up to you to decide if the risk is worth the reward. If you’re a crypto investor already, then you’re probably okay with a certain amount of excitement and risk along the way.On a personal level, I see value in cryptocurrency savings accounts since — let’s face it — there aren’t a lot of places to earn a 8% yield on your savings right now. You could achieve that return with a cryptocurrency savings account, and if all goes well, the value of your asset could also grow in the meantime. 

Many of the best cryptocurrency savings accounts also come with some pretty attractive terms for their accounts. With BlockFi, for example, there aren’t any account minimums. This makes it easy for anyone with even a small amount of crypto to get started. With Crypto.com, on the other hand, you can earn some of the highest returns on the market, yet small time investors with low account balances aren’t eligible for the best returns. You’ll also get paid in the same cryptocurrency you deposit, and the interest is paid out on a weekly basis. 

Then there’s Linus, which lets you deposit U.S. dollars and earn interest in U.S. dollars. That sounds good for sure, but there are notable details in the fine print. With this account, they are lending out your money to people who are buying Ethereum, so the future of your returns hinges on the future value of this cryptocurrency.

The Bottom Line

If you’re a crypto investor and you want the chance to earn a return on your investment while you hold it, then cryptocurrency savings accounts may be exactly what you need. There are lots of cryptocurrency savings accounts out there, so take the time to compare options before you sign up for one. Fees, barriers to entry, and the way you earn interest can vary dramatically, as well as the type of assets you need to get started.

Then again, these accounts aren’t for everyone, and they’re actually a really poor option if you need a place to store your emergency fund. Before you consider one of these accounts, it’s smart to think over the pros and cons and the risk involved. The chance at a return of 8% or more could well worth the risk, but you should go into the situation with your eyes wide open.

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