The Risks and Rewards of Crypto Savings Accounts
In recent years, cryptocurrencies have received a lot of attention due to their projections of utilization in the near future. Some trade the assets for speculative, profit-driven short term intentions, while others truly believe crypto is the future and want to join the long-term movement in the beginning. Either way, many investors have benefitted from the exponential growth of the popular cryptocurrencies. Some investors have looked to see how they could amplify their returns even more through earning passive income on their crypto holdings. Cryptocurrency savings accounts have become popular among crypto investors due to their high returning yields on crypto assets that many investors already owned. These accounts are similar to traditional bank accounts in that they provide a platform for consumers to store their assets for future use and the institution lends it to borrowers, and in exchange investors earn interest on their deposits. Crypto savings accounts work a little differently from traditional bank accounts and credit unions, as there are many advantages and disadvantages of this new innovative product.
The main attraction of crypto savings accounts is the high yielding interest rates, as some even offer up to 20% APY for holding crypto assets. Although the average interest rate is between 5-12% APY, this is still superior to the dismal 0.5% APY offered from bank accounts (Peel). The amount in each interest payment depends on a few factors, like the platform used, the type of interest received (simple or compounding), and how often they are paid out. The yield payouts are calculated off the price of the crypto asset at that time, meaning there is risk in price volatility but also the possibility of compounding returns (Luthi). Depending on the investor, this is seen as a pro or a con based on their risk tolerance. This concept does make planning out future interest payments difficult and causes interest payments to be susceptible to the large price movements of crypto. This is characterized as risky because there is no underlying fundamental value and crypto is seen as a speculative asset, but stable coins eliminate this risk and still possess high yields (Farrington). Although these risks exist, the possible return on crypto along with interest payments can be monumental; as crypto prices increase so will your compounding interest payments. This potential passive income earned by investors attracts lots of investors who are willing to take on the extra risk associated with this new form of financial system.
While some platforms offer insurance for one’s crypto assets in the case of commercial crime, the main concern for skeptical investors is that these service providers cannot back any of the assets by the FDIC since the crypto system as a whole is decentralized (Farrington). Traditional savings accounts protect up to $250,000 per account in the case of a bank failure. These platforms state they have a large sum of money for use of insurance, but much of it isn’t allocated for lending failures but rather just in case the service provider gets hacked or fraud is committed (Kochkodin). Another concern of investors is the need to relinquish the “keys” to their crypto holdings to the lending platform in order to receive the interest payments. This is scary to investors because the crypto system is decentralized so there is no company or organization policing these financial transactions, creating a higher risk of losing one’s assets due to lending failure or fraud (Farrington). These savings accounts are also commonly subject to withdrawal rules like lock up periods and withdrawal limits, but some platforms pride themselves on avoiding these and being as transparent as possible.
Crypto lending and borrowing have come a long way over the last few years. There is the presence of big names in this industry, like the Winklevoss twins who founded Gemini (Kochkodin) and Celsius founder Alex Mashinsky who has founded many technology firms and innovative products (Shapira). The act of lending by opening a crypto savings account provides liquidity for other crypto trades and payments, along with short selling positions. Roshun Patel, VP of Genesis (a crypto brokerage), stated: “At the end of the day, if anything would go wrong on the borrower side, that risk is on Genesis. Since inception to date, we haven’t had a single default or capital loss” (Kochkodin). Although these savings accounts aren’t backed by the FDIC, some platforms pride themselves on their security and transparency. It is important investors do their due diligence in choosing the right service provider, which would help eliminate the stigma that crypto savings accounts are a liability rather than a financial asset. Many investors were doubtful of the cryptocurrency system as a whole a few years ago, stating they were speculative and not a legit financial asset. We have seen crypto gain a lot of popularity recently as investors began to accept it and pile into the movement, so how long will it be until investors come around to crypto savings accounts?
I believe there is a common misconception about these crypto “savings” accounts: at this point in our economy; they are not set to overcome the traditional banking system completely. As of now, this form of financial instrument comes with many risks so it is reserved for those who are willing to take on risk in order to receive higher returns. This form of investing should be used as a financial asset to help diversify one’s entire portfolio and a form of passive income, but not to replace one’s savings account. There are plenty of advantages to this new concept, but it is imperative investors understand the associated risks. This is an innovative financial system that will develop with the times as cryptocurrency as a whole advances and grows in our economy.
*Edited by Sean Francis
Works Cited
Farrington, R. (2021, June 28). What are the risks of crypto savings accounts? Forbes. Retrieved November 16, 2021, from https://www.forbes.com/sites/robertfarrington/2021/05/17/what-are-the-risks-of-crypto-savings-accounts/?sh=463d42c81417.
Kochkodin, B. (2021, May 17). You Can Earn 6% Interest on Bitcoin. Is It Worth the Risk? Bloomberg BusinessWeek. Retrieved November 16, 2021, from https://www.bloomberg.com/news/articles/2021-05-17/bitcoin-interest-is-crypto-savings-account-worth-the-risk.
Luthi, B. (2021, May 20). Are cryptocurrency-backed savings accounts safe? Experian. Retrieved November 16, 2021, from https://www.experian.com/blogs/ask-experian/are-crypotcurrency-savings-accounts-safe/.
Peel, A. (2021, August 23). Crypto savings accounts to get you in the game this year. Yahoo! Finance. Retrieved November 16, 2021, from https://finance.yahoo.com/news/crypto-savings-accounts-game-162039798.html.
Shapira, A. (2021, August 22). Tech talk: Meet Alex Mashinsky, everyone's White Knight. JPost.com. Retrieved November 16, 2021, from https://www.jpost.com/jpost-tech/tech-talk-meet-alex-mashinsky-everyones-white-knight-677441.
