How to earn interest on crypto: A comprehensive guide
Despite being held back by a highly speculative and volatile market, looking to earn interest on crypto is a hot topic. While a few billionaire tycoons like Warren Buffet and Ken Griffin are still skeptical about their success, digital coins are getting more popular than before, with billionaires like Jack Dorsey, Elon Musk, and Michael Novogratz supporting them.
If you’re planning to invest in and earn interest on your crypto holdings, you’re joining a new and exciting trading space. Using crypto to earn interest provides you with a chance to make passive income, which can compound your profits when the cryptocurrency markets appreciate.
This step-by-step guide will give you the investment advice you need about creating crypto interest accounts. Key topics will include how earning interest on crypto holdings works, how much interest you can earn from crypto savings accounts, how to choose the best crypto interest accounts, and selecting top crypto interest platforms to earn interest for your portfolio, all in less than five minutes.
Let’s jump in!
Cryptocurrency Interest-Earning Accounts – How They Work
The principle of crypto accounts earning interest is similar to your regular savings account. You deposit Bitcoin, Ethereum, or other altcoins and earn compound interest on your digital assets. The main difference is that crypto savings accounts have a higher return rate than traditional savings account rates. Some crypto interest accounts offer weekly payouts to users’ wallets who can withdraw funds anytime.
There are several differences between the two; the following are some things that set the two apart.
Unlike most U.S. bank accounts covered by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, crypto earning accounts are generally not covered. FDIC insurance doesn’t cover digital assets like Bitcoin and Ethereum or fiat-pegged stablecoins, meaning that the insurer may not necessarily cover any loss of funds.
However, all is not lost since several crypto interest account platforms are now secured via private insurance, with many insurers already launching services around the custody of funds. Celsius, Nexo, and BlockFi are among the leading crypto savings platforms with insurance cover. This insurance would cover some losses in the unfortunate event that something went wrong.
Theoretically, a crypto interest-earning account works like a traditional savings account. You deposit your digital assets with no deposit limits or lock-up period. And just like your standard bank, they do business with your funds, lending it out to borrowers on your behalf for interest. Once the borrower's payback, you earn an income.
However, it’s worth noting that compared to traditional banks that pay you up to a maximum of 0.7% annual percentage yield (APY), crypto platforms pay rates beyond 10.5% on your crypto deposits. And what’s more, your crypto deposits automatically earn compound interest at the end of each month. As you can already see, crypto savings accounts offer better yields. The amounts may vary depending on the platform you choose, the digital currency involved, and the timing. Several cryptocurrency-based platforms actually offer double-digit returns. Think of the differences as a tradeoff between risk and reward.
The yield you can earn from digital assets can be relatively high. For example, the rates at BlockFi can begin from 0.10% to 7% on its website, while Celsius offers yields at up to 13.16%. In contrast, the best high-yield savings accounts offer rates of about 0.50% APY, with the national average being around 0.06%.
Another difference, though, is that you can easily estimate the amount of interest you’re likely to earn in one year if rates don’t change with your regular savings account. However, when you’re dealing with crypto firms and juggling different crypto assets with varying volatility levels, it’s not easy to estimate what amount you’re likely to earn. That’s why it’s essential to familiarize yourself with these two types of digital assets:
- There are native cryptocurrencies like Bitcoin and Ethereum, whose value fluctuates daily.
- There are stablecoins like USDC and USDT, whose value is pegged on dollars or other assets.
Withdrawal Fees and Limits
Stay on the lookout for applicable withdrawal fees in different platforms that may vary and could be listed in crypto. Other platforms offer varying minimum and maximum withdrawal limits. Depending on the platform that you choose, there are these two types of access:
- Flexible access with no constraints whatsoever on withdrawal.
- Fixed terms require an agreement regarding how long you must leave your funds untouched; the fixed term accounts resemble certificates of deposit, which are savings accounts where your funds get locked up for a specified period in return for higher interest rates.
The cryptocurrency market isn’t like the stock market that opens and closes at set times; cryptocurrencies are accessible for buying, selling, and trading 24/7. Top crypto interest platforms deliver high crypto interest rates because they lend their digital assets to individuals, institutions, and corporations to use in their business functions. Once the borrowers repay the crypto with high interest, your platform takes a small percentage of the interest and sends the rest to your account.
That Sounds Great, But Are There Any Risks?
Well, yes and no!
Yes, because high risks almost always accompany any high reward, and no, because the risk level will be directly proportionate to the crypto platform you’ll choose.
Let me explain.
The only two risks you could ever encounter are hacks and defaults.
Hackers only infiltrate platforms that do store users’ digital assets in hot wallets or those that fail to invest in security infrastructure or high-level encryption. Also, beware of unlicensed platforms that are prone to security breaches.
Crypto itself might be inherently risky, but your crypto savings account could be subject to enormous market swings depending on the platform and coins that you choose. Even though price fluctuations are part of the deal for crypto, seek investment advice on avoiding higher-risk crypto options.
We have already explained how crypto interest account providers can offer you interest for your crypto deposits – they use them to fund loans. And, as you may already know, with all loan arrangements, the risk of some default is always alive.
If, on the one hand, only a small number of borrowers default on their loan repayments, you wouldn’t even get to know about it. However, if there are many defaulters, this could potentially be something to get worried about.
With that said, most of the leading crypto interest account providers have a safeguard in place in the name of collateral. It means that every borrower is obliged to put down a sufficient security deposit in the form of crypto before they can borrow funds from a platform. The result is that even if the borrower defaults on the loan agreement, the platform will sell the collateral so that investors get their dues.
Whenever you deposit your assets into a crypto interest account, you’re dealing with a centralized provider. That means you trust the provider to meet all its obligations.
The platform’s obligations include ensuring that the crypto you’ve invested is kept safe and off the hands of cybercriminals or hackers. It also means ensuring that they give you your share of the interest on time and at the agreed percentages.
Since there’s no guarantee that the platform will keep the agreements you signed, you must do your research on respective service providers before you open a crypto interest account.
Before You Start Investing Your Crypto
Just before you open a crypto savings account and take the deep dive, as far as the traditional method of investing in cryptocurrencies was concerned, you could only make money when the value of the token increased. However, earning crypto interest brings an entirely new investment landscape in that it operates just like a traditional bank.
You deposit funds into your account and get paid an interest rate. And similar to the way your ordinary financial institution operates, some crypto interest account platforms offer a flexible withdrawal policy while others offer lock-up terms.
Before you start your search for the highest yields being offered by different crypto platforms and tokens, you need to understand the modus operandi of these institutions and how they offer you interest on your cryptocurrency deposits that generate capital gains.
For crypto savings accounts, you have two approaches to choose from that differ in the extent they’re centralized: Centralized Finance (CeFi) and Decentralized Finance (DeFi).
Centralized finance offers platforms that allow users to earn interest on crypto within a centralized ecosystem, providing customer service within a recognized business structure. CeFi runs a passive system, meaning that you’re not involved in day-to-day decision-making.
CeFi platforms like CoinLoan, Nexo, and YouHodler currently offer higher rates than their DeFi counterparts like Compound, AAVE, and Yearn. The reason is that traditional methods used by CeFi platforms lead to more stable rates.
DeFi protocols, on the other hand, use variable rates dictated by algorithms that respond to the market by the minute. Lenders flock to DeFi protocol when they become popular to earn interest, but the rates go down if there aren’t enough borrowers.
How to Earn Interest on Crypto
Having learned the ropes, you can start making a passive income via crypto savings accounts and earn compound yields... The following is a four-step guide on starting earning interest from your digital assets.
Step #1: Create an Account
The first step in earning interest on your digital assets is creating your account on one of the top crypto interest platforms like CoinLoan. Once your account is up, link it with your bank account so you can use cash to purchase crypto.
CoinLoan currently offers an annual interest of up to 12.3% APY in crypto, but this may depend on the particular cryptocurrency you’ve deposited. You could also try other platforms like Nexo and Celsius.
Step #2: Compare the Interest Rates.
Once your savings account is ready, take the time to make comparisons to get an idea of the crypto interest rates that different crypto holdings offer. You want to remember that other platforms provide different interest rates.
Also, crypto interest rates fluctuate depending on the prevailing market situation. Some borrowers are traders involved in leverage trading, and they can create a huge supply and demand situation.
Step #3: Purchase Crypto and Add to Your Account
Top crypto interest platforms like Nexo, CoinLoan, YouHodler, and others have made it easy to connect your bank account to your crypto savings account and purchase crypto with ease.
As soon as you buy crypto using any trusted exchange platforms like Nexo, CoinLoan and YouHodler, send your funds directly to your online crypto savings account and start earning interest.
Step #4: Start Earning Interests!
If you carefully followed the three steps on opening crypto interest accounts, it’s time to sit back and watch your crypto savings account deliver passive income and let your crypto holdings grow bit by bit.
What are the Best Cryptocurrencies to Earn Interest?
It’s possible to earn interest on crypto using just about any cryptocurrency. It all depends on the platform you choose and the cryptocurrencies they support. Many leading crypto interest accounts focus on large-cap digital assets like Bitcoin, Ethereum, and Cardano.
If you’re interested in getting high yields without worrying about volatility, you may want to try stablecoins such as USDC or USDT, both of which are pegged to the U.S. dollar. With stablecoins, you can earn interest on crypto without getting bothered about the ever-fluctuating token prices.
On the other hand, when you opt for the traditional cryptocurrencies like Ethereum and Bitcoin, there is always the risk of the token’s value going down. Should this ever happen, you can expect that loss you incur to exceed the interest that your preferred crypto interest account platform is offering.
Is Earning Interest on Crypto for You?
Although crypto interest accounts enable investors to diversify their portfolios, they may not work for people who want to make quick money in the short term. You can only see its true potential if you become a long-term investor.
If you’re a crypto owner who doesn’t mind holding your digital assets over the long term, crypto interest account offerings will pay you dearly for your patience.
What Else Should You Know Before Choosing A Crypto Savings Platform?
If you’re convinced that a crypto earning account is for you, you want to look at the following areas:
Some crypto interest account platforms have easy deposit processes, but their withdrawal processes can be headaches. Check whether you can withdraw your funds for free or you must pay for withdrawals and if so, how much? Make sure that you understand the platform’s withdrawal policy and that it meets your expectations.
The minimum deposit amounts and periods that some providers have set could easily affect the liquidity of your digital assets. Please read the fine print since some platforms offer lower crypto interest rates than they advertise due to tiered rates based on your deposit.
Nothing can be more frustrating than expecting a weekly payout from your crypto interest account and discovering later the platform only practices a monthly payout. You want to ensure that the provider’s payout frequency suits your individual needs.
Ask whether you are allowed to redeem your funds instantly. That’s because some platforms can prove inconvenient if you require withdrawing a large amount of money urgently, maybe for a surgery or any other emergency or when you decide it’s time for you to move your funds somewhere else.
The conclusion of the matter is that crypto interest accounts offer investors the better of two worlds. Apart from being able to invest in your favorite cryptocurrency as you wait and hope that its value will increase over time, you can also earn a regular interest in your holdings while at it.
And, what’s more, when you compare them to your conventional bank account, a crypto interest account delivers more attractive yields, which in most cases, will go beyond 10% APY. However, it would be best if you always considered the risks involved.