Definition and Examples of a Cryptocurrency Savings Account
A crypto savings account provides a place to deposit your cryptocurrency assets. You usually get paid interest on deposits, unlike with just keeping your crypto in a crypto wallet. Like with regular savings accounts, you can withdraw your assets, but rules vary depending on the crypto exchange and account type.
Cryptocurrency savings accounts are high-risk, high-reward investments. While interest rates are attractive, you could also lose all your funds.
Several cryptocurrency exchanges offer these interest-bearing accounts. For example,
Gemini Earn is the high-yield savings account offered by cryptocurrency exchange Gemini, offering a maximum annual percentage yield (APY) of 8.05%. Another example is Singapore-based Hodlnaut, which has a savings account supporting several popular cryptocurrencies and an APY up to 7.25% as of June 2022. It provides weekly interest payments and doesn’t require a minimum deposit.
- Alternate names: Crypto interest account, crypto savings account
How Does a Cryptocurrency Savings Account Work?
A crypto savings account functions similarly to a regular savings account in that the cryptocurrency exchange uses your deposits to make loans to others on the platform. However, the difference is the process involves a specific cryptocurrency, such as bitcoin and ethereum rather than fiat money.
Usually, you transfer existing assets from your crypto wallet to your savings account. However, you can also purchase crypto on the platform to invest. The specific cryptocurrencies you can put in the savings account will depend on the cryptocurrency exchange and its account offerings.
The interest paid in exchange for storing your deposits is in cryptocurrency and usually at a variable rate. It’s based on the specific cryptocurrency’s supply and demand as well as how flexibly you can access funds and which crypto exchange you use. Depending on the account, you might earn simple interest or be able to reinvest returns to benefit from compound interest.
Cryptocurrency savings accounts lack the federal deposit insurance you usually get with regular bank accounts. Therefore, you could lose your assets if the crypto exchange fails. For example, cryptocurrency lender Celsius was forced to pause withdrawals, swaps, and transfer between accounts in June 2022 after a crash in cryptocurrency prices caused a liquidity crunch, making it difficult for the lender to honor payments due to its customers.
Tax Implications of Cryptocurrency Savings Account
Since you’re earning interest, it is reportable on Form 1099-MISC. But remember, you’re earning interest in the form of cryptocurrency, so you may be liable for a capital gain or loss when you redeem your account by selling the cryptocurrency.
Types of Cryptocurrency Savings Accounts
There are two main types of cryptocurrency savings accounts.
Flexible Cryptocurrency Savings Accounts
Some crypto savings accounts are flexible and allow you to add or withdraw your funds whenever you want. Interest calculation often occurs daily and proceeds get deposited daily or weekly. However, you might get a lower interest rate due to the flexibility available. Some cryptocurrency exchanges set a free withdrawal limit for savings accounts, so you could pay a fee thereafter.
Fixed Cryptocurrency Savings Accounts
Fixed accounts lock in your funds for a period of time, similarly to a certificate of deposit. For example, you might agree to have a specific amount of bitcoin held for 90 days and receive a better interest rate in return. After the locked-in period ends, you can either redeem your funds and interest, or continue to reinvest for additional fixed-interest cycles.
Pros and Cons of Cryptocurrency Savings Accounts
Opportunity for diversification
Higher interest rates
Lack of deposit insurance
Nascent regulations, few options
- Opportunity for diversification: Investing in cryptocurrency alongside stocks, bonds, and cash savings accounts helps you spread out your risk among investments. This can reduce the impact of certain investments losing money when you don’t have all your funds held up in one type of asset.
- Higher interest rates: Rates offered on cryptocurrency assets can far exceed those of traditional savings accounts and certificates of deposit. For example, you could get a 10% APY on one type of crypto and 1% APY on another, compared to a 0.08% APY for a regular savings account.
- Flexibility: When going with a flexible cryptocurrency savings account, you can easily transfer your crypto out if you need it. You also have a lot of flexibility with the types of cryptocurrencies you can deposit, so you can find an exchange that works for you.
- Volatility: Cryptocurrency is highly volatile, so the value can change quickly and at any time. While stablecoins offer more stability, there’s always the risk of your crypto’s value declining or a particular cryptocurrency losing popularity altogether. In addition, the interest rate is volatile and affected by the performance of the crypto market, so you might end up with a lower return than expected.
- Lack of deposit insurance: While funds in regular savings accounts would usually be covered by the Federal Deposit Insurance Corporation or National Credit Union Administration, cryptocurrency savings accounts lack this protection. This lack of insurance means you’re relying entirely on the crypto exchange to act responsibly and not fail. If the platform goes bankrupt or gets shut down, you could lose everything in your account.
- Security risks: Cryptocurrency itself is often subject to fraud and scams, and the lack of legal protections further increases risks. In addition, the crypto exchange you work with might not have the highest level of security, and this would put your crypto assets at risk.
- Nascent regulations, few options: Cryptocurrency regulations are still evolving, so not all cryptocurrency exchanges that have crypto savings accounts offer them to U.S. residents. For example, in February 2022, the Securities and Exchange Commission charged BlockFi, a popular crypto lending platform, with failing to meet its rules. As a result, BlockFi no longer offers interest-paying crypto accounts to U.S. residents.
How To Get a Cryptocurrency Savings Account
Before opening a crypto savings account, browse different options to assess the level of security, the rates offered, and the types of cryptocurrencies supported. You’ll also want to check for any minimum investment amounts or potential fees for withdrawals or transfers.
Verify the account is available in your location and doesn’t have any special requirement to be an institutional investor to participate.
You’ll need to sign up with the cryptocurrency exchange offering the savings account and complete its verification process. You’ll then transfer existing crypto assets to that platform or purchase some new ones. The platform will have an option for setting up the type of crypto savings account you want and selecting the crypto type you’re planning to save.
You’ll go through the process of transferring your crypto to the new savings account. Along the way, you’ll also see account terms such as the interest rate, term (for fixed accounts), and the maximum amount allowed.
What It Means for Individual Investors
Cryptocurrency savings accounts are options for you to earn interest on your cryptocurrency holdings. Once you deposit cryptocurrency in the savings account, the cryptocurrency exchange can then lend that crypto to borrowers, and you get paid interest in return. It seems simple enough, but it can prove to be very risky.
While the interest rates are very attractive, they solely depend on the demand and supply for cryptocurrencies and are susceptible to any big market swings. Cryptocurrency savings accounts have little protection for losses that can add up quickly, since cryptocurrency prices can get extremely volatile.
- A cryptocurrency savings account lets you earn interest on cryptocurrency deposits.
- Cryptocurrency savings accounts can offer high interest rates but lack deposit insurance, are volatile, and come with security risks.
- These accounts can be flexible, with withdrawals allowed at any time or fixed and require a minimum holding time.
- Crypto exchanges differ in which cryptocurrencies you can use for your savings account.
- The interest paid depends on crypto market factors, the exchange itself, and the account type chosen.
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