Earn interest on your crypto by depositing your assets into a crypto savings accountRead more...
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To earn interest on your crypto you need to supply your assets to one of the loan providers. If you don’t have any crypto assets you can buy them on a cryptocurrency exchange. Moreover, for some providers you’ll need to sign-up and upload identity documents before you are eligible to earn interest.
Next to cryptocurrencies like Ether and Bitcoin you can also lend so called Stablecoins. Stablecoins are digital currencies pegged 1:1 to US dollars. The most famous stablecoins are Tether, USDC, DAI, Paxos and BUSD. They are convenient to invest because your principal is denominated in dollars, which is a stable currency.
Interest rates differ from one asset to another and are based on supply and demand. When there are lots of people that want to supply a specific crypto asset and there aren’t many people that want to borrow it, interest rates will be low. Conversely, when there are lots of people that want to borrow, but there aren’t many people that want to lend a given crypto asset, then interest rates will be high.
Depending on the provider, it's usually paid into the wallet of your savings account. You're usually paid in the same currency as the currency you’re earning interest on. For example, if you have one Bitcoin in a savings account, you’ll receive interest on that Bitcoin, which will be paid in Bitcoin in your savings account. The frequency of the interest payment will vary per provider, however, it’s usually monthly.
Crypto savings accounts work in a similar way to normal bank savings accounts. In a nutshell, you lend money to an institution, which lends your assets to borrowers in need of liquidity. However, these loans are relatively secure since the loan providers ask the borrowers to deposit crypto assets themselves, as security for the loan. Most providers ask for a ‘loan-to-value’ ratio of 50% meaning that if a borrower wants $1000 they’ll need to deposit $2000 worth of e.g Bitcoin as security for the loan.
Broadly spoken, these are institutions and sometimes individuals that hold cryptocurrency and need short-term liquidity but don’t want to sell their cryptocurrency. To give a few examples of the type of companies using crypto-backed loans:
Like any financial investment, depositing your assets into a crypto savings account comes with risks.
As we mentioned before, the risk of default on the borrower side is very limited because the loans are secured. When the value of the collateral backing the loans falls below a certain treshold, crypto lenders can sell the assets. However, in the event of a black swan event where market prices crash within minutes, the value of the collateral could fall below the loan value.
Perhaps the largest risk factor is that the lending company’s custody provider (where your assets are stored ) gets hacked. If an infiltrator penetrates a custodians’ wallet they could run away with the users’ money. To offset this risk, many custody providers have insurance policies to protect users in case they do get hacked. However, these often have an amount ceiling so whether you get reimbursed or not in the event of a hack depends on how much money was lost overall. Sometimes, the lending providers themselves, have additional insurance policies. If insurances exist, we always list them in the ‘details’ section
Some of the providers listed above, namely Argent, ZenGo & Dharma use the decentralized Compound protocol for their savings accounts. This means your assets are not being lent out by a company but an automated lending platform on the Ethereum blockchain. These smart contracts can have bugs that attackers can exploit to steal the money. All this being said, none of the scenarios mentioned have happened. If you want to read more on the crypto lending sector read our article on “How to think about savings rates in crypto?”.
Some savings accounts are provided by centralized crypto companies while others are provided by DeFi protocols and smart contracts. The former are custodial meaning you lose control over your assets while with the latter you remain in control.
Although security is a major concern for crypto lending providers their wallets, holding all their users’ funds, can potentially be hacked. DeFi protocols on the other hand can have flaws in their smart contracts. Therefore, we have listed whether providers have insurance policies for these types of events.
Centralized providers have to identify their users to comply with regulations whereas DeFi providers don’t. To use a DeFi protocol such as Compound you only have to download a wallet which has integrated Compound, deposit your funds and you automatically start earning interest.
Lastly, you want to find a provider that offers a decent user experience. Can you withdraw your assets any time or is there a lockup period? How often is the interest paid out? Is the app simple to use and does it have a delightful interface?