BlockFi, Outlet, Linus, and Gemini are some of the popular cryptocurrency savings accounts out there. These savings accounts differ from traditional savings accounts in many ways that few people are aware of.
First and foremost, investors should keep in mind that cryptocurrency savings accounts are designed to accept and hold crypto deposits such as Bitcoin, Ethereum, and other well-known cryptocurrencies. Also, interest rates on crypto savings accounts are much higher than traditional savings accounts and even high-yield savings accounts.
What is the interest rate on a crypto savings account? It depends on the platform you decide to use, and the type of cryptocurrency you deposit. BlockFi, for example, offers account holders up to 8.6 percent APY on their crypto deposits.
Crypto savings accounts offer higher returns than regular savings accounts, but there are also risks associated with these kinds of accounts. We shall be considering some of these risks in the next section.Â
Risks of Crypto Savings Accounts
Earning 5% to 8% or even more in a crypto savings account may appear ideal, but you should be aware that these types of accounts, as well as owning cryptocurrency in general, comes with risks. The risks associated with crypto savings accounts do not necessarily mean that they are a bad investment. Some of these risks are:
1. No FDIC Insurance
One of the risks of crypto savings account is the fact that they are not FDIC insured. With traditional savings accounts, customers are covered on up to $250,000 per account in the rare scenario of a bank failure, but crypto assets don’t offer this protection.Â
What this means is that if the company that offers the savings account does not also provide the private keys for the wallet where the savings is held, a user's funds may be lost if the company goes out of business.Â
2. Loss of Control
Another risk of a crypto savings account is that you relinquish complete control of your crypto assets. When you acquire a crypto savings account, you are relinquishing your account "keys" to the lending body.Â
Giving up your account keys is a big risk. If the admin of your cryptocurrency savings accounts lends money and never gets it back, you could lose part or all of your assets with no recourse. Also, there is no dedicated organization or company to help recover your wallet if you lose your keys.Â
3. More Rules on Withdrawals
A traditional savings account allows you to withdraw your money any time you want. You can also close your account whenever you want. However, this is not the case with a crypto savings account.Â
There are withdrawal limits on some crypto savings accounts that cap the amount of money you can remove from your account over a given period. These withdrawal limits may prevent you from accessing your money when you most need it, such as during a financial emergency.
Furthermore, you may be required to pay fees in order to withdraw your funds. If you are one who actively trades cryptos, making several transfers in and out of your account, these fees can add up.Â
Related: Advantages and Disadvantages of Crypto Savings Account
4. Price Volatility
Another important factor that customers should note about a crypto savings account is price volatility. It's simple to account for interest paid when the interest is paid in a dollar-backed stable coin.
However, if the payment is made in cryptocurrency, the overall balance and payments will fluctuate depending on market conditions. What this means is that the interest you earn can appreciate or depreciate on any given day. This makes it difficult to plan and to tell if your account is helping you progress.Â
5. Counter-Party Risk
The reason why crypto savings account can offer you high yields is that they lend out the crypto you deposit at considerably high rates. These platforms sometimes experience a wave of loan defaults that they can’t cover, and this is risky for you as a saver who has assets deposited.Â
Are Crypto Savings Accounts Worth It?
Despite the risks associated with crypto savings accounts, they remain popular. Why is this so? Simply put, they offer returns higher than what a traditional savings account will offer, and this is what drives crypto investors in the first place.Â
Even yet, there are a few things to consider before opening one of these accounts and handing away control of your digital assets. First of all, make sure you carefully analyze the platform or app you'll be using to verify that the provider is reliable, reputable, and secure.Â
Also, evaluate how long the platform or app has been available. Additionally, do some research and read user reviews, as well as complete due diligence on the company, its leadership team, and its investors.Â
Finally, be sure you're not putting all your eggs in one basket (or your entire retirement) on cryptocurrency investments or the returns you can get from a savings account.
BlockFi, Outlet, Linus, and Gemini are some of the popular cryptocurrency savings accounts out there. These savings accounts differ from traditional savings accounts in many ways that few people are aware of.
Written by Sam