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How to earn interest from crypto saving accounts?

August 11, 2022 Coin Telegraph

Crypto investors can earn interest via crypto lending by finding a cryptocurrency exchange or DApp that offers a crypto interest account.

The cryptocurrency industry has offered developers and investors the opportunity to introduce new financial tools providing plentiful options to earn passive income. Simply holding crypto has offered patient investors the chance to make gains over the years. However, there are various other ways to increase crypto assets’ stacks, even in bear markets.

Other than staking, crypto savings accounts allow retail investors to accrue their funds by earning interest on the crypto assets they deposit on specific cryptocurrency platforms if they agree to lend out their coins or tokens. Crypto interest accounts are particularly appealing because they distribute much higher returns than traditional bank savings accounts, considering that the average interest rate applied by a crypto savings account can be up to 7.5%, against the average 0.06% of bank savings accounts.

The difference in rates between crypto and traditional savings accounts is somewhat significant but comes with higher risks associated with the service. We’ll find out here how to access crypto savings accounts, the crypto interest rates and deposit terms and the risks associated with this type of financial instrument.

What is a crypto savings account?

A crypto interest account is generally a DeFi platform’s service that lets you earn interest on digital assets you’ve deposited and agreed to lend out in exchange for a return. This service is similar to a bank savings account that will lend out your money to other customers or financial institutions for a certain amount of time and will give you interest for that service.

By definition, blockchain technology encourages users to become self-sovereign and independent from third parties. However, intermediate companies have become a necessary component of the industry providing crypto savings accounts to those who want to enjoy the benefits of the technology without making too much effort to learn complicated and burdensome processes.

Other than convenience, these companies will also hold some of the risks involved and ensure depositors are paid first if adverse events like insolvency occur. Some companies are backed by insurance and work with well-established custodians to protect their customers.

How does a crypto savings account work?

Once you deposit your crypto assets into a savings account, you start accruing interest from day one. Most of the popular cryptocurrencies can be used in a crypto savings account, with the most picked being Bitcoin (BTC), Ether (ETH) and Litecoin (LTC), while many favor interest rates on stablecoins like Tether (USDT), USD Coin (USDC) and PAX Dollar (USDP).

By depositing your crypto assets into a savings account, you formally grant the platform the right to use your money for any purpose, from lending it out to investing it or staking it on your behalf. Primarily, it will be used for lending it out to earn high returns, some of which will be paid to you as regular interest payments.

Crypto savings accounts may offer you more favorable rates if you agree to lock up your crypto for a while or hold a platform-specific token. Nexo, for instance, increases interest rates by up to 4% for holders of the platform’s governance token.

How to invest in a crypto savings plan?

When you want to invest in a crypto savings plan, the first step is to pick the right account for you and get started as follows:

Choose a cryptocurrency platform you trust that offers realistic interest rates;
Transfer cryptocurrency to this chosen platform;
Follow the few simple steps to deposit your crypto assets into a savings account. Usually, these steps are straightforward, and you’ll be guided through the process by the platform;
Choose if you want to deposit your asset for a limited amount of time or select a flexible time that will allow you to withdraw your crypto at any time;
Start earning interest from the first day.

As mentioned, there are plenty of platforms to choose from, including well-established cryptocurrency exchanges like Coinbase, with the following indications of interest rates on fixed savings:

Binance is the other global popular crypto platform that offers interest rates on many cryptocurrencies with flexible savings and locked savings options:

An increasing number of other financial service companies and cryptocurrency platforms provide these types of accounts. Nexo and Crypto.com are among companies offering greater interest rates to cryptocurrency holders who lock their assets away for weeks or months. However, the drawback with this type of savings account is that you can’t withdraw or sell your crypto during that period.

How much interest you can earn with a crypto savings account largely depends on the platform and the cryptocurrency you choose to deposit. The interest rate offered by the service will also be driven by market conditions and is usually paid out in the cryptocurrency you have deposited.

While their high-interest rates can entice you, you should consider how secure your investment is with them. Choosing the best crypto interest account is not simply a matter of comparing interest rates paid but also making sure your investment is as safe as possible.

Remember, they are custodians of your crypto assets, meaning that by holding your funds, they can even stop you from withdrawing them or delaying the withdrawal process, which may result in a loss for you if the value of the crypto asset changes in the meantime. When choosing the best interest rates, make sure you understand the difference between the annual percentage rate (APR) and the annual percentage yield (APY) because they might mislead you in calculating your yearly returns.

In short, APY includes a compound interest, i.e., the addition of interest to the principal sum of a loan or deposit (the interest on interest accrued). On the other hand, APR does not include compound interest. Due to the compound interest factor, APY will provide a higher return than APR. Yet, it’s always worth reading the savings account’s small print because certain services will pay simple interest only and won’t produce compound interest over time.

Crypto saving account risks

The crypto industry is mostly unregulated, so the investors might not have any cover in case something goes wrong with their assets. In this framework, operate crypto savings accounts that do not offer government-backed deposit insurance like the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

These savings accounts offer higher yields because they are riskier. For example, they could limit how quickly you can withdraw your assets and, in times of difficulties, they might not let customers withdraw their assets at all.

In exchange for these restrictions and the associated risk, these savings accounts are much more interesting for an investor than a typical bank account. However, for these accounts to yield such a high interest which may exceed 20% in some cases, you should wonder how your money is employed in the background.

Like regular banks operate under a “fractional reserve” banking service, so do most crypto companies. They are lending out more than they have to financial institutions with the difference that there is no deposit insurance to back them, as in the case of traditional banks.

Crypto savings accounts vs. crypto wallets

Crypto wallets simply won’t accrue your cryptocurrency holdings as opposed to crypto savings accounts that are conceived to increase the number of coins you own over time.

This might be at the expense of key ownership, though, because the private keys that allow you to access your coins are maintained by the crypto platform. On the other hand, most crypto wallets will ensure you keep full ownership of your private keys.

Security is another concern that should be very well addressed. There are security risks in the centralized platform that holds your private keys because it is potentially at risk of becoming insolvent, bankrupt or being hacked, and you could lose your money.

In the same way, you should choose a wallet carefully to avoid picking a service with little security and a vulnerability to hacking. Also, you must ensure you can easily access your wallet’s private keys if you lose your operational device and need to restore your assets in another digital location.

Cryptocurrency is a work in progress and will likely undergo continuous changes over the years, especially in terms of regulation, which will also affect how crypto savings accounts are managed. In June 2022, the issues of leading crypto lending platforms like Block.Fi and Celsius have raised further concerns over the future of crypto savings accounts and similar related cryptocurrency services.

Caution and due diligence are always recommended if you consider opening a crypto savings account and weigh the associated risks against the chances of high returns, especially if you risk life savings or anything close to that.

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Anchor protocol’s reserves head toward depletion due to lack of borrowing demand

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Anchor

With too many depositors chasing high yields and a lack of borrowers, Anchor interest rates appear to have become unsustainable.

Anchor, the flagship savings protocol of the Terra Luna (LUNA) ecosystem, has seen its reserves decline by 35.7% in the past seven days according to Terra.Engineer. Since the beginning of December, the amount of Terra USD Stablecoin (UST) held in the "terra1tmnqgvg567ypvsvk6rwsga3srp7e3lg6u0elp8" smart contract has declined by over 50%, with only $35.7 million remaining.

As a savings protocol, users deposit their UST assets via their wallets and earn up to 20% yields as their principal is lent out to borrowers, who pay interest on the loan amount. Borrowers must deposit collateral to ensure the lender can get their money back in the event of a default. In addition, Anchor stakes the collateral it receives to generate rewards for depositors.

Whenever there is a deficiency between the income generated through borrowers' interest, collateral staking, and the yield expenses paid out to depositors, Anchor must tap into the aforementioned UST reserves to make up for the difference. Last July, its creator Terraform Labs injected 70 million UST into the reserve protocol, and its value was relatively stable. But in the past 60 days, the total deposit amount has increased from $2.3 billion to $6.1 billion, while the total borrowed amount only increased from $1.2 billion to $1.5 billion.

In bear markets, investors typically flock out of volatile assets in search of stable ones, such as high-yield savings protocols. However, the growing discrepancy between Anchor's deposits and borrowings has placed severe pressure on its reserves. If the trend were to continue, the reserve would run out in the coming months, and Terraform Labs would need to inject another round of UST for liquidity or sharply lower Anchor's promised interest rate.

My thoughts on @anchor_protocol and the yield reserve depleting

1/ Just 2 months ago, the yield reserve was actually increasing every day and the issues of today were not even a consideration. As the adoption of $UST really started to rise and the deposits (lending) into pic.twitter.com/fTH4WecPr9
— Yield Labs (@YieldLabs) January 27, 2022

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How crypto can modernize the world of lending

July 26, 2021 Coin Telegraph

Baanx

Crypto lending offers powerful advantages when compared with the status quo, including more competitive interest rates and flexible terms.

Lending has been around in some form for thousands of years — dating back to ancient civilizations where farmers would borrow seeds and use crops as repayment.

The arrival of fiat currencies transformed the way economies were run back then. Indeed, you could argue that we’re seeing such a seismic shift now as cryptocurrencies become a larger and more influential part of the world’s financial ecosystem.

When done right, crypto lending has the potential to level the playing field — giving consumers a type of flexibility that they may otherwise have been unaccustomed to. For several years now, the rates offered by banks have been tepid to say the least. In some countries, even the most generous savings accounts will only pay less than 1% interest — even if funds are locked up for several years.

Given how inflation has been rising sharply recently, in part because of the money printing performed in response to the coronavirus pandemic, signing up for one of these accounts means a saver’s money would actually command less spending power down the line.

Crypto lending offers three powerful advantages compared with the status quo. First, it is possible to find more competitive deals that ensure capital actually grows — with interest sometimes paid on a weekly or a monthly basis. Second, many platforms offer a much-needed degree of flexibility to lenders, meaning that they won’t be forced to lock up their money for long periods of time and can withdraw their funds at will. And third, it can act as a powerful incentive when markets are behaving rather erratically.

That’s before we’ve even discussed the fact that crypto as collateral can be far more practical from a lender’s point of view than real estate — an asset that is rather illiquid and can be rather time consuming to sell.

It isn’t just lenders who benefit

Of course, all of this sounds like a good deal for lenders — the people who have capital to spare. But it can also be beneficial for borrowers, too. In the current financial ecosystem, where a single blemish on an otherwise impeccable credit history can deny a responsible consumer access to the best interest rates, crypto platforms can offer an invaluable lifeline.

Banks often have an opaque list of requirements when it comes to finding the people they are willing to extend credit to. And, in a world where ever-increasing numbers of consumers are self-employed, otherwise creditworthy applicants can end up being excluded from the market simply because they don’t have a traditional nine-to-five job — irrespective of whether they actually earn more money in their current arrangement.

The crypto world can help to foster inclusivity here, but there are challenges. A number of lenders in this space are offshore and unregulated — something that can make them less appealing to everyday consumers. This also restricts the number of partnerships that crypto platforms can enter into with fintech firms.

A new approach?

One platform that is aiming to shake up the world of lending is Baanx, a crypto-as-a-service fintech intending to bridge the worlds of crypto and fiat. The company allows brands to offer interest-free forms of secured lending to their customers and communities, alongside high savings rates for those who stake their digital assets. This is all achieved via APIs that can be rapidly integrated into any DeFi, exchange, or wallet’s app or website.

This form of interest free and low cost secured lending is provided to those who stake BXX, the utility coin that’s associated with Baanx. Loans can subsequently be moved into crypto wallets or physical and virtual cards. For those who use Bitcoin and Ether as collateral, loan-to-value ratios of up to 50% are available, and approval can be achieved in one click.

Baanx is on the list of temporarily registered cryptoasset businesses with the FCA and also utilizes a lending license. The project’s whitepaper states that it will “lend against any digital asset including cryptos, stocks, bonds and the emerging NFT asset class.”

The volumes of money that can be offered through lending will depend on the volumes of tokens that are staked within its system.

Figures provided by Baanx suggest that the platform now has sold more than 600,000 white-label cards and accounts around the world — almost exclusively through branded corporate clients, including Tezos Crypto Life app, DeFi protocols, exchanges, and wallet providers. It is also planning to launch with a major wallet provider in the U.S. in the fourth quarter of 2021.

Learn more about Baanx

Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.

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