Crypto Savings Accounts
“Earn up to 12% APY in your savings account. Just deposit your money and start earning interest.” This is a real interest rate being offered by crypto banks for depositing money into a savings account. With the national average for a savings account in the US sitting at a whopping 0.04% APY (according to the FDIC in April 2021) and the best high yield savings accounts offering up to 0.50% APY (Marcus by Goldman Sachs as of April 2021), a 12.00% APY “risk-free” savings account (which is comparable to the average annual return of the S&P 500) seems too good to be true.
First, what is a crypto savings account? Similar to how traditional banks work, a crypto bank allows its customers to deposit crypto currency and earn a standard or variable rate over time. The interest rate offered is based on what crypto currency is deposited e.g. Bitcoin, Ethereum or Litecoin and depending on the type of account, customers can choose what type of cryptocurrency interest is paid in. Crypto savings accounts, like other financial institutions, will make money by lending out deposited crypto currency to other investors which companies like BlockFi label as “trusted institutional and corporate borrowers.”
So all seems normal so far, but there are some red flags. The first, as many know, is crypto currency can be very volatile. Since customers deposit and typically earn interest in cryptocurrency, a sharp decrease in value of the cryptocurrency, like 90% which happened to a large number of cryptocurrencies in 2018, can wipe out the assets of the account just as quickly. Another drawback is withdrawals. Crypto savings accounts can create their own rules such as how many withdrawals can take place per month or how long a transfer out of the account can take. Again an abrupt drop in value, can spell doom as an immediate sell-off to mitigate losses may be near impossible. Furthermore, crypto savings accounts may require the user to give up their access to their unique keys/addresses in order to lend out crypto to other investors, which increases the risk of fraud and theft since crypto keys are comparable to an account and routing number for a traditional bank account. The last reason to err on the side of caution with crypto savings accounts is that most of them are not FDIC insured, due to their decentralized nature. FDIC insurance covers up to $250,000 in deposits. Without FDIC insurance, should a crypto bank fail or “disappear,” there is no government entity that can reimburse losses or recover an account. Ending on a more positive note, some crypto savings accounts are evolving to become safer, as companies like AnchorUSD (launched by IBM and Stellar), which offers 8% and FDIC insurance on their USDx accounts.
Given the risk involved, are crypto banks worth depositing money into? To a cryptocurrency investor, the amount of risk assumed by depositing into a crypto savings account may be worth it given that they have already assumed the risk of the crypto currency itself. For an investor looking for a safe higher yield alternative to say bonds, CD’s or high interest savings the risk tolerance may not be the same. Additionally, individuals looking to make some gains on an emergency fund should probably look elsewhere.
Sources: Forbes, WSJ, Investopedia
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