Examining Crypto Savings Accounts

TLDR: While called a savings account, crypto savings accounts are an investment vehicle with none of the protections associated with a traditional savings account. Do not put your emergency fund or other money you cannot afford to lose in one.

Cryptocurrency has already shown the potential for unimaginable returns over the past few years, but the rise of crypto savings accounts offers the opportunity to earn up to 10% interest on the crypto you already have; And even for those that aren’t invested in crypto, some accounts allow you to deposit dollars and get paid interest in dollars without ever having to buy and sell crypto yourself. But how do crypto savings accounts work, what are the risks, and should you put your money in them?

First let’s talk about what a crypto savings account is not. The name is a bit of misnomer because it isn’t actually a savings account and shouldn’t be treated like one. They lack the regulatory protection associated with regular banks, specifically none of them are FDIC insured. Aside from the lack of FDIC protection, what are some of the other negatives associated with a Crypto Savings account?

• Unlike traditional savings accounts, you will have to pay a fee every time you withdraw funds from you account along with a cap on the maximum amount of fund you can withdraw in a given period. While the caps are high enough that it would not affect most people, if you are placing a majority of your portfolio in crypto and need to use it for a large purchase, this could present a problem for you.
• With the more popular coins, you interest rate will actually decrease with the more coins you have. The dollar equivalent where this threshold starts is typically around the six-figure mark which won’t affect many newer investors. But for those who are invested heavily in the crypto space this can be a substantial negative
• For most of the crypto savings accounts, your interest will be paid back to you in the same coin that you deposited. So there if the coin you are invested in sees a significant loss in value, this could wipe out all of the interest you have earned
• Another potential issue with crypto savings is that it requires you to transfer your private keys over to the business so they can lend out your currency. While many of the new crypto banks tout the high security, they use to protect your keys, you are still giving up control of your currency to someone else.
• Many of the crypto banks advertise the amount of insurance they have to protect your money, but if you go into the fine print you’ll see that the insurance only covers your money in the event of commercial theft or embezzlement. While top companies advertise the extensive fail-safes they have instituted to protect your funds through maintaining a baseline of crypto so you can withdraw at any given time along with the collateral they require to guarantee their loans, they have not yet experienced any massive string of defaults. Ideally, their systems would be able to handle such a situation, but it is still untested.

Now for the positives that crypto savings offer, and they are definitely appealing:

• The returns offered easily beat out anything offered by traditional banks, and you would expect them based on the increased risk you take on.
• For the majority of platforms, the interest offered will be the highest on stable coins, with relatively lower interest on the largest cryptos like Bitcoin and Ethereum. If you like to have a sizeable reserve of stable coins so you can buy into other cryptos when their value drops, this could be a great way to earn interest on your reserves in the meantime.
• Some crypto savings accounts allow you to deposit US dollars without ever having to deal with buying and selling cryptos yourself. This is a great way for investors who want to diversify and reap some of the higher yields from crypto without having to buy and sell different cryptos on their own
• Now is probably the highest interest rates we will see from crypto savings accounts. As crypto becomes more generally accepted and less volatile, interest rates on crypto will go down.

So when does putting your money in a crypto savings account make sense?

• As with anything related to crypto, because of the inherit volatility, you shouldn’t invest your entire portfolio or any money that you cannot afford to lose.
• If you are new to crypto and want to dip your toe in the water without buying crypto yourself, the companies that allow you to only deal in US dollars are a great way to start reaping the higher yields immediately.
• If you are a buy and hold investor of crypto, then putting your coins into a savings account is another way to maximize the overall return, but this still involves taking on another level of risk on top of the existing risk by being invested in crypto.

Here is a video I produced which goes into a little more detail on some of the points listed above