A cryptocurrency savings account is a type of account that allows you to deposit cryptocurrencies and typically pays interest on those deposits in return.
Definition and Examples
A cryptocurrency savings account provides a place to deposit your cryptocurrency assets. Interest is usually paid on deposits, unlike holding cryptocurrencies in a cryptocurrency wallet. Just like with regular savings accounts, you can withdraw your assets, but the rules differ depending on the cryptocurrency exchange and the type of account.
Note: Cryptocurrency savings accounts are high-risk investments with high returns. Although interest rates may be attractive, you could lose all your money.
Many cryptocurrency exchanges offer these interest-bearing accounts. For example, Gemini Earn is a high-yield savings account offered by the cryptocurrency exchange Gemini, providing a maximum annual percentage yield (APY) of up to 8.05%.
Important Note: In January 2023, Genesis Global Capital filed for Chapter 11 protection. A few days prior, the U.S. Securities and Exchange Commission charged Gemini and Genesis with illegally raising funds from retail investors through the now-terminated Gemini Earn program. Users deposited cryptocurrencies into the Earn account and lent them to Genesis for interest payments. Gemini suspended account withdrawals in November 2022 because Genesis did not have enough funds to meet withdrawal requests.
Another example is Hodlnaut, based in Singapore, which provides a savings account that supports several popular cryptocurrencies with a yield of up to 7.25% until June 2022. It offers weekly interest payments and does not require a minimum deposit.
Alternative Names: Cryptocurrency interest account, cryptocurrency savings account
How Does a Cryptocurrency Savings Account Work?
A cryptocurrency savings account works similarly to a regular savings account in that the cryptocurrency exchange uses your deposits to lend to others on the platform. However, the difference is that the process involves specific cryptocurrencies, such as Bitcoin and Ethereum, instead of fiat currency.
You typically transfer the assets from your cryptocurrency wallet to your savings account. However, you can also buy cryptocurrencies on the platform for investment. The specific cryptocurrencies you can place in the savings account will depend on the cryptocurrency exchange and its account offerings.
The interest paid for storing your deposits is in cryptocurrency and is usually at a variable rate. It depends on the supply and demand for the specific cryptocurrency and how flexible you are in accessing the funds, as well as which cryptocurrency exchange you are using. Depending on the account, you may earn simple interest or be able to reinvest the earnings for compounded interest.
Note: Cryptocurrency savings accounts do not have the federal deposit insurance that is typically provided with regular bank accounts. Therefore, you could lose your assets if the cryptocurrency exchange fails. For example, the cryptocurrency lender Celsius was forced to stop withdrawals, exchanges, and transfers between accounts in June 2022 after cryptocurrency price crashes led to a liquidity crisis, making it difficult for the lender to meet its clients’ due payments.
Tax Implications of Cryptocurrency Savings Accounts
Since you earn interest, it must be reported on Form 1099-MISC. But remember, you earn interest in the form of cryptocurrency, so you may be liable for capital gains or losses when cashing out your account by selling the cryptocurrency.
Types of Cryptocurrency Savings Accounts
There are
Two main types of cryptocurrency savings accounts.
Flexible cryptocurrency savings accounts
Some cryptocurrency savings accounts are flexible and allow you to add or withdraw funds at any time you want. Interest is often calculated daily, and the yields are deposited daily or weekly. However, you might receive a lower interest rate due to the flexibility offered. Some cryptocurrency exchanges set a free withdrawal limit for savings accounts, so you may have to pay fees after that.
Fixed cryptocurrency savings accounts
Fixed accounts lock your money in for a set period, similar to a certificate of deposit. For example, you might agree to keep a certain amount of Bitcoin for 90 days and receive a better interest rate in return. After the holding period ends, you can redeem your funds and interest, or continue to reinvest them for additional fixed periods.
Advantages and disadvantages of cryptocurrency savings accounts
Advantages
- Diversification opportunity: Investing in cryptocurrencies alongside stocks, bonds, and cash savings accounts helps you distribute risk across investments. This can reduce the impact of certain investments on losing money when you don’t have all your funds tied up in one type of asset.
- Higher interest rates: The rates offered on digital assets can far exceed those offered on regular savings accounts and certificates of deposit. For example, you might get an annual percentage yield (APY) of up to 10% on one type of cryptocurrency and 1% APY on another, compared to 0.08% APY for a regular savings account.
- Flexibility: When opting for a flexible cryptocurrency savings account, you can easily move your cryptocurrency if you need it. You also have a lot of flexibility in the types of cryptocurrencies you can deposit, allowing you to find an exchange that works for you.
Disadvantages
- Volatility: Cryptocurrencies have high volatility, so their values can change quickly and at any time. While stablecoins provide more stability, there is always a risk that your cryptocurrency could decline in value or lose popularity altogether. Additionally, interest rates are volatile and influenced by cryptocurrency market performance, so you might end up with a lower return than you expected.
- Lack of deposit insurance: While funds in regular savings accounts are usually insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration, cryptocurrency savings accounts lack this protection. This lack of insurance means you are entirely reliant on the cryptocurrency exchange to act responsibly and not fail. If the platform goes bankrupt or shuts down, you could lose everything in your account.
- Security risks: Cryptocurrencies themselves are often susceptible to scams and fraud, and the lack of legal protections increases the risks. Furthermore, the cryptocurrency exchange you are dealing with may not have the highest level of security, putting your crypto assets at risk.
- Emerging regulations and limited options: Cryptocurrency regulations are still evolving, so not all cryptocurrency exchanges offering savings accounts may provide them to U.S. residents. For example, in February 2022, the U.S. Securities and Exchange Commission charged BlockFi, a popular cryptocurrency lending platform, for not complying with agency rules. As a result, BlockFi no longer offers interest-bearing cryptocurrency accounts to U.S. residents.
How to get a cryptocurrency savings account
Before opening a cryptocurrency savings account, review the different options to assess the level of security, the rates offered, and the types of cryptocurrencies supported. You will also want to check for any minimum investment amounts or potential withdrawal or transfer fees.
Note:
Check the availability of your account on your site and ensure there are no special requirements to participate as an institutional investor.
You will need to register on a cryptocurrency exchange that offers a savings account and complete the identity verification process. You will transfer existing cryptocurrency assets to that platform or purchase some new cryptocurrencies. The platform will have an option to set up the type of cryptocurrency savings account you want and specify the type of cryptocurrency you plan to save.
You will go through the process of transferring your cryptocurrency to the new savings account. Along the way, you will also see account terms such as the interest rate, duration (for fixed accounts), and the maximum allowable amount.
What does this mean for individual investors?
Cryptocurrency savings accounts are options for you to earn interest on your cryptocurrency holdings. Once you deposit cryptocurrency into the savings account, the cryptocurrency exchange can lend that cryptocurrency to borrowers, earning interest payments in return. It seems simple enough, but it can be very risky.
Although interest rates are very attractive, they heavily depend on supply and demand for cryptocurrencies and overall market availability. Cryptocurrency savings accounts lack sufficient protection against losses that can accumulate quickly, as cryptocurrency prices can be extremely volatile.
Key Summary:
- A cryptocurrency savings account allows you to earn interest on your cryptocurrency deposits.
- Cryptocurrency savings accounts can offer high interest rates but lack deposit insurance, can be highly volatile, and carry security risks with limited options.
- You can obtain a cryptocurrency savings account by registering on a cryptocurrency exchange and transferring your cryptocurrency assets to the new account.
- Cryptocurrency savings accounts are options for individual investors to earn interest on cryptocurrencies, but they carry high risks and lack adequate protection.
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Source: https://www.thebalancemoney.com/what-is-a-cryptocurrency-savings-account-5498711
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