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Cryptocurrency owners are not just bragging about outlandish returns — there’s also the yield. Today, many platforms help you earn high returns just by depositing your crypto assets.
The idea seems to be gaining quick ground: Deposits in decentralized finance (DeFi) applications grew from about $1 billion in June 2020 to just under $40 billion by late January 2021.
But questions loom: How does it work? How high is the interest rate? Are there any risks? Who is it ideal for?
This article covers all your questions and hopefully more so that you can get a solid understanding of interest-earning crypto accounts.
How a Cryptocurrency Interest-Earning Account Works
The premise of an interest-earning crypto account is the same as a regular savings account. You deposit your Bitcoin or altcoin and earn compound interest on your assets.
The only difference is that the rate of return is significantly higher compared to traditional savings account rates. You can also receive weekly payouts to your wallets and withdraw funds anytime.
Currently, the most you can earn from a savings account in the U.S. is 0.7% annual percentage yield (APY), offered by Sallie Mae's SmartyPig account — 11 times the FDIC’s national average of 0.06%.
Crypto interest-earning accounts offer interests up to 7.5% APY, on average. But some platforms can even allow you to earn interest up to 12.73% APY on your cryptocurrencies — no lock-up or deposit limits. The interest is driven by market effects and is paid out in cryptocurrency. You may need to pay a withdrawal fee, which is regularly adjusted according to blockchain conditions.
Your platform can offer you high interest because it lends your crypto assets to individuals, corporations or institutions that use it depending on their business functions. The borrowers return the assets with high interest, and your platform takes a small portion of the interest and passes the rest to you.
Is This Risky?
A high reward indeed comes with high risk. But in this case, the risk is directly proportional to the platform you choose to invest in.
In general, there are 2 main risks you should be wary about: hacks and borrower defaults.
Hackers can easily access platforms that have a weak safety infrastructure, no encryptions and store your tokens in a hot wallet. Additionally, companies that are not licensed with an operating permit may be prone to a breach.
As for borrower defaults, it heavily depends on who the platform chooses to trust. If a company is transparent about its lending standards and maintains a stringent requirement for its counterparties, that lowers the level of risk.
It’s advisable to look into what precautions a platform takes before you deposit your interest. For example, interest-earning crypto accounts like Hodlnaut employ Fireblock’s multiparty computation wallet infrastructure to secure funds.
It also offers an optional user custody protection, an alternative to traditional insurance. In the case of default, the company takes on the loss and pays its users from its equity funds. In such instances, the risk can be rather low.
Are Crypto Interest-Earning Accounts for You?
Cryptocurrency investments are a great way to diversify your portfolio. Although many think of it as a way to make money in the short term, its true potential will be seen when decentralized finance becomes more mainstream — a reality that is increasingly apparent every day.
For crypto owners who want to hold their assets for the long term, interest-earning accounts offer a sweet reward for patience.
But, before you deposit your crypto holdings into an interest-earning account, make sure you do your due diligence so that you can be at ease.
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