If you hold cryptocurrency for the purpose of building wealth or diversifying, you should know that cryptocurrency-based savings accounts can help boost your investment yield even more.
The world is slowly moving away from the traditional financial system towards blockchain technology. Sometimes in the past, almost every transaction had to involve an intermediary, especially a bank. However, with the introduction of blockchain technology and cryptocurrencies, financial transactions do not require intermediaries as was the case with the traditional financial systems.
Today, there are a myriad of blockchain solutions that have been developed through decentralized finance (DeFi) protocols to offer the services offered by most of the traditional financial institutions. The premise of DeFi is a simple one: Fix the long standing inefficiency in cryptocurrency finance of capital being kept idle at a nonzero opportunity cost.
Evidently, the growth of the DeFi industry has accelerated and there is a surge in the number of people participating in DeFi protocols. By December 31, 2020, the DeFi industry had grown to 13 billion from $700 million the same time in 2019. In 2021, the growth has gathered more momentum and the industry is now worth more than $40 billion.
DeFi protocols are taking up most of the services being offered by traditional financial institutions like banks, and insurance companies. As a result, more people are choosing to invest in the DeFi industry, especially in crypto savings accounts, a fast growing sector in DeFi.
Why crypto savings?
The most common way of earning money from cryptocurrency is to buy cryptocurrencies like Bitcoin, Ethereum, and other alternative coins, hold the cryptocurrencies in crypto wallets anticipating their market value to increase, and then sell them at a higher price to make profits.
Besides buying and selling cryptocurrencies, some crypto exchanges offer dedicated crypto savings accounts that mimic the traditional bank savings accounts but with higher annual percentage yields (APYs).
In the traditional savings accounts, the APYs range from 0.1% to 0.6%. This means that you have to deposit huge amounts of funds to earn considerable interest through traditional savings. If you save $100,000 for one month (30 days) with a bank savings account that offers an APY of 0.6%, for example, you would earn $50 (0.6/100 X 1/12 X $100,000) in one month. This is a considerably low income.
While the traditional savings accounts offer APYs below 0.6%, crypto savings offer APYs above 0.6%. For example, Binance Earn, one of the crypto savings account providers, offers APYs ranging from 0.67% to over 40% depending on the coin, duration, and product terms (flexible terms, fixed terms, or DeFi products like “liquid swap” and “DeFi staking”).
To illustrate the point, if you subscribed to 100,000USDT in a fixed savings account for 30 days which has an estimated APY of 6.66%, you would expect to earn 555 USDT (6.66/100 X 1/12 X 100,000USDT). Compared to investing the same amount with a traditional bank, it is evident that crypto savings has higher returns.
How can I participate in crypto savings?
Steps to participate in crypto savings:
Step 1: Find a crypto exchange or DeFi protocol that offers savings product offerings.
Step 2: Depending on the digital assets you have, select the corresponding products.
Step 3: Earn passive income while you sleep.
Is crypto savings safe? What are the risks?
Though crypto staking is a relatively safe way to earn a passive income from crypto assets you are holding, there are things to keep in mind.
The cryptocurrency market is quite volatile and the market prices of the crypto asset that you have staked may go up or down in a matter of seconds. If the prices drop, the value of your savings assets will depreciate. It means the value of your savings reward shall also decrease.
Also, the recent STABLE ACT attempts to regulate USDT that was introduced by members of US Congress. If the bill passes, stablecoins may not be pegged to an equal amount of USD, which may significantly affect the value in the crypto savings accounts.
There’s a positive trend where retail investors are moving to diversify their savings portfolio consisting of stocks and ETFs to crypto asset management solutions to gain a higher annual percentage yield. It can be argued that crypto savings can steadily replace traditional savings accounts in some users’ portfolios. It’s hard to predict when.