A bitcoin savings account gives holders the ability to earn interest on crypto. But how do they work?
Interest from Bitcoin and other cryptocurrencies can be earned in a number of ways. In the current era of zero or even negative interest rates, many investors have ventured outside the traditional financial system in search of a positive yielding returns. A crypto interest account can for some individuals be the solution for rock-bottom yields.
But the crypto investing ecosystem is still young. Bitcoin was created in 2009, making the technology only twelve years old as of 2021. Platforms that offer a type of bitcoin savings account are newer still.
For this reason, investors would do well to first learn crypto basics and conduct their own due diligence when looking to earn interest on crypto. The ways to go about earning that yield range from high-risk and questionable to lower-risk and reasonable. Choosing one method over another could mean the difference between earning a stable yield and losing 100% of the savings offered.
Bitcoin Savings Account vs. Cold Wallet
When it comes to long-term crypto holdings, investors can choose between several options. Two of the best options might be a bitcoin savings account or a cold storage crypto wallet. Each of these come with their pros and cons.
The main benefit of a cold storage wallet would be security. The term “cold storage” refers to funds that have been taken offline where hackers and thieves can’t access them. Bitcoin can be stored in this manner for extended periods of time. Cold storage is thought to be among the safest methods possible to store crypto.
Recommended: Cold Wallet vs. Hot Wallet
The main benefit of a bitcoin savings account would be earning a steady return on those savings. While coins in cold storage might be safe, they won’t be earning anything beyond their potential increase in value. Using one of the potential methods to earn interest on crypto ensures that the coin gets put to work generating passive income for an investor rather than sitting idle indefinitely.
Of course, offering up crypto savings in exchange for interest comes with some kind of risk. The risk varies depending on the method, but in situations like these investors have to assume that the organization they entrust their money to will safeguard it completely.
As we’ll see, this may not always be the case.
Four Ways to Earn Interest on Crypto
What kind of crypto interest account is best? It depends on a user’s preference, technical know-how, and risk tolerance.
There isn’t just one kind of official bitcoin savings account. The term loosely refers to any number of ways that holders can earn interest on their bitcoin or other cryptocurrency holdings.
Here are a few of those methods.
1. Crypto Staking
Staking isn’t technically a bitcoin savings account, but it does provide a return for crypto assets in a similar way.
Coins that use a proof-of-stake protocol work differently than those that utilize proof-of-work (like bitcoin). We won’t go into great detail about consensus mechanisms here, but proof-of-stake involves token holders “staking” their coins for a chance at winning the next block reward. Staking can be an involved, technical process, or it can be as easy as keeping coins in the right wallet on an exchange.
Some exchanges have everything set up on the backend so that all a user has to do to earn staking rewards is hold coins in their hot wallet. Typically, staked coins have to be locked up for a period of time, but some exchanges have worked things out to allow users to move their coins at any time while still earning regular rewards. This method obviously requires learning how a crypto exchange works first.
Keep in mind that staking rewards will be denominated in the token of choice, meaning if that token goes down in price, so too will any rewards.
Recommended: A Guide to Crypto Staking
Yes, SoFi offers crypto trading.
With 30 coins to trade from and no-fee crypto purchases1, our app offers a secure way to trade crypto 24/7.
Get up to $100 in Bitcoin after your first trade2.
2. DeFi Protocols
One of the riskier types of cryptocurrency savings accounts might be decentralized finance (DeFi) protocols.
Some DeFi projects automate the borrowing and lending process. This means that smart contracts govern the loans.
Borrowers like this because they can get a loan with no credit approval necessary. Lenders like it because they can get high yields when lending out capital. Searching for yield in this manner is sometimes referred to as “yield farming.”
While the system can be great for everyone when it works, it can also be catastrophic when it fails. There have been several reports of DeFi protocols either having programming bugs in them or being outright frauds from the beginning. In either case, investors can lose everything and have no recourse.
DeFi platforms typically don’t have to follow any cryptocurrency regulations, making them a sort of “wild west” kind of environment for investors.
3. Exchange Wallets
Some exchanges reward users for holding stablecoins in their exchange wallets. Dollar-pegged stablecoins like USDC and DAI might be eligible for these kinds of rewards.
The interest earned is typically as low as 0.2% or as high as 2%. The upside to this kind of arrangement is that it might not require investors to do anything out of the ordinary. Simply buying stablecoins and holding them in the appropriate wallet could do the trick.
The potential downsides are that the interest earned could be very small (although still greater than fiat currency held in a bank) and not all exchanges will offer this feature.
4. Third-Party Savings Apps
A number of centralized cryptocurrency savings accounts have sprung up in recent years. These are organizations that facilitate the borrowing and lending of crypto assets. Users typically earn a high yield, although not as high as DeFi protocols.
An upside of these apps might be that they offer a good balance between risk and reward. They also tend to be user-friendly and have good customer service, making them ideal for beginners.
The drawbacks might be that these kinds of accounts come with the same third-party risk as anything else. Depositing coins requires entrusting your crypto to those who hold it, and there may or may not be an insurance fund for when things go wrong.
The processes of these organizations are not always transparent, either. It can be unclear how exactly they provide depositors with yield or what kind of risk is being taken.
In an era of ultra-low interest rates, some investors have turned to the cryptocurrency market to earn additional yield. While the crypto universe isn’t appropriate for all yield hungry investors, some measures like crypto staking, DeFi and savings apps may provide a solution.
With SoFi Invest, investors can buy cryptocurrencies like Bitcoin, Ethereum, Cardano, Uniswap and Chainlink 24/7: weekends, holidays, middle of the night. Furthermore, on the mobile app, investors can trade cryptocurrencies alongside the company stocks, exchange-traded funds (ETFs) and fractional shares that they already own.
Photo credit: iStock/Delmaine Donson
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
1 SoFi will assess a fee for each crypto transaction outside of automatic direct deposit purchases. For more information, visit sofi.com/invest/buy-cryptocurrency.
You need both a SoFi Invest crypto account and a SoFi Invest active investing account to get access to no-fee crypto purchases with direct deposit. Active investing and brokerage services are provided by SoFi Securities LLC, Member FINRA/SIPC. Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
2 Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on June 30th, 2022. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
|First Trade Amount||Bonus Payout|