Crypto savings accounts are among the many defi options with roots in traditional banking that you will encounter the longer you are active as a cryptocurrency buyer.
A crypto savings account is not a federally-protected banking option but rather an unregulated option offered by individual platforms or exchanges that pay interest or rewards on the cryptocurrency you deposit into the account just like an IRL account.
What do you need to know as a beginner to make the most out of a crypto savings account?
The first thing to know as a beginner to crypto is that in spite of many third parties aligning their businesses to mimic traditional investing and savings options, with unregulated crypto savings accounts you have no protection whatsoever against theft, fraud, loss of savings, or loss of assets purchased with crypto.
Crypto savings accounts are not protected by the Federal Deposit Insurance Corporation against loss up to $250,000 per depositor the way typical savings accounts are, and there is no regulation on fees, surcharges, or other costs you may have to pay.
Does it sound like we are trying to discourage you from opening a crypto savings account? That’s not our intent, but it is important to make a truly informed decision about which financial services to use.
Knowing the risks makes you a more informed consumer and helps inform your choices about what to invest or save, and where.
When you start comparing crypto savings account features, one of the first things you will notice is how high some of the interest rates can be compared to an FDIC-insured traditional bank account. Not all rates are sky-high, but enough of them are at any one time to make some think seriously about opening an account.
With that in mind, it’s easy to forget that a high interest rate on a new, unknown, or unpopular coin won’t do much good if you can’t sell those coins for a profit later.
Put another way, if you own a coin that hasn’t got much popular support and a low floor price on top of that, earning 90% interest on that coin doesn’t amount to much. If nobody wants to buy your virtual currency, the amount you own is fairly unimportant.
Yes, you could buy and hold that unknown currency until it finally does gain some traction in the marketplace, but the odds of that will depend greatly on a number of variables you may not be able to control or predict.
A high interest rate on Bitcoin, on the other hand, would certainly be worth a look even if you decided not to commit in the end. But what happens when you are ready to cash out some of your savings?
Some accounts don’t let you withdraw or convert crypto without limits. For example, you may be able to deposit Bitcoin into a savings account without limit, but you could be restricted to a weekly withdrawal or to a specific withdrawal limit specified by the company.
If you were hoping to deposit and withdraw your funds in a manner similar to real-world savings accounts, be sure to read the fine print. You will likely find some restrictions on how much you can withdraw when you can do so, and over how long a period of time you are allowed to withdraw.
Why these limits? If your first thought was about greed and profits, you may have overlooked the fact that crypto companies may choose to “stake” some of the crypto in these savings accounts. They may do so to add liquidity to the marketplace, add stability to the operation, or for many other reasons.
The bottom line here is that you will need to ask specifically how much you can withdraw, whether there are any limits to those withdrawals and what fees might be associated with doing so. Fees might be applied as a way to discourage you from taking out too much of your savings at once and hurting the company’s staking options by doing so.
Some exchanges incentivize long-term savers by paying them more to save their crypto longer. And depending on the nature of the savings account you may be offered more competitive rates for buying and saving an exchange’s native currency.
The same rules above apply here; if you buy into an exchange’s currency but that coin doesn’t have a lot of pull in the marketplace, are you just earning more…nothing on top of it?
The benefits of putting your coins into a long-term savings option are obvious when it makes sense to do so; you can rack up serious interest rates and later sell and move on. But while your crypto is locked in a long-term savings account, what happens if it suddenly loses value and conditions appear ripe for things to remain that way?
You may not be able to liquidate your crypto as quickly as you might prefer.
Depending on the exchange, the type of crypto, and other variables, you may be subject to withdrawal fees when removing money from a crypto savings account. It will be important to review the fine print to make sure you know exactly what the fees are.
In the same way you need to understand the terms and conditions of gas fees when conducting crypto transactions? You’ll want the same level of informed consent with savings account transactions, too.
It will also be crucial to ensure you know what the fee payment terms are–do you pay immediately, or can you do so over time? An installment plan isn’t something you read a lot about associated with Bitcoin, for example, but this is a young field with plenty of experimentation. You may find some entrepreneurs willing to try such an approach.
Do you pay in dollars, crypto, or foreign currency? In any of those cases, additional transaction fees could apply. Know your fees.
The moment crypto investments and options begin acting like traditional, highly regulated financial operations, the more interested the federal government becomes. Lest you assume that’s just “investor beware” hyperbole, consider that BlockFi was fined some $100 million for running afoul of federal law over the BlockFi Interest Account.
The charge in that case? Offering unregistered securities. The company had to cancel its offering and reconfigure any operations that violated the applicable federal laws.
The lesson here is that just because a name–and in this case, a big name in the space–offers a service, coin, or perk doesn’t mean they have fully vetted the concept or ran that idea through a legal department first.
Another major name in the crypto space, Coinbase, had its own regulatory trouble with a product called Lend. A press release associated with this Coinbase product stated, “Pre-enroll today to earn interest on USD Coin (USDC), with rates more than 50x the national average of a traditional savings account.”
Coinbase offered a guarantee on these accounts with the goal of letting customers watch their interest grow “in real-time” along with “monthly payouts, all with no fees or withdrawal limits”.
But the Securities and Exchange Commission (SEC) disagreed with the Coinbase assertion that Lend was not a security, investment contract, or loan instrument. The SEC launched a formal investigation which resulted in Coinbase ultimately withdrawing Lend from the public.
If you are a newcomer to cryptocurrency, one of these accounts may not be of much use to you until you understand the risks involved (no government deposit insurance and no guarantee against loss of funds) as well as the rewards (high interest rates on supported cryptocurrencies.)
Newcomers to crypto should know that no two of these account offerings may be alike, and you may need to read ALL the fine print to know what your actual rights may or may not be. There may be hidden fees, withdrawal fees, transaction fees, account opening or closing costs, and more.
Not knowing about these expenses will not save you from having to pay them if you open an account without knowing the full terms and conditions.
Remember that you may not be able to reclaim your funds in a crypto savings account the same way you can with an in-real-life account. Before you give any personal data or financial information to a third party like a crypto savings account platform, you should research the company. Look to see how long they have been in business (a year or less should be a warning sign) and what their online reputation might be.
Avoid any company that has known bad actors, scammers, or shady investors associated with it. Don’t invest money in response to high-pressure tactics, especially where incredible or too-good-to-be-true offers are made. High pressure combined with an appeal to your greed? Always a warning sign to respect.
And finally, there’s nothing wrong with starting small. You may find a savings account you like with reasonable fees and an easy-to-understand set of terms and conditions, but you don’t have to go all-in. You can experiment with making the minimum required deposit where applicable, then try out the service for a few months to see how you like it.
That is a way to try out a new option without too much risk; it helps if you can find information on the company’s performance and user feedback to see if others have had notable experiences with the service (good or bad).
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.