Are Cryptocurrency-Backed Savings Accounts Safe?

What Are Cryptocurrency-Backed Savings Accounts?

For the most part, these cryptocurrency-backed savings accounts function similarly to traditional savings accounts. You deposit your funds in the account, and the institution lends it to investors. In exchange, you earn interest on your balance. In this case, however, the funds in question are cryptocurrency such as Bitcoin, Ethereum or Litecoin instead of U.S. dollars.

Compared with high-yield savings accounts, the rates of return are impressive. Some cryptocurrency exchanges offer up to 10% or even more. In contrast, you may get roughly 0.50% APY with a high-yield savings account as of May 2021.

The APY will typically vary, depending on the type of cryptocurrency you have and the platform you're using. How the interest is paid can also depend on the platform. With BlockFi, for instance, interest accrues daily and is paid out monthly in the same form of cryptocurrency. In contrast, Gemini compounds and pays interest on a daily basis. Crypto.com offers non-compounding interest that's paid out annually in USD Coin, a "stablecoin" that always has a value equal to that of the U.S. dollar.

What Are the Risks and Drawbacks of These Accounts?

The chance to earn APYs that even outpace the long-term average stock market returns can be incredibly appealing. However, it's important to understand the potential issues you may run into with crypto-backed savings accounts:

• Volatile values: While you can earn a good interest rate on most platforms, the cryptocurrencies themselves can be extremely volatile with their prices. This can be an issue if your interest is paid out in a form of cryptocurrency that sees its value diminish. You can mitigate some of this risk by investing with stablecoins like USD Coin.
• No insurance: Unlike a traditional bank account, these accounts don't offer FDIC insurance. This means that if the company fails, you may lose all of your money.
• Liquidity issues: Some cryptocurrency-backed savings account providers require you to lock in your account balance for a specific amount of time. This means that if the price of your cryptocurrency starts tanking, you may be stuck holding on to it for longer than you want to.

Should You Save Your Money in a Cryptocurrency Savings Account?

There's no clear-cut answer to whether it's a good idea to use one of these accounts. If you're a cryptocurrency enthusiast and plan to hold on to your currency for the long haul—cryptocurrency traders often use the term HODL for this approach, or "hold on for dear life"—you may not be concerned about volatility and liquidity issues.

And if you're using a well-established cryptocurrency trading platform, you may not worry much about the lack of FDIC insurance. In fact, using one of these accounts could be a good way to diversify your savings beyond traditional savings accounts.

But if you're new to cryptocurrency and aren't quite sure how you want to approach it, all of those drawbacks and the amount there is to learn may be too great to ignore.

Before you apply for a cryptocurrency-backed savings account, it's crucial to understand what you're getting yourself into. While many cryptocurrencies have seen their values grow exponentially in 2021, it's still possible to lose most or all of your cryptocurrency savings.

In general, though, it's best to avoid using one of these accounts for short-term savings needs. For example, it's best to use a high-yield savings account for your emergency fund or a home down payment fund since it'll be more accessible and its value more predictable—even if its returns will pale in comparison.

If you're considering one of these accounts, here are some of the top options available and their returns:

Note: Advertised APYs as of May 2021

Keep in mind that the best interest rates are typically reserved for stablecoins, which don't provide much potential upside in currency value over time beyond the return from the savings account platform. But you can still get solid APYs on traditional cryptocurrencies that can grow in value on their own.

Is Cryptocurrency Right for You?

If you're thinking about getting a cryptocurrency-backed savings account, you may already have experience with the asset. But if you're inexperienced and simply intrigued by the returns these accounts can offer, it's important to consider whether cryptocurrency is right for you at all.

As previously mentioned, these assets can be extremely volatile, and it can be tough to stomach the price fluctuations. It's also more complicated to buy, sell and store cryptocurrency than cash. You'll need to open a cryptocurrency wallet, which uses complex passwords to keep your assets safe.

It's absolutely crucial that you keep your wallet password in a safe place where it can't be lost. If you forget it, you're out of luck—like the German man who has 7,002 Bitcoin (worth nearly $400 million as of this writing) stored on an external hard drive but can't access it.

Then you'll need to sign up for a cryptocurrency platform, where you can buy and sell various cryptocurrencies. It's also possible to earn cryptocurrency by "mining" it, which involves using computer equipment to solve complicated math equations.

Cryptocurrency holders are also susceptible to scams, which promise huge gains or free money if you send them some cryptocurrency. Never pay someone in cryptocurrency unless you're willing to trust them, and stick to the main cryptocurrency exchanges for buying and selling. You'll also need to be aware of how to handle capital gains from cryptocurrencies on your tax return.

If you're still on the fence, consider using a small portion of your savings to buy some cryptocurrency to test the waters, preferably an amount that you can afford to lose if things go south. Also, plan to spend some time researching and learning about cryptocurrencies so you can be more confident about your decision.