Crypto Alternatives for Everyday Savings Tools

 Remember when interest rates used to be high?  Gone are the days of earning ten percent or more on a short-term certificate of deposit.  Savers have long been high and dry when it comes to profitable places to stash their cash, while interest rates have been at rock bottom for years and other investments were too risky to keep savings in.  Crypto, however, offers a solution. As the market has matured, new products that mirror traditional offerings have come into play, backed by reputable institutions in stable and reliable forms. 

Earning interest on crypto

In crypto, “lending” refers to essentially the same process as depositing money into a certificate of deposit or savings account.  You place your assets in an account, either at an exchange or into a specific wallet, and earn interest as long as those assets stay in the account.  The term lending is used because the assets you deposit are used by the provider to make loans, just like banks do with customer funds. Some companies offer terms of specific duration (like a CD) and others are flexible, allowing you to withdraw your money at any time.  

What kind of assets can you earn interest on?

The type of asset you lend is up to you.  Many services allow you to earn interest on Bitcoin or other cryptocurrencies, but for this article we’ll focus on what are called stablecoins.  Backed by the US dollar (or other national currency) at a ratio of one to one, stablecoins do not fluctuate in value, hence their name.  This makes them ideal for lending, as they have the potential to earn significant interest without volatility or downside risk, just like traditional savings accounts and other products used to be.  

How do you acquire stablecoins?

When you create an account with a provider, you have the option to link and transfer USD from your bank account.  (You may also have the option to use a debit card, though it’s not preferable as it comes with fees that will that eat away at your interest earnings.)  Deposited funds can then be converted into digital dollars, such as USD Coin (USDC) or Gemini Dollars (GUSD), that will then begin earning interest.

What kind of rates are available?

The rate of interest you can earn will depend on the provider you choose.  BlockFi, for example, offers compounded interest rates on Gemini Dollars of up to 8.6% per year.  Other services, such as Coinbase, offer a significantly lower rate at 1.25% per year – though it still blows current bank savings rates, which stand at about a tenth of a percent, out of the water.  While these two are the most well-known providers in the US, companies like Compound, dYdX, and others are springing up to serve customers across the globe.   

Are there risks associated with lending crypto?

You need to be aware that digital assets deposited with fiduciaries like Coinbase and BlockFi are not FDIC insured, because they do not fall under the current definition of US legal tender.  That said, these companies are regulated and licensed by the US government to operate as financial custodians. BlockFi, for example, stores customer assets with Gemini, a US exchange licensed by the New York State Department of Financial Services, and therefore subject to certain reserve requirements and other banking standards under New York law.  Coinbase, North America’s largest crypto exchange, is licensed in every US district in which it operates, as well as over thirty other countries. In addition, these companies also hold a certain level of digital asset insurance, issued by a third party, in the event of a security breach.  

Lending crypto can be a great way to earn interest on extra cash that is similar to the savings tools of yore, when interest rates were a significant source of passive income over time.  While, with crypto, you need to be particularly aware of your own personal account security, more and more services are making it easier and safer to hold stablecoins in interest-bearing accounts.