Why Crypto Accounts Could Be The New Savings Accounts

I’ll be honest, I never really focused on the growing industry of crypto until recently. The crypto market is ever evolving, but in the last few years, it really has boomed. I’ve come across so many more crypto enthusiasts lately, and one thing I find is that they are always looking for more and more ways to make their crypto work even harder!

A method brought to my attention most recently is crypto earn accounts, or what I refer to as crypto savings accounts in this article. These are basically accounts that are created to hold the crypto investments that you make. My interested self soon found out that the first rule here is to understand that these aren’t savings accounts in the more traditional sense, for example there is no protection of the Financial Services Compensation Scheme (FSCS).

However, people are becoming frustrated that regular savings accounts offer minimal returns, which has lead to why people are turning to investing in digital currency as an alternative. People can earn the highest rates of interest on crypto instead of relying on traditional bank savings account, and this article aims to bring some learnings on this growing trend.

While crypto accounts promise a high return, which makes them an intriguing choice, there’s always a slight degree of risk attached. The more knowledge you have around crypto will make you better equipped in this area, and should allow you to decide if the rewards of this newer type of ‘account’ outweigh the risks.

What are crypto savings accounts?

You will hear it being referred to as Crypto “earn” products or “crypto savings accounts”, and they are basically what they sound like. They are accounts to use to potentially earn a return on your crypto assets. In some ways they do work in a similar way to the traditional savings account because when you deposit money into a traditional savings account, you are allowing the bank to loan out your money to third parties, and ‘look after’ your funds. In exchange for this, you usually receive a set percentage back – like interest.

When you own a crypto savings account, the account provider will loan out your cryptocurrency to borrowers and then provide you with a return in exchange. This is most attractive part as the rates of return advertised by crypto savings providers can be very impressive! Some of them offer up to 15%, which is unheard off with tradional banks.

However, there are some important differences to understand about how crypto savings accounts work worth being aware of.

Are crypto savings accounts safe?

The biggest difference is the safety aspect, and it all depends on what type of person you are and how you feel about it. Traditional bank saving accounts are covered by the FSCS, which always give you security. This is where crypto exchanges ‘accounts’ are not. The risk is that your crypto funds are unprotected. This means that if the exchange that holds your crypto goes bust, there is no surefire way to recover your funds.

Something a lot of crypto savings accounts are doing now is setting up insurance, so do have a look into this. You may find that some of the larger crypto platforms can partner up with third-party insurers, and then offer a level of protection in the form of insurance. Others offer a cryptocurrency token as its store of value, which can be used to make up for lost funds under specific circumstances. If you do look into the insurance route, read the small print and be comfortable with what it does and does not offer.

What are the main risks?

There are a number of risks associated with crypto when you consider looking at earn accounts. It’s important to understand them before committing any funds to this type of account.

Let’s take a look:

• FSCS protection. As mentioned, there is no default insurance scheme in place to protect your crypto savings. This means without FSCS protection you are very vulnerable with your earnings. Despite the popularity, the UK doesn’t officially recognise cryptocurrencies as a financial product, and so treats them more like an asset.
• Access. Crypto savings accounts tend to limit access to your coins for a set period of time once you’ve made your deposit. You can risk losing access to your keys during this time as your crypto is lent out to other users who can then use it.
• Volatile. The cryptocurrency market is notoriously volatile, where you can expect price swings everywhere. Most of your crypto savings account value will be determined by these price swings rather than a set rate of return.
• Default risk. It’s all a lending process, therefore your crypto assets are being lent out to another user. This makes it common to be riskier as the borrower may not be able to pay back the loan. It’s important to understand what measures your exchange will take if borrowers do default on their loans.
• Extinct coins. There are more than 13,000 cryptocurrencies available, and it’s unlikely all of them will go up in value or remain in circulation. Keep this in mind when choosing which cryptocurrency to use.

Crypto savings accounts vs traditional savings accounts

Overall, there are key differences between the both. It is obvious from a distance that crypto is very lucrative – some massive amounts of earnings can be made. Crypto savings accounts may look similar to the traditional savings accounts, and in some ways they are, but there are some very key differences.

1. Crypto exchanges may advertise that you can earn “interest” on your crypto deposit. It’s important to understand that this is more “yield” than “interest”. While traditional savings accounts will pay you a set amount of interest, the rate you earn with a crypto savings account depends on the coin or the token’s value.
2. You don’t really earn compound interest with the returns you receive on your crypto savings account. Instead, you only receive a yield on the principal balance that you deposit in the account.
3. There’s no default safety net (such as the Financial Services Compensation Scheme).
4. You’ll most likely find that crypto savings accounts have restrictions on accessing your funds. While a traditional savings account – especially an easy access account – will allow you to access your money whenever you like, a crypto savings account may limit your access or charge a fee for withdrawing your funds before a select date.