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Crypto earn account vs traditional bank account: What are the similarities and differences?

10 min read

In uncertain markets, investors often want to feel more secure about their income and keep money aside for a rainy day in savings accounts.

However, it is not an easy time for saving. Soaring global inflation is eating away at the value of money. In the UK inflation reached a 41-year high of 11.1% in October 2022, while in the Eurozone it has surpassed 10%. At times of high inflation, the interest rates available on a traditional bank current account makes this an unattractive proposition.

Savers might think they will be incentivized to place money in savings accounts by the increasingly high interest rates, which are being introduced by central banks to tackle inflation, as those rates tend to be used as a guide by banks when setting the rates on their current accounts.

However, many traditional savings accounts still pay far less than the headline inflation rate, so both individuals and corporations are under more pressure than ever to find alternative sources of income.

Crypto interest bearing accounts are an alternative option for those looking to earn passive income. A crypto earn account, like those offered by a digital wealth platform such as Yield App, allows customers to earn interest on their digital assets.

Please note, however, that digital assets are subject to market risks and are not covered by the same protections as traditional bank savings accounts.

How do crypto earn accounts work?

These accounts work in a similar fashion to bank accounts. Savers deposit the supported assets into an account offered by a crypto lending platform or crypto earn platform and earn interest (an annual percentage yield or APY) on these assets.

Unlike a bank account, however, APYs are often paid on a daily or weekly basis (rather than monthly, for example). Crypto earn accounts also tend to pay higher yields compared to traditional savings accounts and allow users to earn compound interest on their crypto assets.

Like with regular savings accounts you can withdraw assets from a crypto interest account, but rules depend on the type of account and platform. Companies often offer flexible or fixed-term accounts.

Flexible vs fixed-term crypto accounts

Flexible accounts

Flexible accounts allow you to add or withdraw your crypto assets anytime. However, you might receive a lower interest rate if you want instant access to your crypto. Some cryptocurrency exchanges set a free withdrawal limit for their accounts, so you could pay a fee thereafter.

Fixed accounts

Fixed accounts tend to lock in your funds for a period of time. As a result, they often offer more appealing interest rates. After the lock-up period ends, you can either redeem your funds plus the interest accrued, or continue to reinvest for additional fixed-interest cycles.

Some crypto earn accounts have longer redemption periods. This means you can deposit your crypto assets any time, but if you want to redeem them you will have to wait for a certain period of time after requesting a redemption.

Yield App, for example, offers two different types of interest bearing portfolios. The Flexible portfolios for ETH, USDT, USDC, DAI and TUSD allow instant access to assets.

The Earn+ products, which are available for all the same assets as well as Bitcoin (BTC), have a 30-day redemption period and pay a higher annual interest rate.

READ: Is Bitcoin the equivalent of digital gold?

It is a personal decision for each customer which option fits into their passive income strategy.

At Yield App it is possible to combine both strategies within one cryptocurrency portfolio based on the proportion of your digital assets to which you require instant access.

Crypto earn accounts vs bank accounts

There are also some crucial differences between crypto interest bearing accounts and bank savings accounts.

Importantly, crypto accounts offer more favorable rates than those offered by banks and will also offer an additional incentive if the funds are locked up for longer.

For example, you could earn up to 9% annual percentage yield (APY) on a crypto earn account (as of December 2022), compared to 0.85% on a regular savings account in the UK.

READ: DeFi - Where Does All the Money Go?

Take a simple example. If you place an initial deposit of $500 in an account, in one year the crypto earn account will pay $45 on your cryptocurrency holdings, while the standard bank deposits would only pay $4.25.

Through the power of compound interest, this adds up significantly over time and helps customers generate passive income.

As mentioned above, interest rates on crypto earn accounts are paid out daily or weekly, while banks tend to pay their interest out on a monthly basis.

Key risks and how to avoid them

However, it is important to note the associated risk with cryptocurrency, and especially with crypto lending platforms.

Cryptocurrency is still a nascent technology. As such, the industry remains unregulated and does not provide consumer protections common to most financial services in the traditional finance world. Therefore, cryptocurrency accounts are not protected or insured like a bank holding would be.

READ: How to keep your digital assets secure

The lack of insurance means you need to choose a crypto platform that you trust and one that can demonstrate a lack of exposure to higher risk counterparties or yield generation strategies, including lending assets to generate income.

If the platform has a liquidity mismatch, becomes insolvent or gets shut down then some or all of your assets may not be returned.

During the 2022 crypto downturn, many crypto platforms were caught out due to high risk crypto lending practices.

READ: FTX collapse: Implications for the crypto industry

Yield App never lends out customer assets and follows a stringent risk management and diversification strategy to protect client capital.

Cryptocurrency options

For those that are interested in allocating funds into a crypto earn account, they can choose which digital currency they would like to hold.

All the most popular cryptocurrencies can be used in these interest bearing portfolios, including Bitcoin (BTC), Ether (ETH), and stablecoins. Customers choose from the supported coins and accept the associated crypto interest rates.

Stablecoin benefits explained

Stablecoins are often considered particularly attractive as an alternative to traditional savings accounts because they are pegged to fiat assets.

As such, they allow holders to remain in the crypto ecosystem, without being exposed to volatile coins like Bitcoin and Ether, whose prices fluctuate with the crypto market.

For example, the two largest stablecoins by market cap, USD Tether (USDT) and USD Coin (USDC) are pegged 1-to-1 to the value of the US dollar.

READ: How to live off the interest from your stablecoins (yield.app)

These two coins are able to maintain their peg to the dollar by backing the issued tokens with assets like commodities, fiat currencies, treasuries, or similar high-credit-grade assets stored in a bank.

There are several types of stablecoins that differ in their mechanism for maintaining the peg to the underlying asset. You can find out more about this in our detailed blog on how stablecoin pegs work.

The main distinction between different types of stablecoins is in the assets that are used as collateral to create the peg, as well as whether the stablecoin is considered centralized or decentralized.

How to pick a crypto platform

As highlighted earlier, not all crypto platforms, like not all banks, are created equal. It is therefore important for participants to conduct their own research and shop around.

Of critical importance is the risk and governance standards of a crypto platform. In other words, how do they operate their business model?

Yield App, for instance, only offers BTC, ETH, and stablecoins because of its careful due diligence policy and liquidity management.

READ: How does Yield App conduct its due diligence?

Its proprietary risk management framework allowed Yield App to avoid exposure to some of the material issues faced by market participants earlier in 2022 such as UST/Luna.

Another difference is the rates on offer and the choice of assets. It is important to keep an eye out for offers that seem too good to be true, as they often might be. You can learn more about how to spot these from this presentation by Yield App’s CIO, Lucas Kiely.

Off-ramping crypto holdings

Another consideration for crypto investors and holders is how easy it is to input and extract their fiat money from a crypto earn account.

Currently, there is limited infrastructure to let people spend their digital assets in the real world, so being able to quickly and easily transfer crypto assets from and into a traditional bank account is crucial.

In the world of digital assets, this is called on-ramping and off-ramping - bringing your fiat currency into the crypto-sphere and taking them out again into the fiat world.

READ: How to get cryptocurrency from DeFi into the real world

To get money out of your cryptocurrency wallet and into the real world you would typically have to use a crypto exchange. The largest gateways for your crypto assets into the real world are centralized exchanges.

Yield App is currently developing an on-and off-ramp solution for EUR, USD and GBP, which will be launched soon. This will allow customers to quickly, seamlessly and cost-effectively buy and sell crypto via a bank account transfer.

Difference between crypto earn accounts and crypto wallets

It is important to note that a cryptocurrency earn account is fundamentally different from a crypto wallet.

A crypto wallet is a way to store your crypto assets, this can be self custody (your wallet and private keys) or custodial, which is also secured by a private key, but similar to a bank savings account it is secured and managed by a third party on your behalf.

To find out more about cryptocurrency wallets and for tips on how to choose the best one for your needs, click on the link below.

READ: The best cryptocurrency wallets for DeFi

Bottom line

In the current turbulent market conditions coupled with high inflation, opportunities to earn real interest (rates adjusted to inflation) are limited.

A crypto earn account provider can offer an attractive alternative to traditional capital-guaranteed products offered by banks and financial institutions in a high-inflation environment.

Don’t forget, though, that there are risks involved in crypto. It is critical to pick a platform carefully as crypto interest bearing accounts lack insurance and come with some security risks. However, earning interest through the best crypto earn accounts can be a useful addition to a diversified portfolio.

Passive income strategies, such as those offered by Yield App, could be a suitable choice for those who don't have the time or expertise to trade but want to earn money on their crypto in all market conditions.

Do you want to earn a secure and sustainable yield on your digital assets? Sign up for a Yield App account today!

DISCLAIMER: The content of this article does not constitute financial advice and is for informational purposes only. The price of digital assets can go down as well as up, and you may lose all of your capital. Investors should consult a professional advisor before making any investment decisions.


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