A Cryptocurrency bank account is becoming more of an ask as a product. Cryptocurrency is becoming the next new thing. Bitcoin, with a market cap of 990 billion dollars is leading the pack of cryptocurrency popularity. Most people that have a hand in cryptocurrency have held it strong. There is a saying among bitcoin enthusiasts ‘Hodl’ hold on for dear life, well that may not be any more. With the rise of cryptocurrency services from exchanges to tax services and now even platforms that enable you to earn on your cryptocurrency, Its now possible to boost your investment yield.“we stand today on the edge of a new frontier” - JFK
On platforms that are commonly referred to as cryptocurrency savings accounts or cryptocurrency bank accounts. Users can earn interest for lending out their assets. The term ‘cryptocurrency bank account’ is just an easier way to define the characteristics of the platform, It may be a great way to earn more on your assets and should be viewed as an investment. Since most people know that a savings account earns interest on the accounts holdings it’s easy to refer to services that give interest on cryptocurrency as a cryptocurrency savings account because simply put they earn interest on your cryptocurrency holdings. Though in reality there is no such thing as cryptocurrency bank account. That's why it’s important to know how cryptocurrency bank accounts function. For the sake of the content on this blog post, a cryptocurrency bank account is street slang for an account that pays me interest using cryptocurrency.
As the federal reserve lowers the interest rate it leaves people wondering how to get more returns on their holdings. That's where these new cryptocurrency bank accounts step in. Offering interest rates much more then the US federal reserve. Investors are putting their cryptocurrency into these types of cryptocurrency bank accounts. With rates as high as 8% APY or more people are wondering how it’s possible and if it’s sustainable. While we don't know how sustainable cryptocurrency banks accounts are we do know how they generate their returns as well as protect user funds.
Normally financial institutions within the United States have FDIC insurance to cover the funds under their control but digital assets such as bitcoin have yet to be covered under FDIC. That doesn't mean that there is no protection for progressive financial institutions that interact with digital assets.
Fireblocks for example an enterprise-grade platform that facilitates a secure infrastructure for digital assets. Enabling exchanges, custodians, banks, trading desks and hedge funds alike security while interacting with digital security's. In fact they have secured the transfer of over $9 billion in digital assets and have a unique insurance policy that covers assets in storage and in transit. Because of cryptocurrency insurance like Fireblocks, services such as interest yielding platforms in the cryptocurrency sector can offer protection to their clients. Insuring that their funds are being handled securely and with care.
In this new age of digital money, cryptocurrency bank accounts are starting to take off. But where do they get the money to provide these rates of returns. Such attractive high rates of interest can be achieved because cryptocurrency banks often don't have brick and mortar locations that drive up the operational costs. Lastly cryptocurrency bank accounts work in some of the same fashion as normal bank accounts. When a user lends money to an institution the institution may lend your assets to borrowers in need of liquidity. As the borrower pays back the loan to the institution lenders receive their interest. Essentially the supply and demand of cryptocurrency financing dictates the interest rate.
These cryptocurrency loans can be more risky then normal loans because cryptocurrency loans are leveraged against cryptocurrency that is more volatile then fiat currencies. In hopes to remedy these leverage issues most loan providers ask for an amount to over-collateralize the loan to help protect against users defaulting on the loan. In some cases providers ask for a ‘loan-value’ ratio of 50% meaning that if the borrower wants $1000 they'll need to deposit $2000 worth of value in what ever assets that loan provider accepts. So that in the event that the loan becomes undercollateralized there are funds to liquidate to cover the cost of the defaulting loan. This adds another layer of protection to the lenders assets.
Commonly when you have a bank account you receive your interest in the same currency you deposit, like when you deposit USD into a savings account your interest is pay out in USD. The same is not true for all cryptocurrency bank accounts. While some cryptocurrency bank accounts are payed out in-kind for example your bitcoin deposit will earn interest and be paying out in Bitcoin. Other cryptocurrency bank accounts may pay your interest out in your native currency.
On the other hand some cryptocurrency bank accounts may pay simple interest while others compound the interest you have earned, Helping you earn even more money on your account. Some cryptocurrency accounts payout biweekly while others payout monthly. Interest rates on some platforms may not be guaranteed but historically has proven to be relatively stable and trust worthy. Its good to be aware of how a cryptocurrency bank chooses to payout their interest to better utilize your assets
It’s frustrating when access to your funds takes a long time but have you thought about how many times you can transfer your funds? Normally when dealing with banks there is a limit of how many times you can have an electronic transfer. But that usually that doesn't apply when you go to a branch location and talk to a teller. Nonetheless when using cryptocurrency bank accounts most of them forgo the limit of how many times you can deposit or withdraw from your account, giving you better control over how you can access your assets. While this may be true some accounts while they don't limit the number for transactions per month they may require a minimum amount to withdraw. While this may be a deal breaker for some others may not see it as an issue, its good to reflect personally on how you plan to use an cryptocurrency bank account and whether how you plan to access and use your assets is feasible while the cryptocurrency bank account you may be interested in opening.
The bottom line is that while cryptocurrency banks are not FDIC insured, they can still be insured to some extent. While cryptocurrency markets are risky and volatile, cryptocurrency loans can be over-collateralized to protect against defaults. The opportunity may still be available to get a high yield on your investment but with the high yield of a cryptocurrency bank account also comes the high volatility market of cryptocurrencies. You must weigh your know risk and balance the pros and cons of cryptocurrency bank accounts. You may ask yourself is it important to have your interest payed out in-kind? As to increase your cryptocurrency holdings or would you rather try to avoid some of the volatility of the cryptomarket and keep your interest earned in your native currency? There are many options and possibility's out there when it comes to picking a cryptocurrency bank account.
Now that the basics of how a cryptocurrency bank account and a traditional bank account compare to each other and what the differences there may be. It should be clearer for you to better assess your own situation but its good to seek the advice of a trained professional for financial advice.
As time goes on it is clear that using a normal cryptocurrency account or wallet as a bank account can be a problem. In particular when you are falling to single platform risk. Single platform risk is a huge that you can avoid by using a crypto product that is aimed at replacing your bank account, and protects you against this risk.
Risk is something that can be managed through a service, or by doing it yourself. Outlet is what we recommend as a cryptocurrency bank account. There are plenty of ways to manage your risk and different strategies involved in doing so. Some great strategies you can follow yourself are the follow:- Just use Outlet. Outlet manages the risk side for you.
- You can use a combination of 3 or more lending platforms yourself. The problem with using the lending protocols and platforms yourself is that its not simple, and you have to actively manage the risk involved in each of the ledning protocols or services you are using to replace your bank account.