How to Earn Interest on Crypto – Forbes Advisor
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A common criticism of cryptocurrency as an investment asset is that it offers no cash or dividend income. But the criticism is not entirely true: Crypto staking and lending offer investors ways to generate income from their crypto holdings.
Staking allows you to generate passive income on long-term crypto holdings. And in some cases, staking also helps support blockchain networks. You can also lend crypto or deposit it into an interest-bearing account on a crypto lending platform.
Crypto lending and staking can offer higher returns than US Treasuries or high-yield savings accounts. This interest can accumulate over time and provide passive income for crypto investors.
Nevertheless, crypto investing also comes with unique risks that could make it unappealing to the typical income investor.
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Earn interest on crypto with staking
Staking is a popular way to earn interest on crypto assets and also helps support the security of crypto blockchains that rely on a proof-of-stake consensus mechanism, like Cardano (ADA), Solana (SOL), and Polkadot. (DOWRY).
Ethereum (ETH) is also moving from a proof-of-work mechanism to a proof-of-consensus mechanism, an upgrade known as Ethereum 2.0 which is expected later this year. Ethereum investors can already stake their ETH holdings, depending on the cryptocurrency exchange.
Staked coins are locked up and pledged in the cryptocurrency protocol. In return, entities staking crypto are allowed to become validators and set up what is called a validating node.
The protocol then chooses validators to confirm blocks of transactions among eligible nodes. Each time a new block of transactions is verified and added to the blockchain, a small number of new cryptocurrency coins are created and distributed to that block’s validator as a reward.
“Once you stake crypto, your node will be used to validate transactions and get paid to validate them,” says Josh Emison, CEO and co-founder of Sansbank.
“The more crypto staked, the more transactions you are assigned to clear, and the more you get paid.”
Earn interest with the crypto loan
In addition to staking, crypto investors can earn interest through crypto lending.
To lend crypto, investors need to find a cryptocurrency exchange or decentralized finance (DeFi) app that offers a crypto interest account, similar to traditional savings accounts offered by banks.
Some loan accounts pay variable crypto interest rates, and some pay fixed crypto interest rates for coins locked for a specific length of time, similar to traditional certificates of deposit (CDs).
Where to Earn Interest in Crypto
Investors can stake crypto through a crypto exchange or their crypto wallets. The return investors can expect from their staked cryptocurrency varies depending on the crypto they are staking and the platform they are using.
Gemini, KuCoin, Kraken, and Coinbase (COIN) are some of the most popular crypto exchanges for staking.
For example, Coinbase currently advertises an annual percentage yield (APY) of up to 5.75% for cryptocurrency staking, including 3.675% for Ethereum and 2.6% for Cardano.
Crypto investors also have various choices for earning interest on crypto loans, although the market is somewhat chaotic for crypto lending platforms at the moment.
According to current Crypto.com interest rates, investors can earn up to 14.5% APY on their Crypto Earn accounts, including 6% APY on Bitcoin (BTC) and Ethereum (ETH), at this day.
Unfortunately, popular crypto lending platforms such as Voyager Digital, BlockFi, and Celsius have recently been forced to freeze client assets as they face liquidity crunches associated with the recent crypto winter.
Some of the latest implosions include Voyager Digital, which recently filed for Chapter 11 bankruptcy protection, and BlockFi, which is in the hot seat after a big customer failed to answer a call from margin on an oversized loan.
Advantages and disadvantages of earning interest in crypto
There are pros and cons to earning interest on cryptocurrency holdings.
Interest rates for crypto staking and crypto lending are usually much higher than interest rates on US Treasury bonds or high yield savings accounts. They are even higher than the dividend yields of most US stocks.
For investors who have already determined that they are holding a cryptocurrency for the long term, staking or lending can be an attractive source of passive income. Additionally, interest accrues over time, increasing the potential earning potential of the crypto if investors reinvest their interest.
The biggest downside to earning interest on crypto is the risk associated with staking and lending. This is partly because not all crypto exchanges or lending platforms insure account holder funds.
In contrast, the Federal Deposit Insurance Corporation (FDIC) generally insures up to $250,000 per account for savings accounts and CDs per member bank. Similarly, US Treasury yields are backed by the US government and will be paid as long as the US remains solvent.
Not only is cryptocurrency uninsured by the FDIC, but the crypto market is also extremely unregulated. U.S. Securities and Exchange Commission Chairman Gary Gensler recently stated in March that many crypto exchanges “potentially operate outside the law.”
Additionally, the cryptocurrency markets themselves are extremely volatile, which creates its own risks. Even cryptocurrency investors earning 10% or 15% interest rates are still extremely underwater on their investments this year. For example, Bitcoin prices are down 56% year-to-date, while Ethereum prices are down 67%.
Modulus Global CEO Richard Gardner said the risks associated with crypto lending extend far beyond the volatility of the cryptocurrency market.
“Instead, the overarching problem is that you don’t really know what your loan company is investing in, because the regulatory system is currently such that there are no hard and fast rules on disclosures,” says Gardner.
Gardner says the high interest rates offered by crypto lending platforms may indicate the risks these platforms take with their loans.
“Once you’ve lent money to someone else’s investment, if they fail, they can’t pay you back,” Garner says. He noted that the drop in Celsius is a prime example of this type of risk mismanagement.
Is staking safer than crypto lending?
Dan Ashmore, cryptocurrency data analyst at CoinJournal, says many crypto lenders have acted more like high-risk hedge funds than banks by gambling with their deposits.
“With the lack of regulation in the space, it is difficult to quantify the risks of lending your crypto through these third parties,” says Ashmore.
Ashmore says crypto lending may not be the best fit for investors with lower risk tolerance.
“The specifics of staking vary from blockchain to blockchain, so while it’s hard to generalize and say, which is better for investors overall (not to mention each investor will have their own risk tolerance, financial situation and investment goals), staking is generally considered a safer investment option,” he says.
Earning interest in crypto can be an attractive option for long-term cryptocurrency investors with high risk tolerance. But the 2022 turmoil in crypto markets, especially among crypto lenders, demonstrates that crypto interest income is far from a safe bet.