How to Earn Interest on Crypto – Forbes Advisor

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A common criticism of cryptocurrency as an investment vehicle is that it offers no cash or dividend income. But the criticisms are not entirely true: Crypto staking and lending offer investors ways to monetize 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 or deposit crypto into an interest-bearing account on a crypto lending platform.

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Borrowing and investing in cryptos can offer higher returns than US Treasury bonds or high-yield savings accounts. This interest can accumulate over time and provide passive income for crypto investors.

Nevertheless, crypto investing also carries unique risks that can make it unappealing to the typical income investor.

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, such as 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 and expected later this year. Ethereum investors can already stake their ETH holdings depending on the cryptocurrency exchange.

Coins wagered are locked up and pledged in the cryptocurrency protocol. In return, entities that stake crypto are allowed to become validators and set up a so-called validation node.

The protocol then chooses validators to confirm transaction blocks between eligible nodes. Each time a new transaction block 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 bet crypto, your node is used to validate transactions and get paid to validate them,” said Josh Emison, CEO and co-founder of Sansbank.

“The more crypto wagered, the more transactions you have 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 loans.

To borrow crypto, investors need to find a cryptocurrency exchange or decentralized financial (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 on coins that are locked for a period of time, similar to traditional certificates of deposit (CDs).

Where can you earn interest in crypto?

Investors can wager crypto through a crypto exchange or their crypto wallets. The returns that investors can expect from their cryptocurrency staked depend on the crypto they stake and the platform they use.

Gemini, KuCoin, Kraken, and Coinbase (COIN) are some of the most popular crypto exchanges for staking.

For example, Coinbase currently advertises an annual percentage return (APY) of up to 5.75% for cryptocurrency wagering, including 3.675% for Ethereum and 2.6% for Cardano.

Crypto investors also have several choices for earning interest on crypto loans, although the market is somewhat chaotic for crypto lending platforms at the moment.

Under current interest rates, investors can currently earn up to 14.5% APY on their Crypto Earn accounts, including 6% APY on Bitcoin (BTC) and Ethereum (ETH).

Unfortunately, popular crypto lending platforms such as Voyager Digital, BlockFi, and Celsius have recently been forced to freeze client assets as they face liquidity issues related to the recent crypto winter.

Some of the latest implosions include Voyager Digital, which recently filed for Chapter 11 bankruptcy protection, and BlockFi, which sits in the top spot after a major customer failed to answer a margin call for an oversized loan.

Advantages and disadvantages of earning interest in crypto

There are pros and cons to earning interest on cryptocurrency holdings.

The interest rates for crypto staking and crypto loans are usually much higher than the interest rates on US Treasury bonds or high-yield savings accounts. They are even higher than the dividend yield of most US stocks.

For investors who have already established that they hold a cryptocurrency for the long term, staking or lending can be an attractive source of passive income. In addition, interest rates grow over time, increasing the crypto’s potential profit potential 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 money from account holders.

In contrast, the Federal Deposit Insurance Corporation (FDIC) generally insures up to $250,000 per account for savings and CDs per member bank. Similarly, US Treasury yields are backed by the US government and will be paid out as long as the US remains solvent.

Not only is cryptocurrency not insured by the FDIC, but the crypto market is also extremely unregulated. US Securities and Exchange Commission chairman Gary Gensler recently stated in March that many crypto exchanges “may be operating outside the law”.

In addition, the cryptocurrency markets themselves are extremely volatile, which comes with its own risks. Even cryptocurrency investors earning 10% or 15% interest are still extremely underwater with their investments this year. For example, Bitcoin prices are down 56% so far while Ethereum prices are down 67%.

Modulus Global CEO Richard Gardner said the risks associated with crypto lending go far beyond the volatility of the cryptocurrency market.

“Instead, the overarching problem is that you don’t really know what your lender is investing in because the regulatory system right now is such that there are no hard and fast rules for disclosures,” Gardner says.

Gardner says the high interest rates offered by crypto lending platforms could point to the risks these platforms are taking with their loans.

“Once you lend money to someone else’s investment, and if they fail, they can’t pay you back,” Garner says. He noted that the drop in Celsius is a good example of this kind of mismanagement of risk.

Is staking safer than crypto loans?

Dan Ashmore, cryptocurrency data analyst at CoinJournal, says many cryptocurrency lenders have behaved more like risky 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,” Ashmore says.

Ashmore says crypto loans may not be the best choice for investors with a 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 as a whole (not to mention each investor will have their own risk tolerance, financial situation and investment goals), cessation is widely regarded as a safer investment option,” he says.

Earning interest in crypto can be an attractive option for long-term cryptocurrency investors with a high risk tolerance. But the turmoil in crypto markets in 2022, especially among crypto lenders, shows that crypto interest income is far from a safe bet.

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