Cryptocurrency investors can leverage deposit accounts as a means of generating returns in the form of interest payments. By harnessing this strategy, they can earn money on their digital currency holdings. However, this approach has its costs and potential benefits like any other.
This article will provide key information surrounding deposit accounts, as well as their perks and drawbacks.
Benefits Of Crypto Deposit Accounts
Cryptocurrency deposit accounts can offer attractive interest rates to investors by providing them with an opportunity to generate appealing returns.
The BlockFi Interest Account (BIA), provided by fintech startup BlockFi, pays up to 6.2% per year.
Uphold, another startup in the digital currency space, offers account holders up to 10% per year on their cryptocurrency holdings.
These rates are quite generous compared to those offered by more traditional interest-bearing accounts. The 50 largest regional banks paid 0.05% per year at the time of this writing (March 2019), and some of the biggest-name banks such as JPMorgan Chase & Co. and Citigroup Inc. paid even less.
Drawbacks Of Crypto Deposit Accounts
The aforementioned rates are appealing, but BlockFi's rates are not guaranteed. More specifically, BlockFi says the following in its Membership Terms: "We will determine the interest rate for each month in our sole discretion," adding that account holders "acknowledge that such rate may not be equivalent to benchmark interest rates observed in the market for bank deposit accounts."
Shortly after announcing that it was offering account holders annualised rates of up to 6.2%, BlockFi revealed that it was placing limitations on its prior advertised rates. As of 1 April, 2019, it would only pay advertised rates of up to 6.2% on balances up to and including 25 Bitcoin or 500 Ether. Any balances above that would earn 2% per year.
Further, accounts offered by BlockFi and Uphold are not covered by insurance schemes like the Federal Deposit Insurance Corporation (FDIC). Uphold states in its member agreements for U.S. residents that "Balances are not insured by the Federal Deposit Insurance Corporation, the Financial Services Compensation Scheme, or any other entity or insurance scheme, whether governmental or private." The agreements for other jurisdictions provide the same disclaimer.
BlockFi provides similar language, stating in its Terms of Service that "Your Crypto Interest Account is not a checking or savings account, and it is not covered by insurance against losses."
The accounts offered by BlockFi and Uphold also have deposit restrictions.
BlockFi has a minimum deposit amount of either one Bitcoin or 25 Ether.
Uphold has different guidelines, providing minimum and maximum amounts that customers can transfer into their accounts when making transfers from bank accounts and debit/credit cards.
Investors should keep in mind that alternative strategies can potentially generate far higher returns. Active trading, for example, can create compelling returns. However, risk is inherent to investment, so any individuals interested in such strategies should remember the potential downside involved.
While crypto deposit accounts can provide compelling interest rates, they also come with their drawbacks. These accounts are not covered by insurance schemes, so they don't offer the same protections as bank accounts. Further, some of their rates are not guaranteed.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…