How to earn interest on crypto – Forbes Advisor

A common criticism of cryptocurrency as an investment asset is that it does not provide income from cash flow or dividends. But the criticism is not entirely true: crypto staking and lending provide investors with ways to generate income from their cryptocurrencies.

Staking allows you to generate passive income on long-term cryptocurrencies. And in some cases, staking also helps support blockchain networks. You can also lend crypto or deposit it in an interest-bearing account on a crypto-lending platform.

Lending and investing in crypto can yield higher returns than either the US Treasury or high-yield savings accounts. This interest can increase over time and provide passive income for crypto investors.

Nevertheless, crypto investment also comes with unique risks that may make it unattractive to the typical income investor.

Earn interest on crypto with effort

Staking is a popular way to earn interest on cryptocurrencies and also helps support the security of crypto-block chains that rely on a proof-of-stake consensus mechanism, such as Cardano (ADA), Solana (SOL) and Polkadot (DOT).

Ethereum (ETH) is also moving from a proof-of-work to a proof-of-consensus mechanism, an upgrade known as Ethereum 2.0 which is expected later this year. Ethereum investors can already bet their ETH holdings, depending on the cryptocurrency exchange platform.

Deposited coins are locked and pledged to the cryptocurrency protocol. In return, units that invest in crypto become validators and set up what is known as a validation node.

The protocol then selects validators to verify blocks of transactions among the qualified nodes. Each time a new block of transactions is verified and added to the blockchain, a small number of new cryptocurrencies are created and distributed to the block validator as a reward.

“When you invest in 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 efforts, the more transactions you are assigned to validate, and the more you get paid.”

Earn interest with cryptocurrencies

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 cryptocurrency account, similar to traditional savings accounts offered by banks.

Some lending accounts pay variable cryptocurrencies, and some pay fixed cryptocurrencies for coins that are unlocked for a certain period of time, similar to traditional certificates of deposit (CDs).

Where to earn interest in crypto

Investors can bet crypto through a crypto exchange or their crypto wallets. The return investors can expect from their invested cryptocurrency varies depending on which crypto they invest in and which platform they use.

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

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

Crypto investors also have different choices to earn interest on crypto lending, although the market is somewhat chaotic for crypto lending platforms at the moment.

Under 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), as of this writing.

Unfortunately, popular cryptocurrency lending platforms such as Voyager Digital, BlockFi and Celsius have recently been forced to freeze customers’ assets when dealing with liquidity crises related to the recent cryptocurrency winter.

Some of the latest implications include Voyager Digital, which recently applied for Chapter 11 bankruptcy protection, and BlockFi, which is in the hot seat after a large client failed to meet a margin requirement on a loan with collateral.

Advantages and disadvantages of earning interest in crypto

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

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

For investors who have already decided to hold cryptocurrencies in the long run, investing or lending can be an attractive source of passive income. In addition, interest rates worsen over time, which increases the potential earning power of crypto if investors reinvest their interest.

The biggest disadvantage of earning interest on crypto is the risk associated with betting and lending. This is partly because not all crypto exchanges or lending platforms insure the account holders’ funds.

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

Not only is cryptocurrency not FDIC-insured, but the cryptocurrency market is also extremely unregulated. The chairman of the US Securities and Exchange Commission, Gary Gensler, said recently in March that many crypto exchanges potentially “operate outside the law”.

Furthermore, the cryptocurrency markets themselves are extremely volatile, which creates their own risks. Even cryptocurrency investors who earn interest rates of 10% or 15% are still extremely deep under water on their investments this year. For example, Bitcoin prices are down 56% so far this year, while Ethereum prices are down 67%.

Richard Gardner, CEO of Modulus Global, says that the risk associated with crypto loans extends far beyond the volatility of the cryptocurrency market.

“Instead, the overall problem is that you do not really know what your lending company is investing in because the regulatory system at the moment is such that there are no hard and fast rules for disclosure,” says Gardner.

Gardner says that the high interest rates offered by crypto-lending platforms may indicate the risk these platforms take with their loans.

“When you lend money to someone else’s investment, they can not pay you back if it goes up,” says Garner. He noted that the fall of Celsius is a good example of this type of poor risk management.

Is staking safer than crypto lending?

Dan Ashmore, cryptocurrency data analyst at CoinJournal, says that many cryptocurrencies have acted more like high-risk hedge funds than banks by playing with their deposits.

“With a lack of in-room regulation, it’s difficult to quantify the risk involved in lending your cryptographer through these third parties,” says Ashmore.

Ashmore says that crypto loans may not be best suited for investors with lower risk tolerances.

“Investment specifications vary from blockchain to blockchain, so although it is difficult to generalize and assert, which suits investors better overall (not to mention the fact that each investor will have their own risk tolerance, financial conditions and investment objectives), generally considered as a safer investment alternative, he says.

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