For the most part, cryptocurrency-backed earning accounts function similarly to traditional savings accounts. You deposit your funds in the account, and the institution lends it to investors. In exchange, you earn interest on your balance.
In this case, however, the funds you deposit are stablecoins such as USDC or UST. Compared with traditional savings accounts, the rate of returns is impressive. Some cryptocurrency platforms offer up to double digit interest rates. In contrast, you get roughly 0.06% APR for your average traditional savings account.
In a crypto account, the APR will vary, depending on the type of cryptocurrency you deposit and platform you’re using. How the interest is paid can also depend on the platform. For example, interest can accrue daily and be paid out monthly in the same type of coin you deposited. If you deposit funds in USDC, the interest is paid in USDC. When you want to withdraw your funds, you simply convert the USDC into US dollars. Since you invest using a stablecoin, the value is equal to that of the US dollar.
Depending on the platform, your funds can be available to withdraw at any time or can be locked for one to three months. You will receive a higher interest rate if you are willing to lock your funds for a period of time.
At this time, crypto earning accounts are not FDIC insured. FDIC is the federal agency that insures traditional bank funds up to $250,000 per depositor. However, crypto platforms only lend your funds on a fully collateralized basis. They typically keep 100-150% of asset reserves as collateral. This keeps the interest rates stable over time and your funds are backed no matter how the market moves, thus reducing the risk.
If you’re using a well-established cryptocurrency platform, you may not be too worried about the lack of FDIC insurance. In fact, using one of these accounts is a good way to diversify your earnings beyond traditional savings accounts, CDs and money market accounts.
Bottom line: If you’re interested in long-term cryptocurrency investing, a crypto earning account can help you enjoy a predictable source of passive income.