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Crypto interest accounts offer rates as high as almost 9%: Here's what you need to know before opening one

"The last thing you want is to be unable to get at your crypto when you want it."

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There's more than one way to make money off a cryptocurrency investment. If you've accumulated some crypto that you plan to hold for the long term, a crypto interest account may seem attractive, especially in a low-yield environment. Some tease rates as high as 8.6%.

While these interest-earning accounts might look like savings accounts, they're actually quite different and riskier, experts warn. Earning interest on your cryptocurrency is not the same as saving your money in cash, says Erika Safran, a certified financial planner and the principal at Safran Wealth Advisors in New York City. "You have to recognize you could lose 50% of your investment in just a few days," she says. "Do your homework."

Here's what you should know before opening a cryptocurrency interest-earning account, according to CFPs.

How a cryptocurrency interest-earning account works

When you open a cryptocurrency interest-earning account, cryptocurrency exchanges and service providers pay you a yield in exchange for borrowing your tokens. In that way, stashing your cryptocurrency in an interest-earning account is similar to putting your money into a traditional savings account at a bank.

But crypto interest-earning accounts advertise annual percentage yields (APY, or the amount of money you earn in one year) that far exceed the amount of interest you can earn on a traditional savings account. The average APY on a savings account is around 0.06%, according to May data from the FDIC, while DepositAccounts.com notes that some of the top high-yield savings accounts currently offer 0.70%. Compare that to cryptocurrency interest-earning accounts from companies like Gemini, BlockFi, Vauld, and Nexo, which say they'll offer rates as high as 8.6%, depending on what kind of coin you own.

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The risk: 'There are absolutely no guarantees'

Putting aside the extreme volatility of cryptocurrencies, a key difference between regular savings accounts and crypto versions is safety.

"There are always risks to consider, such as lockup periods with certain services, as well as [the] general business risk of the company paying the interest," says Doug Boneparth, a CFP and founder of Bone Fide Wealth in New York City. "The last thing you want is to be unable to get at your crypto when you want it."

Traditional banks insure your money (up to $250,000 per depositer, per bank, per ownership category) through the Federal Deposit Insurance Corporation, a federal agency. Credit unions have similar protections through the National Credit Union Administration. So long as you bank with a participating financial institution, there's no risk of you losing money as you might with an investment.

Cryptocurrency is decentralized, meaning there's no single bank or authority that oversees it. So when you put your money in a crypto interest-earning account that's serviced by a company, the only protection you have is the company's terms of service.

And because cryptocurrency isn't regulated by the federal government, it's hard to know which companies you can trust, Safran explains. "The key is to look into the company and find out how your deposits are being backed," she says.

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Gemini, a crypto exchange founded by the billionaire twins Tyler and Cameron Winklevoss, lets clients move their coins into interest-bearing accounts. Depending on what coin users deposit (bitcoin, ethereum, dogecoin, or other tokens), you can earn interest rates ranging from 2.25% to 7.4% APY. That interest is earned and compounded daily. Gemini customers can withdraw money at any time and the company promises no fees to transfer or redeem your holdings.

Still, "there are absolutely no guarantees," Safran says, and adds, "Just read the disclaimer on the company's website."

BlockFi's terms of service sums up the risk involved in cryptocurrency interest-earning accounts explicitly: "Digital currency is not legal tender, is not backed by any government, and the BlockFi Interest Account is not a bank account nor a brokerage account, and is not subject to FDIC, SIPC, or other similar protections. Interest rates, withdrawal limits, and fees are subject to change and are largely dictated by market conditions. This is not a risk-free product and loss of principal is possible."

Stablecoin accounts earn higher interest rates but still have drawbacks

If you navigate to any of the sites offering cryptocurrency interest-earning accounts, you'll notice an offer of an even higher APY for something called stablecoins.

Stablecoins are a class of cryptocurrencies, and in theory, a way to avoid extreme cryptocurrency price swings. Bitcoin's recent performance is a good example of the kind of volatility for which crypto has come to be known: Its price peaked near $65,000 in April before falling by more than 30% to around $30,000 in just a few hours on May 19.

To minimize volatility, stablecoins can be tied to external assets, such as the U.S. dollar or gold, though they still use blockchain technology to facilitate transactions. The stablecoin USDC, for example, is backed by and redeemable for the U.S. dollar on a one-to-one ratio through platforms like Coinbase and Circle.

You have to recognize you could lose 50% of your investment in just a few days.
Erika Safran
CFP, Principal at Safran Wealth Advisors

Companies like Vauld offer up to 12.68% APY on some stablecoin interest-earning accounts.

While these coins aim to deliver a calmer investing experience, their stability is still dependent on the issuer of the coin. That means their value is only as stable as the company backing them.

As with crypto generally, only invest what you're willing to lose

"Whether or not you're earning interest is really secondary," Safran says. Assets in a cryptocurrency interest-earning account are an investment and need to be treated that way, rather than as savings.

When it comes to investing your money and growing long-term wealth, experts generally recommend sticking the bulk of your money in low-cost, diversified investments such as index funds.

Even crypto millionaire Grant Sabatier doesn't suggest most people take a big risk on the asset class: "I still don't recommend that new investors — anyone with less than $25,000 to invest — invest in cryptocurrency," he told Grow earlier this month.

Keep your crypto investments to a small slice of your portfolio, Safran says. "[It's] a high-risk, high-reward investment ... and you should never invest any money in cryptocurrency that you are not willing to lose."

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