There has been a dramatic uptick in the conversation around interest paying crypto accounts, so what should potential investors realize, both in terms of pros and cons?
Crypto markets continue to embody the idea of price volatility, with double digit percentage swings in prices being a routine occurrence across different cryptoassets. Even as stablecoins and other tokenized assets are more integrated into the wider discussion, there is still an association with volatility for many cryptoassets. Adding in recent comments and actions taken by policymakers in the United States and abroad, and the desire for more stable (no pun intended) ways for investors to generate returns, the appeal of interest bearing crypto accounts should be obvious.
Particularly in an economic environment where interest rates are being artificially suppressed, and with other assets trading either at, or near, all time highs, the idea of being able to earn passive income at higher rates has led to a rush of investment into an array of products. There are any number of firms that have launched and rapidly expanded operations seeking to capitalize on this growing demand. With such rapid growth, however, it is important to look beyond the appealing rates of return being offered, and understand some of the other factors that should inform the investor decision making process.
Let’s take a look at some of the issues that every investor should take into account when analyzing which – if any – interest paying crypto options are the correct fit for them.
Centralization risk. This should go without saying, but the very fact that there are organizations offering these services does lead right back to the intermediary and institutional affiliation that some crypto proponents might not be a fan of embracing. Granted these risks are no different from the risks that investors take on a routine basis with incumbent financial institutions and brokerages, but this is worth pointing out. In addition, in order to open accounts at these institutions requires fulfilling the full array of know your customer (KYC) compliance measures.
Whether a specific investor subscribes to the notion of “not your keys not your coins” is not the point; the fact is that these offerings are divergent from the decentralized ideal of crypto.
Fees and balances. Something that gained attention following the direct listing of Coinbase are the fees that can often be affiliated with crypto transactions at centralized organizations. While incumbent brokerages have reduced fees to zero in many cases, the transaction fees charged by crypto organizations can come as a surprise to some investors. Additionally, while most crypto organizations do not have a minimum or maximum balance limits, the balances being transacted can all be impacted by fees.
Highlighted by the recent conversation around gas fees on the Ethereum blockchain, the fees involved can take a sizeable chunk out of certain transactions, especially ones of lower amounts.
Differing payouts. It is true that there are no, or few, minimum balance requirements at crypto banking organizations, but the amounts that are on deposit can impact the rate of return that is earned. For example, the higher value of crypto that is on deposit at a specific organization may lead to that investor earning a lower rate of return. Clearly this is subject to change and modification by the organization, but again, is something to keep an eye on.
Variable rates. One of the strongest appeals of crypto interest paying accounts are the (much) higher rates that are offered when compared to fiat based savings or money market accounts. One could make the argument that these higher rates are the primary reason why this facet of the crypto landscape has attracted much of the attention and investment flows, but interest rates can change. Interest rates can, and have, been increased, decreased, or otherwise modified as market conditions have changed and evolved. While framed as a passive income approach, investors should still periodically check and confirm just what interest rates they are actually earning.
Form of payouts. One other factor that needs to be understood is what form the interest and earnings will be denominated in; will these payments take the same form as the initial funds deposited, or does it take an alternative form? There are pros and cons to any approach offered, clearly, but is something that 1) needs to be researched by investors, and 2) monitored for any changes as market conditions change.
The ability of investors to earn interest and passive income on crypto deposits, although introducing facets of the centralization, represents an important step in the continued integration, maturation, and adoption of cryptoasset options. Such innovative thinking has, in turn, been rewarded in the forms of increased attention and investment in many of the organizations; this is great news. Passive income never truly is passive, and crypto interest options are not dissimilar from other fiat based options in that sense. That said, and like any other investment decisions, there are multiple factors that need to be taken into account and examined by potential investors prior to allocating funds.