Earning potential is typically associated with tremendous historical price rises in the crypto market. Long-term holding of cryptocurrency also presents a great opportunity. However, earning interest on your crypto is becoming another opportunity for investors to make extra earnings on their crypto holdings.
Let’s look at the different ways you can earn interest on your crypto.
How to Earn Interest on Crypto
There are a few ways to produce crypto interest.
Crypto Lending
Crypto lending platforms provide users with passive income with a method reminiscent of regular banking.
Crypto borrowers are a somewhat diverse group, with individual and large institutional borrowers. They borrow cryptocurrencies from lending platforms, with two requirements:
- They pay interest on the crypto they borrow.
- They must provide collateral to secure the loan.
If you’re a crypto hodler trying to make passive income, this means:
- You can provide the crypto needed to support these loans.
- The crypto lending platform will pay you a percentage of the interest rate they charged the borrower.
- If the borrower cannot pay the loan back, their collateral is used to reimburse lenders (in this case, you).
The specifics of each step of this process will vary widely across different crypto lending platforms. For the most part, interest rates are higher than traditional fiat financing. With some searching, you should be able to get interest rates exceeding 10% for many cryptocurrencies.
In general, stablecoins tend to produce higher interest. Popular cryptocurrencies like Bitcoin can be lent for high-interest rates as well. But it is your responsibility to compare your options and ensure you are satisfied with an offer before participating in crypto lending.
Crypto Interest Account
The primary way users profit from crypto lending is by opening a “crypto interest account.” With these accounts, you can lend cryptocurrencies in exchange for interest repayments.
Relative to traditional financial accounts that most people are familiar with, rates are very high.
Crypto Staking
Staking provides a form of passive income unique to the crypto world. You can earn interest by holding specific cryptos in certain accounts. The account provider rewards you for this because your cryptos are being put to work.
Most staking opportunities are available to those willing to put a specified balance into a staking pool. For a casual crypto investor, you can think of them as a high-interest savings account. They will end up producing similar results.
All the cryptocurrencies that enable staking use a “consensus” mechanism called “proof of stake.” This alternative to proof-of-work has grown increasingly popular.
One of the most significant examples of a staking opportunity is Ethereum 2.0 (Eth2). Ethereum “validators” stake at least ETH 32 to support Ethereum’s shift to a proof-of-stake consensus mechanism. By staking your ETH to validate transactions on the blockchain, you are helping the blockchain’s development while earning rewards for doing so. Ethereum also enables those willing to stake less than ETH 32 to stake in a pool.
This is why many cryptos don’t enable staking. Eth 1.0, and indeed Bitcoin, run on the proof-of-work consensus model. This removes the possibility of staking.
Things to Consider When Earning Interest on Crypto
There are undoubtedly many profitable opportunities for crypto interest. But there are a few pros and cons worth considering before deciding to pursue them.
Advantages of Earning Interest on Crypto
Let’s look at the main benefits of earning interest on your crypto.
High Interest
The first and most important advantage of cryptocurrency interest opportunities is simply how profitable they can be. Crypto interest accounts provide annual yields that are usually considered impossible relative to high-interest fiat accounts.
Rates vary widely by platform and by coin. However, it’s almost always easy to start earning from 6% to 18% APY.
Low Fees
Despite the incredibly high yields that crypto interest creates, relatively few fees are associated with earning them. You don’t need to pay anything to park your crypto and watch it grow in most cases. For example, with crypto lending, the lending platform makes plenty by charging borrowers a higher interest rate than they’re paying you. In addition, these platforms tend to be quite generous to those providing the lending capital.
For the most part, there are few fees. There are extremely low costs associated with using these accounts with better examples.
Low-Volatility Stablecoins
If you are aiming for less volatility, you still have the option for a stable, high-yield investment. As an alternative to traditional banking interest rates, which cap out at around 3% in the best times, stablecoins are a higher-yield option.
Stablecoins are cryptocurrencies pegged to the exact value of a fiat currency. For example, US Dollar Tether (USDT) is a cryptocurrency that is always worth exactly $1.00. Its value is $1 today and will be $1 for as long as it exists as a tether coin. There are also equal counterparts for Euros, Pounds, and other fiat currencies.
At a glance, it’s easy to find great deals for stablecoins.
Disadvantages of Earning Interest on Crypto
The disadvantages of crypto interest primarily surround security concerns.
Security Concerns
The old crypto adage “not your keys, not your coins” remains relevant in the era of passive crypto income. When you earn yields on the platforms that offer interest, you’re trusting the keys to part of your crypto portfolio with them. If hackers successfully attack them, your assets are at risk.
The good news is that most interest-yielding crypto platforms use excellent security. This is why there are some cases of hacking attacks leading to no funds lost.
Potentially Weak Insurance
This is a concern that can easily be alleviated by looking into the platform’s insurance. You can easily find a platform with a comprehensive insurance policy with even minimal caution.
How Much Interest Can You Earn on Crypto?
Your bottom line will benefit according to the interest offered by the platform you’re earning interest with. In general, interest rates are pretty high in crypto. It’s far from unheard of to make an APY of 20% on certain assets.
How is Interest Earned on Crypto Paid?
Crypto interest is typically paid out periodically. Refer to the policies laid out by your account provider to see the payout schedule.
