Cryptocurrencies are becoming more popular for those looking for a new way to make money. However, the investors are often advised to keep in mind that the market is risky, widely volatile, and controversial. While all these factors are true to some extent, they do not outweigh the benefits that may come with investing in cryptocurrency assets.
Often when people ask about the best strategy to get money with crypto, the answer they always get is “buy and hold” or HODL. Well, HODLing may be the best strategy in the long run. However, there are ways you can earn interest in your cryptocurrency while holding it. That means your asset does not have to lie idle as you wait to cash on it later. So, what is the safest way to earn interest in your cryptocurrency holdings? How much can you earn?
In this guide, you will learn about different ways to gain interest in your crypto, their pros and cons, and the strategy of selecting the best method.
The first way to earn interest in your cryptocurrency is through staking. Simply put, staking involves locking up your portion of your funds to help maintain a specific network. Blockchain networks that support staking use Proof-of-Stake (PoS) consensus mechanism and include Ethereum 2.0, Cardano, Polkadot, Avalanche, and Solana.
As a reward for helping in maintaining the network, the investors receive interest. The annual interest rate is determined as the annual percentage rate (APR) for simple interest and annual percentage yield (APY) for compounded interest. The interest rate varies greatly between coins and ranges between 0.05% and 100% annually.
Some tokens may offer a very high-interest rate but present higher risks. Therefore, you should do some research before deciding which coin to stake.
Another important factor with staking is that different staking coins have different rules. For instance, staking Ethereum requires locking up funds for a long period. Staking other coins, on the other hand, may allow for a much shorter and well-defined staking period.
While staking is less resource-intensive compared to mining, it is still technical and has many limitations, especially for beginners. The easiest way to stake for a beginner is through wallets and exchanges.
Exchanges such as Binance, Bitstamp, and Kraken enable users to stake a variety of crypto coins and earn interest. Apart from offering an easy way to stake and earn interest, they allow a low minimum staking amount. In some cases, some exchanges will not even require a minimum lock-up period. Instead, they allow you to withdraw your assets anytime.
The disadvantage with staking through an exchange is that it involves giving up control of your funds to the exchange. This may put your funds at risk in case anything happens to the exchange. Exchanges may be hacked or go out of business. In addition, most exchanges charge a fee for offering you the staking service.
Instead of staking through an exchange, you can stake through your wallet if you do not want to give control over your funds. There are many staking wallets supporting staking, such as Exodus, Ledger, and Atomic.
Ensure you consider the fees that the wallets changes. Some may not even charge staking fees, hence perfect, especially for beginners. However, you should also remember that in most cases, wallets support a small variety of staking coins.
DeFi and Yield Farming
Another way to earn interest on your crypto asset is to invest in DeFi and Yield farming projects. DeFi is short for decentralized finance, which are financial services that are controlled by a distributed network of independent computers rather than a centralized authority. DeFi uses pre-defined rules defined in computer codes (smart contracts).
Many DeFi projects allow users to lock up their holdings to earn interest. The locked-up funds can be put to different use, including staking, lending, supplying liquidity to decentralized exchanges (DEX), and farming.
Here are some of the reputable DeFi worth checking out:
Uniswap is an innovative decentralized exchange built on the Ethereum blockchain. More specifically, Uniswap is an Automated Liquidity Protocol with no order book. The protocol allows users to earn interest on the holdings that they have locked up. The interest comes from the fees that traders pay for using the platform.
Aave and Compound
Aave and compound are two popular lending DeFi platforms that allow users to borrow and lend their assets trustless. You can earn interest on your cryptocurrency holdings by depositing a supported coin to the platform.
Yield Finance is a platform that optimizes yield for maximum DeFi returns by automatically switching crypto portfolios between DeFi networks. The platform helps users avoid the hustle of manually looking for where they can get the most returns with their holdings.
The platform requires users to deposit stablecoins into the network to receive Yearn tokens. For example, you can deposit DAI to the network and earn yDAI.
The deposited tokens start earning interests immediately, and the platform moves them around to maximize returns. You can cash out any time by converting your yDAI back to your original DAI stable coin.
The platform also offers an advanced service called “Vaults,” which manages funds with more complex and riskier strategies. Money placed in vaults remains available for trading, borrowing, and supplying liquidity. Additionally, this special service also supports a wider variety of coins compared to standard yearn service.
Cryptocurrency Savings Account
Finally, we come to the easiest option, which is a cryptocurrency savings account. A Crypto savings account is provided by centralized companies, which agree to pay users interest for holding their tokens on their platforms. The company can use the deposit in various ways, including lending it out to generate interest.
Savings accounts may vary in the interest they offer; hence, it is important to research to find the best account with the highest return. For example, while Celsius offers up to 8% APY on stablecoins, hi.com offers up to 11% APY on stablecoins.
The main drawback with a crypto savings account is that you have to give up control over your funds to a third party. However, with these accounts, you do not need to worry about the lockup period. Additionally, a crypto savings account is a good alternative for coins that do not support stakings, such as Bitcoin and Ethereum 1.0.
Some of the common platforms offering crypto savings account services include hi.com, BlockFi, Nexo, and Celsius Network.
Again, you need to do research on different coins and the interest you can earn on them as well as the fees you will be charged. Remember that not all platforms that offer high interest are safe. Sometimes, high-interest rates may signal increased risk. It may be a less reputable company or a new, untested coin.
Getting Started with Earning Interest
A cryptocurrency savings account is, without a doubt, the more direct way to earn interest on your cryptocurrency. However, you should consider the following factors before depositing your money on any project.
The first guideline is to look for a project with decent interest. Different platforms offer different interests in the cryptocurrencies they support. Some platforms, such as Hi.com, offer high-interest rates that can help you generate more and generate more money fast. However, you must research to find out that the indicated interest is true and not a bait to lure people into a fraud.
The second factor to consider is the security of the platform. It is senseless to go after a high interest of 80% APY and lose all your money in the end. Look for a reputable platform with no record of fraudulent activities. You can also check the reviews of the platforms online to see what other users are saying about the project.
The third factor you should consider is the currency you want to invest in. The currency you are holding is equally important as the amount of interest you can earn. When you invest your coins, you are holding them. You will want to hold tokens that are secure and unlikely to lose value in the future. There is no need to earn high interest on a token that will plunge in value or even disappear in the near future. Going for a token with a promising future gives your investment a healthy level of safety.
Finally, just like any other investment, you should invest what you can lose. The crypto market is still volatile, and despite the token you are dealing with, there is an inherent level of risk. You can invest a percentage of your crypto holdings in avoiding losing everything in case things go south. Another way of dealing with the risk presented by the market is diversifying your portfolio. You can divide your funds and invest in different tokens. Hi.com, for example, supports multiple coins; you can invest in HI, ETH, BTC, and USDT stablecoins. You spread the risk by diversifying your portfolio.
Additional Things to Consider when Investing
First, check the company or network offering the crypto savings account and see if it supports the coin that you are like. Staking such coins will make sense to you.
Also, confirm if the company you want to use is centralized or decentralized. Centralized cryptocurrency platforms pose the risk of mismanagement and fraud, while decentralized platforms have technical risks with a more complex interface, which may be challenging for beginners.
Additionally, consider the lockup periods, frequency of interest payouts, service fees, interest rates, and minimum lockup amounts. Finally, consider a safe platform with a good reputation as they present lower risks. You will want to avoid the sites with a bad reputation, even if they are offering high-interest rates.
As we can see, there are many ways to make passive income with your cryptocurrency assets. Cryptocurrency interest-earning accounts are ideal for non-technical users, who may find it simple to deposit crypto to begin earning interest. While decentralized finance (DeFi) services offer an alternative way to earn interest trustlessly, they pose risks technical risks. The use of DeFi also requires extensive research and proper diligence to navigate the many risks.
Additionally, unlike HODLing, a crypto interest account offers a way of earning a decent income from your crypto holdings. Platforms such as Hi.com offer high-interest rates of up to 40%, which you can rarely get from other investment platforms.