Traditional interest rates for standard savings accounts have plummeted in recent decades. Anyone would be considered lucky to earn the highest national interest of 0.70% since rates declined significantly in the 1990s and again in the 2000s. Bitcoin interest is changing that.
Even though these rates have fallen to historic lows, the rise of Bitcoin and other altcoins is creating a growing demand for the ability to earn interest on crypto investments.
Here’s what you should know before getting started and the best ways to earn interest when you do.
How Does Earning Interest On Bitcoin Work?
Since we’re talking specifically about the cryptocurrency that reached a value of nearly $65,000 before falling by more than 30% in a matter of hours, it makes sense that you might question whether or not you should invest in it. How can you accrue interest on something this volatile?
The most common way is by depositing bitcoin in an account through a lending platform.
Your bitcoin is lent to others, and the interest they pay for borrowing funds is the interest you earn. Interest earned is determined by the market and paid out in the same cryptocurrency that was initially put in.
To account for the possibility of a borrower defaulting, the companies responsible for these platforms utilize collateralization. This means that a valuable asset — in this case, bitcoin — is used for loan security and can be seized from the borrower and sold by the company.
But investor beware. Not all of these platforms are created equal, and the risks and rewards associated with these types of investments are important to know.
Things To Consider Before Earning Interest On Your Bitcoin
Much like any investment, there are pros and cons to consider before you start getting your money involved.
The first — and perhaps most obvious — risk that comes with Bitcoin is the volatility of its value. Floating rates mean accepting unknown variables in its value throughout increases and decreases.
The truth is that the majority of rates don’t fluctuate too much, but it does happen. Although it’s impossible to accurately determine when the value of any coin might go up or down, there are best practices for managing these changes (more on this later).
Stricter Withdrawal Rules
Claiming your earnings at a moment’s notice can also be a hassle when it comes to earning interest on Bitcoin. The accessibility of your money will depend on the savings account you invest with and the withdrawal limits they’ve put in place.
For example, some accounts will set a maximum amount that can be withdrawn during a specific period of time. If your earnings need to become emergency savings on short notice, it’s important to make sure your account will allow this.
Look for options that let you process withdrawals instantly without limits or surprise fees. With Vauld, there are no hidden fees or changing rates. Transactions are totally transparent.
No FDIC Insurance
The term “decentralized” comes up often when talking about cryptocurrency, and its connotation can be positive or negative depending on the person you talk to.
In this case, being decentralized simply means that transactions occur through two parties without a third party, such as a central bank, to rely on.
In many ways, the decentralization of crypto is seen as a good thing, but the downside is that it is not backed by the U.S. government and, therefore, not FDIC insured.
For something like Bitcoin, you have to rely on the terms of service written by the company you invest with rather than the FDIC. Making sure you’re protected is all about learning what measures are put in place by the platform your account is with.
At Vauld, for example, we follow standard practice by moving funds from the investor’s wallet to a centralized lending pool that’s insured for $100 million in BitGo.
Understanding details like this is crucial in ensuring that your bitcoin is safe.
The Pros Of Earning Interest On Bitcoins
Once you know the risks associated with earning interest on Bitcoin, you can begin to focus on the benefits that got your attention in the first place.
High Risk, High Reward
One of the main appeals of earning interest on your bitcoin is the high profit margins, which are well beyond what you can expect to earn with a CD. In fact, the rates are much more comparable to what CD rates were decades ago.
It can also be worth finding out whether a platform has multiple options when it comes to investing. To make the most out of your investment, look for a company that offers compounding interest on your principal amount at the end of a fixed deposit payout or weekly payout.
Compound interest allows you to make more on the interest you’ve earned. Unlike simple interest, this means your bitcoin earnings will grow faster the longer it’s kept in an account.
Quick Payouts On Bitcoin Interest
The payouts for accrued interest depend on who you invest with, but these are usually quick and regular across the board.
Vauld, for example, offers a payout every week, or at the end of a specified term for fixed deposits. With Vauld, you also start earning as soon as you deposit your coin.
Additionally, some companies make it easy to keep an eye on current rates based on which coin is deposited. This gives you a seamless user experience.
Remember back in the day when a six-month CD had the potential to earn over 10% in interest? Well, it makes sense if you don’t.
The 2021 State of U.S. Crypto Report found that the average crypto investor was born in 1983, meaning they would have only been 10 years old when these rates plummeted to a historic 3% (plateauing around 5% in 1995).
The good news is that Bitcoin and other altcoin investment has brought back the ability to earn more based on locked-in deposits. A potential 2-3% rate increase (APY) over typical savings rates is offered by most accounts for a fixed term.
But just like compound interest, it’s important to make sure the company offers this.
Tips For Getting The Best Interest Rate On Your Bitcoin
1) Pick The Right Account
Although Bitcoin is one of the more common investment choices, it’s worth noting that not every company accepts an expansive list of altcoin. That being said, our first step is to find the right account for your investment.
At Vauld, our long list of options includes annual yield percentage rates of each coin to help customers monitor the best rate of their investments.
As mentioned above, also be cautious of red flags such as hidden fees, caps on earning, or companies that lock up your currency for an extended period.
2) Choose Your Bitcoin Interest Strategy
When it comes to joining the Bitcoin investment market, people will typically trade or HODL (hold on for dear life). If you’re in it for a short-term profit, you’re likely an experienced trader and have a plan already established. For the rest, HODL comes into play.
Holding on to your bitcoin strategically can be done in two basic ways. The first is by setting a goal and refusing to trade until your asset has reached that particular value.
Social media has already found a clever way to brand this strategy, known as “When Lambo” — shorthand for the profit earned equaling the cost of a Lamborghini.
The other way to HODL is by treating your investment as a reserve asset. In the event that Bitcoin dominates the traditional dollar, holding on to your coin is a way to have a stake in the future of finances. Essentially, these HODLers don’t ever trade.
3) Monitor Your Rates
The rate of interest you earn has the potential to fluctuate. Keeping an eye on these changes will provide a better understanding of your earnings and help you get the highest possible rate.
4) Stick With Venture Capital
When it comes to maximizing profits, a good strategy is to invest where venture capital is. This form of private equity financing is provided to companies with high growth (or high growth potential) by venture capital firms.
Starting an account on a platform backed by venture capital means you can rest assured that your investments are with a financially secure and trusted company.
What Else Should You Know About Bitcoin Interest?
Next to choosing the right account for your investment needs, the best way to be successful is by managing the volatility of cryptocurrency. This might sound counterintuitive, but there are easy steps to assure that you stay ahead of the trend.
First, it’s important to not make decisions based on the success or failures of others. Letting emotions such as fear or greed drive decisions can lead to abrupt choices, and this is especially true when dealing with a value that is infamous for its fluctuation.
A good way to avoid attaching emotions to investment decisions is through diversification. Diversification of cryptocurrency doesn’t necessarily mean placing bitcoin in multiple accounts.
Instead, be sure that other, non-crypto investments are being made to diversify your portfolio and account for varying levels of volatility. Risking everything you can afford through one investment can be a sure way to lose money.
Once you’re ready, Vauld can help you take control of your money. We provide a seamless experience on an easy-to-use platform for everyone looking to earn interest on Bitcoin safely and effectively.
Plus, with offers of over 11% APY on certain stablecoin interest-earning accounts, the wealth-building potential on Vauld outshines the competition whether you’re lending, borrowing, or trading.
Ready to get started? Register on Vauld to start earning with your cryptocurrency today.