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Are savings in a crypo account safe?

crypto-savings-account

Interest rates on crypto savings accounts are higher than many traditional ones, but is this a safe investment when it comes to your financial goals?

Is having your savings account in cryptocurrency safe?

Despite the Reserve Bank of Australia’s recent decision to raise the cash rate, interest on traditional savings accounts is still relatively low. This has paved the way for a rise in the popularity of crypto or NFT savings accounts, which are now enjoying interest rates upwards of 4%.

While it may be enticing to invest in cryptocurrency to take advantage of the higher interest rates all investments carry risk, and it is important to ask yourself if having your savings in cryptocurrency is safe.

Here’s what you need to know about crypto savings accounts and so you can ascertain whether they suit your financial goals.

What is a crypto savings account?

A crypto savings account is like a traditional savings account in that the funds invested are used by the institution behind the savings account who will then lend, leverage or invest the currency on your behalf and pay you a cut of the earnings.

Crypto savings accounts have been available for some time now, but they are becoming increasingly popular as providers make the option more accessible to those who know little about cryptocurrency.

One of the key differences between traditional cash savings accounts and crypto savings accounts is that there are no set interest rates and the same digital asset (e.g., Bitcoin) may pay different interest rates depending on the provider.

How do I earn interest on crypto?

To start earning interest on crypto an investor would first need to select and then buy cryptocurrency from a provider. There are smartphone apps available to facilitate the purchase and to hold the currency.

Although the account will show that the investor is holding a certain amount of cryptocurrency, they are in fact lending it to the provider of the account, who continues to profit from the currency by on-lending it for re-investing. The aim is for the provider to earn more than what the investor paid for the crypto so they can pay the investor a cut of the profits, which is the interest.

Which cryptocurrencies can I earn interest on?

There are dozens of digital assets that are available on the crypto market, and some of the most well-known cryptocurrencies including Bitcoin, ethereum, solana and cardano are able to be held in high-yield crypto savings accounts.

What are the risks of investing in cryptocurrency?

A promise of higher returns always carries higher risk, and cryptocurrency is no different. Although there are many success stories of crypto millionaires and even billionaires, it is important to remember that the crypto market, like the world’s stock markets, experience highs and lows.

Cryptocurrencies can be extremely volatile; often swinging in excess of 10% per day. As an example, Bitcoin was trading at more than AUD$100,000 at the end of 2021 and is now trading at around AUD$45,000.

One of the biggest pitfalls of a crypto savings account is that if you need to access your savings in a hurry and the market is experiencing a downturn you may find you have less in your savings account than you had originally set aside. A cash savings account or gold investment will always provide more stability, even if its returns are lower.

Are crypto savings accounts guaranteed by the government?

When a traditional cash savings account is held by an authorised deposit-taking institution, deposits of up to $250,000 are guaranteed by the federal government’s Financial Claims Scheme. Crypto savings accounts are not currently offered by any authorised deposit-taking institutions and are therefore not covered by the Scheme. In addition, Australia’s financial regulators are yet to establish regulations surrounding this relatively new product offering and crypto savings accounts are not regulated by Australian Securities and Investments Commission.

The lure of a high-yield crypto savings account can be very appealing if you are trying to boost your savings, but it is crucial that you consider that volatility of the unregulated crypto market before you make an investment.

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