While a crypto savings account could increase your rate of return, these types of accounts come with a level of risk that a more traditional account may not. When you open a savings account with a bank, credit union, or online financial institution, there are typically more security measures in place to keep your money safe.
Before you decide to invest in a crypto-based account, it’s important to evaluate the unique qualities and potential risks associated with one.
No FDIC insurance
The vast majority of traditional bank accounts have FDIC insurance through the Federal Deposit Insurance Corporation. The FDIC protects up to $250,000 per account in the event of a bank failure or bankruptcy.
Crypto interest accounts are not covered under FDIC insurance. So if something happens, there’s no government guarantee that you can get your funds back.
Price volatility
Cryptocurrency can be very volatile. The value is constantly going up or down, and this turbulence can drastically affect the money in your account.
Since you’re investing with cryptocurrency and your returns will also typically be in cryptocurrency, your balance and interest can heavily fluctuate based on the market. And if the value of your asset drops or goes extinct, your initial investment and returns can be entirely wiped out.
Withdrawal limits
While more of an inconvenience than a risk, some crypto savings accounts impose withdrawal limits on account holders that cap the amount you can take from your account over a specific period of time. In addition to withdrawal limits, you may also have to pay fees to withdraw money.
These restrictions can put your money out of reach when you need it most. If this is concerning, you should look for a more liquid option, like a crypto-based account with flexible withdrawals and no lock-up periods.
Loan defaults
Because the crypto you deposit into your account is being lent out to borrowers, you risk losing all or some of your assets if the borrower can’t pay back the administrator of your crypto savings account.
If the crypto platform suffers a wave of defaults on their loans that they can’t cover, this could negatively affect your balance. That’s why it’s important to choose a crypto savings account with a strong track record over the course of years.
Regulatory action
If a regulatory body like the Securities and Exchange Commission (SEC) decided to implement new rules or enforce existing rules more strictly, it could change how crypto savings accounts are managed and used.
For example, the SEC could require more transparency from account providers, impose limits on certain types of transactions, or even halt the operation of crypto savings accounts altogether if they find that they’re not compliant with regulatory standards.
