Investors who plan to hold their crypto assets for years, otherwise known as HODLers in crypto parlance, typically store their cryptocurrencies stashed in a hardware wallet or keep it idle on a crypto exchange. But this practice is changing.
Today, HODLers are turning to cryptocurrency savings accounts as they pay high interest in crypto deposits. The interest rates on conventional bank deposits are almost negligible — often below 0.5% — when compared to the likes of a crypto savings account — up to 12% annual percentage yield (APY).
High reward typically goes hand in hand with high risk and that is the case with cryptocurrencies and crypto savings accounts. The name of the game is trust and due diligence on the part of the investor.
How it Works
To understand the level of risk that you’re exposing yourself to, it’s important to know what happens behind the scenes.
When you deposit your crypto assets into a crypto savings account, the platform lends your holdings to individuals, corporations or institutions. Each entity uses the borrowed crypto assets for its business functions — market-making on its own platform, hedging against Bitcoin prices or liquidity.
The borrowers return the assets to the lenders with high interest. The platform takes a small portion of the interest for itself and passes the rest to the users. It may also lend your assets to decentralized protocols and earn interest from there.
What’s the Risk?
HODLing exposes investors to several kinds of risk. Since cryptocurrency is a form of digital currency, investors face the risk of hacks. The chance of a hack depends heavily on the platform and the safety protocols it uses. Without encryptions or a strong safety infrastructure, it could be prone to a breach. Companies that are not regulated or licensed with a traditional operating permit and government registrations may also be easy bait for hackers.
Furthermore, if a platform stores your tokens in a hot wallet, it may be vulnerable to attack. Traders prefer a hot wallet to trade funds quickly. But this type of storage could be dangerous because the public and private keys are kept on the internet.
Another risk associated with crypto lending is that a borrower could potentially default.
If a lender does not have stringent requirements for its counterparties, investors can be subjected to a high level of risk. If the company is not transparent about its lending standards, it could be a cause for concern.
What Is Considered a Safe Crypto Platform?
When researching crypto platforms to work with, you should look for 3 main aspects: reputation, safety standards and lending policy.
When it comes to reputation, it does not necessarily mean that the company must have a massive team and funding. For instance, Singapore-based crypto platform Hodlnaut is relatively smaller in size but is considered more reputable than many bigger players. The company has over 10,000 registered users and $500 million in custody, setting itself apart by offering some of the best interest rates available for cryptocurrencies while maintaining a high bar for safety standards and lending policies.
Hodlnaut takes a security-first approach. It uses no hot wallets and employs Fireblocks’s multi-party computation wallet infrastructure to secure funds. When you deposit funds into Hodlnaut, funds are secured with Fireblocks’s wallet infrastructure until it is lent out to one of its partners.
Furthermore, the company offers users custody protection for their funds through Nexus Mutual, an alternative to traditional insurance and one that is well-suited to decentralized trading and finance.
As for its borrowers, Hodlnaut is very selective about its capital requirements. It only lends to corporate entities with good credit scores, and the loan-to-value (LTV) ratio of its loans is usually 70% or lower, reducing the risk of default.
But, in the event of a default, Hodlnaut has been clear that it would take on the loss and pay its users from its equity funds. It may also liquidate the borrower’s collateral and repurchase the borrowed funds and may take legal action to recover the funds if necessary.
High-yielding cryptocurrency accounts offer outlandish returns of up to 7.5% on Bitcoin and can help you make the most of your crypto assets.
But it’s important to evaluate your risks because compared to traditional banking, crypto banking is nascent. Because little regulation exists, crypto is more of a speculative instrument. For this reason, it is important that you carefully research any platform you’re considering and learn about its security features, policies and history of breaches or defaults.
Ideally, you should choose a platform that offers high interest rates and can harmonize the extreme volatility of cryptos with financial best practices.
See more from Benzinga
© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.