There has been a dramatic increase in the conversation about paid crypto accounts, so what should potential investors understand, both in terms of the pros and cons?
Crypto markets continue to epitomize the idea of price volatility, with double-digit percentage changes in price being a common occurrence across different cryptoassets. Even though stablecoins and other tokenized assets are more integrated into the larger discussion, there is still an association with volatility for many cryptoassets. Adding to the recent commentary and action taken by policymakers in the United States and abroad, and the desire for more stable (no pun intended) ways for investors to generate returns, the attractiveness of accounts cryptographic interest carriers should be obvious.
Particularly in an economic environment where interest rates are artificially suppressed and other assets are trading at or near record highs, the idea of being able to earn passive income at higher rates has led to a rush to invest in a product line. There are a number of companies that have launched and rapidly expanded their businesses seeking to capitalize on this growing demand. With such rapid growth, however, it’s important to look past the attractive rates of return on offer and understand some of the other factors that should inform investors’ decision-making process.
Let’s take a look at some of the questions every investor should consider when analyzing which paid cryptocurrency options, if any, are right for them.
Risk of centralization. It should go without saying, but the very fact that there are organizations offering these services goes straight back to the intermediary and institutional affiliation that some crypto supporters might not be a fan of embracing. Admittedly, these risks are no different from the risks that investors regularly take with financial institutions and brokerage houses in place, but it is worth highlighting. In addition, to open accounts at these institutions, it is necessary to adhere to all of the Know Your Customer (KYC) compliance measures.
Whether a specific investor subscribes to the notion of “not your keys, not your coins” is not the issue; the point is, these offerings diverge from the decentralized ideal of crypto.
Fees and balances. Something that has caught the eye following Coinbase’s direct listing is the fees that can often be affiliated with crypto transactions in centralized organizations. While incumbent brokerages have reduced fees to zero in many cases, the transaction fees charged by crypto organizations may surprise some investors. Additionally, while most crypto organizations do not have a minimum or maximum balance limit, in-trade balances can all be affected by fees.
Highlighted by the recent conversation about gas fees on the Ethereum blockchain, the fees involved can dramatically reduce some transactions, especially those of lower amounts.
Different payments. It is true that there are no, or few, minimum balance requirements in crypto banking organizations, but the amounts on deposit can affect the rate of return achieved. For example, the higher value of the crypto that is on deposit with a specific organization may lead that investor to earn a lower rate of return. Clearly this is subject to change and modification by the organization, but again, it is something to watch out for.
Variable rates. One of the strongest attractions of paid crypto accounts is the (much) higher rates that are offered compared to fiat savings accounts or money market accounts. It could be argued that these higher rates are the main reason this facet of the crypto landscape has garnered a lot of attention and investment flows, but interest rates can change. Interest rates can and have been increased, decreased or otherwise altered as market conditions have changed and evolved. Although designed as a passive income approach, investors should still periodically check and confirm the interest rates they actually earn.
Form of installments. Another factor that needs to be understood is the form in which interest and income will be denominated; will these payments take the same form as the original funds deposited, or will they take an alternate form? There are clearly pros and cons to any proposed approach, but it is something that 1) should be investigated by investors, and 2) watched for any changes as market conditions change.
The ability of investors to earn interest and passive income on crypto deposits, while introducing facets of centralization, represents an important step in the continuous integration, maturation and adoption of crypto-asset options. Such innovative thinking has, in turn, been rewarded in the form of increased attention and investment in many organizations; this is great news. Passive income is never really passive, and crypto interest options are no different from other fiat-based options in this sense. That said, and as with any other investment decision, there are many factors that should be considered and considered by potential investors before allocating funds.