How to Earn Interest on Crypto Forbes Advisor – Forbes

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One common criticism of cryptocurrency as an investment asset is that it offers no income from cash flow or dividends. But the criticism is not entirely true: crypto staking and lending give investors ways to generate income from their crypto holdings.

Staking lets you generate passive income on long-term crypto holdings. And in some cases, staking also helps support blockchain networks. You can also lend out crypto or deposit it in an interest-bearing account on a crypto lending platform.

Lending and staking crypto may offer greater returns than either U.S. Treasurys or high-yield savings accounts. This interest can compound over time and provide passive income for crypto investors.

Still, crypto investing also comes with unique risks that might make it unappealing to the typical income investor.

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Staking is a popular way to earn interest on crypto holdings and also helps support the security of crypto blockchains that rely on a proof-of-stake consensus mechanism, such as Cardano (ADA), Solana (SOL) and Polkadot (DOT).

Ethereum (ETH) is also transitioning from a proof-of-work to a proof-of-consensus mechanism, an upgrade known as Ethereum 2.0 that is expected later this year. Ethereum investors can already stake their ETH holdings, depending on the cryptocurrency exchange platform.

Staked coins are locked up and pledged to the cryptocurrency protocol. In return, entities staking crypto are allowed to become validators and set up whats known as a validation node.

The protocol then chooses validators to confirm blocks of transactions from among the eligible nodes. Each time a new block of transactions is verified and added to the blockchain, a small number of new cryptocurrency coins are created and distributed to that blocks validator as a reward.

Once you stake crypto, your node will be used to validate transactions and get paid to validate them, says Josh Emison, CEO and co-founder of Sansbank.

The more crypto staked, the more transactions you are allotted to validate, and the more you are paid.

In addition to staking, crypto investors can earn interest via crypto lending.

To lend crypto, investors need to find a cryptocurrency exchange or decentralized finance (DeFi) app that offers a crypto interest account, which is similar to traditional savings accounts offered by banks.

Some lending accounts pay variable crypto interest rates, and some pay set crypto interest rates for coins locked up for a specific time, similar to traditional certificates of deposit (CDs).

Investors can stake crypto through a crypto exchange or their crypto wallets. The yield investors can expect from their staked cryptocurrency varies depending on which crypto they stake and which platform they use.

Gemini, KuCoin, Kraken and Coinbase (COIN) are among some of the most popular crypto exchanges for staking.

For example, Coinbase currently advertises an annual percentage yield (APY) of up to 5.75% for staking cryptocurrency, including 3.675% for Ethereum and 2.6% for Cardano.

Crypto investors also have various choices to earn interest on crypto lending, although the market is somewhat chaotic for crypto lending platforms at the moment.

According to current Crypto.com interest rates, investors can earn up to 14.5% APY in their Crypto Earn accounts, including 6% APY on Bitcoin (BTC) and Ethereum (ETH), as of this writing.

Unfortunately, popular crypto lending platforms like Voyager Digital, BlockFi and Celsius have recently been forced to freeze customers assets as they deal with liquidity crises associated with the recent crypto winter.

Some of the latest implosions include Voyager Digital, which recently filed for Chapter 11 bankruptcy protection, and BlockFi, which is in the hot seat after a large client failed to meet a margin call on an overcollateralized loan.

There are advantages and disadvantages to earning interest on cryptocurrency holdings.

The interest rates for crypto staking and crypto lending are typically much higher than interest rates on U.S. Treasurys or high-yield savings accounts. They are even higher than the dividend yields of most U.S. stocks.

For investors who have already determined they are holding cryptocurrency for the long-term, staking or lending can be an attractive source of passive income. In addition, interest compounds over time, increasing the potential earnings power of crypto if investors reinvest their interest.

The biggest downside of earning interest on crypto is the risk associated with staking and lending. Thats partly because not all crypto exchanges or lending platforms insure account holders funds.

In contrast, the Federal Deposit Insurance Corporation (FDIC) typically insures up to $250,000 per account for savings accounts and CDs per member bank. Likewise, returns on U.S. Treasurys are backed by the U.S. government and will be paid as long as the U.S. remains solvent.

Not only is cryptocurrency not FDIC-insured, but the crypto market is also extremely unregulated. U.S. Securities and Exchange Commission Chair Gary Gensler recently said in March that many crypto exchanges are potentially operating outside of the law.

Furthermore, cryptocurrency markets themselves are extremely volatile, which creates its own risks. Even cryptocurrency investors earning interest rates of 10% or 15% are still extremely deep underwater on their investments this year. For example, Bitcoin prices are down 56% year to date, while Ethereum prices are down 67%.

Modulus Global CEO Richard Gardner says the risks associated with crypto lending extend far beyond the cryptocurrency markets volatility.

Instead, the overarching issue is that you dont really know what your lending firm is investing in because the regulatory system is currently such where there arent hard and fast rules on disclosures, Gardner says.

Gardner says the high-interest rates offered by crypto lending platforms can indicate the risks those platforms are taking with their loans.

Once you lend money to somebody elses investment, if it goes belly-up, they cant pay you back, Garner says. He noted the downfall of Celsius is a prime example of this type of poor risk management.

Dan Ashmore, cryptocurrency data analyst at CoinJournal, says many crypto lenders have acted more like high-risk hedge funds than banks by gambling with their deposits.

With the lack of regulation in the space, it is difficult to quantify the risks involved in lending your crypto out via these third parties, Ashmore says.

Ashmore says crypto lending may not be the best fit for investors with lower risk tolerances.

Staking specifics vary from blockchain to blockchain, so while it is difficult to generalize and assert, which suits investors better overall (not to mention the fact that each investor will have their own risk tolerance, financial circumstances and investment goals), staking is generally considered a safer investment option, he says.

Earning interest in crypto may be an attractive option for long-term cryptocurrency investors with a high-risk tolerance. But the 2022 turmoil in the crypto markets, particularly among crypto lenders, demonstrates that crypto interest income is far from a safe bet.

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How to Earn Interest on Crypto Forbes Advisor - Forbes