Cryptocurrency startups have begun offering investors an option to earn interest on virtual assets to battle volatility even as the industry awaits regulatory and legal clarity on the issue. Crypto startups are offering fixed returns on one’s holdings. How do these investment products work? What makes them different from conventional deposits? What should investors watch out for? Aseem Gujar & Partha Sinha find out…
One can buy crypto either through an exchange’s app or invest indirectly via exchange-traded funds (ETFs) as was explained last week in this column.
Cryptocurrency startups are giving another option to investors: Some call it fixed deposit or fixed income product, while others steer clear of traditional finance terminology and refer to it as interest-generating investment.
These FD-like products promise passive income to those seeking exposure to crypto. These products have an investment tenure ranging from a week to a year and allow cashing out early if needed without any penalty. Though these seem similar to bank FDs, such crypto-linked investments are outside the regulatory purview and hence risky.
Sumit Gupta, CEO and co-founder of crypto exchange CoinDCX, which has such offerings, said that there are products which allow users to monetise their idle assets.
Exchanges Borrow Your Tokens
Industry players said that such products are mostly targeted at those who understand crypto technology. Those who own crypto can transfer tokens to an exchange or an investment platform that offers FD-like products. Those who don’t own crypto, can buy, and lend it back to the same investment platform.
Just like how a bank FD can be booked through netbanking, crypto holders too can perform the transaction online after selecting a lock-in period. The platform then lends your crypto holdings to other exchange users as a margin for trading or even lets other bourses borrow for their liquidity needs.
At the end of the lock-in period, the platform returns the principal back with interest — all in crypto terms. The crypto platform earns from the difference between the borrowing and lending rates. Also, it’s the crypto bourse that takes the risk in fixed-income products, according to an exchange executive.
If you have 100 Bitcoin and the interest rate is, say, 10%, at the end of the year, your wallet will be credited with 110 Bitcoin. However, as returns on your deposits will be in crypto, earnings in fiat money terms will depend on the value of the virtual asset at the end of the tenure.
Expected Interest Rate
The interest rate for cryptocurrencies can vary depending on demand. For example, crypto exchange Vauld offers 3% per annum for tokens like Matic and Lumen, 6.5% per for Bitcoin and Ether, and 12% for stablecoins like Tether & USD Coin, according to its website. Demand and interest rate for stablecoins is relatively higher as having an underlying asset like the US dollar or gold makes them less volatile.
However, returns may not be fully guaranteed. For instance, crypto investment platform Flint said it promises ‘up to’ 13% returns on some stablecoins for compliance purposes. “We keep the returns stable as much as possible,” said Flint co-founder Anshu Agrawal.
Investor Checklist
Many fly-by-night operators exist in the crypto space due to lack of regulation, hence one should check the credentials of investment platforms and seek out expert opinion to avoid loss of capital.
Industry players also said that they have seen instances where individuals withdrew their bank FDs to invest the amount in crypto deposits. Investors should adhere to their asset allocation plan and not go overboard with crypto equivalents as there is no regulator to fall back upon in case of grievances.
Recently, the Advertising Standards Council of India (ASCI) introduced guidelines for advertising and marketing of crypto assets in which companies have been prohibited from using words “currency”, “securities”, “custodian” and “depositories” as consumers associate these terms with regulated products.
FAQs
Crypto savings accounts work much like certificates of deposits (CDs). In a nutshell, the investor will deposit tokens into a crypto interest account and earn a yield. Savings accounts are usually offered by crypto exchanges, including Crypto.com, OKX, and Binance.
How does crypto deposit work? ›
Deposit accounts function similarly to a bank account. Users deposit cryptocurrency, and the lending platform pays interest. The platform can use deposited funds to lend out to borrowers or for other investment purposes.
How does crypto fixed deposit work? ›
Under the ZebPay fixed term deposit, as an investor, you can lend your crypto currencies for a period of 7 days, 30 days, 60 days, and 90 days. You can easily withdraw the coins you have deposited before expiry of the fixed deposit and a penalty will be charged.
What happens to crypto if the Fed raises interest rates? ›
“When the Fed introduced restrictive monetary policies by increasing rates in 2022, this caused equity markets and cryptocurrencies to appropriately decline in valuation,” says Octavio Sandoval, director of investments at Illumen Capital.
How to earn interest on cryptocurrency in India? ›
Lend at Fixed Returns up to 8.5%
- Select a crypto you own.
- Specify the quantity to lend.
- Choose your lend term period.
- Your lending are deposited at the end of the term.
Savings or Growth Accounts
The most straightforward way to earn interest on crypto is to use a savings or growth account. These work very similarly to their fiat counterparts. All you need to do is enter your crypto assets into a savings or growth account, and then wait for it to accrue interest over a period of time.
Do banks report crypto deposits? ›
Banks are required to report certain transactions to financial regulatory authorities, including those involving cryptocurrency. Banks must report transactions that meet certain dollar thresholds, as well as suspicious transactions that may indicate money laundering or other illegal activities.
What is the difference between deposit and transfer in crypto? ›
Deposit: Receive crypto to your wallet. Withdrawal: Send crypto out of your wallet. Trade: Exchange one cryptocurrency for another cryptocurrency or fiat currency. Transfer: Send crypto between two wallets you own.
How do I deposit crypto back into my bank account? ›
Bitcoin ATMs provide a convenient way to deposit and withdraw money without visiting a bank. You can use these ATMs to buy or sell bitcoins with fiat money, making it another option for transferring crypto funds to your bank account.
Is crypto interest income? ›
Yes. Cryptocurrency interest is considered ordinary income subject to income tax. Do you pay taxes on stablecoin interest? Stablecoins are taxed similarly to other cryptocurrencies.
BTC APYs generally range from 2.5% to about 7%, depending on the platform, the lockup period, and in which tokens you earn your rewards.
Does crypto deal with interest? ›
You can earn interest in crypto from your held crypto assets. Centralized exchanges let you lend crypto and earn interest, as well as offer interest and savings accounts. DeFi apps offer many different ways to earn interest on your crypto and often higher interest rates.
What happens to crypto when interest rates go down? ›
Lower rates would weaken U.S. Treasury yields, making riskier assets such as cryptocurrencies more attractive to investors. Bitcoin's drop dragged down other crypto-tokens and crypto-related stocks such as MicroStrategy.
Why do higher interest rates hurt crypto? ›
How do rising interest rates affect Bitcoin investors? Rising interest rates may prompt some investors to seek safer assets, potentially reducing demand for Bitcoin due to increased borrowing costs and market volatility.
What happens to Bitcoin when inflation goes up? ›
In the past, Bitcoin has shown a correlated relationship with equity markets - and has shown negative price reaction to rates going up in response to inflation, along with equities. Since March, 16th, 2022, the Federal Reserve has gone away from zero-interest rate policy.
Can you get interest on crypto? ›
You can earn interest in crypto from your held crypto assets. Centralized exchanges let you lend crypto and earn interest, as well as offer interest and savings accounts. DeFi apps offer many different ways to earn interest on your crypto and often higher interest rates.
Do you pay taxes on interest earned with crypto? ›
Do you need to report crypto interest? Yes. Cryptocurrency interest is considered ordinary income subject to income tax.
Is interest earned on crypto taxable? ›
The IRS treats crypto as “property,” which means you'll need to report certain crypto transactions on your taxes. You'll even be asked on the main form, Form 1040, whether you received, sold, sent, exchanged, or otherwise acquired “any financial interest in any virtual currency.”
Which crypto pays the highest interest? ›
The 10 Best Cryptocurrencies for Staking
- BNB. Real reward rate: 7.43% ...
- Cosmos. Real reward rate: 6.95% ...
- Polkadot. Real reward rate: 6.11% ...
- Algorand. Real reward rate: 4.5% ...
- Ethereum. Real reward rate: 4.11% ...
- Polygon. Real reward rate: 2.58% ...
- Avalanche. Real reward rate: 2.47% ...
- Tezos. Real reward rate: 1.58%
