How to Earn Interest on Crypto
If you’re holding crypto as a long-term investment, you may have thought about using it to generate a return. In this post, I’ll explain how you can earn interest on your crypto and how each method works.
How to Earn Interest on Crypto Summary
Earning interest on your cryptocurrency holdings can be a great way to grow your portfolio and generate passive income. Here are some ways to earn interest on your crypto:
Crypto lending: You can earn interest by lending your cryptocurrency to borrowers on platforms like BlockFi, Celsius, and Nexo. These platforms pay interest rates of up to 10% or more, depending on the cryptocurrency and the duration of the loan.
Staking: Staking involves holding your cryptocurrency in a wallet and locking it up to help support the network. In exchange, you can earn rewards in the form of additional cryptocurrency. Staking is available on many platforms, including Binance, Coinbase, and Kraken.
High-yield savings accounts: Some cryptocurrency exchanges and wallets offer high-yield savings accounts that pay interest on your deposits. These accounts typically offer interest rates of 2% or more, depending on the cryptocurrency and the platform.
Yield farming: Yield farming involves providing liquidity to decentralized finance (DeFi) protocols in exchange for rewards. These rewards are typically paid out in the form of additional cryptocurrency. Yield farming can be risky, so it’s important to do your research and understand the risks involved.
By using these methods, you can earn interest on your cryptocurrency holdings and generate passive income over time. However, it’s important to remember that cryptocurrency is a volatile asset class and there are risks involved with any investment. Be sure to do your research and invest responsibly.
Staking Cryptocurrencies
Put simply, staking is the action of locking up or “parking”, a portion of your funds in order to help maintain a specific network. These networks are generally Proof-of-Stake (PoS) blockchains such as Ethereum 2.0, Cardano, Polkadot.
In return for helping to maintain the network, a staking reward will be distributed between the stakers in the form of interest. The annual interest rate, also known as APR or APY, varies a lot between coins and can range anywhere from 0.05% to 100% per year.
A higher interest rate often means there are additional risks, so you’ll want to do some research before deciding which coin you’ll want to stake.
Another important aspect of staking is that each coin has different rules. For example, if you stake Ethereum, you’ll need to lock up your funds for a very long period of time. At the time of this article, it currently doesn’t even have a clear end date. Other coins may allow for a much shorter and well-defined staking period.
While staking can be done directly from your computer without the need for any dedicated equipment, this process is fairly technical, has a lot of limitations and isn’t advised for beginners. The easiest way to stake for a beginner would be through an exchange or a wallet.
Most popular exchanges like Binance, Cryptocom, Kucoin and allow you to stake a variety of coins. Aside from the ease of use of staking on an exchange, the minimum amount to stake will usually be fairly low and in some cases there won’t even be a minimum lock up period.
A good alternative for people who don’t want to give control over their funds would be to stake through a wallet. There are a number of staking wallets; Ledger, Exodus and Atomic just to name a few.
Make sure you take a look at what fees each wallet charges: you may find some that don’t charge any staking fees at all. Keep in mind that in most cases wallets will offer a smaller variety of coins that they make available for staking.
Crypto Savings Account
The next option for generating interest on your crypto holdings is through a crypto savings account. A crypto savings account is an account provided by a centralized company which agrees to pay you interest for holding your crypto on their platform. The company can then use your deposit to pay lenders who will return it in time with interest.
The downside here, again, is that you’ll have to give up control over your funds. On the upside, however, there is usually no lockup period for a savings account and it’s a good alternative for coins that don’t support staking, such as Bitcoin.
Many exchanges such as Coinbase, Binance, Kucoin and CEX allow you to have a savings account as well.
Again, you’ll need to do your research regarding how much interest you can get for each coin and what fees you’ll be charged. Remember that high interest rates usually signal some form of increased risk, whether it’s a new untested coin or a less reputable company – so do not just blindly choose the highest return possible. High return higher risk !
DeFi and Yield Farming
Finally we come to our most complicated option, which is DeFi. DeFi stands for Decentralized Finance – a term given to financial services that aren’t controlled by a central authority, but by a network of independent computers using predefined rules.
Many decentralized services allow you to lock up your holdings and earn interest in return. The locked up funds can be used for different purposes such as lending, staking, supplying liquidity to decentralized exchanges and farming.
It would be impossible to cover the whole theory behind all of this here, so suffice to say that in return for the interest you’re receiving, your funds will be used for other purposes while they are locked up.
Let’s go over some of the more reputable DeFi services that are worth checking out:
Aave and Compound
Aave and Compound are two leading DeFi networks that allow for decentralized borrowing and lending. You can earn interest on your crypto holdings by depositing any of the supported coins to their platform.
Uniswap
Uniswap is a leading decentralized exchange that we’ve covered in depth in our “What is Uniswap?” post. By providing liquidity to Uniswap, you can earn interest on your holdings. This comes from the fees that traders pay to use the protocol, part of which is distributed to liquidity providers.
Yearn Finance
Yearn Finance is a yield optimizer for maximizing DeFi returns by automatically switching your holdings between DeFi networks, so you don’t have to manually look for where you can get the most returns at any given moment.
It works by depositing stablecoins, cryptocurrencies that have a constant value, into the Yearn network and receiving Yearn tokens in return. For example if you deposit the stablecoin DAI to the yearn network you receive yDAI in return.
These tokens then start accumulating interest as your deposited funds are constantly moved around to maximize returns. Whenever you wish to cash out you can just trade your yDAI back to your original DAI stablecoin.
Aside from simply depositing coins to a limited range of lending protocols, Yearn also supplies an advanced service called “Vaults” which manages the funds with more complex and somewhat riskier strategies.
Vaults are an actively managed deposit. Money placed in vaults can be used for trading, borrowing or supplying liquidity. Vaults also support a wider variety of coins than the standard yearn service.
DeFi Downsides
While the DeFi space holds a lot of opportunities to earn interest, it’s not without its downsides.
To start with, earning interest with DeFi usually works through the use of specific coins that support the network you’re looking to use. This means that in some cases you’ll need to convert your holdings into a different type of coin.
Additionally, decentralized services are usually much less intuitive for the average user and can require that you understand some additional technical jargon. Therefore we advise to use them only after doing extensive research and understanding how the service works completely.
If you’re not sure exactly what you’re doing you may want to use a centralized service that will allow you the same functionality and yield through an easier interface.
And finally, DeFi is an emerging technology, and just like with any new technology there is always the risk that there are bugs or flaws in the programming. Millions of dollars have already been lost in DeFi because the technology is in such a very early stage.
If you want to get a complete list of the different DeFi services which can earn you interest just head over to DefiPulse.com, the largest site today that lists them all. There you can also find short explanations about each network, interesting statistics and see how much money is currently locked in all DeFi protocols.
Started with Earning Interest
Great! Earning interest on your cryptocurrency holdings can be a great way to grow your portfolio and generate passive income. Here are some ways to get started:
Research the different options: Take some time to research the different ways to earn interest on your cryptocurrency. Look at the interest rates offered, the risks involved, and the platforms that offer these services.
Choose a platform: Once you’ve done your research, choose a platform that offers the type of service you’re interested in. Some popular platforms for earning interest on cryptocurrency include BlockFi, Celsius, and Nexo.
Set up an account: To start earning interest, you’ll need to set up an account with the platform you’ve chosen. This typically involves providing some personal information and verifying your identity.
Deposit your cryptocurrency: Once your account is set up, you can deposit your cryptocurrency into the platform’s lending or staking program. You may need to choose which cryptocurrency you want to deposit and how long you want to lock it up for.
Monitor your earnings: After you’ve deposited your cryptocurrency, you can start earning interest right away. Monitor your earnings regularly to see how much you’re earning and make sure everything is working as expected.
By following these steps, you can start earning interest on your cryptocurrency holdings and generating passive income over time. However, it’s important to remember that cryptocurrency is a volatile asset class and there are risks involved with any investment. Be sure to do your research and invest responsibly.