The Best Crypto Savings Accounts

Crypto savings accounts work in a similar way to normal bank savings accounts. In a nutshell, you lend money to an institution, which lends your assets to borrowers in need of liquidity. However, these loans are relatively secure since the loan providers ask the borrowers to deposit crypto assets themselves, as security for the loan. Most providers ask for a ‘loan-to-value’ ratio of 50% meaning that if a borrower wants $1000 they’ll need to deposit $2000 worth of e.g Bitcoin as security for the loan.

Who are these providers lending my assets to?

Broadly spoken, these are institutions and sometimes individuals that hold cryptocurrency and need short-term liquidity but don’t want to sell their cryptocurrency. To give a few examples of the type of companies using crypto-backed loans:

• Cryptocurrency Miners: Need financing to cover their operating expenditures (pay employees, electricity costs etc.).
• Traders: Want to seize arbitrage opportunities and need short-term liquidity to execute profitable trades.
• Hedge funds: Have invested in ICO’s or other digital assets and want to leverage their position to pursue more investment opportunities.
• Cryptocurrency Exchanges: Need financing for their margin lending and trading services.

Are there any risks?

Like any financial investment, depositing your assets into a crypto savings account comes with risks.

Loan Default Risk

As we mentioned before, the risk of default on the borrower side is very limited because the loans are secured. When the value of the collateral backing the loans falls below a certain treshold, crypto lenders can sell the assets. However, in the event of a black swan event where market prices crash within minutes, the value of the collateral could fall below the loan value.

Custodian Hack

Perhaps the largest risk factor is that the lending company’s custody provider (where your assets are stored ) gets hacked. If an infiltrator penetrates a custodians’ wallet they could run away with the users’ money. To offset this risk, many custody providers have insurance policies to protect users in case they do get hacked. However, these often have an amount ceiling so whether you get reimbursed or not in the event of a hack depends on how much money was lost overall. Sometimes, the lending providers themselves, have additional insurance policies. If insurances exist, we always list them in the ‘details’ section

Smart contract vulnerability

Some of the providers listed above, namely Argent, ZenGo & Dharma use the decentralized Compound protocol for their savings accounts. This means your assets are not being lent out by a company but an automated lending platform on the Ethereum blockchain. These smart contracts can have bugs that attackers can exploit to steal the money. All this being said, none of the scenarios mentioned have happened. If you want to read more on the crypto lending sector read our article on “How to think about savings rates in crypto?”.