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 stocks or high-yield savings accounts.
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. That’s partly because not all crypto exchanges or lending platforms insure account holders’ funds.
In contrast, under the Financial Claims Scheme (FCS), deposits are protected up to $250,000 for each account holder at each licenced bank, building society or credit union incorporated in Australia.
Not only is cryptocurrency not FCS-insured, but the crypto market is also unregulated in Australia and overseas.
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 market’s volatility.
“Instead, the overarching issue is that you don’t really know what your lending firm is investing in because the regulatory system is currently such where there aren’t 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 else’s investment, if it goes belly-up, they can’t pay you back,” Garner says. He noted the downfall of Celsius is a prime example of this type of poor risk management.