How do crypto savings accounts work?

The crypto market is ever evolving. And crypto enthusiasts are looking for more and more ways to make their crypto work harder. One such way to do this is through a crypto “earn account” or “crypto savings account”. These are accounts that are built to hold your crypto investments.

It’s important to understand that these aren’t savings accounts in the traditional sense, and don’t have the protection of the Financial Services Compensation Scheme (FSCS). While they promise high returns, there’s a degree of risk attached. The more you learn, the better equipped you’ll be to decide if the rewards of this new breed of accounts outweigh the risks.

Crypto is unregulated in the UK; there's no consumer protection; value can rise or fall; tax on profits may apply*.

* Stablecoins linked to the respective fiat currencies. Note: we have based our comparison on “in-kind” earn rates (where the yield is paid in the same currency as your holding). In some cases higher rates may be available if you’re willing to be paid in an exchange’s native/preferred currency.

What are crypto savings accounts?

Crypto “earn” products – or “crypto savings accounts” – are a way to potentially earn a return on your crypto assets. They work in a similar way to a traditional savings account in that, when you deposit money into a traditional savings account, you give the bank permission to loan out your money to third parties. In exchange, you receive a set percentage back – like interest.

With a crypto savings account, the account provider will loan out your cryptocurrency to borrowers and provide you with a return in exchange. The rates of return advertised by crypto savings providers are impressive, with some offering up to 10% or more. However, there are some important differences to understand about how crypto savings accounts operate, which we cover in this guide.

Are crypto savings accounts safe?

The biggest difference when it comes to crypto savings accounts is that while traditional banks are covered by the FSCS, crypto exchanges are not. So your funds are unprotected. This means that if the exchange that holds your crypto goes bust, you have no way to recover your funds.

If you’re looking to open a crypto savings account, then it’s worth taking a look to see if the crypto exchange has its own insurance in place. Some of the larger crypto platforms partner with third-party insurers to offer a level of protection. Others rely on a native cryptocurrency token as its store of value, which can be used to make up for lost funds under specific circumstances.

Carefully read any details of insurance protection to understand the assets it does and doesn’t cover. It may protect only cryptocurrency and not any fiat cash reserves held on the platform.

What are the risks?

There are a number of risks when you consider crypto earn accounts. And it’s important to understand them before committing any funds to this type of account. Let’s take a look:

• FSCS protection. As we mentioned, there’s no default insurance scheme in place to protect your crypto savings. In fact, the UK doesn’t recognise cryptocurrencies as a financial product, and so treats them more like an asset. As a result, it’s best to think of a crypto savings account as an investment account, not a traditional deposit savings account.
• Access. Crypto savings accounts tend to limit access to your coins for a set period of time once you’ve made your deposit. You’ll lose access to your keys during this time as your crypto is lent out to other users who can then use it.
• Volatility. The cryptocurrency market is notoriously volatile, with price swings commonplace. Most of your crypto savings account value will be determined by these price swings rather than a set rate of return.
• Default risk. As part of how crypto savings accounts work, your crypto assets are being lent out to another user. Therefore there’s a risk that the borrower won’t be able to pay back the loan. It’s important to understand what measures your exchange will take if borrowers do default on their loans.
• Extinct coins. There are more than 13,000 cryptocurrencies available, and it’s unlikely all will go up in value or remain in circulation. Keep this in mind when choosing which cryptocurrency to use.

Crypto savings accounts vs traditional savings accounts

Crypto savings accounts may look similar to the traditional savings accounts you’d find at your local bank in that they accept and store your cryptocurrency, allowing you to earn a return on your deposits. But there are some key differences to understand:

1. Crypto exchanges may advertise that you can earn “interest” on your crypto deposit. It’s important to understand that this is more “yield” than “interest”. While traditional savings accounts will pay you a set amount of interest, the rate you earn with a crypto savings account depends on the coin or the token’s value.
2. You don’t really earn compound interest with the returns you receive on your crypto savings account. Instead, you only receive a yield on the principal balance that you deposit in the account.
3. There’s no default safety net (such as the Financial Services Compensation Scheme).
4. You’ll most likely find that crypto savings accounts have restrictions on accessing your funds. While a traditional savings account – especially an easy access account – will allow you to access your money whenever you like, a crypto savings account may limit your access or charge a fee for withdrawing your funds before a select date.

How do I open a crypto earn account?

Each platform or exchange has different steps to follow to sign up. To start, look for a Sign up or Register button on your platform’s site, and follow the steps required.

Most exchanges are required to comply with anti-money laundering regulations and “know your customer” policies that require government-issued ID, including a photo and proof of address. Typically, as part of the account set-up, you’ll need to provide these documents and then wait for your identity to be verified.

Once this has happened, you can look to open your crypto savings account through the platform’s website or app. You’ll need to make a deposit. Whether this is in your chosen cryptocurrency or in your fiat currency will depend on your crypto earn account provider.

Pros and cons of crypto earn accounts

How do crypto earn accounts work?

Crypto savings accounts offer earn rates that depend on the type of cryptocurrency deposited. You’ll often earn higher rates by depositing stablecoins – cryptocurrency such as TGBP (TrueGBP) that’s “pegged” to a stable asset like pounds sterling – instead of Bitcoin (BTC). But if BTC continues to hit all-time highs, you could see even higher future savings than from earnings in pounds sterling.

What happens if the value of your crypto rises?

How much of a return you make on your crypto savings account depends on the type of cryptocurrency you have. We’re going to take you through what happens if BTC continues to reach all-time highs and what that means in terms of gains.

Suppose a deposit of £2,500 converted to about 0.087 BTC (February 2022 rate). At current average earn rates advertised for crypto accounts – which are around 4.5% – that value could grow to 0.14 BTC over 10 years – or £3,882 at that same exchange rate.

If the price of BTC rises, your potential gains could be even higher:

Scenarios	Potential price of 1 BTC in 10 years	Potential value of 0.087 BTC in GBP in 10 years	Potential value of 0.14 BTC in GBP in 10 years	Difference
Low	£100,000	£8,700	£14,000	£5,300
Mid	£500,000	£43,500	£70,000	£26,500
High	£1 million	£87,000	£140,000	£53,000

What happens if the value of your crypto falls?

Investing in cryptocurrencies is not for the faint hearted. The volatility of the market can have a significant impact on your crypto savings. If the value of your crypto assets drops, then there’s a chance your initial investment and returns will be wiped out.

If your balance and earnings are paid back in crypto, the total amount will fluctuate according to market conditions – making it extremely difficult to plan ahead.

The other big risk when it comes to the value of crypto falling is that your high yield is dependent on your crypto being lent out at much higher rates. If the platform you use has a wave of defaults on loans because the value of a certain coin has dropped, they could potentially be unable to cover the losses and you could lose the assets you have deposited.

Bottom line

Crypto savings accounts are offering cryptocurrency investors a way to put idle cryptocurrency assets to work. The annual returns advertised are higher than those of traditional savings accounts. And the range of cryptocurrency accounts is constantly expanding.

While the potential returns may seem high, crypto savings accounts aren’t well regulated and offer no protection in the form of the FSCS. Many accounts also have limitations with cryptocurrency withdrawal and overall custody, and you risk losing your investment and returns if the value of your crypto drops.

For those with substantial crypto holdings who are not concerned about volatility and liquidity issues, then holding a crypto savings balance can help boost passive returns. But for those who are not in it for the long haul, it could prove to be a risky endeavour.

Frequently asked questions

• Can I use crypto as a savings account?

  Yes, you can deposit your crypto into a crypto savings account and potentially passive returns over a set time period. Another option for storing your assets is a crypto wallet. This will store your private keys and allow you to send, receive and spend your cryptocurrencies. However, there is no rate of return offered on your balance.

• How risky are crypto savings accounts?

  While crypto savings accounts offer high levels of reward, there are also risks attached. They are not covered by the FSCS, so you could lose your funds if your crypto exchange was to fold. Similarly, they are vulnerable to price fluctuations which can significantly impact the balance and return you stand to receive.

• What is a good annual yield for crypto savings?

  Rates vary greatly when it comes to crypto – some as high as 12%. You will most likely find that the highest rates are paid on stablecoins like USDC and Tether.

*Cryptocurrencies aren't regulated in the UK and there's no protection from the Financial Ombudsman or the Financial Services Compensation Scheme. Your capital is at risk. Capital gains tax on profits may apply.

Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.