Investors who aspire to hold their crypto assets long term, are often known as HODLers in the crypto sphere, generally keep their bitcoin in a hardware wallet or cryptocurrency exchange. However, this practice is evolving.
Currently, some HODLers are opting for cryptocurrency exchanges with great interest rates on cryptocurrency deposits. The interest rates on traditional bank deposits are very low – often around 1.5% (for example, the saving rate at CommonWealth Bank Australia is 1.30%) – when compared to the crypto equivalent, you are able to earn up to 12% annual percentage yield (APY) on certain coins.
Binance Australia, Crypto.com. Celcius, Nexo and Swyftx are some popular crypto exchanges that offer a very high APY for BTC. For instance, you can earn up to 4.08% APY on your BTC on Swyftx, 5% APY on Celsius, 7% APY on Nexo and 8.19% APY on Binance Australia. These interest rates are incredibly attractive, but where the yields come from is of great concern for investors.
Undoubtedly, great risk generally accompanies high profit, which holds true with cryptocurrencies and crypto earn wallets. Trust and due diligence are essential on the side of the investor.
How it Works
To comprehend the degree of risk you’re putting yourself in, you need to understand what goes on behind the scenes.
When you put crypto assets into a wallet that earns interest, the platform will lend those coins to individuals , organisations, or institutions. The crypto lent is often used for a number of business purposes, from market making, Bitcoin price hedging to liquidity management.
Due to high interest, the borrowers return the assets to the lenders. The platform retains a small percentage of the interest and gives the remainder to its users. You can also lend your funds to decentralised protocols and earn interest.
What’s the Risk?
HODLing in a BTC interest wallet exposes investors to a variety of risk types. Since Bitcoin is considered a digital asset, investors are vulnerable to attacks from bad parties. The likelihood of a breach relies significantly on the platform’s security mechanisms. It can be vulnerable to a security compromise without encryption or a robust safety infrastructure. Companies not regulated or licensed with government registrations may be targets of cybercriminals.
In addition, a platform that holds your tokens in a hot wallet can be susceptible to assault. Traders want a hot wallet for expedited transactions. As public and private keys are stored on the internet, this form of storage might be risky.
Another risk linked with crypto financing is the possibility of borrower default. Investors may be exposed to significant risk if a lender does not impose stringent criteria on its counterparties. If the company’s lending rules are not disclosed, it may be a worrying sign. The latest news surrounding Celsius is a good example of a cryptocurrency lender that encountered a liquidity crisis, meaning they did not have enough coins on hand if their users attempted to cash out
What to Consider when choosing a Crypto Exchange?
While investigating crypto platforms to deal with, you should check for 3 primary aspects: fees, safety standards and customer support rather than interest rates, which is not something a crypto exchange prioritises.
Fees
When selecting a crypto exchange, fees should be one of your first considerations. Most exchanges impose a nominal fee on each transaction and impose fees and limitations on withdrawals. You can refer to our detailed reviews of crypto exchanges, such as our CoinSpot Fee Review, to learn more about the fee structure of crypto exchanges.
Therefore, it’s better to compare all costs charged by the exchange. Typically, most exchanges charge a 1% transaction fee, which is reduced as your trading volume grows. Others charge excessively high withdrawal fees for some altcoins, and some others allow users to acquire cryptocurrencies using a credit or debit card with a fee of 5% or more.
Safety Standards
As crypto has become more popular and lucrative, hackers have been more interested in it. The hacking of prominent cryptocurrency exchanges such as Binance and KuCoin has resulted in the loss of tens of millions of dollars. Although exchanges often pay people whose coins are stolen, nobody wants to be in this situation.
Whether you need to store your crypto assets on an exchange permanently or for a while before transferring them to your wallet, the exchange’s security should be your first concern. Consider, for example, how much of the exchange’s assets are kept offline in hard storage.
You can also seek exchanges with high-level security measures, such as two-factor authentication. Each time you log in, you will be required to enter 6 digit code to authenticate your identity, this code will be generated via an authenticator app. Also, choose crypto exchanges with certifications or have met security standards if you seek peace of mind when trading or storing your digital assets.
Customer support
Not all crypto platforms offer adequate customer support. This is unfortunate, as you will want an exchange that can respond quickly to your needs if your account ever experiences issues.
Choose an exchange that provides 24/7 customer service and allows you to reach the support crew quickly. This is an invaluable feature that will significantly enhance your experience when selecting a cryptocurrency exchange with a responsive support team. You can determine this by searching for online reviews on sites like Trustpilot.
Bottom Line
Crypto banking is still in its infancy compared to regular banking; thus, it is necessary to assess your risks. Due to the lack of regulation, crypto is mostly a speculative asset. For this reason, you must investigate the security features, rules, and history of breaches or defaults of any platform you are considering.