How to Earn Interest on Crypto - The Definitive Guide

Earning interest on crypto is an extremely hot topic in this industry. This is for one simple reason: it allows people to make additional digital assets for potentially little effort. However, even with this in mind, there are still significant elements you need to consider and be aware of.

The aim of this definitive guide is to help you navigate these areas, and instill you with the knowledge you need to begin your own research and pursuit into earning interest on crypto. While this is a relatively straightforward process, it is still extremely useful to have a primer on the topic, and gain some necessary insights to help stir you in the right direction.

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Can You Earn Interest on Crypto?

It is absolutely possible to earn interest on crypto. There are several methods of doing this, which all generate interest in different ways, and suit different types of people.

How To Earn Interest on Crypto

There are numerous ways to earn interest in crypto. These all have their own merits and drawbacks, and function in distinct ways. Let’s take a look at them now:

Savings or Growth Accounts

The most straightforward way to earn interest on crypto is to use a savings or growth account. These work very similarly to their fiat counterparts. All you need to do is enter your crypto assets into a savings or growth account, and then wait for it to accrue interest over a period of time.

A top choice for this is Ledn. Their savings accounts, referred to as Growth Accounts, support BTC, ETH, USDT, and USDC, and offer highly competitive interest rates. Not only this, but Ledn has a strong reputation for transparency, and takes risk management extremely seriously. For example, each user’s Growth Account is ring-fenced, meaning they are only exposed to the counterparties that produce interest for them.

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Yield Farming

Yield farming is the process of locking away your crypto assets onto a platform or service, where it is then used to add liquidity to different markets and exchanges. Users earn interest as a reward for helping these markets function and operate. This is typically a decentralized endeavor, and is viewed as an essential part of decentralized finance overall. However, some centralized services also allow for yield farming as a method of earning interest.

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Crypto Lending Services

Many projects let you lend out your crypto and earn interest in the process. Generally, you will not directly do this yourself, but rather you will work with a service and hand your assets over to them, with them lending it out for you– giving you the rewards for doing so. Typically, this is how interest is generated from crypto savings accounts, as well as from some types of yield farming, where people lend their assets out to liquidity pools.

Staking

Some cryptocurrencies give you the ability to earn interest via staking them. This is the process of locking away your cryptocurrency onto a blockchain, and earning interest as a reward for validating blocks and ensuring transactions occur on the chain itself. Despite how complex it might sound, this is a relatively hands-off process– once you lock the funds away in a wallet, the blockchain does the rest of the work.

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However, only assets that belong to proof-of-stake blockchains can engage in this. The biggest name in the crypto space that fits this criteria is Ethereum. That being said, you may run into companies and projects that claim to allow you to stake other assets, such as BTC or USDT, but this is actually a misnomer. Sometimes the term “staking” is used to loosely denote any method of earning interest, so make sure to read carefully what a project is offering when it claims to allow for staking. In other words, it can be misleading at times.

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Crypto Interest Rates vs Traditional Banks

When learning about how to earn interest on crypto, it is natural to wonder how exactly rates differ from those offered by traditional banks and institutions. You may have already noticed that crypto interest rates (and associated risks) tend to be somewhat higher than their fiat counterparts. But why is this?

There are several reasons, but one of the greatest is that crypto services typically have less operational and overhead costs. Crypto companies do not have many physical offices or branches, and so they employ fewer people overall.

Not only this, but the highly speculative nature of the crypto space can lead to a scenario where there are higher interest rates, as a reflection of this. This occurs because lenders need to be compensated for the inherent risks that come from aspects such as volatility and market shifts. Therefore, to attract more lenders, interest rates are set higher.

The Risks Associated With Earning Interest On Crypto

While earning interest on crypto is considered much safer than other related activities, such as trading, there are still some risks that can occur, which people should be made aware of. Let’s take a look at some of the major ones here.

Volatility Risk

As mentioned earlier, the crypto market is extremely volatile, and so this can lead to risks. If an asset begins to swing rapidly in one direction, it can significantly affect the value of the interest being earned. For instance, if the value of the cryptocurrency drops substantially, the interest earned (even if it's at a high rate) may not compensate for the loss in the actual value of the crypto asset. This volatility risk means that the returns on your investment can be highly unpredictable and could lead to a situation where the value of your initial investment is eroded, despite earning interest.

If this is particularly worrisome for you, the best way to mitigate this risk is to only earn interest on stablecoins, such as USDT and USDC. These are both assets that are pegged to the US dollar, meaning they do not fluctuate in the same way as regular cryptocurrencies. Ledn supports interest-earning Growth Accounts for both USDT and USDC.

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Regulatory Risk

As the crypto market is still being debated and explored by regulatory bodies, this means there is a potential risk for end users. This is because the rules and guidelines imposed by these regulators could mean that certain interest-earning activity gets banned or restricted in particular regions. The good news about this type of risk is that you can usually learn about rules like this a little before they are implemented, meaning you typically get time to prepare and make arrangements. This is because regulators broadcast their decisions, which get picked up by crypto news sites.

Insurance Risk

It is no secret that the crypto world is less protected than its fiat counterpart. There are fewer rules and guidelines that are imposed– with this in mind, crypto assets are not insured in the same way as legal tender is. Banks and major financial organizations provide government-backed insurance on deposits, investor protection funds, or other actions, which insures deposits up to a certain amount, providing a safety net for bank customers or investors.

However, in the crypto world, such government-backed insurance is generally not available. Some crypto services might have their own private insurance implemented that can help out their user base, but this is dependent on the project, and is unlikely to have the same benefits as government-related insurance.

Bankruptcy Risk

Closely connected to insurance risk is bankruptcy risk. If a crypto service goes bankrupt, then it can bring about some major issues for its user base, who might have their assets tied up in the company’s tools. If this happens, then it can cause user funds to become unreachable, and in the worst case, lost for good.

The best way to avoid an issue like this is to carefully choose the service you work with. Research them by taking a look at their risk management methods and protocols, and checking to see if people have had any issues with them in the past. Typically, a company will not suddenly go bankrupt without there being some signs or “writing on the wall” that suggests this could happen.

Look into the way a service handles risk management, and what its protocols and methods are, as this will give you an indication of whether bankruptcy is likely. It also helps to pick a service that makes assurances that it will not unduly use your assets for matters that do not directly relate to earning you interest.

The Best Crypto Savings Account For Earning Interest

For people looking for the best way to earn interest on crypto, Ledn is a fantastic option. This is a company with a great track record for being reliable, honest, and having strong risk management protocols. It is known for being transparent and trustworthy, whilst still offering competitive interest rates on Bitcoin, Ethereum, Tether, and Circle’s USDC. Therefore, it functions with both regular crypto assets, as well as stablecoins.

This makes Ledn’s Growth Accounts perfect for many users who are looking to earn decent rewards whilst being careful and mindful about their activity. Its ring-fenced accounts that expose user funds only to the counterparties that earn them interest keeps credit risks mitigated in benefit of Ledn’s community. Not only this, but the fact that Ledn publishes its monthly open-book reports, and biannual proof-of-reserve data means that you can assess the company’s health and inner-workings for yourself.

How to Get Started

To get started with Ledn, simply head over to their Growth Accounts page and open an account. From there, you can set up your Growth Account, input your funds, and begin earning interest!

Conclusion

As you can hopefully tell by now, earning interest on crypto is a relatively simple and straightforward process. This is a powerful method of making extra returns on your assets, without the hassle and intensity of directly trading them.

If this sounds enticing to you, and you would like to earn interest on your ETH, BTC, USDT, or USDC, then make sure to check out Ledn’s Growth Accounts and see if they are the right choice for you.

Sponsored by 21 Technologies Inc. and its affiliates (“Ledn”). All reviews and opinions expressed are based on my personal views.