The search for a decent savings account is always ongoing, and this search has birthed several savings options you can choose from besides the regular bank savings account.
Cryptocurrency has become a popular way to save money recently because it gives you the chance to get a high return on your deposit. Traditional savings accounts, on the other hand, no longer have the same appeal because of low interest rates and failing institutions.
This article examines, in detail, cryptocurrency savings in comparison to your traditional bank savings account. The aim is to help you ascertain which of the two offers better returns and, thus, more preferable.
What Are Traditional Bank Savings?
A traditional bank savings account is the most basic form of savings. Unlike the best crypto interest accounts, which are primarily virtual and receive crypto deposits, bank savings are a product of conventional financial institutions, such as banks or credit unions. Offer deposit accounts from which you earn interest on your deposited amounts.
Bank savings offers you a moderate interest rate. Most investors open these accounts because of their safety and dependability and because they can use them to store excess cash, establish emergency money, or make short-term savings goals.
Pros of a Traditional Bank Savings Account
1. Bank savings require meager initial startup costs. You can open a bank savings account for as little as $25. You can start saving with even a tiny amount because some banks will let you open an account for as little as $1.
2. Traditional savings accounts benefit from simple access and high liquidity. You can instantly transfer money into your checking account if you need it right away. As long as you keep the minimal balance required, this isn’t the case with conventional savings accounts.
3. Market swings are not a factor in your money. In contrast to an investment account, where your balance may fluctuate based on the state of the stock market, this one does not.
4. There are no restrictions on the annual deposit amount. For example, yearly deposit caps apply to IRAs. However, there is no cap on the money you can keep in conventional savings accounts.
5. Your money is covered up to $250,000 in a savings account with a bank that belongs to the Federal Deposit Insurance Corporation (FDIC). Your account is also protected up to $250,000 if you use a credit union insured by NCUA insurance.
6. Consider using a conventional savings account for your emergency or rainy day fund. You’ll require quick access to your money when needed. Traditional savings accounts excel in this area.
You can invest money for your other financial objectives by generating passive income with crypto or investing in longer-term vehicles like an IRA.
Cons of a Traditional Bank Savings Account
Traditional savings accounts are straightforward instruments with advantages due to their accessibility and simplicity.
There are, however, certain additional factors to consider:
1. There are minimum balance requirements or monthly fees associated with your account. High-yield savings accounts may also offer more excellent interest rates.
2. You’ll probably have a low savings rate, which will reduce the amount of compound interest you may earn. Traditional savings accounts often have lower interest rates and annual percentage yields than high-interest or high-yield accounts.
3. Another drawback is that you don’t get any tax advantages with a regular savings account, unlike a Roth IRA, where your deposits grow tax-free, or decentralized finance DeFi interest accounts, which allow you to profit handsomely from investments but are also tax-free. There are many ways how to avoid capital gains tax on cryptocurrency, and the use of a crypto savings account is one of them.
What Are Crypto Savings Accounts?
Typically, there are cryptocurrency platforms that enable you to deposit your existing tokens and receive income via a cryptocurrency savings account. In essence, these accounts are the digital version of a bank savings account. So, you earn interest on crypto you keep in such an account.
Additionally, your cryptocurrency is liquid and rarely subject to holding periods, much like a traditional savings account. Investing to a point where you can make $100 a day trading cryptocurrency is possible.
In contrast to regular savings, interest rates on Bitcoin deposits are frequently substantially higher than those of traditional savings accounts. Due to their guaranteed stability, investors prefer traditional savings accounts.
On the other hand, despite having greater volatility and other dangers, cryptocurrency savings accounts can provide significant profits. Some platforms offer a guarantee in the event of failure. However, they typically lack deposit insurance.
Pros of Crypto Savings Accounts
1. Spread your risk across investments by investing in cryptocurrencies, bonds, equities, and cash savings accounts. When you don’t have all your money invested in one asset type, it might lessen the impact of particular assets losing money.
2. If necessary, you can easily withdraw your cryptocurrency while choosing a flexible crypto savings account. You can choose an exchange that works for you because of the variety of cryptos you can deposit.
3. Cryptocurrency assets may offer higher interest rates than conventional savings accounts. For instance, crypto savings or crypto yield farming may offer a 10% annual percentage yield (APY), while a bank savings account’s APY is at 0.08%. You can also explore the best interest rates for crypto to get even higher interest.
Cons of Crypto Savings Accounts
1. Cryptocurrency is erratic in its value. It can alter at any time, so there is always a chance that the value of your crypto may fall or that a specific cryptocurrency will cease to gain wide patronage. As a result, you may receive a lower return than anticipated because the interest rate is unstable and determined by the performance of the cryptocurrency market.
2. Additionally, cryptocurrency savings are not insured due to the absence of deposit insurance, as is done with traditional savings accounts. Due to the lack of insurance, you depend solely on the cryptocurrency exchange to behave appropriately and remain operational. You risk losing all the money in your account if the platform fails.
3. Laws governing cryptocurrencies are still developing; not all cryptocurrency exchanges offer crypto savings accounts in the U.S. Since there are no formal legal safeguards, the hazards associated with cryptocurrency are further increased. Additionally, the crypto exchange you use might not be the most secure, which would put your digital assets in danger.
How Does Your Crypto Savings Account Function?
The functioning models of cryptocurrency savings accounts vary. While some accounts may invest your funds in other projects, others will contribute them to lending pools. Conversely, there are ways how to make your own cryptocurrency that you can explore.
All these activities influence the interest you receive on your coin deposits. Although the amount they make can fluctuate, you are often guaranteed a minimum fixed return percentage.
There are several ways how to make money with cryptocurrency, which can help you maximize your crypto earnings. For instance, while digital savings generate good interest, using the highest-yielding crypto accounts gives you even more.
How secure are crypto savings accounts?
Regarding crypto savings accounts, the most significant distinction is that, unlike traditional banks, crypto exchanges get no protection from the FSCS. This implies you need a method to get your money back if the exchange where your cryptocurrency is stored fails.
Check whether the cryptocurrency exchange has insurance before opening a crypto savings account. Some more prominent cryptocurrency platforms collaborate with independent insurers to provide a certain level of security. Others employ a native crypto coin that you can use to replace lost money as their store of value.
Traditional Banking vs. Cryptocurrency Savings Accounts
Crypto and bank savings are similar in that they accept and store your crypto or physical cash, enabling you to receive interest on your deposits. However, there are vital distinctions to take into account before deciding where to save:
1. Crypto exchanges promote the possibility of earning higher interest on your deposit. This is a result of it being more about yield than interest. Traditional banking accounts pay a fixed amount of interest. In contrast, the interest rate you receive from a cryptocurrency savings account is based on the value of the coin or token.
2. Compound interest is not earned by compounding the rewards you receive on your digital currency savings. Instead, you only get a dividend on the money you put into the account as principal.
3. While crypto lending platforms, among the top crypto interest accounts, may provide higher returns, they do not have a default safety net like the Financial Services Compensation Scheme, which traditional bank savings have.
Ready To Set Up Your Crypto Savings Account?
Crypto saving is perfect for those who frequently trade cryptocurrencies or want to boost their return rates on liquid assets. However, it’s not prudent to invest a significant portion of your assets in one of these accounts due to its risks.
It’s best to start small and add on overtime when you are more confident with staking cryptocurrencies for interest to the point where you can make $100 a day trading crypto.