Bitcoin

Investors who plan to hold their crypto assets for years, otherwise known as HODLers in crypto parlance, typically store their cryptocurrencies stashed in a hardware wallet or keep it idle on a crypto exchange. But this practice is changing. Today, HODLers are turning to cryptocurrency savings accounts as they pay high interest in crypto deposits. The interest rates on conventional bank deposits are almost negligible — often below 0.5% — when compared to the likes of a crypto savings account — up to 12% annual percentage yield (APY). High reward typically goes hand in hand with high risk and that is the case with cryptocurrencies and crypto savings accounts. The name of the game is trust and due diligence on the part of the investor. How it Works To understand the level of risk that you’re exposing yourself to, it’s important to know what happens behind the scenes. When you deposit your crypto assets into a crypto savings account, the platform lends your holdings to individuals, corporations or institutions. Each entity uses the borrowed crypto assets for its business functions — market-making on its own platform, hedging against Bitcoin prices or liquidity. The borrowers return the assets to the lenders with high interest. The platform takes a small portion of the interest for itself and passes the rest to the users. It may also lend your assets to decentralized protocols and earn interest from there. What’s the Risk? HODLing exposes investors to several kinds of risk. Since cryptocurrency is a form of digital currency, investors face the risk of hacks. The chance of a hack depends heavily on the platform and the safety protocols it uses. Without encryptions or a strong safety infrastructure, it could be prone to a breach. Companies that are not regulated or licensed with a traditional operating permit and government registrations may also be easy bait for hackers. Furthermore, if a platform stores your tokens in a hot wallet, it may be vulnerable to attack. Traders prefer a hot wallet to trade funds quickly. But this type of storage could be dangerous because the public and private keys are kept on the internet.