By: Ofir Beigel | Last updated: 02/16/23
If you hold cryptocurrencies as a long-term investment, you may have considered using them to generate a return. In this article, I’ll explain how you can earn interest on your crypto and how each method works.
How to Earn Interest on Crypto Summary
There are several ways to make money with crypto. For those who already hold cryptocurrencies long-term, you may want to consider earning a return on these holdings through staking, crypto interest accounts, DeFi, and yield farming. Finally, it is important to properly research each method before implementing any of your cryptocurrencies.
Don’t like reading? Watch our video instead:
That’s how to earn interest on crypto in a nutshell. For a full explanation on each of these methods, keep reading.
1. Cryptocurrency Staking
Simply put, staking is the action of blocking or “parking” a portion of your funds in order to help maintain a specific network. These networks are usually Proof-of-Stake (PoS) blockchains such as Ethereum 2.0, Cardano, Polkadot.
In exchange for helping maintain the network, a staking reward will be distributed among participants in the form of interest. The annual interest rate, also known as APR or APY, varies widely from coin to coin and can range from 0.05% to 100% per year.
A higher interest rate often means there are additional risks, so you’ll need to do some research before deciding which coin you want to stake.
Another important aspect of staking is that each coin has different rules. For example, if you stake on Ethereum, you will have to lock up your funds for a very long period of time. As of this writing, there isn’t even a clear end date. Other coins may allow a much shorter, well-defined staking period.
Although staking can be done directly from your computer without requiring dedicated equipment, this process is quite technical, has many limitations, and is not recommended for beginners. The easiest way to stake for a beginner would be through an exchange or wallet.
Popular exchanges like Kraken, Bitstamp, and Binance allow you to stake a variety of coins. In addition to the ease of using staking on an exchange, the minimum amount to be staked will generally be quite low and in some cases, there will not even be a minimum lock-up period.
On the other hand, when you bet on a stock market, you relinquish control of your funds to the stock market. This means your funds are at risk if the exchange is hacked or goes bankrupt. Additionally, most exchanges charge a fee for providing their staking services.
A good alternative for people who do not wish to give control of their funds would be to stake via a wallet. There are a number of staking wallets; Ledger, Exodus and Atomic to name a few.
Be sure to take a look at the fees charged by each wallet: you may find some that don’t charge any staking fees. Keep in mind that in most cases wallets will offer a smaller variety of coins that they will make available for staking.
2. Crypto Savings Account
The next option for earning interest on your crypto holdings is to use a crypto savings account. A crypto savings account is an account provided by a centralized company that agrees to pay you interest for holding your crypto on its platform. The company can then use your deposit to pay lenders who will return it on time with interest.
The downside here, again, is that you will have to give up control of your funds. On the plus side, however, there is usually no lock-up period for a savings account and it is a good alternative for coins that do not support staking, like Bitcoin.
Some of the most popular companies allowing you to open a savings account are YouHodler and Nexo. Many exchanges such as Coinbase, Gemini, and CEX also allow you to have a savings account.
Again, you will need to do your research regarding the amount of interest you can get for each coin and the fees you will be charged. Remember that high interest rates generally signal some form of increased risk, whether it’s a new, untested coin or a less reputable company – so don’t blindly choose the highest yield high possible.
3. DeFi and yield farming
Finally, we come to our most complicated option, which is DeFi. DeFi stands for Decentralized Finance – a term given to financial services that are not controlled by a central authority, but by a network of independent computers using predefined rules.
Many decentralized services allow you to lock up your holdings and earn interest in return. Blocked funds can be used for different purposes such as lending, staking, providing liquidity to decentralized exchanges and agriculture.
It would be impossible to go into all the theory behind this here, so suffice it to say that in exchange for the interest you receive, your funds will be used for other purposes while they are locked up.
Let’s review some of the most reputable DeFi services worth checking out:
Aave and compound
Aave and Compound are two leading DeFi networks that enable decentralized borrowing and lending. You can earn interest on your crypto holdings by depositing any of the supported coins on their platform.
Uniswap is a leading decentralized exchange that we covered in depth in our “What is Uniswap?” job. By providing liquidity to Uniswap, you can earn interest on your holdings. This comes from fees that traders pay to use the protocol, a portion of which is distributed to liquidity providers.
Yearn Finance is a yield optimizer for maximizing DeFi yields by automatically switching your holdings between DeFi networks, so you don’t have to manually search for where you can get the most yields at any given time.
It works by depositing stablecoins, cryptocurrencies that have a constant value, into the Yearn network and receiving Yearn tokens in return. For example, if you deposit the stablecoin DAI onto the Yearn network, you receive yDAI in return.
These tokens then begin to accrue interest as your deposited funds are constantly moved to maximize returns. Whenever you want to make a withdrawal, you can simply exchange your yDAI for your original DAI stablecoin.
In addition to simply depositing coins to a limited range of lending protocols, Yearn also provides an advanced service called “Vaults” that manages funds with more complex and somewhat riskier strategies.
Vaults are an actively managed repository. Money placed in safes can be used to trade, borrow or provide liquidity. Vaults also support a wider variety of coins than the standard Yearn service.
Disadvantages of DeFi
Although the DeFi space offers many opportunities to earn interest, it is not without its drawbacks.
To begin, earning interest with DeFi generally works through the use of specific coins that support the network you wish to use. This means that in some cases you will need to convert your holdings to another type of coin.
Additionally, decentralized services are generally much less intuitive for the average user and may require you to understand additional technical jargon. Therefore, we advise you to use them only after carrying out thorough research and understanding the complete working of the service.
If you’re not sure exactly what you’re doing, you may want to use a centralized service that will give you the same functionality and performance through a simpler interface.
And finally, DeFi is an emerging technology, and as with any new technology, there is always a risk that there will be bugs or flaws in the programming. Millions of dollars have already been lost in DeFi as the technology is in its infancy.
If you want to get a complete list of different DeFi services that may interest you, just head over to DefiPulse.com, the largest site today that lists them all. There you can also find brief explanations about each network, interesting statistics and see how much money is currently locked in all DeFi protocols.
4. Start earning interest
By now, you may be totally confused by the endless options available for earning interest on your crypto, and you’re probably wondering: how do I choose where to put my money?
Our first guideline here at 99Bitcoins is always “better safe than sorry”. This means that as crypto is such a new and exciting but also risky space, we always try to minimize this risk as much as possible.
This means we won’t block money that we can’t afford to lose or need on hand. A good rule of thumb for us is to use 10% of our crypto holdings to generate interest.
Of course, this may change depending on your risk tolerance and overall strategy, but if you’re just starting out, it’s a good place to start to familiarize yourself with the options we’ve covered.
Additionally, for us it is always about the currency we seek to hold and not how much interest we can generate. This means that if we hold BTC, we will not convert it to another currency in order to earn higher interest. Instead, we will look for a service that allows us to generate interest on our BTC.
5. Important points to consider before investing
First, take a look at the company or network providing the service. Perhaps there is a specific coin that you really love and want to support its network, so banking on that coin makes the most sense for you.
Additionally, check whether the company you are considering using is centralized or decentralized. Centralized businesses present risks of fraud, mismanagement, and theft, while decentralized businesses present technical risks and typically have more complex interfaces that are not very intuitive for beginners.
It’s up to you which type of business you prefer, but personally, we think simplicity trumps everything else in this case.
Other things to consider are lock-in periods, service fees, frequency of interest payments, minimum lock-in amounts, and of course the annual percentage rate, sometimes called the APR or APY.
Finally, we prefer to lock funds only in established networks and exchanges that have been operating for a while without major issues. Of course, this usually means a lower interest rate, but like I said earlier, prevention is better than cure.
One thing you will want to avoid at all costs is HYIPs and crypto doublers. These are sites that promise unusually high returns or claim to double your coins and pretend to be legitimate decentralized companies, when in reality they are just Ponzi schemes in disguise.
If you’re unsure about the legitimacy of a company, be sure to check if it appears in our list of recommended services in the description below, or ask around on various community forums and on Reddit.
As we saw above, there are several ways to generate passive income on your crypto balance. Non-technical users may find it easier to deposit cryptocurrencies into a savings account or stake part of their balance on a cryptocurrency exchange. Users who are concerned about losing control of their funds can stake their crypto using a crypto wallet such as Exodus.
More advanced users can stake using their computer or use DeFi services such as Uniswap to lend against interest. However, using such services requires extensive research and is not without risks, so due diligence is required.
For me, the answer has always been to buy and hold, or “HODL” as crypto enthusiasts would say. This position has not changed – hodling is, in my opinion, the best long-term strategy. You can definitely make money while you hang around, just make sure you don’t risk more than you can afford to lose.
That’s all for today’s article on how to earn interest on your crypto holdings! Hopefully, you now know what options are available, their specific pros and cons, and how to choose the one that best suits your personal needs.