In high inflationary times, your cryptocurrency stash is the best bet against this economic onslaught. It is simply one of the best performing assets in the world and is likely to see its importance grow over time. If you are prepared to HODL, Bitcoin will never betray you, that is a guarantee. But, in a quest to increase one’s crypto reserves, it is important to see how a passive increase in one’s net crypto holdings can be managed. Here is how you can earn interest on your cryptocurrency holdings.
On-Chain and Off-Chain Solutions
There are different ways in which a crypto user can earn interest on his/her digital assets. First, there is the major difference between on-chain and off-chain solutions.
On-chain solutions aka staking are only available in a handful of cryptocurrencies right now e.g. Ethereum, Polkadot, Solana, and others but many more crypto networks are moving towards it. Staking is basically mining rewards that are doled out to people who lock their crypto in place on the ledger in anticipation of returns. It is one of the most secure options available if you wish to earn passive returns on your crypto.
BUT, and there is a big but, Bitcoin has no such facility available. This is because Bitcoin still has Proof-of-Work mining which is an energy intensive approach. So, locking up your BTC directly through your wallet and earning returns is not an option and if someone is telling you otherwise, it is a scam, pure and simple. However, there are ways through which even Bitcoin can be used to get interest but they fall beyond the scope of on-chain solutions.
Many of the top PoS altcoins can be “staked”, meaning you can lock a certain amount in place and earn returns on them. However, you have to be careful in deciding how much to stake on these altcoin blockchains because their returns are in the form of newly minted native coins and not fiat currency like the USD or a more stable crypto like Bitcoin.
Many new altcoins offer massive staking rewards to users. Pancake swap (CAKE) altcoin can be locked in place for big rewards, often above 35% APY which is absolutely massive. Others like Polkadot (DOT), Solana (SOL) and others give anywhere between 7-20% depending on the amount locked in place.
But, since the returns are in the native cryptocurrencies, there is always the possibility that by the time your staking time period or term period has passed, your total investment remains the same in USD terms or even be less than the original investment. This is why altcoin staking is to be done very carefully with due diligence. It is among the most risky interest-based options in the crypto market.
Here is where you can compare staking returns of different crypto networks as well as custodial on-chain staking offered by companies.
Just like in banking, there are several options available to earn interest on your crypto. But, users need to be wary of the fact that such solutions always involve giving up some of your control over your crypto to a third party. Maybe a part of your stash is locked up in the system that you cannot withdraw or it is entirely out of your hands at times. While there are risks involved in these solutions, the returns are considerable. Currently in the United States, the interest rate is 0.5%. On the other hand, one can easily find a Bitcoin wallet company that offers 8% or even more interest. The average interest on such platforms is 7.5% on a yearly basis.
There are two main ways to earn interest on your crypto through off-chain solutions:
- Fixed Returns through Custodial Companies
There are a host of companies that offer fixed interests for users who wish to deposit their crypto. They include heavyweights like Blockchain.com, Blockfi, HODLnut, Crypto.com, Gemini and others.
There are various options available. You need to analyze them and then compare them to get the best deal possible just like when you are looking for a savings account in a regular banking institution.
This is a much less riskier option as you can use Bitcoin and USD stablecoins here, both of which are relatively stable as compared to altcoins who come and go out of fashion all the time. Earning interest in Bitcoin is especially beneficial for the long-term. You can HODL and earn interest at the same time and then see your BTC increase their dollar value over time and accumulate interests as well. Interests in this case are relatively lower and can be anywhere between 5-8% normally.
However, one point that may deter some HODLers from this practice is the fact that they are giving the keys to their Bitcoin away. While these companies are registered organizations with legal standing, their systems aren’t bulletproof like Bitcoin’s native blockchain and mistakes can occur, leading to users losing their funds and ending up in court battles to recover them. On the other hand, the upside is that you are literally earning rewards for HODLing which wasn’t easily available before.
- P2P DeFi
P2P DeFi is a much more complex matter as it involves direct contracts between two parties. This is why it is called Peer-to-Peer (P2P) Decentralized Finance (DeFi). This is not a strict fixed interest scheme. It is basically what two parties can agree between each other and sky’s the limit. However, the free market usually brings it down to competitive levels. So, in essence, it is P2P borrowing with interest collateralized by cryptocurrencies.
The DeFi sector is evolving and disrupting the lending industry heavily. If you analyze half of the top 20 cryptocurrencies by market capitalization, you will see that around 80% of those have a connection to DeFi one way or another. Ethereum is the most popular DeFi programming tool. Cardano, Solana, Polkadot, Terra Luna, Chainlink, Avalanche, Uniswap and many others, all offer P2P DeFi capabilities. To cover them in detail is beyond the scope of this article but you have to be very careful in getting involved in the DeFi space as it is still a young space and you can expect issues here and there.
But, despite the teething issues with the sector, it is clear that this model of P2P financing through crypto as collateral is the future of finance itself.
Earning interest on your crypto reserves has never been so easy in the short, yet significant history of digital currencies. However, there are different ways to go about it including on-chain and off-chain solutions, the latter of which is further divided into fixed returns and P2P DeFi (Crypto collateral) possibilities. These three options give the end user a wide range of choices. Considering the abnormally low interest rates in the conventional banking sector, interest rates in the crypto sector remain lucrative, thus opening up new avenues for capital holders to get passive income from. Even if you are not a crypto user directly, you can benefit from this useful opportunity. Just be sure to do enough research to be able to understand its innate workings before embarking on it.