Earn Interest on Bitcoin. Is It Worth the Risk?

Over the past year, we see a lot of financial applications being built, in order to accommodate cryptocurrency investors. No longer is hodling and trading the only things you can do with your coins. Nowadays, you can buy bitcoin and earn interest on it as well.

The best part? The interest rates are massive compared to traditional savings accounts, and in some cases even exceed the potential profits made on the stock market. These new products are now taking the world by storm. But is it really worth it? In this article we analyse the pros and cons of earning interest on your Bitcoin, and the risks that come along with it. Let’s delve in.

Where to earn interest in Bitcoin

There are, generally speaking, two ways to earn interest on your Bitcoin:

High yield savings platforms

The first way, and the most popular with new investors, are high-yield “savings accounts” for crypto. The most popular of these are BlockFi and Celcius Network, but there are also less popular options, like Nexo.

These platforms offer yield that ranges between 6%-8% APY on your coins, with BlockFi recently decreasing the amount of 0,5% APY when locking more than one Bitcoin.

While the latest had built a reputation as being one of the best platforms to use in order to earn interest, their recent decisions have made many investors turn away from it. From their perspective, it is only normal to decrease interest rates in bullish market conditions, and they are trying to shrug it off as normal.

DeFi products

While DeFi is a name more commonly associated with Ethereum, it is possible to use Bitcoin as a staking coin on there as well. While not exactly using the original Bitcoin you can swap your Ethers to “Wrapped Bitcoin”, also known as wBTC, and is it within all DeFi protocols that offer high interest returns.

Platforms like these include Aave, Compound, Curve, and others, and they will generally have higher yield compared to savings platforms. This, however, comes with its own set of risks, more of which we will discuss in the next chapter.

Risks associated with earning interest on BTC

It is important to understand that each of the two options discussed above has its own risks. Hence, it is important to study them separately instead of seeing them as one option. Make sure you have a clear understanding of the risks involved and only do what makes you feel comfortable.

Risks of high yield savings platforms

The risks observed here are pretty similar with centralized exchanges, which is why it is very important to read the terms and conditions before choosing to send your coins to the platform.

  • BlockFi reserves the right to change the actual interest you are expected to receive for your locked coins, and has demonstrates it can do so swiftly.
  • BlockFi also keeps a copy of your private keys, which essentially goes against the concept of decentralization. If anything happens to the platform, you may lose access to your keys and thus your coins.

Risks of DeFi platforms

Before choosing to use a DeFi product it is important to research the product, its TVL (Total Value Locked) and determine whether it is a safe option to use. That said, it is an open market with a lot of risks, similar to those observed with decentralized exchanges.

  • You can earn interest by providing liquidity to pool(s), which in this case are cryptocurrency projects. The higher the returns, the higher the chances of the project failing to deliver could be, in which case you could lose your funds.
  • Yield Farming (earning interest on DeFi) is also very vulnerable to code-related issues which could lead to exploitation and hacks. Once again, you may lose (part of) your funds.

Benefit of earning interest with your coins

  • You can grow your portfolio in BTC, which is the main goal of most traders.
  • You can search out options of relative safety and stake your BTC for a short period of time, earning some quick wins with coins that you would otherwise not use.
  • The earned interest can be redistributed into other coins with high potential.
  • Interest is often paid daily, which means that you also benefit from its compounding effect.
  • You may have a lower tendency towards selling which, in the long term leads to a better price of Bitcoin for your portfolio holdings.

Wrapping up – Is it worth taking the risk?

Earning interest on your BTC is as rewarding as it is risky. Knowing the pros and cons will help enable you to make an informed decision with an amount of risk that you are able to handle. From that point onwards, make sure you have a sound plan and stay up to date with any and all developments in the space.

Finally, you may want to make sure you only use part of your portfolio when staking at interest bearing accounts like BlockFi, as you may want to avoid generating a single point of failure.

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