Investors looking to hold crypto assets for the long term, often known as HODLers in the cryptosphere, typically hold their bitcoins in a hardware wallet or cryptocurrency exchange. However, this practice is evolving.
Currently, some HODLers prefer cryptocurrency exchanges with high interest rates on cryptocurrency deposits. Interest rates on traditional bank deposits are very low – often around 1.5% (for example, CommonWealth Bank Australia’s savings rate is 1.30%) – and you can earn up to 12% annual interest compared to the cryptocurrency equivalent. (APY) in certain coins.
Binance Australia, Crypto.com. Celcius, Nexo and Swyftx are some popular cryptocurrency exchanges that offer very high APY for BTC. For example, up to 4.08% APY on BTC on Swyftx, up to 5% on Celsi, up to 7% on Nexo and 8.19% APY active Binance Australia. These interest rates are incredibly attractive, but investors are very concerned about where the returns are coming from.
Of course, high risk usually accompanies high profits, and this applies to cryptocurrencies and cryptocurrency wallets. Trust and due diligence are essential for an investor.
Here’s how it works
To understand the degree of risk you are putting yourself in, you need to understand what is going on behind the scenes.
When you deposit crypto assets into an interest-earning wallet, the platform will lend those coins to individuals, organizations or institutions. Credit cryptocurrency is often used for a number of business purposes, from market making, Bitcoin price hedging to liquidity management.
Borrowers return assets to lenders due to high interest rates. The platform keeps a small part of the interest and gives the rest to its users. You can also lend your money to decentralized protocols and earn interest.
What is risk?
HODLing in a BTC interest wallet exposes investors to various types of risk. Because Bitcoin is considered a digital asset, investors are vulnerable to attacks from bad parties. The probability of a breach depends significantly on the security mechanisms of the platform. Without encryption or a robust security infrastructure, it can be vulnerable to security compromises. Unregulated or unlicensed companies can be targeted by cybercriminals.
Additionally, a platform that stores your tokens in a hot wallet may be vulnerable to attack. Traders want a hot wallet for accelerated transactions. Because public and private keys are stored on the Internet, this form of storage can be risky.
Another risk associated with cryptocurrency is the possibility of borrower default. Investors may be exposed to significant risk if the lender does not impose strict criteria on its partners. If the company’s lending policies are not disclosed, this can be a worrying sign. The latest news about Celsius is a good example of a cryptocurrency lender experiencing a liquidity crunch, meaning its users did not have enough coins on hand if they attempted to withdraw cash.
What to look for when choosing a crypto exchange?
When researching cryptocurrency platforms, you should check 3 main aspects: payments, security standards, and customer support rather than interest rates, which is not something that cryptocurrency prioritizes.
Fees
When choosing a cryptocurrency exchange, fees are the first thing to consider. Most exchanges charge a nominal fee for each transaction and impose fees and limits on withdrawals. You can refer to our detailed reviews of cryptocurrency exchanges, such as ours CoinSpot Fee Overviewto learn more about the fee structure of cryptocurrency exchanges.
Therefore, it is better to compare all the costs charged by the exchange. Typically, most exchanges charge a 1% transaction fee, which decreases as your trading volume increases. Others charge exorbitant withdrawal fees for some altcoins, while others allow users to purchase cryptocurrency using a credit or debit card with a fee of 5% or more.
Safety Standards
As cryptocurrency became popular and profitable, hackers became more interested in it. Hacking of popular cryptocurrency exchanges such as Binance and KuCoin resulted in tens of millions of dollars in losses. Although exchanges often pay people whose coins are stolen, no one wants to be in that situation.
Whether you want to hold your crypto assets on an exchange permanently or for a while before transferring them to a wallet, the security of the exchange should be your first concern. For example, consider how many stock market assets are stored offline in hard storage.
You can also look for exchanges with advanced security measures like two-factor authentication. Each time you log in, you will be asked to enter a 6-digit code to verify your identity, which will be generated by the authenticator software. Also, if you are looking for convenience when trading or storing your digital assets, choose cryptocurrency exchanges that have certificates or meet security standards.
Customer support
Not all cryptocurrencies offer adequate customer support. That’s unfortunate, because if there’s a problem with your account, you’ll want an exchange that can respond to your needs quickly.
Choose an exchange that provides 24/7 customer service and allows you to quickly reach support staff. This is an invaluable feature that will greatly enhance your experience when choosing a cryptocurrency exchange with a responsive support team. You can determine this by looking for online reviews on sites like Trustpilot.
Bottom line
Cryptobanking is still in its infancy compared to conventional banking; thus, you need to assess your risks. Due to the lack of regulation, cryptocurrency is largely a speculative asset. For this reason, you should research the security features, regulations, and breach or default history of the platform you are considering.