How to Earn Interest on Crypto Holdings – A Beginner’s Guide (2021 Updated)

The following video presents opinions
and educational content discussing aspects of financial investment and is intended for informational
purposes only. The content presented here should
not be considered financial or legal advice, and we would encourage the viewer
to seek professional counsel before making investment decisions. Is there a safe way to earn interest
on my cryptocurrency holdings? What do I need to look out for? And how much can I actually earn? Well, stick around, in this episode of Crypto Whiteboard
Tuesday we’ll cover these questions and more.

Hi, I’m Nate Martin
from 99Bitcoins.com and welcome to Crypto Whiteboard Tuesday where we take complex
cryptocurrency topics, break them down and translate them
into plain English. Before we begin, don't forget to subscribe to the channel
and click the bell so you’ll immediately get notified
when a new video comes out. Today’s topic is how to earn interest
on your cryptocurrency holdings. We get asked all the time: what's the best strategy to make money
with crypto? Our answer has always been
“Buy and hold” or HODL as crypto enthusiasts would say. And our position hasn’t changed: hodling is, in our opinion,
the best strategy in the long run, but there are ways you can earn interest
on your crypto while holding it.

In this video I’m going to cover
exactly what methods are available and give you the pros and cons
for each one. Even more, I’m going to show you
how to choose the best one for you and give you practical tips to get started, so let’s dive in. The first option we’ll discuss
for generating interest on your crypto is through staking. Now, if you want to get the full breakdown
on what staking is, you’ll want to take a look
at our “What is staking?” video.

In a nutshell, staking is the action of locking up,
or parking, a portion of your funds in order to help
maintain a specific network like Ethereum, Cardano, Polkadot
or any other platform that uses the staking mechanism. In return for helping to maintain
the network, a staking reward will be distributed
between the stakers in the form of interest. The annual interest rate,
also known as APR or APY, varies a lot between coins and can be anywhere from 0.05%
to 100% per year. A higher interest rate usually means
there are additional risks, so you’ll want to do some research before deciding which coin
you’ll want to stake. Another important aspect of staking is that
each coin has different rules for it. For example, if you stake Ethereum you’ll need to lock up your funds
for a very long period of time, and at the time of this video, it currently doesn’t even have
a clear end date. Other coins may allow for a much shorter, and well-defined, staking period.

While staking can be done directly
from your computer without the need for any dedicated equipment, this process is fairly technical, has a lot of limitations
and isn’t advised for beginners. The easiest way to stake for a beginner
would be through an exchange or a wallet. Most popular exchanges like Kraken,
Bitstamp and Binance allow you to stake a variety of coins. Aside from the ease of use of staking
on an exchange, the minimum amount to stake
will usually be fairly low and in some cases there won’t
even be a minimum lock up period.

On the downside,
when you’re staking on an exchange you’re giving up control of your funds
to the exchange. This means that your funds are at risk
if the exchange gets hacked or goes out of business. Additionally, most exchanges take a fee
for providing their staking services. A good alternative for people who don’t
want to give control over their funds would be to stake through a wallet. There are a number of staking wallets; Exodus, Ledger and Atomic
just to name a few. Make sure you take a look at what fees
each wallet charges: you may find some that don’t charge
any staking fees at all. Keep in mind that in most cases wallets will offer a smaller
variety of coins that they make available for staking.

You can find a list of reputable
exchanges and wallets that supply staking services
in the description below. The next option for generating interest
on your crypto holdings is through a savings account. A savings account is an account
provided by a centralized company which agrees to pay you interest
for holding your crypto on their platform. The company can then use your deposit
to pay lenders who will return it in time with interest. The downside here of course is that you’ll
have to give up control over your funds. On the upside, there is no lockup period
for a savings account and it’s a good alternative for coins
that don’t support staking, such as Bitcoin. Some of the more popular companies
that allow for a savings account are Blockfi, Celsius Network and Nexo. Many exchanges such as Coinbase,
Gemini and CEX allow you to have a savings account as well.

Again, you’ll need to do your research regarding how much interest you can get
for each coin and what fees you’ll be charged. And remember that high interest rates
usually signal some form of increased risk, whether it’s a new untested coin
or a less reputable company. So don’t just blindly choose
the highest return possible. We’ve put a list of reputable companies
that supply a crypto savings account in the description below. Finally we come to our most
complicated option which is DeFi. DeFi stands for Decentralized Finance, and it's a term given to financial services that aren’t controlled
by a central authority, but by a network of independent computers
using predefined rules. Now if that sounds
a little confusing, I get it. Check out our “What is DeFi?” video for a simple, but more detailed
explanation on the subject. Many decentralized services allow you
to lock up your holdings and earn interest in return. The locked up funds can be used
for different purposes such as lending, staking, supplying liquidity to decentralized
exchanges and farming. I know some of these terms
don’t make a lot of sense at the moment, but since it would be impossible to cover
the whole theory behind all of this here, just know that in return for the interest
you’re receiving, your funds will be used for other purposes
while they are locked up.

Let’s go over some of the more
reputable DeFi services that are worth checking out. Aave and Compound are two leading
DeFi networks that allow for decentralized borrowing
and lending. You can earn interest on your crypto holdings by depositing any of the supported coins
to their platform. Uniswap is a leading decentralized exchange that we’ve covered in depth
in our “What is Uniswap?” video. By providing liquidity to uniswap
you can earn interest on your holdings. Yearn Finance is a yield optimizer
for maximizing DeFi returns by automatically switching your holdings
between DeFi networks, so you don’t have to manually look
for where you can get the most returns at any given moment. 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 to the yearn network you receive yDAI in return. These tokens then start
accumulating interest as your deposited funds are constantly
moved around to maximize returns. Whenever you wish to cash out you can just trade your yDAI
back to your original DAI stablecoin.

Aside from simply depositing coins
to a limited range of lending protocols, Yearn also supplies an advanced service
called “Vaults” which manages the funds with more complex
and somewhat riskier strategies. Vaults are an actively managed deposit. Money placed in vaults can be used
for trading, borrowing or supplying liquidity. Vaults also support a wider variety of coins
than the standard yearn service. While the DeFi space holds
a lot of opportunities to earn interest it’s not without downsides. To start with, earning interest with DeFi usually works through the use
of specific coins that support the network
you’re looking to use. This means that in some cases you’ll need to convert your holdings
into a different type of coin. Additionally, decentralized services
are usually much less intuitive for the average user and can require that you understand
some additional technical jargon. Therefore we advise to use them
only after doing extensive research and understanding how the service
works completely.

If you’re not sure exactly
what you’re doing you may want to use a centralized service
that will allow you the same functionality and yield through an easier interface. And finally, DeFi is an emerging technology, and just like with any new technology there is always the risk that there are bugs
or flaws in the programming. Millions of dollars have already
been lost in DeFi because the technology is in such
a very early stage. If you want to get a complete list
of the different DeFi services which can earn you interest just head over to DefiPulse.com, the largest site today
that lists them all. There you can also find
short explanations about each network, interesting statistics and see how much money
is currently locked in all DeFi protocols. By now you might be totally confused by the endless options available
for generating interest on your crypto, and you’re probably asking –
how do I choose where to put my money? At 99Bitcoins, our first guideline is always –
better safe than sorry. This means that because crypto
is such a new and exciting but also risky space, we always try to minimize this risk
as much as possible.

This means that we won’t lock up an amount
we can’t afford to lose or that we need to have available at hand. A good rule of thumb for us is to use 10% of our crypto holdings
for generating interest. Of course this can change depending on your risk tolerance
and overall strategy, but if you’re just starting out, this is a good starting point while you
get familiar with the options we covered.

Additionally, for us it’s always about what currency we’re looking to
keep on holding and not how much interest we can make. Meaning, if we're holding BTC, we won’t convert it to another currency
in order to generate higher interest. Instead, we’ll look for a service that allows us to generate interest
on our BTC. Here’s a list of some additional things
to check before making your choice. First, take a look at the company
or network supplying the service. Perhaps there’s a specific coin
that you really like and want to support its network, therefore staking that coin
makes the most sense to you. Additionally check to see if the company
you’re planning to use is centralized or decentralized. Centralized companies
pose the risks of fraud, mismanagement and theft while decentralized companies pose
technical risks and usually have more complex interfaces
which aren’t very beginner intuitive.

It’s up to you what type of company
you prefer but personally we believe that simplicity
trumps everything else in this case. Other things to look at are lock up periods,
service fees, frequency of interest payouts,
minimum lock up amounts and of course the annual percentage rate,
sometimes referred to as APR or APY. Finally, we prefer to lock up funds
only in established networks and exchanges that have been running for some time
without any major issues. Of course this usually means
a lower interest rate, but as I said earlier –
better safe than sorry.

One thing you’ll want to avoid
at all costs are crypto HYIPs and doublers. These are sites that promise
unusually high yields or claim to double your coins and pretend to be legit
decentralized companies, while in fact they are just
ponzi schemes in disguise. If you’re not sure whether or not
a company is legit, make sure to see if it appears in the list
of our recommended services in the description below, or ask around in the different
community forums and on reddit. That’s it for today’s video
about how to earn interest on your crypto holdings. Hopefully by now you know
what options are available, their specific pros and cons and how to choose the best one
for your needs.

You may still have some questions. If so, just leave them in the comment section below. Finally, if you’re watching this video
on YouTube, and enjoy what you’ve seen, don’t forget to hit the like button, subscribe to the channel
and click that bell so that you’ll be notified
as soon as we post new episodes. It really helps us out a lot. Thanks for joining me here at the Whiteboard. For 99bitcoins.com,
I’m Nate Martin, and I’ll see you…in a bit..

You May Also Like