Nature

How to get started in crypto banking


By Anna Serio

Crypto is going mainstream. Some 20% of Americans owned cryptocurrency at the end of 2021, according to a Morning Consult survey, and that number appears to be growing.

But more than that, cryptography infiltrates mainstream culture. New York’s new mayor used Coinbase to convert his first paycheck to Ethereum. A record number of crypto firms ran ads during the Superbowl. And investors have taken notice and are pumping money into the industry.

The crypto bank offers a way to learn about cryptocurrency for those who have refrained from investing in the past because it seemed too complex. While crypto products are considerably riskier than traditional investments, crypto banking offers a more familiar way to earn and grow your crypto holdings through APY high yield accounts, credit cards and more.

Relax with CeFi

When the cryptocurrency was created in 2009 with the advent of Bitcoin, it was designed to be part of a decentralized finance (DeFi) system that allows users to directly send and receive financial assets between each other . To do this, he used a decentralized public ledger called blockchain. Users retain control of their assets at all times using blockchain without needing bank or government permission to transact.

It can be technologically daunting to use DeFi if you are unfamiliar with crypto or coding. One mistake in one line of software code can result in the loss of millions of dollars in assets – or, in the case of the DeFi Compounder staking protocol, earn them unexpectedly. But today, there is a growing market for centralized financial platforms and exchanges (CeFi) that are easier to use.

Using a CeFi platform is much like using an online bank or investment account. Many CeFi platforms require you to verify your identity as part of Know Your Customer (KYC) protocols before you can open an account. After that, transactions are almost instantaneous.

Most platforms offer crypto banking products, which have similarities to what you would find in a traditional bank, although they differ in structure and regulation. Interest rates are often more competitive than traditional finance, but the risks of crypto banking are also significantly higher and not always obvious to the average consumer.

The general rule with crypto applies here too: only invest what you are prepared to lose.

Build your crypto portfolio without investing your own funds

One way to start a crypto wallet is to sign up for products that offer rewards in the form of cryptocurrency. Crypto deposit accounts allow you to earn returns on fiat currency – like the US dollar (USD) – which comes in the form of cryptocurrency. These returns are usually at a higher rate than your traditional savings account. For example, Outlet Finance is offering APYs of up to 9% on its USD account at the time of writing.

One of the main advantages of using a USD account is that it sometimes offers FDIC insurance to protect your deposits (but not always). But returns do not enjoy the same kind of protection. Instead, platforms that offer coverage rely on private insurance policies that may cover a fraction of your deposit value, if at all.

Crypto credit cards can help you build your crypto wallet without having to buy digital assets. These cards offer crypto rewards every time you swipe, at rates comparable to a traditional credit card. For example, the SoFi credit card offers 2% crypto rewards on all purchases at the time of this writing, while the Upgrade Bitcoin rewards card offers 1.5% cash back in Bitcoin.

Keep in mind that the FDIC treats crypto investments like securities. This means that capital gains taxes apply to your crypto rewards.

Spend your crypto or expand your wallet

Once you’ve built up your crypto wallet, you might want to consider using other crypto banking products to help tap into those funds. Many CeFi platforms allow you to exchange your crypto assets for another coin or fiat currency.

But if you trade USD frequently, you might want to consider a crypto debit card. These convert your crypto to USD each time you swipe, allowing you to spend the cash like cash. (However, keep in mind that each swipe triggers a taxable event.)

For those who want to retain future earnings or avoid paying capital gains, a crypto loan may be a better choice. These loans are similar to a security-backed loan in that crypto lenders ask you to add more collateral if the loan goes into a margin call. If the price drops enough, the lender can liquidate your collateral.

Consider the risks before signing up

Crypto banking can make it easier for beginners to invest in crypto. But using these accounts carries significant risks that aren’t always obvious to the average consumer.

Despite their resemblance to banking apps, CeFi platforms offer fewer protections than a traditional bank or even a fintech. With the exception of some USD deposit accounts, crypto bank accounts are not protected by FDIC or SIPC insurance.

While many platforms advertise the use of private insurance to protect their holdings, these policies typically only cover a fraction of the actual assets held by the platform. For example, popular custodian Gemini offers insurance that covers $200 million of its holdings. Crypto insurance also typically does not cover platform bankruptcy or insolvency. When Cred filed for bankruptcy in 2020, for example, customers lost up to $140 million that they may never see again.

Some CeFi platforms like Unchained Capital try to circumvent this risk by offering a multisignature or multisig wallet. Multisig wallets allow you to share custody of the wallet with the exchange and custodian, requiring two of the three keys to access funds. But even they are not bulletproof. In 2017, a bug in the Parity wallet temporarily allowed hackers to access funds with a single key, winning $32 million in crypto assets.

The changing regulatory landscape also presents a risk to crypto account holders. In March 2022, Crypto.com abruptly asked borrowers from a handful of European countries to repay their crypto loans within a week. Many have speculated that the move was in response to uncertainty surrounding potential loan regulation. A February 2022 SEC settlement with BlockFi not only led BlockFi to shut down its yield accounts, but several others followed suit to avoid trouble with regulators.

Crypto Banking offers an easy way to start investing in crypto. But it’s a risky investment that often requires you to hand over control to a company that offers limited protection. Only invest funds you are comfortable losing and do your due diligence before signing up.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


nasdaq

Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.
Back to top button