Since its introduction, bitcoin has primarily served as a speculative instrument, with profits being limited to capital gains earned through price increases. But while more cautious investors are happy to sit on their bitcoin and wait for its value to rise, more risk-tolerant investors are keen on putting their bitcoin to work for them in the meantime. The latter can now benefit from a number of bitcoin investment services, including bitcoin mining pools, bitcoin loans and bitcoin savings accounts.
What is a bitcoin savings account?
A bitcoin savings account is similar to a regular savings account in that assets which you deposit effectively become the property of a third party. You transfer bitcoin into a wallet controlled by the savings account provider and surrender control of your private keys to the account provider.
Most bitcoin savings accounts begin to pay out interest from the day that you make a deposit – typically within minutes of the transaction being processed. As with assets held at banks, interest is calculated dynamically based on the amount of assets held in the account at any given time. You can generally withdraw bitcoin from a bitcoin savings account whenever you choose to. Some accounts require you to withdraw a minimum amount per withdrawal (0.01 BTC, for example). The bitcoins which you withdraw from your account will not normally be the same bitcoin which you deposit into the account. They are simply random bitcoins taken from the account provider’s liquidity pool.
How do bitcoin savings accounts earn interest?
Typically, bitcoin savings account providers lend out the bitcoin which you deposit to bitcoin marketplaces which lend it to bitcoin traders for interest in the way of leverage. Some bitcoin savings account providers also operate bitcoin marketplaces, and use bitcoin pooled through savings account deposits to provide leverage on their own platforms. Some account providers invest deposited bitcoin in bitcoin mining pools. A part of the profit earned through these practices is passed on to you as the depositor in the form of interest.
Because bitcoin is a highly volatile asset, bitcoin savings accounts generally use a dynamic interest model. The interest rate is adjusted monthly, daily or even in real time based on the profits generated by the account provider, the price of bitcoin, and the amount of bitcoin which you invest in the savings account. Many account providers cap the amount of deposited bitcoin which you earn interest on (to 100 bitcoins, for example). Some providers limit the amount of bitcoin which can be placed in a single account.
What are the advantages of bitcoin savings accounts?
The primary advantage of holding bitcoin in a bitcoin savings account rather than a bitcoin wallet is that your bitcoin is invested and earns interest on an ongoing basis. You earn returns in bitcoin with little involvement on your part, making this a passive form of bitcoin investment. Another advantage is that losses incurred through investments made by account providers do not affect your account – barring severe losses or the failure of your account provider. Your account balance is always available to you and you can withdraw your bitcoin at any time (although some providers place limits on the amounts which can be withdrawn within certain time frames).
Are bitcoin savings accounts secure?
When you place bitcoin in a bitcoin savings account, you relinquish control of your bitcoin to the account provider, and subsequently to other third parties through which your bitcoin may be invested. For this reason, you should only use bitcoin savings accounts from providers which you trust completely. Because cryptocurrencies and services related to them are still an experimental science, many service providers are small and newly established, making it difficult to ascertain which account providers are reputable or to find accurate information about their financial state. Take time to research opinions from trusted sources, such as established bitcoin experts who have a reputation to maintain. Reputable service providers will list their address, company registration details, the names, photographs and biographies of key employees and telephone numbers. Consider confirming the information reliable sources (relevant authorities, for example) before settling on an account and transferring bitcoin.
Even reputable account providers are vulnerable to electronic theft, and a high concentration of bitcoin on a platform makes it a prime target for hacking attempts. This risk is multiplied when multiple platforms are involved in the investment cycle.
Unlike savings held in Swiss savings accounts, which benefit from the Esisuisse depositor protection guarantee, assets held in bitcoin savings accounts are not (currently) guaranteed. While many bitcoin service providers are legitimate, registered companies, many of them are small and relatively weak financially.
Swiss banks are supervised by FINMA in order to minimize the chance of bank failure, but bitcoin account providers are generally unregulated. The extreme volatility of bitcoin and the absence of regulation puts bitcoin service providers at high risk of failure. The risk is multiplied if several bitcoin service providers (bitcoin savings account providers, bitcoin marketplaces, bitcoin mining pools) are involved in the investment cycle. While investing in bitcoin in the first place requires high risk tolerance and high risk capacity, investing bitcoin in bitcoin savings accounts requires total risk tolerance and risk capacity. Only invest assets in bitcoin and bitcoin savings accounts if you can easily afford to lose them.
Alternatives to bitcoin savings accounts
Like bitcoin savings accounts, bitcoin mining pools provide a passive means of earning yields on bitcoin. Bitcoin invested in bitcoin mining pools is invested in computing power which is used to mine bitcoin. In the bitcoin mining process, new bitcoin is automatically generated by the bitcoin network as payment for the processing of transactions. So the bitcoin which you earn as interest on your investment in a mining pool is newly-generated bitcoin rather than bitcoin earned through lending activities. This makes bitcoin mining pools a somewhat more reliable bitcoin investment vehicle than bitcoin savings accounts.
Peer to peer margin funding markets, such as those operated by several large bitcoin marketplaces, are a form of peer to peer lending platform which provides another alternative to bitcoin savings accounts. In peer to peer margin funding, investors offer bitcoin loans for the purpose of financing leveraged trading on the marketplace. Traders in need of leverage can borrow bitcoin directly from investors to fund their trades. This form of bitcoin investment requires more active involvement on the part of investors. But you can also lose your investment if trading positions perform badly and cannot be liquidated at the stop-loss price. Another disadvantage is that bitcoin lent out to traders cannot be accessed until traders close their investment positions.
Bitcoin lending is another alternative for bitcoin owners looking to invest their bitcoin. In this type of lending, you as the investor provide loans – typically peer to peer loans – to individuals and businesses in bitcoin. Borrowers then repay the loans with interest. This is the highest-risk form of bitcoin investment, as the risk of borrowers defaulting on loans is born entirely by you as the investor.
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