Since there are lots of different ways of earning money with cryptocurrency, many traders lend it in order to trade and earn money. After using the cryptocurrency for a specific period of time, you will have to pay the interest rate while returning it. Lots of investors around the globe earn money in the form of interest rates by lending their cryptocurrency. In this article, we will explore the topic of interest rates in accordance with cryptocurrencies and see how it affects the cryptocurrency market.
A person lending cryptocurrency to either an individual or a corporation charges interest as a specific percentage of the lent money. Borrowed cryptocurrency can be used to trade or buy anything the borrower wants to. For example, you can use borrowed cryptocurrency to buy a house or a car for your family.
In the same way, businesses around the globe are also borrowing cryptocurrency for their long-term projects. Whenever you deposit your money in a bank account, the bank pays you back the interest rate set by the federal bank in your country. In the case when interest rates are high, borrowers pay more money to lend it, and investors and lenders earn more money by borrowing it.
Interest Rate Calculation
Central banks are usually directed to set a specific interest rate within their jurisdiction. This rate is directly related to the interest rate banks charge each other in the overnight market. This interest rate is used to determine the annual interest rate banks offer to their customers. Annual percentage rates are almost always higher as compared to the interest rate set by the federal bank because of various factors.
So, if you are getting a loan on a mortgage or a car, you should view the annual percentage rate as the benchmark instead of the rates set by the central bank.
In addition to the fixed interest rate and annual percentage rate, the prime rate is used by banks for short-term loans like credit cards and so on. The prime interest rate is usually around 3% higher as compared to the interest rate set by the central bank.
Moreover, banks giving away loans always assess your personal profile and give you an interest rate depending on the level of risk they are facing by lending you money. If a bank suspects that a customer will not return their money, they might refuse to give them a loan or offer them a high-interest rate.
Your credit score also matters a lot when you are asking your bank for a loan. For example, if your credit score is low, you will get a high-interest rate on your loan, and customers with average to high credit scores almost always get loans with low-interest rates. The prime rate is offered to customers with an almost perfect credit score.
Fixed and Variable Interest Rate
When giving away loans, banks charge their customers fixed or variable interest. In fixed interest rate loans, the interest rate remains the same through the repayment time of the loan. In fact, a large part of the first few repayments you make is the interest. In this type of repayment, the loan installments usually keep getting bigger as time passes, and you’re required by the bank to repay the actually borrowed money.
On the other hand, interest on variable interest loans keeps changing with time as the interest rate is adjusted by the central banks on an annual basis. This type of interest rate applies to every loan which doesn’t have a fixed interest rate.
Different types of loans come with either fixed or variable interest rates. For example, a mortgage can either come with a fixed loan, or you might be required by the bank to pay variable interest in the long run. A benefit of a variable interest rate is that you might have to pay less money in the form of interest if the interest-rate drops on an annual basis. However, if the interest rate increases, you will have to pay more interest on your variable interest loan.
Both the fixed and variable interest rates in the loans come with their own benefits and drawbacks. So, it is important for you as a borrower to thoroughly research the whole market and make the best decision according to the circumstances you are exposed to. Always research the whole market and take a look at different options rather than relying on the first lender you come across. This will always save you lots of money in the long run.
Fluctuation in Interest Rates
In a market with high-interest rates attached to loans, borrowers are always reluctant when borrowing money. People have less money available to make purchases, and this might cause the market to plunge.
On the other hand, when the interest rate on loans is low, people apply for big loans to purchase expensive items like houses and cars. Moreover, low-interest rates encourage new businesses to borrow more money and become operational. This creates lots of new jobs and helps stabilize the economy.
While governments around the globe know the benefit of low interest-rate loans, these come with the risk of inflation. When inflation hits any economy, it causes the prices of everyday items to increase and makes it even more difficult for poor people to buy essential items.
Lending Cryptocurrency to Earn Interest
While loans are a common thing in traditional markets like real estate, the crypto market is still relatively new, and so is lending and borrowing within this market. However, the recent surge in the popularity of cryptocurrency lending platforms suggests that it can be a great area of interest for investors and borrowers around the globe. This activity of lending and borrowing cryptocurrency also creates market activity on a daily basis.
For example, investors lending their money in the traditional market are also showing interest in cryptocurrency lending platforms. Because of the high return potential of cryptocurrency lending platforms, these investors are attracted to invest lots of money into cryptocurrency, and this generates market activity for cryptocurrency around the globe.
How to Start Earning Interest With Cryptocurrency
If you are one of those cryptocurrency investors who want to earn with cryptocurrency in the long run, you should definitely consider lending your cryptocurrency to earn interest. With the help of this type of investment, you will be able to make continuous passive income, and if the cryptocurrency market keeps on growing, your interest will be compounded.
Depending on the type of lending platform you choose and your choice of cryptocurrency, you can earn a certain percentage of all of your cryptocurrency investment on a yearly basis. Let’s explore a few steps you can take to start earning interest with your cryptocurrency easily.
Create an Account
In order to start the process of earning interest on your cryptocurrency investment, you will have to create an account on a platform which allows you to do so. You can also take your cryptocurrency like Ethereum 2.0 in order to earn money through proof of stake whenever the new update launches. Specific staking platforms might charge you a fixed percentage of your total reward at the end.
You can find a good cryptocurrency lending platform like BlockFi if you do not have any experience in earning interest with it. Platforms like these even allow you to link your bank account and buy any amount of cryptocurrency directly with your money. You can start earning around 8 to 12 percent APY depending on the platform and cryptocurrency you choose. The interest rate is also compounded monthly.
Choose the Best Interest Rate
When comparing different cryptocurrency lending platforms to start your journey of earning passive income, you must compare the interest rates offered by different platforms beforehand. Different platforms might charge you a different percentage of the annual interest you earn through them, and the money you make at the end can vary even if you calculate it for the same cryptocurrency.
Moreover, keep in mind that the interest rate you earn on cryptocurrency keeps changing depending on the demand and supply of that specific coin’s loans. These loans are usually taken by investors who use leverage in trade and buy cryptocurrency platforms that provide leverage trading features.
A good annual percentage yield of interest for a stable cryptocurrency can be between 6 to 9 percent. However, for specific crypto coins and under exceptional circumstances, the annual percentage yield can go as high as 100%. However, exceptionally high-interest rates might indicate the inflated value of a cryptocurrency. So, you should think twice before investing in a cryptocurrency offering more than a 25% interest rate per year.
Newly launched cryptocurrency lending platforms can also provide you with initial deposit bonuses. So, always do the due diligence before choosing a crypto lending platform.
Invest In the Right Cryptocurrency
You will find almost every cryptocurrency to buy inside the platform you sign up with to fund your crypto lending account. Some platforms even allow their users to attach their bank accounts and buy cryptocurrency directly with their money. This feature is introduced to make cryptocurrency more accessible for everyone, even if they are completely new to the cryptocurrency market.
On the other hand, if your crypto interest platform does not support adding a bank account and requires only crypto payments, you will have to make a new account with the cryptocurrency exchange to first buy some cryptocurrency before depositing it in the interest account. Once you make an account on a popular exchange and buy the required amount of cryptocurrency, you can send it to your interest account and deposit the cryptocurrency by following the steps mentioned there.
Start Earning Interest
As soon as you deposit sufficient cryptocurrency in your interest account, you will start earning money right away. All you have to do now is sit back and enjoy earning passive income in the long run. This journey is even better for cryptocurrency investors who believe in bitcoin and other cryptocurrencies and think that their value will keep increasing in the long run.
Moreover, the cryptocurrency market is way different as compared to the traditional money market. For example, if you deposit a bitcoin worth $20,000 at the start of the year, that bitcoin might be worth over $50,000 by the end of the same year. In addition to this, the interest rate provided by the interest-bearing account will also be more than doubled within a year.
This type of exponential growth potential is what attracts crypto investors from around the globe to start earning passive income and making lots of money through interest bearing cryptocurrency accounts.
However, there are only a few well-established cryptocurrencies that can almost guarantee you a good annual percentage yield on interest. Keep in mind that the reward is paid in the form of the same cryptocurrency you deposited in your account at first. This way, you remain in the market for the whole life of your investment.
Lots of platforms also offer reasonable interest rates on stablecoins. These coins are usually stable in their value because they are attached to other assets like the US dollar. The interest rate indicated by stablecoins depends on the demand and supply for stablecoin loans. Almost every type of interest in the crypto market floats depending on the demand and supply of cryptocurrency loans. Even after all these factors, some coins like bitcoin usually have a stable APY at around 8%.
Centralized Vs. Decentralized
Every type of interest you can earn by lending your cryptocurrency can come either through a centralized or decentralized system. In the case of centralized platforms, they let you open interest-bearing cryptocurrency accounts, which provide you with interest in the long run.
These platforms are usually easier to understand for complete beginners to the cryptocurrency market. Depending on the type of cryptocurrency you choose, you can earn between 5 to 12 percent per year. There are lots of centralized cryptocurrency lending platforms which you can choose from after doing enough research on all the options.
More established cryptocurrencies like Ethereum also allow you to earn through a decentralized system. In this type of cryptocurrency interest, you are not required to deposit your cryptocurrency in any specific interest-bearing account. However, relying on the Ethereum platform to earn through a decentralized system can be a fairly complicated process, but there are clear advantages to choosing this method. You can do proper research in this domain as well to earn more interest rates depending on the option you choose.
Compounding Your Interest
The amount of interest in a cryptocurrency account is paid on a weekly basis most of the time. This is great news for you as an investor because compounding your interest can help you grow your cryptocurrency account much faster than the traditional way. If you do not withdraw the amount you earned as interest in the last year, it will be compounded to provide you with even more profit the next year.
So, your long-term earnings in a compound interest account solely depend on your patience. If you deposit your cryptocurrency for a longer period of time, you will be able to earn even more cryptocurrency. However, this is not the case in traditional interest paid for the investment in fiat money. The interest you earned earlier cannot be used as your capital for the next year.
Benefits
One of the biggest benefits of earning interest on cryptocurrency is the competitive interest rates. It is very hard for traditional interest-yielding accounts to provide you with even 7% growth in a year. However, because of the lower costs attached to cryptocurrency investments, companies are usually able to provide you with much higher interest rates in interest-based crypto accounts.
Here is a breakdown of the benefits of earning interest on cryptocurrency.
- There is no limit on the minimum deposit when you are earning interest with cryptocurrency investment.
- There is usually no lock-up time when you deposit your cryptocurrency with an interest paying platform.
- As your cryptocurrency keeps appreciating in value, your interest rate will also increase with time. This can lead to huge returns in the long run.
Drawbacks
Here are some of the possible drawbacks of earning interest in cryptocurrency.
- There is almost no regulation in this industry because of its decentralized nature. Therefore, if you do not do the due diligence, you might get scammed easily.
- Changing interest rates could also mean lower returns if your cryptocurrency of choice starts depreciating in value.
- If the cryptocurrency you’re holding depreciates too much in value, you might lose a lot of your capital.
Conclusion
The key takeaway from this guide article is that you can always choose a better option to invest your money and earn a good interest rate. However, instead of betting your life savings on a highly volatile thing like cryptocurrency, you should only invest the money you’re willing to lose.