Hodler, Can You Spare a Bitcoin?

Crypto savings accounts pay yield to borrow your tokens, but don’t mistake them for a bank

Brandon Kochkodin

It’s not just the outlandish returns of the past year that some Bitcoiners are bragging about these days. There’s also the yield.

At a time when interest rates on conventional bank deposits are pinned to the floor—often below 0.5%—financial technology companies are offering to pay owners of Bitcoin and other cryptocurrencies annual percentage yields of 2% to 6% and sometimes more. You can deposit your coins with a few taps on one of their smartphone apps.

What’s the catch? There are several, actually. In addition to the risk you’re already taking in owning crypto, the earnings are paid in crypto currencies, too. As Bitcoin investors have seen in recent trading, token prices can fall sharply, wiping out whatever yield advantage you’re getting, if you’re comparing it with what you could’ve made investing dollars. And you’re essentially lending companies your crypto without many of the protections that come with a bank account, such as coverage from the Federal Deposit Insurance Corp.

Some of the companies hawking yield accounts have websites that look more than a little like an online bank’s. Crypto lender Nexo uses the tagline “Banking on Crypto” and touts the $375 million of insurance it carries on custodial assets. What that policy covers, however, isn’t like FDIC insurance, which protects savers from losses. On a separate page on its site, Nexo says the insurance is in place to protect users against “commercial crime,” which includes “physical and/or cybersecurity breach, and/or employee theft,” not losses that may be incurred from its lending activities.

Yields are part of a surprising turn in the crypto market. Bitcoin and its descendants, such as Dogecoin, Ether, and countless other tokens, are often seen as a way to avoid the established financial system. Some “holders” (crypto slang for long-term holders) are wary of yield accounts because they’d have to entrust the service with their private keys, the alphanumeric strings that grant control of a digital asset. But alongside that world has sprung up a complex, interconnected market that looks a lot like a wilder version of Wall Street— complete with financial derivatives, arbitrage, borrowing, and a panoply of middlemen. Some have called it a shadow banking system for crypto.