How to earn interest on crypto? A beginner's guide

One of the most appealing aspects of crypto assets is their potential to generate passive income across various digital assets. Typically, crypto interest rates surpass those offered by traditional bank savings accounts. Hence, crypto investors continuously seek optimal interest rates and methods to enhance their passive income streams, leading to the popularity of crypto interest platforms for storing cryptocurrency holdings.

If you're interested in learning how to earn interest on crypto, you've come to the right place. We'll explore the top methods for earning interest on your initial investment, including staking via a crypto exchange platform, lending platforms, and decentralized finance (DeFi).

What are the top ways to earn interest with crypto?

There are three primary methods to effortlessly earn interest on your crypto assets and investments:

1. Staking rewards via crypto protocol staking offer stable and secure returns.

2. Crypto lending platform staking is relatively safe, although the interest earned is typically lower than staking rewards.

3. DeFi typically provides the highest annual percentage rate and yield if interest is compounded, but it also entails the highest risk. Let's delve into each method below.

Earning interest through crypto staking

Crypto staking rewards enable you to earn interest on any proof-of-stake crypto asset. Assets eligible for staking include Ethereum (ETH), Cardano (ADA), Polygon (MATIC), Cosmos (ATOM), and Solana (SOL). Staking rewards typically offer a higher annual percentage rate (APR) compared to traditional savings accounts and most conventional financial institutions. The amount of interest earned depends on the staked asset's quantity and the associated interest rates, usually ranging from 3-10% depending on the cryptocurrency.

To engage in crypto staking, you can either manage it independently or utilize a cryptocurrency exchange platform. With platforms like Coinbase, you can deposit funds and stake supported assets through their platform, receiving interest based on your staked amount while the platform takes a commission.

Alternatively, you can stake through your own crypto wallets instead of relying on a cryptocurrency exchange. Although it involves a slightly more technical process, you're likely to earn a higher interest rate and retain greater control over your crypto holdings.

Earning interest through crypto lending

Crypto lending can be facilitated via specialized crypto lending platforms like AAVE, or through crypto exchanges such as Binance or KuCoin. Through crypto lending, you earn interest rates based on the demand for the asset you lend. Stablecoins like USD Coin (USDC) typically yield higher returns compared to assets like Ethereum, as they are widely utilized across various crypto markets.

These platforms are sometimes termed as crypto interest accounts or crypto savings accounts on centralized exchanges. However, following the FTX Exchange collapse and the discontinuation of services like BlockFi, Celsius, and Voyager, which previously provided diverse crypto savings accounts and crypto interest accounts, many platforms now refrain from using the term "crypto saving account" to avoid discouraging crypto investors. Instead, they often use terms like "Earn" or similar references to denote that users are earning interest on crypto.

Crypto lending platforms often enable users to earn interest on both supplied and borrowed assets. Some platforms may even offer a positive annual percentage rate (APR) for borrowing if an asset faces insufficient borrowing demand, serving as an incentive for crypto investors. Lending opportunities are available for various crypto assets, with interest rates varying based on the asset, lock-up periods (if applicable), minimum deposits (if any), and whether it involves simple or compound interest. Certain crypto exchanges also provide crypto loans.

To supply crypto and earn interest on your crypto holdings, you must possess the supported coins or tokens. If you lack the supported coins or tokens, you can either acquire crypto using fiat currency or exchange your existing digital assets for the supported coins.

Earning interest on your crypto via DeFi

Generating interest on crypto through DeFi represents the riskiest approach among the available options. It exposes you to various potential risks, including platform hacks, impermanent loss, and manipulation in the crypto market. To earn interest on crypto through DeFi, you typically participate in providing liquidity to a liquidity pool, which involves supplying two assets in equivalent dollar amounts.

For instance, you can contribute liquidity to an ETH/USDC pool, but you'll need both USD Coin and Ethereum for this purpose. You can either exchange some ETH or USDC, or vice versa, to then contribute liquidity. Subsequently, you earn a proportionate share of the trading fees generated by the pool. This approach is more intricate than the other two options and entails greater risk.

Is it safe to earn interest on your cryptocurrency holdings?

Yes, each method carries varying levels of risk tolerance. Staking is considered the safest option, while engaging in yield farming through DeFi poses significantly higher risks.

Is staking safer than lending?

Yes, staking is deemed safer than lending. However, it's essential to note that when staking with a centralized exchange, any Federal Deposit Insurance Corporation (FDIC) coverage applies solely to fiat currency held on the platform, not to your crypto account holdings. Whether you choose to store assets on a crypto exchange depends on your individual risk tolerance.

Which coins are eligible for staking?

Which cryptocurrencies can be staked directly to the protocol? The eligible coins for staking directly to the protocol are any proof-of-stake crypto assets. However, the coins and tokens available for staking through crypto exchanges vary depending on the platform.

Do exchanges offer interest on crypto?

Yes, some cryptocurrency exchange platforms do offer interest on crypto. This applies to both centralized and decentralized exchanges, and they often provide competitive interest rates.

Is it preferable to simply HODL?

Depending on the asset, yes, it may be better to just HODL (Hold On For Dear Life) based on your risk tolerance. Bitcoin interest rates are typically very low and often necessitate loaning it out, relinquishing key ownership, which makes it less lucrative. However, staking with proof-of-stake assets directly to their blockchain network is nearly risk-free, offering high interest rates compared to traditional bank accounts. Additionally, the interest earned is often auto-compounded, enhancing overall earnings on your crypto assets.