Bitcoin Savings Accounts – a Basic Guide

A bitcoin savings account – often simply called “bitcoin interest” or “bitcoin rewards” – is a service which lets you earn interest on bitcoin. It works much like a regular savings account or fixed deposit. You deposit bitcoin into an account – a wallet controlled by the savings account provider – and the account balance earns interest over time.

How do bitcoin savings accounts earn interest?

Bitcoin savings account providers can afford to pay you interest because they use your bitcoin to fund ventures which they profit from. The most common ventures include: 

• Bitcoin margin financing. This works much like the conventional lending business practiced by banks. The bitcoin which you place in a bitcoin savings account is lent out in exchange for interest. The interest rate charged on these loans is higher than the interest paid to you for the use of your bitcoin, so the account provider profits off the difference. Most commonly, bitcoin is lent out to investors to finance leveraged trading.

• Bitcoin mining. Some bitcoin savings account providers invest deposited bitcoin in bitcoin mining pools. In this case, the service provider uses part of the mined bitcoin to pay you interest, while profiting from the rest.

Most bitcoin savings accounts begin to pay out interest from the time that you make a deposit. Bitcoin savings accounts generally use dynamic interest models which adjust interest rates monthly, daily or even in real time based on bitcoin lending market demand and the market for bitcoin as a whole.

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. Another major advantage is that you earn returns without having to sell your bitcoin. 

As with actual savings accounts, your account balance should remain intact. Only the amount of interest you earn may vary. This makes bitcoin savings accounts a lower-risk alternative to active bitcoin trading for earning yields with bitcoin.

What are the disadvantages of bitcoin savings accounts?

The fact that bitcoin savings accounts are a new industry with poor regulation poses some risks for investors. Account providers are often relatively new companies without substantial track records or creditworthiness ratings. Regulation and supervision over many of the players involved – from account providers to lenders, borrowers, and mining pools – may be minimal or non-existent.

Security is another important factor. Like banks, bitcoin service providers hold large amounts of assets in one place, and are therefore an attractive target for criminals. Some service providers have insurance for private keys, or use insured third-party custodians.

Can I withdraw bitcoin from savings accounts at any time?

A number of different bitcoin savings account models are available. Some accounts let you withdraw all of your bitcoin at any time. Others have daily withdrawal limits.

Fixed deposit models are also offered. Like actual fixed deposits, these typically have higher interest rates, but you cannot withdraw your bitcoin until the end of a fixed term.

Typically, bitcoin savings accounts cannot be used to make purchases or other transactions to third-party accounts. You must first have the service provider make a transfer from your bitcoin savings account to your personal wallet, from which you can perform those transactions.

Are there alternatives to bitcoin savings accounts?

Bitcoin savings accounts are a simple, passive solution for earning returns on bitcoin which you hold. But there are other options for earning yields on bitcoin without selling it.

• Mining pools. Bitcoin invested in mining pools is used to purchase computing power which, in turn, is used to mine new bitcoins. You are paid dividends based on the amount of bitcoins mined. Unlike bitcoin savings accounts, you bear the risk of losing some of your bitcoin if the mining pool does not perform. In exchange, you get the possibility of earning higher returns than you would from a bitcoin savings account.

• Peer to peer margin financing. Some bitcoin marketplaces host peer to peer lending platforms on which you can lend your bitcoin to other investors who use it to leverage trades. Here too, you bear the risk of loss if borrowers default, but you could potentially earn higher interest.

• Peer to peer loans. Bitcoin-denominated peer to peer loans are a high-risk option for earning returns without selling bitcoin. You can find more information in the guide to bitcoin loans.

What is the difference between bitcoin savings accounts and staking?

Bitcoin is a proof-of-work cryptocurrency. Staking only applies to proof-of-stake cryptocurrencies which reward miners based on the amount of coins they hold. In staking, you make your coins available to a service provider which uses them to gain a mining advantage. The service provider uses some of the new coins mined to pay you interest or rewards. 

What should I consider when looking at bitcoin savings accounts?

The service provider’s reputation is paramount. Only use established service providers which you know and trust.

Withdrawal fees are also an important consideration. Most bitcoin account providers do not charge for deposits, but do charge withdrawal fees when you transfer bitcoin out of your account.

When does using bitcoin savings accounts make sense?

As with all investments, bitcoin savings accounts come with risks. Service providers may become insolvent or be targeted by cybercriminals. Depositor protection guarantees and insurance, while present, have yet to be tried and proven. For these reasons, you should only consider bitcoin savings accounts for bitcoin which you can afford to lose in a worst-case scenario.

If you are not ready or able to take any risk, storing bitcoin in your own secure wallet is a better option. Alternatively, you can use the secure custody services offered by some Swiss banks and established bitcoin service providers.

More on this topic:
Swiss securities broker comparison
Swiss savings account comparison
Guide to investing in bitcoin
Guide to buying and using bitcoin in Switzerland
Bitcoin loans explained