Earn more interest with Crypto Banking
Traditional Banking
Here is how much the best banks are returning to you in interest per year:
If you see your bank on the table above then congrats you are earning a fraction of what you could be earning and if you don’t see your bank on the table, then you are earning even less. So how can you earn more?
Stablecoins
Stablecoins are cryptocurrencies that are pegged to the value of another currency. The cryptocurrency USDC is pegged to the U.S. dollar meaning 1 USDC will always be worth 1 USD. Exchanging 1 USD for 1 USDC allows you the benefits of traditional banking and crypto banking:
- The value of your assets won’t fluctuate like other cryptocurrencies.
- Your money can be deposited into custodial and non-custodial accounts to earn unrivaled interest.
How to get started in 5 Steps
1. Exchanging USD for USDC
First, we’ll need a platform to exchange our dollars for USDC. In the U.S. Coinbase is the largest and most regulated exchange. Visit the Coinbase website or download the Coinbase app:
https://www.coinbase.com/join/jalbert4
*The Coinbase link is an affiliated marketing link and we will both earn $10 if you sign up and make a purchase of $100. If you would like to access the website without the referral you can visit https://www.coinbase.com/
You will be prompted to fill out the following:
Verify your email:
Set up two-step verification:
Verify your identity:
Once you provide your personal information you’ll be directed to the dashboard where you can choose your payment method to fund your account. Choose your preferred method, in this case, we’ll choose a bank account:
Select your bank:
Sign in to your bank:
Once your account is connected to your bank you can purchase stablecoins like USDC and Dai by visiting the “Prices” tab or clicking on Buy/Sell in the top right corner of the dashboard.
Purchasing stablecoins is free of charge on Coinbase and it will take 3–4 business days for your bank to transfer money.
2. Decide who you want to control your money
Once your bank transfer is complete you’ll have full control over your USDC. In the interest table at the beginning of the article, none of the traditional banks offered more than 1.00% interest. For crypto banks, 1.00% interest is appalling.
To appreciate the differences in interest rates between traditional banks and crypto banks let’s compare the best rate from traditional banking with no minimum, Sallie Mae at 0.70%, to the lower rates for crypto banking, Poloniex at 3.58%. If you save $10,000 with Sallie Mae for a year, you’ll earn $70 at the end of the year. If you save 10,000 USDC with Poloniex for a year, you’ll earn $358 at the end of the year. In the worst-case scenario, crypto banks will earn you 5x more money than the best traditional bank. In the best-case scenario, crypto banks will earn you 10x or more money! If I still have your attention, let’s discuss how to choose which service is the best for you.
Custodianship
When you deposit money into your bank, you are giving the right to the bank to lend out your money how they see fit. In traditional banking, the bank is in control of your money and is known as the “custodian”. Custodial accounts are an option in crypto banking but as an alternative you can cut out the middle man and deposit your money into automated lending platforms. The lending platforms are considered “non-custodial” because there is no one group in charge of deciding how to lend out the money you deposit. Instead, the lending platform’s community votes on the lending rules, and software manage the lending process.
Risks and Rewards
Custodial Accounts
- An organization is in charge of securing your funds and can be held accountable in the event they are lost or stolen.
- Custodial accounts charge a fee for managing and securing your funds which results in lower interest rates for you.
- Organizations can pool large sums of money, utilize non-custodial accounts, and reduce the impact of transfer and contract fees.
Non-custodial Accounts
- You are in charge of securing your funds. If someone steals your funds or you misplace them, it’s unlikely you’ll ever see your funds again.
- Non-custodial accounts typically offer higher interest rates.
- The process requires you to pay network fees for transfers and contract fees to initiate and exit contracts.
We will be working with the non-custodial service, Aave, because of its ease of use, interest rates, and security. Now we need to cover wallets and Ethereum (ETH).
3. Set up your Wallet
If you followed step 1 then you have access to your USDC but it’s not in your possession, it’s in Coinbase’s possession. To use non-custodial services, you first have to move your USDC out of Coinbase and into a digital wallet. Like a physical wallet, a digital wallet is used to store your funds and it is your responsibility to not lose access to the wallet or to give access to it to anyone else. There are several digital wallets you can use and for this example, we will be using a wallet that was created by Coinbase.
To set up your wallet search for “Coinbase Wallet” on either Android or iPhone and download the app. Once you download and open the app, create a new wallet:
Agree to the terms and conditions:
Choose your username:
Determine if you want your account to be public or private:
Create your pin number to access the account:
You can try converting crypto at a later time. Press maybe later.
Connecting to your Coinbase account will make for a smoother process. Press connect to Coinbase:
After connecting to your Coinbase account the most important step in this entire process is to backup your account. Press on the gear icon on the bottom right corner of the home screen to navigate to your settings:
Press recovery phrase:
A recovery phrase is a common practice for securing digital wallets. The Coinbase wallet will generate 12 random words that you must remember in the exact order they are provided.
IT IS ABSOLUTELY ESSENTIAL THAT YOU STORE YOUR RECOVERY PHRASE IN A SECURE PLACE WHERE NO ONE ELSE CAN ACCESS THE PHRASE.
If anyone discovers your recovery phrase, they can assume complete control of your digital wallet and steal your funds. If you ever sign out of your wallet or try to sign in to your wallet from a new device, you will need to provide your recovery phrase. If you lose your recovery phrase you will lose access to your wallet and all of your funds in your wallet.
Google and Apple offer you the option to back up your recovery phrase in their respective clouds. Storing your phrase in a cloud service will allow you to sign in to your wallet with a password instead of the 12-word recovery phrase. Whether you use a cloud service or not, Coinbase wallet will prompt you to manually back up your recovery phrase for extra security. Once your wallet is secured, you can proceed with transferring your USDC from Coinbase to your Coinbase wallet.
Navigate back to the wallet tab, press on get coins, and press on buy or transfer from Coinbase:
Choose USDC and the amount you would like to transfer:
To transfer USDC to your wallet you will have to pay a network fee. The network fee fluctuates over time but is a flat rate regardless of how much money you transfer. At the time of this writing, the network fee was $4.58. Once you confirm the transfer, it will take a few minutes for your USDC to arrive in your wallet.
4. Purchase and transfer your ETH
USDC is a cryptocurrency built using an Ethereum smart contract.
Smart Contracts
Smart contracts are digital contracts that are published to the public and automatically facilitate the initiation, enforcement, and exit of the contract. To initiate and exit a smart contract you will need to pay a “gas” or “miner” fee. It is more often called a gas fee because the fee is used to fuel the Ethereum network which is in charge of managing all of the smart contracts. Since USDC is built using an Ethereum smart contract, you will need to pay for your gas fees using Ethereum.
Gas Fees
Gas fees are determined by the type of contract the Ethereum network is processing, how many contracts it is processing at a given time, and the price of Ethereum. Since gas fees fluctuate drastically, I provided a lower and upper estimate for the total cost of Crypto banking.
As displayed in the table above, you should expect to spend between $45 and $352+ on fees paid in Ethereum. Considering the impact the fees may have on your savings, it may be worth your time to wait for fees to drop before processing your transactions. You can visit Gasnow.org to find the times when gas prices are typically low. At the bottom of the home page, you can find the Average Gas Price table. Be sure to check the time zone.
If you feel comfortable with the current gas prices you can purchase your Ethereum on Coinbase and transfer your ETH to your Coinbase wallet following the same process in step 1.
5. Transfer USDC to high yield accounts
Now your Coinbase wallet should have ETH and USDC like so:
Press earn interest on your crypto:
It important that you carefully read the two screens above to understand the risks of using smart contracts for collateralized loans.
Risks of Smart Contracts for Collateralized Loans
Smart contracts are written in code, code is written by humans, and humans make mistakes. Like any other code, smart contracts are susceptible to bugs and hacks which can put your funds at risk. To mitigate the risks, the code of many smart contracts is available for the public to review and is audited by third parties.
Smart contracts for collateralized loans have the additional risk of not having enough funds to return money to all of its depositors. The same risk exists with traditional banking but is less likely and less frequent. This can happen if the prices for cryptocurrencies plummet.
Platforms like Aave allow users to deposit cryptocurrencies and use their crypto as collateral for loans. If the prices plummet, the total amount borrowed can exceed the total value of the collateral causing the system to lock down and prevent withdraws. Withdraws will resume once prices return to normal. In the worst-case scenario, protocols like Aave have built-in insurance policies to cover funds. I have chosen to work with Aave in particular because it is the largest Decentralized Finance (DeFi) lending platform with over 18 billion dollars deposited into the network.
If you feel comfortable with the risks, continue by searching for USDC:
Choose the Crypto service you would like to use:
Choose the amount you would like to deposit:
Review your deposit, estimated APR, and miner fee. The miner fee will be paid from the Ethereum in your wallet. As a reminder, if you are not in a rush, it is in your best interest to wait for fees to drop.
Now you’ll be able to view your USDC in the earn section of your app. Congrats you are now earning interest on your USDC! Your USDC will never decline in value and you are earning more interest than any traditional bank can offer.
Withdrawing Funds
When you want to withdraw your funds, navigate to the earn section, tap on Aave and click on withdraw.
As mentioned earlier, you have to pay a fee to enter a contract and to exit a contract. For Aave, the fee to withdraw is higher than the deposit fee.
Once you withdraw from Aave, your USDC will be returned to your wallet. From your wallet, you can send your USDC back to Coinbase and trade in your USDC for USD. When you have USD you can withdraw to any traditional bank.
At what point is this worth it?
There are many fees associated with Crypto banking so we want to be sure that the interest we receive on our USDC covers our fees and still gives us more interest than traditional banks. The following are the fees I incurred for the whole process.
To determine if the process is worth it, I calculated the break-even point between the Crypto returns and returns from traditional banks.
In the first year of savings, the starting amounts above would earn you as much as the best banks even when you factor in all the fees of course assuming you incur similar costs. The second-year and onwards you will make hundreds more in Crypto Savings than traditional savings.
Take-Aways
Cryptocurrencies are not all volatile and there are products and services available for even the most conservative savers among us. You won’t ever make returns on your money without taking risks but be sure to take as much time as you need to understand what you are getting yourself into. While earning hundreds of dollars more in interest is exciting, the decentralized finance industry has far more fascinating applications that reward us all for our participation. Thank you for reading and let me know your thoughts.
Notes
- Full disclosure: I do not use this method for earning on my savings. I use much riskier cryptocurrencies and protocols for even higher returns. I will cover many other ways to earn on cryptocurrencies in future articles.
- Nothing I write is financial advice, I am merely exposing you to what is possible.
- Ethereum fees are high at the moment. The development team is working on a solution to dramatically reduce fees over the next two years.
- I have not validated all of the crypto accounts in this article. Do your own research before moving your money anywhere.
Resources
Want to get a better understanding of how this all works? Check out these resources:
- USDC Website: https://www.centre.io/usdc
- Compare Crypto Interest Rates: https://loanscan.io/
- Compare Crypto Interest Rates: https://defirate.com/
- Cost of Ethereum Transactions: https://www.gasnow.org/
- Coinbase Affiliate Link: https://www.coinbase.com/join/jalbert4
- Coinbase: https://www.coinbase.com/