5 ways your crypto account is different from a bank account
Disruptive technology can change the way we think about and do things.
Take blockchain and banking. The smart thing about blockchain – the technology behind the world’s first digital currency, Bitcoin (BTC) – is that it can eliminate the middleman from all kinds of transactions.
For example, you no longer need to use a bank or financial institution to transfer money, or even borrow money.
This gave birth to what is called decentralized finance (DeFi). DeFi encompasses a host of applications that can reshape traditional financial services, such as the currency we use, as well as the way we lend and save.
You may have seen advertisements for DeFi savings accounts with high interest rates and low fees. You’ll usually find them with the best cryptocurrency exchanges, although you don’t need to buy crypto to take advantage of the great rates.
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If you are planning to transfer your money from your bank account to a crypto account, it is important to understand the differences. Crypto accounts often offer less protection to consumers and put more responsibility on your shoulders.
Here are five things to watch out for.
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1. Interest rate
Interest rates are where DeFi apps really stand out. The best savings accounts can pay APYs of around 0.5%, but you could earn over 8% with a DeFi account. It depends on several factors, such as:
- What currency you use
- How long are you willing to tie up your money
- Which DeFi app you choose
It is a good idea to find out how the company is able to offer you these rates. They may lend your money to other people, in which case you need to be comfortable with their lending strategy.
As a borrower, you may be able to get lower interest rates than you would find with normal personal loans. However, you may need to secure your loan with crypto as collateral.
2. FDIC insurance
Most banks are FDIC insured. This means that if your bank goes bankrupt, you will be covered for up to $ 250,000 per person per bank. On the other hand, if your crypto exchange or hot wallet provider fails, you could end up with nothing.
This is one of the reasons that many cryptocurrency enthusiasts use cold wallets or hardware wallets. These are small devices that you can store offline and give you full control over your digital assets. However, you won’t be able to earn interest on the money you keep in a cold wallet.
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If you want to earn interest, you will have to leave your money at the stock exchange or at the brokerage house. This is why it is important to know what protections are in place. Some exchanges that keep your crypto safe take out private insurance to cover your assets. Others have FDIC insurance for US dollars, but not for cryptocurrencies.
3. Protection against theft, hacking and fraud
FDIC insurance doesn’t cover theft and fraud, but your bank probably does. There are several ways that banks can protect their customers against fraud. First of all, they monitor your account for any suspicious activity. If a transaction is unusual, the bank may call you for confirmation or temporarily block your account.
Second, if you lose money – especially on your credit card – there’s a good chance you can get it back, as long as you report the theft promptly.
Now if your crypto account is hacked or if you are the victim of fraud, that is another matter.
Let’s say there is malware on your computer and $ 500 worth of Bitcoin is stolen from your wallet. Once the money is moved, it will be almost impossible to get it back. Crypto accounts don’t have the same safety net as banks.
There have been a number of high profile exchange hacks, the most prominent of which was Mt. Gox in 2014. Around 850,000 Bitcoins were stolen and only around 200,000 were recovered. Many customers have lost their money.
4. Customer service
The level of customer service you receive depends a lot on the business you use, whether it is a bank or a crypto account. However, if you like to go to your local branch and talk to someone face to face, you may need to stick with a traditional bank.
At the other extreme, let’s say you choose to move your digital assets to an offline hardware wallet as shown above. You would be 100% responsible for the security of this wallet. You will need to set up a password and something called startwords, which are used to recover the account. If you lose them, you could completely lose access to your wallet – there is no convenient “Forgot Password” button.
Cryptocurrency data company Chainalysis estimates that between 2.3 million and 3.7 million Bitcoin has been lost. It’s roughly between $ 91 billion and $ 148 billion at today’s rate.
5. Available currencies
Unlike your bank account, which probably only stores US dollars, your crypto account will allow you to hold a range of digital and fiat (traditional) currencies. You can hold – and potentially earn interest – dollars, pounds, and euros, as well as many types of cryptocurrency, such as Bitcoin and Ethereum.
Weigh the risks
If you’ve had a bank account your entire life, it’s easy to take the protection it offers for granted. When you open a crypto account, you have to understand that it is not the same thing. It does not mean that you should not enjoy the benefits of DeFi. It just means you have to work harder to protect your money.