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Executive summary:
Consider this question: What’s better for your long-term savings?
- Riding the waves of volatility in the crypto markets, or
- Parking your cash in a traditional savings account?
While this split might be a little simplistic, it does tap into many investors’ concerns – how to put savings into a medium that will help them grow.
In this article, we’ll discuss traditional savings accounts vs. crypto savings accounts. The former is safer, insured, and yields modest returns, whereas crypto accounts usually provide higher returns, along with higher risk and volatility. (Click here to compare current rates.)
While crypto has shown impressive long-term growth, it is subjected to sharp drops like the various “crypto winters.” Traditional savings accounts offer stability, but their returns are usually below the inflation rate. Both can play a part in a diversified investment strategy. Read on.
What Are Crypto and Traditional Savings Accounts?
A traditional savings account is a deposit account offered by “traditional” financial institutions, such as banks or credit unions. These accounts typically provide a modest interest rate. As such, investors open these accounts for their safety and reliability, as they’re suitable for storing surplus cash, creating emergency funds, or saving for short-term objectives.
A crypto savings account, offered by a cryptocurrency exchange or other centralized crypto platform, enables investors to earn interest on their crypto deposits. The exchanges use these deposits to lend to others on their platform, much like a traditional bank lends out deposited money. Unlike standard savings, interest rates on crypto deposits are often much higher than those of conventional savings accounts.
Investors might choose traditional savings accounts due to their assured stability. On the other hand, crypto savings accounts can offer significant returns while subject to higher volatility and other risks. Moreover, they usually lack deposit insurance, although some platforms provide a guarantee in the case of failure.
(Click here to compare current rates for each.)
What to Consider when Investing in Traditional or Crypto Savings Accounts?
As you consider either a crypto or traditional savings account, it’s essential first to define your risk tolerance, investment goals, and investment window.
Risk Appetite
Every investment carries a certain degree of risk and reward. In this particular case, traditional savings accounts offer minimal risk. Your capital is insured up to $250,000, so you can expect a small but stable return.
Conversely, investing in cryptocurrencies is a high-risk, high-reward venture. Some digital currencies saw meteoric rises, but others have seen significant losses–in some cases over 90% of the initial investment.
Despite relative stability over the past few months, Investors in crypto savings accounts should be ready for extreme price fluctuations. To reduce risks, diversifying your crypto exposure is the best approach. Be aware that most altcoins other than stablecoins tend to follow the price of bitcoin, at least in the short term.
Learn about risk and opportunity in crypto assets with our Investor Scorecards, available to Premium members.
Altcoins tend to follow a similar trajectory. Original data via TradingView.
Investment Objectives
Are you looking for capital growth? Preserving your wealth? Saving money for retirement? Accumulating funds for college tuition or a down payment on a house?
If you're focused on preservation, for example, the safety of a traditional savings account might appeal more. However, if you're seeking growth, the potential high returns of crypto assets could be more attractive.
Still, despite the short-term volatility, bitcoin is more often regarded as a store of value (SOV), and many investors consider it for its low correlation to traditional markets.
Investment Window
Timeframe impacts your risk tolerance as well. Generally, the longer your investment horizon, the more risk you can take since you have more time to recover from potential losses.
Crypto investments can be volatile in the short term but offer higher returns in the long run. The so-called “hodl” strategy has proved to be a winning formula for many, and our own “Blockchain Believers” philosophy revolves around investing in a limited amount of crypto for the long haul.
But getting into crypto on the rise and selling high can prove effective if you pay attention. The trade-off is that you're essentially gambling, and if you're interested in a savings account, that's probably the last thing you need.
A traditional savings account could suit long-term goals, providing stability and predictable growth.
Choosing between a crypto or a traditional savings account ultimately means understanding your financial objectives, risk tolerance, and investment horizon. Both can serve a purpose in your financial strategy, depending on your circumstances and goals.
Platforms
Some of the crypto exchanges and centralized platforms that offer crypto savings accounts are
- Coinbase
- Binance
- NEXO
- Crypto.com
- YouHodler
- Kucoin
As of this writing, The annual percentage yield (APY) ranges from 1.5% to 7% for bitcoin, up to 4% for Ethereum, and up to 12% for dollar-backed stablecoins. (Click here for current rates, updated weekly.)
How Have Crypto and Traditional Investing Performed?
Outside your investment goals and risk tolerance, there’s the fundamental question of market performance. Traditional savings accounts and crypto markets have fundamentally different mechanisms and forces driving performance, which must be considered before making significant financial investment decisions.
Crypto Market Performance
The performance of the two largest cryptocurrencies – bitcoin and Ethereum – has been impressive during the last 5 years. However, this doesn’t guarantee that they will continue to perform–they could rise or fall in years, months, or even weeks.
Bears can also dominate the crypto market for years, and getting exposure at peaks can be a painful experience. For example, the crypto winter of 2022 wiped out about 60% of bitcoin’s value.
Still, the performance of bitcoin and Ethereum since August 2018 makes them winners compared to the S&P 500 and the tech-oriented Nasdaq.
Even after suffering through a crypto winter, BTC and ETH have outperformed stocks. Original data via TradingView.
A $1,000 investment in bitcoin at the beginning of August 2018 would have nearly quadrupled its value today, and adding $100 at the end of each month would have led the total value to an estimated $17,000, translating into $10,000 in net profits. Using a crypto savings account that provides 2% APY on average, the same scenario would end up with over $21,000, which means over $14,000 in net profits.
Traditional Savings Performance
A traditional savings account's performance pales compared to crypto assets and even stocks. Instead, they're good for parking money and creating emergency funds, but you should be aware that high inflation can eat a good chunk of the purchasing power.
These accounts offer incredibly modest interest rates that don't reach 1% annually. Instead, they guarantee stability and flexibility, with most savings accounts allowing some form of withdrawal. Additionally, these accounts are subject to changes in fiat currency's value (or devaluation). Last year, the annualized figure of the US consumer price index (CPI) exceeded 9%, a noticeable currency devaluation rate.
While the APY of traditional savings accounts was already low in 2018 – 0.22% on average – the COVID-19 pandemic forced central banks to cut interest rates to record lows, causing the APY of savings accounts to drop below 0.15% in 2021.
While on an uptrend, savings account yields pale in comparison to crypto yields. Data via DepositAccounts.
If you had invested $1,000 in August 2018 and then added $100 every month, you would have ended up with a net profit of only about $80, meaning that the total amount would have been about $7,080 versus the initial investment of $1,000 and the additional $6,000 dispersed over 5 years.
Online high-yield savings accounts offer much higher rates, with the APY often exceeding 4% as of today. If we consider a 4% rate for the last 5 years – even though that would be a stretched best-case scenario – a similar investment approach would end up with a total of about $8,000, which means $1,000 in net profits.
Investors should know that both high-yield savings accounts and traditional savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC), which insures up to $250,000 of deposits per investor if the financial institution fails.
Investor Takeaway
The decision between investing in crypto or traditional savings accounts is a personal one, but the takeaways are:
- Crypto savings accounts can yield higher returns, but are also subject to market volatility and risk. Not for the faint of heart.
- Traditional savings accounts offer stability, predictability, and insurance, but with lower returns that might not even beat inflation.
Both can serve a purpose in a diversified financial strategy. Make sure to regularly reassess your financial goals and stay informed about market trends, crypto regulatory updates, and the performance of your investments.
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