12/21/2020

What is the difference between cryptocurrency and banks?

For more than a decade now, savers in traditional finance have been struggling under the weight of ultra-low interest rates. In the US, for example, the average savings rate is just 0.04%, around 0.40% in the UK, and in 2020 around 0.50% for countries in the Euro area (with Spain and Germany as low as 0.02%). And, with major central banks continuing to favour money printing to keep lending high and stock markets afloat over raising interest rates, this situation shows little sign of reversing. 

As banks have been shrinking rates, however, we have seen the emergence of new technologies that have transformed the way we use money, leading many of us to now seek alternative ways to invest and save. One opportunity that an increasing number of people are now turning to is cryptocurrency – but how does investing in crypto really compare to the established banking institutions we know so well?

Pros of traditional banks

In a financial world that has seen many innovative disruptions in recent decades, the banks that we are more familiar with seem to offer a high level of stability and security. Brick-and-mortar banks have been challenged by new fintech initiatives that can offer greater flexibility, convenience, and reduced costs, but banks still retain certain advantages.  

Due to their wide acquisition of physical assets, traditional banks are usually considered to have lower risk levels. This is not least because they are generally regulated by central banks or financial regulators, unlike some cryptocurrency companies that may escape regulation (although many state watchdogs are now regulating cryptocurrency platforms and exchanges). 

Security is another factor to consider: financial services experience almost 300 times more cyberattacks compared to other industries, making security a much greater concern for this sector. Banks are continually increasing their spending on cybersecurity, but the average cost of a breach is also rising. 

Traditional banks have the budgets and manpower to maintain high levels of security, although they are generally slower to adopt new technologies like blockchain that are able to provide improved security, transparency, efficiency, and reduced costs. This is beginning to change, with banks like Deutsche Bank and JP Morgan opening up to blockchain,  but they are still far behind the fintech disruptors.

Cons of traditional banks

In the ever changing world of finance, investors may feel they are missing out by failing to take advantage of the new opportunities that fintech and cryptocurrency providers are offering. As large, international organizations that have seen little change for decades, traditional banks struggle to adapt to new ways of banking. 

Online banks are often able to offer slightly higher interest rates than traditional banks, as well as a range of other technology-based benefits, but their Annual Percentage Yields (APYs) are still only fractionally higher. For both physical and online banks, their rates are very low in comparison to high yield cryptocurrency accounts. 

High costs, low rates

Another thing that shouldn’t be forgotten is that traditional banks generally charge fees for their services, such as maintenance or excessive transaction fees, which are at an average of $7 per month in the US. More modern online banks are a way of reducing these fees, though typically not removing them.  

But the biggest downside to using your familiar bank or building society as a place to keep your savings is that it will lead to the exact opposite of your main objective – i.e. losing money. The impact of the ultra-low interest rates introduced by central banks since 2009 has in many western countries caused inflation rates to exceed interest rates

This means that the hard-earned cash you were saving for the future is probably not paying off, and indeed is actually devaluing. Aside from anything else, this simple fact renders traditional banks fairly redundant as a means of saving.  

Pros of cryptocurrency

As cryptocurrency has come to the attention of the wider public, stories about certain coins and tokens that have skyrocketed to deliver incredible returns for investors have multiplied. The last year has seen phenomenal increases in the value of cryptocurrencies like Bitcoin, Ether, and Dogecoin, and this has been widely reported in the media. Crypto has even garnered the interest of institutional investors – even Harvard and Yale endowments have backed crypto-focused venture capital funds.

In general, cryptocurrencies have been on a continual increase in value, with sudden surges caused by the changing perceptions of a particular currency, or even a tweet from an influential personality. Although these sharp increases will be enough to pique the interests of investors on the lookout for high returns, the level of volatility is enough to make a lot of long-term investors feel less than comfortable.

But this has all changed with the introduction of stablecoins like USD Coin (USDC) and USD Tether (USDT), which are pegged to the US dollar and designed to be constant in value. These stable versions of cryptocurrencies are able to harness blockchain’s potential without the volatility inherent in many other areas of the crypto market. 

Stablecoins and DeFi deliver steady yields

Stablecoins have also given rise to the growing world of Decentralized Finance (DeFi) where users can invest these and other assets in return for an APY typically in excess of 10%. Investing with a DeFi wealth management platform like this is a great way of earning interest on your money while lowering your risk compared to the wider crypto market - and all through a system that removes the need for third-party intermediaries like banks or brokerages. 

One of the greatest things about investing funds into DeFi is that it offers APYs that are much higher than savings accounts at most banks. DeFi platforms generally offer rates that far exceed inflation so investors have the chance to make real returns, rather than lose money in real terms, as many do in cash.   

Many DeFi wealth management platforms, including YIELD App, also offer users the option to invest in cryptocurrencies other than stablecoins, including the two biggest: Bitcoin and Ether. While not offering the same price stability as stablecoins, these more volatile cryptocurrencies do allow users to take advantage of price growth during bull markets, while providing income in all conditions. This way, investors are able to earn consistent, passive income whether the price of the cryptocurrency is going up or down.

Cons of cryptocurrency 

Investing in crypto or DeFi is not without its drawbacks, though: or at least particular points that investors should be aware of. With these types of accounts and platforms, users may find they have limited access to their funds at particular times, or that accessing funds may incur fees. There can also be limits to the proportion of funds available at any given time. 

Unlike traditional banks, not all DeFi and crypto wealth management platforms provide deposit insurance or protection, either. In the US, UK and Europe, cash saved in a bank is usually protected up to a certain level no matter what happens at that bank (up to $250,000 in the US and €100,000 in Europe). In crypto, however, the level of deposit protection provided will depend on the individual platform, while users can also take out their own individual insurance policies.

All things considered, however, it would seem clear that traditional banks are no longer a sensible choice for savings. Ultra-low interest rates have become the new normal in traditional finance and crypto-powered DeFi platforms can offer a lucrative - if not very different - alternative. 

Users should be aware that this is a different system of banking that needs to be adjusted to, but with a trusted and reliable cryptocurrency wealth management platform, there is no reason they can’t minimise the risks and enjoy the yields. 

Do you want to make up to 20% APY on your USDT, USDC and ETH? Sign up for a YIELD App account today

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