Ethereum is the 2nd largest cryptocurrency by market capitalization, and its value has appreciated faster than Bitcoin over the last 12 months. Ethereum differs from Bitcoin because you can use smart contracts on its blockchain.
Smart contracts are code on Ethereum’s blockchain, which can handle crypto assets autonomously, and enables you to earn interest on Ethereum tokens in unique ways.
2 Ways to Earn Interest on Ethereum
The 2 most common ways to earn interest on Ethereum is through Ethereum staking and loans. Lending platforms like BlockFi offer savings accounts with interest rates between 5.25% to 6.35% annually. These platforms use your funds to supply loans to institutional and retail investors, and they offer you a competitive interest rate for doing so.
Alternatively, you can stake your Ethereum on the Eth 2.0 beacon chain to earn between 4% to 10% annually. Ethereum staking is being used to upgrade the Ethereum blockchain using what’s called Proof-of Stake consensus.
This upgrade will lower the cost to transact on Ethereum’s blockchain and greatly increase the transaction throughput on the blockchain. If you choose to stake your Ether tokens, you won’t be able to withdraw your funds until the Eth 2.0 upgrade completes later this year.
Step 1: Open a crypto account
There are many platforms that let you earn interest on your Ethereum tokens. This interest is paid to you in Ethereum, so your initial investment and interest will appreciate if Ethereum’s token goes up in value. Conversely, if Ethereum depreciates, then your interest earned and initial investment will go down in value.
Some top lending platforms that offer competitive interest-bearing savings accounts for Ethereum are BlockFi and Nexio.io. These platforms also let you take out loans in cryptocurrency, but you need to use cryptocurrency as collateral. This is a great option for investors who may need a loan but don’t want to sell their cryptocurrency holdings.
You can also make an account with a cryptocurrency exchange to stake Ethereum. Staking Ethereum is a great way to earn interest, as it’s a secure and simple way to earn more Ethereum. You can join the waitlist to stake Ethereum on Coinbase, or you can get started staking Ethereum today on Kraken.
If you want to stake Ethereum independently, you can do so using an Ethereum wallet like Argent. However, you need to own 32 Ethereum tokens to stake your tokens independently. Exchanges aggregate investors’ crypto to stake it on the blockchain, so you can deposit any amount of Ethereum on Coinbase or Kraken. These exchanges charge an administrative fee for staking your Ethereum tokens, taking around 15% to 25% of the interest you earn.
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Sum of median estimated savings and rewards earned, per user in 2021 across multiple Coinbase programs (excluding sweepstakes). This amount includes fee waivers from Coinbase One (excluding the subscription cost), rewards from Coinbase Card, and staking rewards. ³Crypto rewards is an optional Coinbase offer. Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can click here. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts.
Step 2: Look at interest rates
For cryptocurrency lending platforms, interest rates are calculated by the supply and demand for loans on the platform. While these interest rates have been relatively stable, there’s no guarantee that you’ll earn 5% to 7% annually over the long term. It’s a good idea to monitor the interest rate you’re earning on your Ethereum every once in a while to know exactly how much interest you’re earning.
If you decide to stake your Ethereum tokens, the interest rate you earn off of staking fluctuates with the supply of Ether tokens staked on the blockchain. It’s estimated that Ethereum staking will earn between 5% to 10% returns annually. The Ethereum tokens you earn from staking are split proportionally between all staked Ether on the blockchain, so the more investors that stake Ether tokens, the less interest you’ll receive.
Step 3: Add Ethereum to your portfolio
To fund your account on these platforms, you need Ethereum tokens. If you don't already own Ethereum tokens, you can use your bank account to wire funds to your BlockFi account. Otherwise, you’ll need to purchase Ethereum on a crypto exchange and send your tokens to the platform you want to earn interest on.
Some exchanges like Coinbase and Kraken let you earn interest on your Ether tokens directly on their exchanges in the form of Ethereum staking.
Step 4: Earn interest
The interest rate you earn will differ depending on whether you stake your Ethereum tokens or use a lending platform. If you stake your Ether tokens on Eth 2.0, your tokens will be locked up for almost a year minimum, so you can’t access your funds even if interest rates fall.
If you’re earning interest on a lending platform, then you should monitor for fluctuations in interest rates, as you may be able to use several platforms to earn the highest interest possible. Different platforms have different interest rates, and each cryptocurrency has different interest rates as well. Some investors choose to switch between different cryptocurrencies to earn the highest interest rates possible.
How Does Compound Interest Work for Ethereum?
Most platforms that offer interest on cryptocurrencies offer compounding interest rates. Compound interest adds the interest you earn to your account, so you can earn interest on your initial investment plus the interest you’ve already earned.
BlockFi compounds interest every month, whereas Ethereum staking doesn’t compound at all. Seeking out compounding interest rates for Ethereum will likely earn you more than simple interest over the long term.
Pros and Cons of Earning Interest on Ethereum
While there are clear benefits to earning interest from Ethereum, it’s a much riskier investment than a normal savings account. Although crypto savings accounts are low risk, you’re still exposed to cryptocurrency which is a highly volatile asset.
Let’s take a look at the risks associated with Ethereum’s volatility. Say you earn interest with Ethereum on BlockFi, and you invest in 10 Ethereum tokens for $15,000 ($1,500 per token). If Ethereum is worth $2,500 at the end of the year, then your initial investment will be worth $25,000, and you’ll be earning interest on this $25,000 plus any interest accrued.
Alternatively, if Ethereum is worth $1,000 at the end of the year, your account value will decrease to $10,000 plus any accrued interest. The accrued interest on your investment will increase the amount of Ether tokens you own, but the USD value of your savings account would go down.
Should You Stake Ethereum?
Staking your Ethereum tokens is a great way to grow your cryptocurrency holdings. The funds you stake on Ethereum’s blockchain will be locked up until Eth 2.0 fully launches, and there isn’t a set release date for the launch yet. If you stake your Ethereum tokens, you’ll need to be ok with not having access to your tokens for up to a year.
Frequently Asked Questions
Can I get free Ethereum with a crypto interest account?
Most platforms that offer interest bearing accounts for Ethereum don’t offer free Ethereum for signing up. However, BlockFi offers investors $10 of free bitcoin for every friend that uses their referral code. If you want, you can convert this Bitcoin to Ethereum, essentially earning you free Ethereum.
What is Ethereum 2.0?
Ethereum 2.0 is an upgrade to the Ethereum blockchain that switches the consensus model from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Proof-of-Work consensus secures blockchains through cryptocurrency miners, whereas Proof-of-Stake secures blockchains through validator nodes that have a financial stake in the blockchain’s cryptocurrency. With a PoS system, Ethereum will be able to handle many more transactions per second at a much lower transaction cost.
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