Education

How Does Crypto Earn Interest?

Are you seeing more opportunities to earn interest on your crypto but unsure of what that means? How does crypto earn interest? The short answer is that most interest earned through crypto is a floating interest rate based on supply and demand.

Although the rate fluctuates, most larger coins have a relatively stable APY. For example, Bitcoin (BTC) interest rates typically range between 2% to 7%. Stablecoins like USD Coin (USDC) tend to offer higher rates, often 8% or above.

Our guide covers everything you need to know about how crypto earns interest. Read on to discover how you can start earning yield on your crypto holdings.

How Crypto Lending Compares to Fiat Lending

Earning interest on crypto is similar to earning interest on fiat currencies, such as the US Dollar. Both require users to sign up for an account and deposit funds. Besides that, fiat banks and crypto platforms differ in a couple of key ways. 

Typically, the yield that banks offer doesn’t outpace inflation. In contrast, crypto platforms reward users with a higher annual percentage yield (APY) that either comes close to inflation or surpasses it. Crypto platforms can provide higher yield for lenders because borrowers, especially institutions, are willing to accept higher interest rates for access to in-demand, scarce digital cryptocurrencies like Bitcoin.

Fiat platforms generally set interest rates based on the policies set by central banks. For example, U.S. banks rely upon the Federal Reserve to determine how much yield savings accounts earn. 

Market demand rather than national policies instead set crypto interest rates. If there is a high demand to borrow certain cryptocurrencies, borrowers will have to pay higher fees to borrow. Crypto platforms then distribute yield to savers.

How Does Crypto Earn Interest?

The APY rate crypto platforms offer depends on several factors. For some cryptocurrencies, like Bitcoin, APY might be only around 2%. For other cryptocurrencies, especially stablecoins, APY might exceed well above 10%. 

Most crypto interest platforms offer flexible terms for savers. You can withdraw funds from the platform, including interest payments, at any time. This means that you don’t have to commit to locking up your funds for a certain period of time. 

Most crypto interest platforms also offer collateralized loan products, which allow users to borrow funds. Users take out a loan in the form of a stablecoin by depositing their existing crypto holdings as collateral. For example, as of this writing, Abra Borrow offers loans with as low as 0% APR at 15% LTV.

Although less common, a few platforms offer fixed terms (i.e., three months or six months) with set APY.

Most platforms don’t require a deposit minimum or have a very low deposit minimum (i.e., $5.00) required to start earning interest.

There are two popular ways to earn interest with crypto: staking and interest accounts. Both use two unique processes to generate yield.

For crypto interest accounts, users deposit funds into an account, then the platform lends those funds to borrowers. The platforms generate yield when borrowers pay back loans with interest. Savers then receive part of that interest payment for providing liquidity to borrowers.

For crypto staking, users commit funds towards a blockchain validator. A validator is responsible for authenticating crypto transactions on a public blockchain network. Then, the network generates new cryptocurrencies and rewards stakers, with crypto for maintaining security. The amount crypto stakers receive varies based on the blockchain network’s rules.

Two Types of Crypto Lending — Stablecoins vs. Utility Coins & Tokens

If you visit any crypto interest platform, you’ll almost immediately notice two major categories of supported cryptocurrencies: stablecoins and utility coins/tokens. 

Utility coins are essentially any cryptocurrency that has a specific use case. Some focus primarily on digital payments, while others have utility for decentralized finance (DeFi) applications or gaming ecosystems.

Stablecoins are cryptocurrencies that have their value tied to another asset. For example, many USD stablecoins like USDC and USDP hover around $1.00 per unit. Stablecoins can also tie their value to other assets like precious metals (i.e. gold or silver) and other fiat currencies (i.e. EUR, GBP, or CNY).

Stablecoins often have higher interest rates than volatile cryptocurrencies. They offer a far more predictable store of value over time compared to utility cryptocurrencies like Bitcoin and Ethereum.

Download Abra and Start Earning Interest on Your Crypto

Abra Earn is a crypto interest account that makes earning APY simple. 

There are no fixed terms, yield compounds daily, and users receive interest payouts weekly. The app supports popular utility coins/tokens, including BTC, ETH, ADA, LTC, BCH, XLM, and CPRX. It also supports the top USD stablecoins, including USDC, USDP, USDT, and TUSD.

The Abra app provides a crypto wealth management platform that is highly accessible even for beginners, with four convenient ways to fund your account, plus features like recurring transactions that help you automate your crypto purchases.

Download Abra today and start earning interest on your crypto and stablecoins.

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