What is the difference between cryptocurrencies and banks
For more than a decade, investors using traditional financial instruments have been experiencing difficulties due to ultra-low interest rates. For example, in the US, the average interest rate on savings is only 0.04%, in the UK – about 0.40%, and in the eurozone countries in 2021 – about 0.50% (in Spain and Germany – up to 0.02%). And since the main central banks continue to prefer printing money to keep high levels of lending and stock markets afloat, rather than raising interest rates, this situation shows no signs of changing.
However, as banks lowered their interest rates, we saw the emergence of new technologies that changed the way money was used, which forced many of us to look for alternative ways to invest and save. One of the opportunities that more and more people are turning to is cryptocurrency.
How does investing in cryptocurrency differ from well-known banking institutions?
Advantages of traditional banks
In a financial world that has experienced many innovative shocks over the past decades, the banks we are familiar with offer a high level of stability and security. Traditional banking services are challenged by new financial technologies (FinTech), which can offer greater flexibility, convenience and cost reduction, but banks still retain certain advantages.
It is generally assumed that traditional banks have a lower level of risk due to the extensive acquisition of physical assets. This is due, in particular, to the fact that they are often regulated by central banks or financial regulators, unlike some cryptocurrency companies that can avoid regulation (although many state supervisory authorities now regulate cryptocurrency platforms and exchanges).
Security is another factor to consider: financial services are subject to cyber attacks almost 300 times more often than other industries, which makes security a much more important task for this sector. Banks are constantly increasing their cybersecurity spending, but the average cost of hacking is also rising.
Traditional banks have budgets and manpower to maintain a high level of security, however, they are often slower to adopt new technologies such as blockchain, which can offer greater security, transparency, efficiency and cost reduction. Today, the situation is starting to change, as banks such as Deutsche Bank and JP Morgan are implementing blockchain, but they are still far behind the explosive financial technologies.
Disadvantages of traditional banks
In the ever-changing world of finance, investors may feel that they are losing out by not taking advantage of the new opportunities offered by FinTech and cryptocurrency providers. Being large international organizations in which practically nothing has changed for decades, traditional banks have difficulty adapting to new ways of doing banking.
Online banks can often offer slightly higher interest rates than traditional banks, as well as a number of other technological advantages, but their annual interest rate (APY) is still only a fraction higher. Both in physical and online banks, interest rates are very low compared to high-yield cryptocurrency accounts.
Very high costs, very low rates
Do not forget that traditional banks often charge for their services, for example, a service fee and a commission for unnecessary transactions, which in the United States averages $ 7 per month. More modern online banks allow you to reduce these fees, although they usually do not cancel them.
But the biggest drawback of using a bank or investment fund as a place to store your savings is that it will lead you to the exact opposite result of your main goal – saving money. The impact of ultra-low interest rates imposed by central banks since 2009 has led to inflation rates exceeding interest rates in many Western countries.
This means that your hard-earned money, set aside for the future, most likely does not pay off and is actually devalued. Among other things, this simple fact makes traditional banks a rather unnecessary institution for saving.
Advantages of cryptocurrencies
As cryptocurrencies attracted the attention of the general public, stories abounded about how some coins and tokens soared up, offering investors incredible returns. According to the data Coinmarketrate.com in the last year, there has been a phenomenal increase in the value of cryptocurrencies such as Bitcoin, Ethereum and Dogecoin, and the media picked up on this. Cryptocurrencies interested even institutional investors: even Harvard and Yale funds supported venture funds focused on cryptocurrencies.
In general, the value of cryptocurrencies is steadily increasing, and sudden jumps are caused by a change in the perception of a particular currency, or even a tweet from an influential person. Although these sharp rises arouse the interest of investors seeking high returns, the level of volatility is sufficient for many long-term investors to feel uncomfortable.
But everything changed with the advent of stable coins, such as USD Coin (USDC) and USD Tether (USDT), which are pegged to the US dollar, and are designed to have a constant value. These stable versions of cryptocurrencies are able to use the potential of the blockchain without the volatility inherent in many other areas of the cryptocurrency market.
Stable coins and DeFi offer stable returns
Stablecoins have also given rise to the growing world of decentralized finance (DeFi), where users can invest these and other assets in exchange for income (APY), usually exceeding 10%.
Investing using the DeFi wealth management platform is a great way to earn interest on your money while reducing risk, compared to the broader cryptocurrency market, and all this through a system that eliminates the need for external intermediaries such as banks or brokerage houses.
One of the best advantages of investing in DeFi is that they offer annual interest returns that are much higher than savings accounts in most banks. DeFi platforms often offer interest rates significantly higher than inflation, so investors have the opportunity to make real profits, and not lose money in real terms, as many do with cash.
Many DeFi wealth management platforms also offer users the opportunity to invest in other cryptocurrencies besides stablecoins, including the two largest: Bitcoin and Ether. Although these more volatile cryptocurrencies do not provide the same price stability as stablecoins, they allow users to take advantage of price increases during bull markets, providing income in any conditions. Thus, investors can receive passive and stable income regardless of whether the price of the cryptocurrency is rising or falling.
Disadvantages of cryptocurrencies
However, investing in cryptocurrencies or DeFi is not without drawbacks, or at least certain points that investors should be aware of.
Using such applications and platforms, users may find that they have limited access to their funds at certain times, or that a commission may be charged for access to funds. There may also be restrictions on the proportion of funds available at any given time. According to Coinmarketrate.com this may be due to technological issues (PoS algorithm and staking), or to the terms of smart contracts.
Unlike traditional banks, not all funds management platforms in DeFi and cryptocurrencies offer insurance or deposit protection. In the US, UK and Europe, money stored in a bank is usually protected to a certain level, regardless of what happens in that bank (up to $250,000 in the US and 100,000 euros in Europe). However, in the case of cryptocurrencies, the level of deposit protection will depend on each platform, while users can also enter into their own insurance policies.
Today, it seems clear that traditional banks are no longer a reasonable option for savings. Ultra-low interest rates have become the new norm for traditional financing, and DeFi platforms powered by cryptocurrency can offer a profitable, albeit very risky alternative.
Users should understand that this is a different banking system that needs to be adapted to, and offers an absolutely innovative approach.