Tag: savings account

In an attempt to popularise cryptos, platforms focussing on India have come out with various products with cryptocurrencies as the underlying. The attempt is to mainstream cryptos by marketing these products as ‘investment options’. This has meant that crypto deposits, crypto SIPs, and managed crypto portfolios etc. have come to the fore. Investors who are exposed to traditional investment avenues such as deposits, mutual funds and curated portfolios, but do not have the conviction of boarding the crypto bandwagon just yet, may be tempted by these alluring crypto schemes. But, things are seldom as rosy as they appear to be. Here we discuss these new-fangled crypto schemes in detail.

Crypto deposits

Sold as crypto ‘fixed deposits’ or ‘savings accounts’, platforms offer an annual percentage yield (APY) of upto 14 per cent depending on the type of cryptos you keep. There are 30-40 types of cryptos usually accepted such as Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Ripple (XRP), USD Coin (USDC), Uniswap (UNI), Binance USD (BUSD), Chainlink (LINK), Polygon (MATIC), etc. In comparison, the annual interest rates (not APY) on conventional bank savings accounts are 3-4 per cent and on bank FDs is 5-6 per cent. The high reward goes hand in hand with high risk in the case of cryptos. When you deposit crypto assets into a crypto deposit/savings account, the platform lends your holdings to others for various purposes for 7-90 days. The platform takes a small cut, while passing on the rest of the interest to users. For the depositor, the tenure can be open-term (withdraw any time) or fixed-term (penalty applies on early withdrawal).

Crypto deposits/savings account exposes investors to several risks. One, the risk of hacks is omnipresent. The possibility of a hack greatly depends on the platform and the safety protocols it uses. Platforms that store your tokens in a hot wallet are more vulnerable to attack. Two, when you give your cryptos the ultimate borrower could potentially default. One would hope platforms have stringent requirements for borrowers and robust lending standards. If not, it is a major cause for concern. Since neither cryptocurrencies or crypto platforms are regulated, in case of a default you won’t be able to press any charges on anybody. Ideally, we would ask you to do careful research on any platform you’re considering and learn about its security features, policies and track record of breaches or defaults. But, being an unregulated space, crypto platforms are under no legal binding to share any information with you or with the authorities.

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Crypto SIPs

If you are aware of mutual funds, you may know that Systematic Investment Plans (SIPs) allow users to do rupee-cost averaging by investing a fixed amount amount at frequent intervals. Irrespective of the returns of mutual funds or the prevailing market sentiment, SIP users put in the decided sum over a long period of time to average their cost of investment in stocks, fixed income securities or gold. In the mutual SIP arena, long-term returns of large-cap funds historically have been 10-15 per cent CAGR over 15-year period. But in the world of crypto SIPs, the advertised returns are much greater and often outlandish. For instance, one platform claimed that crypto SIP can give 1800 per cent. Another platform talked about an ‘RoI’ (return on investment) of 60-1400 per cent! The modus of operandi is the same as a mutual fund SIP, but the underlying asset is volatile cryptos. So, investors should take any indicated RoI or historical rate of return with a pinch of salt. The same risks that you encounter while buying cryptos directly are also present while doing crypto SIPs. Platforms often compare MF SIPs with crypto SIPs, but market fluctuations are not wild in mutual funds. To sweeten the deal, crypto SIPs come with zero expense ratio, but there are other charges that hit returns. For instance, per SIP transaction trade fees (0.25 per cent in some platforms) i.e. each transaction and each redemption can be a costly affair if you invest or redeem crypto SIPs multiple times.

Managed crypto portfolios

Given the technical nature and the lack of understanding about cryptos, platforms have come up with ways for you to invest money but the portfolio management will be done by ‘skilled’ traders. As an investor someone with no time or skill buys a ‘token’ i.e. passes on their portfolio to a trader and lets them manage it. In return, the trader takes a portion (20-25 per cent ) of the profit. Investors can sell the tokens, i.e. units of the managed portfolio, as their value increases and enjoy supposedly hands-free wealth creation. Some platforms claim they have a stringent process to ensure only best crypto traders manage others’ money. They do full KYC, review previous trades, portfolio sizes etc. to assess the quality of the trader.

As an idea, managed crypto portfolios are great. But, practical experience has exposed many problems. Some of the largest crypto platforms have witnessed huge number of complaints from distraught investors.

The platforms waited for sometime, hoping investors would recover some losses. But, ultimately they pulled the plug. Given the young nature of crypto as an asset, the high volatility and lack of actually skilled traders/portfolio managers, managed crypto portfolios is another signal of why you should be extremely careful while dealing with such assets. Every day some unknown crypto goes up by 1000-2000 per cent, but there are also some who fall by 90-95 per cent in a day. With such volatility and lack of real-world use of cryptos, be very sure before trying such offerings.