Traditional banks have been around since the 15th century, but cryptocurrency banks have been around for less than a decade. With the growing popularity of digital currencies, cryptocurrency banks are poised for global adoption. But what is a cryptocurrency bank, and how is it different from a cryptocurrency exchange or a cryptocurrency wealth management platform?
This new finance category combines two sectors: traditional banking and blockchain technology.
This blog post will explore how cryptocurrency works and how it differs from wealth management platforms.
The cryptocurrency bank explained
Cryptographic banking platforms are similar to traditional banks in that they allow customers to save, earn and borrow money.
The main difference is that cryptocurrency banks revolve around cryptocurrencies (also known as digital currencies), such as Bitcoin for transactions, instead of fiat currencies, such as the US dollar or the euro.
Cryptocurrency banks are also different from stand-alone digital wallets (also known as cryptocurrency wallets) and cryptocurrency wealth management platforms. Unlike the other two applications, cryptocurrency banks typically include federally protected bank accounts and debit/credit card services.
How do cryptocurrency banks work?
Like traditional banks, cryptocurrency banks typically require users to complete or verify their customer knowledge (KYC) in order to deposit funds. Once the user transmits or verifies the KYC, he can start using the platform.
Users can then customize the cryptocurrency. To convert cash to a cryptocurrency, users must first use a cryptocurrency exchange. Some platforms have a built-in exchange that allows you to buy cryptocurrencies with “fiat.” Fund a cryptocurrency account created from a digital wallet (called a cryptocurrency wallet).
Zero cryptocurrency banks allow users to access digital wallets. For example, non-crypto currency banks do not have the ability to withdraw cryptocurrencies from external wallets. At the other end of the spectrum, many cryptocurrency banks provide digital services near the port.
Increasing Your Profits
Many crypto banks quickly gained traction because they offer much better rates for lenders and borrowers. For the most part, traditional banks offer less than 1% apy (annual percentage per year) for savings bills, which do not get close to overcoming annual inflation levels. In contrast, several crypto banks provide 10% APY or higher for stable coins such as USD Coin (USDC) and Tether (USDT).
Arbitration is a significant reason crypto banks can offer high-interest rates to savers. In the case of crypto banks, arbitration is defined as the difference between the interest rate that the platform pays to crypto interest accounts and the interest that borrowers pay to the platform. The arbitration margin (profit) is much higher for crypto banks than for traditional banks.
When a customer gives funds to a crypto bank, the borrower (i.e., hedge fund or institutional trader) can use that capital to generate high returns on specific trades. This means that borrowers are generally willing to pay higher interest rates on loan.
Use Crypto as a loan guarantee
Some cryptocurrency banks offer interest rates 1% APR (annual percentage rate) or lower cryptocurrency loans. The great advantage of cryptocurrency loans is that consumers do not need to sell speculative assets that can increase value over time.
Crypto loans are more convenient than traditional loans because they do not require long background control or application reviews. Some cryptocurrencies can immediately issue loans. Consumers may receive an enzymatic loan and/or a flexible long-term loan depending on the loan provider.
Using cryptocurrency loan platforms, users capture their cryptocurrency holdings, such as Bitcoin and Ethereum as a hostage. Then they get a loan as Stablecoin. Each forum requires the user to maintain a specific value loan ratio (LTV). Thus, if the cost of the collateral axle is decreasing, the user may need to add more cryptocurrencies as collateral to make the loan open or avoid liquidation.
Market Volatility is a risk
It takes time to adjust to market volatility, regardless of which crypto bank a consumer chooses.
Cryptocurrency values fluctuate substantially more than other asset types such as stocks or precious metals. Of course, if crypto prices rise, this may be a fantastic result. When prices fall, however, newer market participants frequently lose faith and end up panic selling at a loss.
Many novice investors suffer from FOMO (fear of missing out) and only buy when the market reaches new highs. Unless you’re a day trader, prudent investment necessitates patience and the ability to retain a long-term perspective that is unaffected by short-term market movements.
Security — Threat
Another critical issue that should not be overlooked is security. Customers must be cautious of security concerns even while using custodial crypto platforms that manage funds.
The customer bears some of the responsibility for keeping their account safe. Phishing assaults and simply sending payments to the wrong public address are prevalent issues.
Unlike traditional banks, which can reverse banking transactions in exceptional circumstances (such as credit/debit card theft), crypto platforms cannot. It is critical to always employ the greatest crypto security measures.
Financial Inclusion is a benefit
The biggest advantage of crypto banking is its global accessibility. Traditional banks have failed their consumers in several countries. Economic advancement has been hampered by a lack of banking infrastructure or deposit insurance, hyperinflation, exorbitant remittance costs, and bank closures.
Crypto is beginning to address these concerns by introducing a new system to promote financial inclusiveness. Customers of cryptocurrency platforms have equal access to financial services, regardless of their location or income level.
Advantage 24-hour/365 access
Another advantage of using crypto banks is that there is frequently no distinction between business and non-business hours.
There is no need to wait until Monday morning if a user wishes to take out a loan on a Friday night. If a user wishes to transfer cash from a digital wallet to a lending platform to begin collecting interest, the process is nearly immediate. Furthermore, interest begins to accrue immediately.
“Crypto never sleeps,” as the saying goes. While this can be annoying if you’re always staring at pricing charts, it’s undoubtedly a plus when accessing financial services.
Don’t forget to check how safe the online broker or exchange you are using is. Legally, you are the owner, but most of the work of keeping your digital assets safe is done by a third party. If you aren’t sure about how safe they are, you may want to store your cryptocurrency in a crypto wallet. This way, you can keep your coins offline, where hackers can’t get to them.
As a trusted business consulting company, Damalion is ready to help investors open a crypto account and grow their assets through a wide range of opportunities, including cryptocurrency. Call a Damalion expert today to get going.
This information is not meant to be a replacement for tax or legal advice that is specific to you. We suggest that you talk to a qualified tax or legal advisor about your situation.
