Crypto Accounts vs. Traditional Banking: Key Differences Explained

Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.

If you're considering a crypto account, make sure you understand the risks.

Disruptive technology can change the way we see and do things.

Take blockchain and banking. The clever thing about blockchain -- the tech behind the world's first digital currency, Bitcoin (BTC) -- is that it can cut the middleman out of all kinds of transactions.

For example, you no longer need to use a bank or financial institution to move money, or even borrow money.

That has given rise to something called decentralized finance (DeFi). DeFi encompasses a host of applications that may reshape traditional financial services, such as the currency we use, as well as the way we lend and save.

You might have seen advertisements for DeFi savings accounts with high interest rates and low fees. You'll usually find them with top cryptocurrency exchanges, even though you don't need to buy crypto to take advantage of the great rates.

The Ascent's picks for the best online stock brokers

Find the best stock broker for you among these top picks. Whether you're looking for a special sign-up offer, outstanding customer support, $0 commissions, intuitive mobile apps, or more, you'll find a stock broker to fit your trading needs.

See the picks

If you're considering moving your money out of your bank account and into a crypto account, it's important to understand the differences. Crypto accounts often have less consumer protection and put more responsibility on your shoulders.

Here are five things to watch out for.

One email a day could help you save thousands

Tips and tricks from the experts delivered straight to your inbox that could help you save thousands of dollars. Sign up now for free access to our Personal Finance Boot Camp.

By submitting your email address, you consent to us sending you money tips along with products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms & Conditions.

1. Interest rates

Interest rates are where DeFi applications really stand out. The best savings accounts may pay APYs of around 0.5%, but you could earn more than 8% with a DeFi account. It depends on several factors, such as:

• What currency you use
• How long you're willing to tie your money up for
• Which DeFi application you pick

It's a good idea to find out how the company is able to offer you those rates. It could be that they will lend your money to other people, in which case you need to be comfortable with their lending strategy.

As a borrower, you may be able to get lower interest rates than you would find with normal personal loans. However, you may have to secure your loan with crypto as collateral.

2. FDIC insurance

Most banks are FDIC insured. That means that if your bank fails, you'll be covered for up to $250,000 per person, per bank. In contrast, if your crypto exchange or hot wallet provider fails, you could be left with nothing.

This is one reason many cryptocurrency enthusiasts use cold wallets or hardware wallets. These are small devices you can store offline that give you total control over your digital assets. However, you won't be able to earn interest on the money you keep in a cold wallet.

Buying your first stocks: Do it the smart way

Once you’ve chosen one of our top-rated brokers, you need to make sure you’re buying the right stocks. We think there’s no better place to start than with Stock Advisor, the flagship stock-picking service of our company, The Motley Fool. You’ll get two new stock picks every month, plus 10 starter stocks and best buys now. Over the past 17 years, Stock Advisor’s average stock pick has seen a 686% return — more than 4.5x that of the S&P 500! (as of 11/18/2021). Learn more and get started today with a special new member discount.

Start investing

If you want to earn interest, you'll need to leave your money with the exchange or brokerage. That's why it is important to find out what protections are in place. Some exchanges that keep your crypto extra safe take out private insurance to cover your assets. Others have FDIC insurance for U.S. dollars, but not for cryptocurrencies.

3. Protection against theft, hacking, and fraud

FDIC insurance does not cover theft and fraud, but your bank probably does. There are several ways banks work to protect customers against fraud. First, they monitor your account for suspicious activity. If a transaction is unusual, the bank may call you for confirmation or temporarily freeze your account.

Second, if you do lose money -- especially on your credit card -- there's a good chance you can get it back, as long as you report the theft quickly.

Now, if your crypto account gets hacked or you fall victim to fraud, it's a different matter.

Let's say there is malware on your computer and $500 worth of Bitcoin is stolen from your wallet. One the money has been moved, it will be almost impossible to recover. Crypto accounts don't have the same safety net that banks do.

There have been a number of high profile exchange hacks, the biggest of which was Mt. Gox in 2014. Around 850,000 Bitcoin were stolen and only about 200,000 were recovered. Many customers lost their money.

4. Customer service

The level of customer service you receive depends a lot on which company you use, whether it's a bank or a crypto account. However, if you're someone who likes to go into your local branch and speak to someone face to face, you may need to stick with a traditional bank.

On the other extreme, let's say you opt to move your digital assets into an offline hardware wallet as discussed above. You'd be 100% responsible for the security of that wallet. You'd need to set up a password and something called seed words, which are used to recover the account. If you lost them, you could completely lose access to your wallet -- there's no handy "forgot your password" button.

Cryptocurrency data company Chainalysis estimates that between 2.3 million and 3.7 million Bitcoin have been lost. That's roughly between $91 billion and $148 billion at today's rates.

5. Available currencies

Unlike your bank account, which probably only stores U.S. dollars, your crypto account will let you keep a range of digital and fiat (traditional) currencies. You can keep -- and potentially earn interest on -- dollars, pounds, and euros, as well as many types of cryptocurrency, such as Bitcoin and Ethereum.

Weigh the risks

If you've had a bank account all your life, it's easy to take the protection it offers for granted. When you open a crypto account, you need to understand that it's not the same. That doesn't mean you shouldn't take advantage of the benefits of DeFi. It just means you need to work harder to protect your money.

Buy and sell crypto on an expert picked exchange

There are hundreds of platforms around the world that are waiting to give you access to thousands of cryptocurrencies. And to find the one that's right for you, you'll need to decide what features that matter most to you.

To help you get started, our independent experts have sifted through the options to bring you some of our best cryptocurrency exchanges for 2021. Check out the list here and get started on your crypto journey, today.