Savings products allow users to earn free cryptocurrency through placing their cryptocurrency in an exchange’s cryptocurrency savings product.
Cryptocurrencies listed in the savings section will have a yearly APY. For example, AAX currently have their Solana summer savings event going on. This allows users to earn up to 20% APY on various cryptocurrencies.
In figure one, we can see that there is a 10% APY rate on SOL. Therefore if you deposit 50 SOL for one year, after 365 days (providing APY remains constant) you will have 55 SOL.
Figure one – SOL APY AAX 20/08/21
With savings products, they are split into two sections, fixed and flexible savings.
Fixed savings products have a set time period / duration. Cryptocurrencies need to be held within that savings account for the set duration in order to earn the set APY. Additionally, users cannot hold for longer than the set duration.
For example, in figure two, we can see that this AAX fixed savings product allows you to earn a yearly APY of 20% on BTC over a seven day period.
Figure two – BTC APY fixed savings AAX 20/08/21
AAX’s fixed savings products offer the highest rate of any exchange. You can learn more about these special offers from this recent announcement.
In this article, we will only be evaluating flexible savings products (FSP). This is because it allows us to make a direct comparison of HODLing vs FSP HOLDing.
What is HOLDing?
HODLing is when you buy cryptocurrencies and hold them for an extended period of time, no matter what price action occurs. Whether a cryptocurrency goes up or down, HOLDers HODL (hold on for dear life).
Learn more about HOLDing vs trading.
When HOLDing, the amount of cryptocurrencies which you own will not increase, as there is no interest rate. For some investors this is not attractive. In order to combat this, exchanges have now created savings options.
Why flexible savings options could be attractive to HODLers.
The reason why flexible savings could be attractive is due to compounding. Compounding takes an asset’s earnings (in this case interest earned through a cryptocurrency exchange savings interest) and reinvests these earnings in order to create an exponential portfolio coin growth.
Figure three – compounding vs HOLDing (basic chart)
When HODLing cryptocurrencies, the coin growth is linear. The number of coins which a user will have remains constant. Compounding increases the number of coins. Over an extended period of time, compounding can significantly increase a portfolio’s value.
Compounding could be the next frontier of HODLing for many investors. Lets dive into flexible savings offered by various exchanges and see which offer the most attractive savings options.
Number of flexible savings options
In figure four, we see a comparison of the number of flexible savings options offered by some of the largest centralised exchanges.
Figure four – number of flexible savings options
From the chart, it is clear that Binance and OKEx lead the way, with AAX close behind. However, Huobi, Kraken and FTX do not offer a lot of savings options, despite having numerous cryptocurrencies listed on their respective exchanges.
Exchanges offer savings products for various cryptocurrencies in order to prevent users having their overall cryptocurrency token share diminished through vesting. Cryptocurrency token vesting is the rate at which a project team sells their cryptocurrencies in order to fund project development. This gives the cryptocurrency an inflation rate. If a cryptocurrency user purchases and HODLs a cryptocurrency with a high inflation rate, this will reduce their effective market share for the cryptocurrency in question.
For example, Solana currently has an 8% inflation rate, with this 8% inflation rate decreasing by 15% a year until inflation reaches an annual inflation rate of 1.5%. Therefore in order to protect users from inflation through offering interest higher than the inflation rate, AAX have created the Solana Summer initiative.
Learn more about the AAX Solana Summer:
Which exchanges offer the highest flexible APY p/y?
The exchange which offers the highest flexible APY is OKEx with the cryptocurrency VELO. AAX are second, offering 10% APY on CVC, STEP, RAY, SRM and SOL. Only OKEx and AAX offer double figure projected yearly APYs from their flexible savings products.
Figure five – highest CEX flexible savings offered.
However, simply making an APY comparison across exchanges is somewhat misleading. Projects have varying inflation rates. For example, Step Finance had an initially high 2021 inflation rate due to an aggressive start of year token release schedule. However, this inflation aggression was mitigated for users through the STEP / USDC Raydium fusion, offering yearly APY upwards of 50,000% (50K% due to low initial liquidity, decreased to 2K% at end of Raydium fusion). Therefore, in order to create a level playing field, let’s firstly evaluate flexible stablecoin savings.
Stablecoin flexible savings compared
Stablecoins are cryptocurrencies which are pegged to fiat currencies. The most common fiat currency stablecoins are pegged to is the US dollar.
In figure six are the flexible savings offered by cryptocurrency exchanges. We can see from figure six that AAX leads the way, with OKEx a close second.
Figure six – flexible savings offered by exchanges (flexible)
Stablecoin savings currently lack overall interest. This is due to the cryptocurrency market being within a bull run. Substantial returns are currently being seen by both Bitcoin and altcoins. Therefore, cryptocurrency users currently have their focus shifted away from stablecoins until the eventual bear market kicks in.
Bitcoin remains the number one cryptocurrency by market capitalization. Bitcoin is the most HODLed cryptocurrency, as many within the cryptocurrency market believe that it is a great hedge against inflation.
Exchanges have begun offering BTC savings products, despite BTC only having a supply of 21,000,000. Let’s evaluate the flexible BTC savings offered by exchanges.
Bitcoin flexible savings
In figure seven, we can see the flexible savings offered by various exchanges. AAX currently offers a yearly APY of 4% when BTC is stored in AAX savings. Other centralised exchanges shown do not come close to the APY offered by AAX for BTC.
Figure seven – yearly BTC APY flexible savings from various CEX`s.
With the BTC inflation rate just over 1%, only AAX and Huobi offer savings products higher than the BTC inflation rate.
Figure eight – Bitcoin inflation rate over time.
As mentioned earlier, savings products are attractive to HODLers due to compounding.
Therefore, let’s compare the flexible BTC APY offered by AAX to Binance, the largest centralised cryptocurrency exchange by volume.
Binance vs AAX BTC savings comparison.
In figure nine, the account in question (for compounding demonstration purposes) has an account balance of 100 BTC. For this graph it is assumed that the current APYs offered are maintained as a constant over a five year period. When compounding of interest offered occurs over a set five year period, the exponential growth rate of each account varies dramatically.
Figure nine – APY over a five year period through compounding*
Note – Bitcoin number based on compounding once every 365 days*
Over a five year period, compounding sees the BTC in the AAX account increase by 21.658 Bitcoins (+21.68%). In comparison, the BTC in the Binance account would increase by 2.52 (+2.52%) BTC. This is a difference of 14.979 BTC over a five year period. With Bitcoin looking set to hit BTC>$100,000 USD over the next few years (according to the stock flow model), this portfolio growth difference could be significant…
Figure ten – BTC difference Binance 0.5% vs AAX 4% compounding over five years.
Comparing selected exchanges compounding over five years.
Having just compared the current rates offered by AAX and Binance, let’s compare other exchanges APY from figure seven over a five year period in figure eleven.
Figure eleven – five year compounding from exchanges APY evaluated in figure sven
In figure seven, APY% differences are not dramatic. However, after five years of compounding, there is a significant portfolio differential from AAX savings in comparison to other CEX BTC savings options.
Savings and compounding conclusion
Utilising savings features offered is a great way for users to hedge against BTC inflation. We use BTC to hedge against ever devaluating fiat currencies. However, savings options now allow us to hedge against the inflation of BTC. In figure twelve, we can see the positive difference which AAX Bitcoin flexible savings can have on a portfolio over a five year period.
Figure twelve – BTC holdings 2021 to 2026 through 4% AAX BTC APY
|2021 BTC holdings||2026 BTC holdings if compounded through 4% APY|
In conclusion, compounding by using an exchange savings product is a great way for users to earn interest on their cryptocurrencies. Compounding through interest offered can substantially increase the portfolio size of a cryptocurrency user over a long period of time.