Hands holding a bunch of Bitcoin

Pros & Cons of Keeping Your Emergency Fund in Crypto


Having an emergency fund is a time-tested financial planning technique that calls for setting aside enough money to survive on, just in case the unforeseen happens. 

Most experts will recommend that you keep your emergency funds in liquid form, such as cash or other liquid investment tools.

While that advice is certainly worth considering, recent advancements in cryptocurrency have introduced a new option: using crypto assets for your emergency fund.

That advice may have been questionable a few years ago when crypto was primarily Bitcoin and Ethereum (and other altcoins) that had extreme volatility. Additionally, back then, buying low and selling high was the only way to make money (with some rare exceptions).

However, cryptocurrency has evolved quite significantly in recent years. Let’s explore what those options are.

Emergency Funds and Crypto: Your Options

There are two primary advancements that make using crypto for your emergency fund a viable option: stablecoins and DeFi

Stablecoins are specific cryptocurrencies designed to always equal a specific amount, typically US$1. Most coins accomplish this by having the crypto pegged to a real dollar held by the issuing company. Others, such as DAI, don’t rely on USD but accomplish the same goal. DeFi, at its simplest, is the concept of earning interest on your crypto assets.

So, it’s now actually worth considering using crypto for your emergency fund since you won’t be impacted by price volatility that could wipe out your emergency funds. Plus the APY on many coins is significantly higher than savings rates with most fiat institutions (with rare exceptions). The APY for stablecoins ranges between 4% to 12%, as compared to the 1% maximum that a traditional financial institution will offer most people.

It’s time to take an earnest look at using crypto to store your emergency funds. Don’t worry, we aren’t just going to pile on praise, we will also be discussing the drawbacks of doing this.

Requirements for Having a Cryptocurrency Emergency Fund

Don’t run out and create a non-custodial Bitcoin wallet and call it your emergency fund. There are a few requirements that need to be spelled out before proceeding. Before picking crypto and wallet for your emergency fund, make sure you understand the below criteria:

  • A custodial wallet: A non-custodial wallet rarely offers APY, plus they also rarely integrate with the services that you would need to create a reliable emergency fund, such as an easy “offramp” to sell your crypto and transfer it into a bank without needing a separate exchange. 
  • A longstanding reputation for excellence: You’re going to be trusting whichever company you choose with your emergency fund – make sure that they’re going to be around when you need your money. The world of crypto is riddled with failed businesses, many of which were wallets. Thoroughly research the reputation and security policies of any company that you’re evaluating. 
  • An attached debit card: Prepaid debit cards allow you to directly spend your cryptocurrency without having to sell it and transfer it to your bank, it’s simply converted to USD or euro and spent whenever you swipe your card. However, these debit cards are classified as a prepaid card, which may have issues with some services and vendors that require a traditional prepaid card (ironically, most places to buy crypto don’t accept prepaid cards). Still, a prepaid card will come in handy in many situations.

Benefits of Storing Your Emergency Funds in Crypto

Why should you even consider taking the cash out of your safe and putting it into cryptocurrency? That idea may seem strange, but it’s well worth suspending your knee-jerk reaction and honestly evaluating the idea. There are several core benefits to putting your emergency funds in cryptocurrency.

Significantly Higher APY

Creating an emergency fund is not a short-term plan. It’s a long-term plan that hopefully you never even have to use. This means that putting your emergency fund somewhere with impressive interest rates will put your emergency fund to work for you, rather than leaving a pile of bills in a safe.

As mentioned before, stablecoins have significantly higher interest rates than almost every savings account available. To reap these rewards, you need to carefully pick out which company will take custody of your wallet. Different companies offer different interest rates, so it pays to look into them thoroughly before signing up.

Once set up, deposit your stablecoins and it functions essentially as a savings account. If a worst-case scenario does happen, withdraw your crypto from the interest account (you want this transfer to be as fast as possible), convert it to fiat currency, and move funds to your payment card.

You can also use your debit card or sell crypto to transfer to your bank. Many custodial wallets now offer instant transfers, making this an even more viable option.

Easily Convert to Other Cryptos

You likely won’t want to convert your entire emergency savings into Bitcoin, but what’s wrong with using some of your interest payments on expanding your portfolio? Even investing a small amount of crypto into a non-stablecoin can have massive gains, we’ve all seen Bitcoin’s astronomic rise. You can use your same wallet for personal finance, creating an easy way to reinvest your interest payments back into the emergency fund or to explore other cryptos.

It’s also notable that fiat interest rates will impact the value of stablecoins since they’re designed to be equal to US$1 (or another fiat alternative). Anything that impacts the value of a dollar will directly impact the value of your stablecoins, most notably rising inflation rates. Converting some of your stablecoins into any other crypto allows you to completely separate from fiat’s fluctuations, which may be desirable based on your risk tolerance.

Additionally, your emergency fund can be stored in a traditional crypto wallet that does not earn interest but will be more readily available to be used in an emergency situation. Crypto markets are open 24/7 globally, which means your emergency fund is only a transfer away from being usable fiat currency in your bank. 

Drawbacks to Keep in Mind for Crypto Emergency Funds

You need to be aware of two major drawbacks that accompany pursuing the higher returns that come with storing your savings in stablecoins. It’s time to confront the ugly side of crypto that every investor should be aware of.

Potential Losses from Cybercrime

Anyone investing in cryptocurrency needs to fully understand that we’re dealing with digital money and that will attract criminals. It’s been true since the beginning and it’s true now. Fortunately, custodial wallet companies are well aware of all common attacks and much of their development is focused on evading new attempts.

However, the company you choose to host your wallet could get hacked. Plenty of reputable exchanges and wallets have been hacked in crypto’s lifespan. No wallet company is immune to being attacked, so keep this risk in mind and definitely double-check their security policies. You can also help by enabling 2FA and anything else that is offered. We at Coinmotion take pride in providing one of the most secure bitcoin services.

No Federal Guarantee

One of the best things about traditional financial institutions is that if there is a hack or robbery and your funds are lost, FDIC insurance (and its European alternative) will make sure you’re reimbursed (up to specific limits). At present, there are no crypto wallets that have a federal guarantee for reimbursements. It’s possible that some custodial wallet companies have internal policies to protect your funds, but they won’t be federally enforced and could become a long legal battle if there is a hack.

Not All Stablecoins are Reliable

Picking the wrong crypto can result in a massive loss, and many believe stablecoins are immune to sudden massive drops. While that’s true on the surface, every potential investor needs to do their due diligence and research the stablecoin for their emergency funds. Interest rates are obviously worth considering, but you also need to look deeply into the company issuing the stablecoin. 

For example, Tether (USDT) is the most popular stablecoin and has the third highest market capitalization in all of crypto. However, critics have questioned if the company truly has the billions of USD needed to maintain the 1-to-1 ratio that the issuing company promises. As stablecoins have grown in popularity, the U.S government is now investigating the truth behind Tether. Should they discover nefarious activity, Tether itself might disappear – along with your emergency fund.

Even though most stablecoins are tied to the United States Dollar, it’s not an inherent requirement. European investors may prefer EURt to avoid the rising inflation rates in the U.S. Unfortunately, EURt is not widely available on most platforms, so you’ll need to pick the right platform.

You May Pick the Wrong Platform

Not all interest-bearing platforms are identical and chasing the highest interest rate may put you at risk. Some reputable platforms double-collateralize your investment to further reduce risk and ensure that you always receive your funds when you need them. However, these platforms offer lower interest rates.

Some platforms try to lure investors by offering double-digit interest rates, but they come with significantly higher risk. For example, investing platform Celsius had grown in popularity because of high interest rates, but they are actually taking investors’ crypto and lending it to others or otherwise reinvesting it. Even though users enjoy massive interest rates, will their crypto be available when they need it? Turns out Celsius crashed as the major crypto lender filed for bankruptcy on July 13th, 2022.

You Will Likely Pay Taxes

Governments around the world have begun to tax crypto sales and trades, which may destroy all of the profit earned through a high APY. For example, Finland has at least a 30% capital gains tax that will be applicable if you ever use your emergency funds. Other countries have similar laws, dramatically reducing the appeal of earning a high-interest rate. 

Fortunately, platforms such as Coinmotion offer crypto-collateralized loans that will give you access to your emergency funds without needing to sell off all your crypto. These types of loans give investors a way to leverage and use their funds without needing to fully cash out.

Is a Crypto Emergency Fund Right for You?

Just like everything in crypto, using stablecoins for your emergency fund is risky, but also rewarding. You’re almost guaranteed to receive a higher APY than a traditional financial institution, but there are also more risks than using a savings account or a pile of cash in your safe. 

However, for those brave crypto enthusiasts willing to take on those risks, the high APY for these cryptos will accrue year after year, helping your emergency fund also build your investment portfolio.

Are you looking to explore using cryptocurrency for your emergency fund? Sign up for a Coinmotion account today to get started.

The views, thoughts, and opinions expressed in the text belong to the author and not necessarily to the author’s employer, organization, committee, or other group or individual.

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