Which One Is Better: Fixed Deposit OR Buying Cryptocurrency?

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Which One Is Better: Fixed Deposit OR Buying Cryptocurrency? – Investingoals.com

Fixed deposit and cryptocurrencies are like North and South directions, totally different from each other.

There is a lot of generation gap present between these two terms. FD is elders’ first choice while on the other hand, cryptocurrency is younger ones’ craze.

Both of them come with their own set of pros and cons. Let’s dive into the article.

Fixed Deposit

Being a household name for a century, FD has made a separate fanbase for itself.

A fixed deposit (FD) is a financial instrument provided by banks or NBFCs which provides investors a higher rate of interest until the given maturity date.

It is known as a term deposit, time deposit, and certificate of deposit (CD) in Canada, Australia, New Zealand, and The United States, and as a bond in the United Kingdom and for a fixed deposit is that the money cannot be withdrawn from the FD.

As I told you that both FD and crypto have their own set of pros and cons. So, let’s begin with the pros of FD.

Pros of FD

Fixed deposits serve you with plenty of reasons to choose as an investment option—

Guaranteed returns

This is the biggest reason behind the popularity of FDs. Fixed interest rates for an entire term ensure you with an extra amount that you will get without facing any if or but.

Fixed deposit calculators allow you to plug in the amount you’re saving and your APY (Annual Percentage Yield) to gauge how much your money will grow.

Current returns can be calculated based on the following—

  • 0.40% APY for 3 months with a minimum deposit of $50
  • 0.55% APY for 6 months with a minimum deposit of $500
  • 0.45% APY for 9 months with a minimum deposit of $1,000
  • 0.75% APY for 1 year with a minimum deposit of $2,500
  • 0.75% APY for 2 years with a minimum deposit of $500
  • 1.00% APY for 3 years with a minimum deposit of $500
  • 0.90% APY for 4 years with a minimum deposit of $500
  • 1.15% APY for 5 years with a minimum deposit of $500

Safety

Along with savings accounts and money market accounts, FDs are some of the safest places to keep your money. That’s because money held in an FD is insured.

So long as you purchase your FD account through an FDIC-insured bank, you’re covered in case the bank shuts down or goes out of business.

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The current coverage limit is $250,000 per depositor, for each account ownership category, per financial institution.

At federal credit unions and the majority of state-chartered credit unions, the NCUA insures your money up to the same limits.

FD laddering

FD laddering is a savvy savings technique that allows you to keep your money liquid and accessible while taking interest rate changes into account.

When you build an FD ladder, you’re essentially opening multiple FDs at different interest rates and with varying dates of maturity.

This approach to using certificates of deposit for savings means you continuously have FDs that are maturing. You can then decide whether to take your money out or roll it into a new FD to take advantage of higher rates.

Cons of FD

Early withdrawal penalties

FDs are designed for holding money that you don’t plan to spend right away. While you aren’t barred from taking money out of a fixed deposit early, there’s usually a price to pay for doing so.

Banks and credit unions often charge an early withdrawal penalty for taking funds from an FD ahead of its maturity date.

This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use an FD for savings.

Accessibility

FD requires you to keep the money in place until it matures. This means an FD likely isn’t the best choice for your emergency fund.

Fixed deposits lack accessibility features, after putting your money in it, you almost have to forget about it to get the promised returns.

Interest rate risk

Using FDs as a savings tool means being aware of what’s happening with interest rates. When rates are high, your FDs will generally yield a better return. But when rates are low, money held in FDs won’t grow as much.

FDs carry interest rate risk in that it’s possible to lock in savings at one rate, only to see rates climb. Unless you have a step-up or bump-up an FD, you wouldn’t be able to take advantage of that higher rate without opening a new fixed deposit.

Cryptocurrency

Cryptocurrency – volatile, energetic just like teenagers. It has become much more than just a trend, exciting people to get unimaginable returns.

The credit for developing such a craze for crypto goes to Bitcoin and Ethereum, both being familiar names even to five years old.

A cryptocurrency is a collection of binary data which is designed to work as a medium of exchange.

Here, individual coin ownership records are stored in a ledger which is a computerized database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.

Pros of Cryptocurrency

Cryptocurrency too serves you with jaw-dropping reasons to choose it over any other option.

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Potential for high, higher, highest returns!

In the last five years, the S&P 500 index of large-cap US equities has compounded at an annualized growth rate of 14.5% (in USD, net dividends reinvested); over the same time period, the price of Bitcoin in USD has compounded at an annualized growth rate of 131.5%.

Potential diversification

Some have cited cryptocurrencies as an alternative hedging instrument to gold in a portfolio context. For example, the S&P 500 declined in 17 out of the 60 months to end December 2020, of which the price of bitcoin rallied in seven. In the five years to the end of 2020, a portfolio consisting of 10% invested in bitcoin and 90% in the S&P 500 would have generated compound annual returns of 26.8%.

Protection from inflation

Inflation has caused many currencies to urge their value to decline with time. At the time of its launch, almost every cryptocurrency is released with a tough and fast amount.

The ASCII computer file specifies the quantity of any coin; there are only 21 million Bitcoins released within the planet.

So, because the demand increases, its value will increase which might maintain with the market and, within the long run, prevent inflation.

Cons of Cryptocurrency

High volatility and potential for large losses

The annualized volatility of the monthly percent change in the price of Bitcoin in US dollars is about 90% as measured over the past five years.

This compares to annualized volatility of the monthly percent changes in the S&P 500 and the gold price of 15.3% and 13.4% respectively.

To give some idea of what this volatility might mean for an investor, consider the range of returns: the maximum monthly Bitcoin return over the 60 months to end December 2020 was 76.1%, and the minimum -37.6%. The timing of an investment in Bitcoin or other cryptocurrencies will have a significant bearing on the returns achieved.

Unregulated and unbacked 

Cryptocurrencies are a construct of the private sector with no official oversight or regulation. This means that cryptocurrencies are wide open to being exploited by criminals as a means to scam unwary investors.

A 2019 academic study found that 25% of BTC users are involved in illegal activity and that 46% of Bitcoin transactions are associated with illegal activity.

Fixed Deposit vs Cryptocurrency

Analyzing the pros and cons of both of these options must have given you a hint as to which would be the best option for you. Now, it’s time to make that hint even clearer.

Below mentioned points will help you to make a firm decision.

Transactional cost

FDs are long-term plans and the entry and exit points are generally continuous till maturity.

People generally do not exit their FD plan before it matures. No transaction happens and hence there is no transaction cost.

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On the contrary, since the crypto market is volatile, people make quick decisions. They enter, stay for some time, exit, and then come back when the prices hit deep low.

The number of entry and exit points is way too many and this incurs a lot of transactional costs.

Long-term plan

FDs are long-term plans. So is the crypto investment. But only pro-crypto investors understand this and are unshakable. Hence, even though both FD and cryptos are long-term investment vehicles, many use the latter for short-term gain.

Inflation rate and rate of interest

As the inflation rate is higher, traditional instruments like FDs don’t provide great relief.

Even though crypto gets your heart beat faster, a person with good research on crypto can enter the market, stay for the time, make amazing money, and exit intelligently. He/she doesn’t wait for the 5-year tenure to get over.

Tax

The cryptocurrency tax rate for federal taxes is the same as the capital gains tax rate. In 2021, it ranges from 10-37% for short-term capital gains and 0-20% for long-term capital gains.

On the other hand, there is no specific tax rate for interest from FDs.

You pay taxes at the ordinary income rate, which depends on your income level and other items on your return.

As a result, your tax rate can change from year to year, and you might pay different rates on FD income each year.

For instance, if an investor is in the 24% tax bracket and has earned $300 in FD interest for the year, they owe $72 in taxes, according to current tax rates.

Final Thoughts

Fixed deposit or crypto both are fabulous in their own places. Landing onto the conclusion, which is better is highly subjective and your individual choice.

If security and surety of your money is your prime concern then you should choose FD. It is capable of serving you with a sense of security and stability; however, the returns are much lower than crypto. But, also zero chances of suffering any loss.

So, if you feel that you’ll be happy with small and stable returns along with zero risks then go with a fixed deposit.

On the other hand, if you like adventures and are capable of taking risks for a certain amount then no doubt crypto is the best option for you.

The crypto world is magical but risky. So, invest only that much amount which does not hamper your financial stability.

Wrapping up with it, hope you find the information given here useful and worth knowing. If so then do share this post with the people who might be looking for the same.

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