CDs vs. Crypto: An Overview

In the hierarchy of investment instruments regarding risk and return, traditional saving accounts have the lowest risk and reward. A small step up from a savings account is a certificate of deposit. This is an account you place your money in at a bank or other financial institution, with a promise not to withdraw it. The bank pays you interest for lending them money and returns it when the CD matures. On the other hand, crypto is a digital asset with several uses. As an investment, it experiences wide price fluctuations and is very susceptible to external influences. This volatility gives it a very high amount of risk but the possibility of high returns.

Certificates of Deposit

First and foremost, CDs are a loan to a financial institution. It is a commitment to leave the funds with it to do what it wants with it until the lending period is over. You receive regular interest payments from the bank and get your money back when the CD matures.

Risk

CDs are one of the safest places you can put your money and expect any growth. They are considered safe because your combined bank accounts at one institution are insured up to at least $250,000 per account per ownership category (i.e., single, joint, retirement accounts).

CDs are a low-risk investing option because it's very likely you'll get your money back along with the interest the bank owes you unless the bank fails and you exceed the insurance limits.

Ideal Length of Investment

Certificates of deposit are generally considered suitable for short- or medium-term (one to five years) investing because of the terms offered and the guaranteed returns. Many investors use CDs to reallocate their portfolios as they transition from growth to preservation strategies because of the guaranteed returns and shorter timelines. They take funds from more risky investments and use them in income-generating strategies like a CD ladder, where CDs mature at regular intervals, leading to a regular source of income.

Liquidity

While CDs are one of the more safe investments you can make, they don't have much flexibility due to how they are designed. Banks use the money you lock into a CD in loans to other customers and earn interest—interest is how banks make money. If you pull your money out before the CD matures, you'll pay early withdrawal penalties that can be steep because withdrawing it causes complications for the bank.

Locking your money up means you can't access it if you need it, so CDs are much less liquid than crypto and some equities, bonds, or other instruments.

Returns

The returns you get from a CD are generally guaranteed by the bank, making them less risky. Because of the low risk, there is less reward in the form of low interest rates that don't match the possible returns of a more risky investment.

Cryptocurrency

One of the newest asset classes in many years, cryptocurrency emerged in 2008 not as an investment but as an alternate payment method. It soon caught on with investors once it was realized there was a market for them and people were making money. Crypto became popular with investors who accept more risk. Its volatility has caused some to lose thousands of dollars while others were able to make tremendous gains.

Risk

Crypto is an asset that experiences wide and quick price fluctuations. There are several reasons behind this, but the most prevalent is that there is nothing backing a cryptocurrency's market price except sentiment, fear of missing out, speculation, hope, greed, hype, and other human beliefs and behaviors. This makes it highly susceptible to regulatory actions, news events, and public or popular figure influences. The emotional investing behind crypto introduces risks that an average investor's bank account generally can't tolerate.

Ideal Length of Investment

Since crypto has only been around since 2008, it is difficult to tell how long it should be held. Some fans say you should never sell your crypto, while others use it to day trade and try to profit from the price fluctuations.

Liquidity

One of the advantages crypto has over CDs is that it is much more liquid—you can cash it in at almost any time. However, if prices are dropping, you run the risk of experiencing slippage. Slippage occurs because some blockchains take more time to process transactions than others, so depending on the cryptocurrency and market conditions, its price could drop between the time you make the transaction and the time you receive your money—resulting in less than you expected. But, the reverse is also true—you may get more than you thought if its price rises.

Returns

You've likely seen or heard of the tremendous returns experienced by some crypto investors who jumped on board early. Those who held on through 2023 have made enormous gains. However, as mentioned, the fact that crypto prices can change drastically in a matter of minutes makes it a very risky investment.

The Bottom Line

Certificates of deposit (CDs) and cryptocurrencies are polar opposites as investments. CDs are useful for preserving capital, income planning, and slow growth. Cryptocurrencies, because they are still a new asset class and prone to wild price swings, are useful for risk-tolerant speculators. Which is best for you depends on your financial circumstances, risk tolerance, and investment strategy.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our for more info. As of the date this article was written, the author does not own cryptocurrency.