August 14, 2022
  • August 14, 2022

Are credit cards with cryptocurrency rewards a good idea?

By on July 18, 2022 0

Traditionally, credit card rewards came in three forms: points, miles, or cash back. Cryptocurrency is now also a reward currency, thanks to the launch of several new credit cards. The process is quite simple and works the same way as a traditional cash back program. You earn a percentage of your purchases in US dollars, which is then used to buy crypto (usually automatically).

One of the main appeals of this type of credit card is that you can buy crypto – a notoriously risky business – without spending any money on your salary. Like any cash back card, you have to spend money to earn the rewards. But if it’s money you’re spending anyway, the crypto you earn is “free.”

However, not everyone sees it that way.

“I would advise against departmentalization in ‘hard-earned’ money and reward money,” says Russell Wild, financial adviser and author of “Bond Investing for Dummies” and “Exchange-Traded Funds for Dummies.” “At the end of the day, $10 is $10. The crypto, which just lost a bundle while the stock market also lost a bundle, doesn’t seem to have much diversification value.

It is true that the fall in crypto values ​​is hampering some of the initial excitement surrounding these cards. To examine the issue from both sides of the (bit)coin, we spoke with real cardholders about their experiences.

The case for crypto rewards cards

One of those early adopters is Jerry Paul Pio, who lives in New York and works as a recruiter for crypto companies. Pio has two of the most popular crypto rewards cards: the BlockFi Rewards Visa® Signature credit card and the Gemini® credit card.

The BlockFi credit card became available to select people on its waiting list of nearly 400,000 people in July 2021, but anyone can now apply on its website. The main selling point is 1.5% cashback on every purchase, which is used to purchase a cryptocurrency of your choice at the end of each month. There are no annual fees or foreign transaction fees.

Gemini, the crypto service founded by Cameron and Tyler Winklevoss, unveiled its no-annual-fee credit card to the general public in April 2022. Applications are open to existing Gemini users who are fully verified. The card reward categories are:

  • 3% back on meals (up to $6,000 per year, then 1%)
  • 2% back on groceries
  • 1% cashback on all other purchases

Pio says he uses the BlockFi card the most and his experience with the BlockFi card has been positive so far.

“With the BlockFi card, even though it’s a small amount – 1.5% cash back, and I wish it were more – just the fact that I put a little aside each month, I think in the long run it will be something big,” says Pio. “I don’t think I’ll be a millionaire from credit card rewards, but I’m continually adding to my pile.”

This fits with his overall approach to investing, which is surprisingly traditional. “I hardly sell anything,” he says. “I am not a day trader. I invest for the long term.

Pio follows the dollar cost averaging philosophy, an investment strategy that is not unique to crypto. The idea is to invest fixed sums of money on a regular basis, rather than investing a large sum all at once. This reduces the risk of buying when a stock hits a high and then losing value over time. Contributing a percentage of each paycheck to a 401(k) account is an example of dollar cost averaging.

Even before the launch of crypto rewards cards, Pio was a rewards enthusiast. Before the BlockFi card, he was a big fan of his Apple Card. He also used the Bank of America Customized Cash Rewards credit card and the Venmo card for travel and restaurant purchases.

“I always tried to be a points player and collect as many rewards as possible,” says Pio. “And then I saw that I could recover Bitcoin? It was amazing.

Another crypto enthusiast, Reggie Iaximana, follows a similar strategy with his BlockFi and Gemini credit cards. Prior to crypto rewards cards, he used a combination of cash back credit cards with no annual fee, including the Chase Freedom card, for most of his recurring spending. I asked him what he used to do with his cash back earnings.

“I used it to buy cryptos,” Iaximana explains.

It’s easy to see why BlockFi and Gemini cards appeal to him. Iaximana’s old strategy isn’t bad, but it does require some extra work and money. You have to redeem your cash back directly to your bank account and then buy crypto with it, which usually comes with transaction fees.

If you’re set on investing in crypto for the long term like Iaximana, crypto rewards cards automate the process and (usually) eliminate transaction fees. He believes that crypto rewards cards re-empower the consumer.

“That way you earn rewards that can actually increase in value over time, if you choose to keep them,” Iaximana says. “Traditionally with rewards points, credit card companies want you to earn rewards and then spend them on certain brands like airline tickets or hotels. It’s just a positive feedback loop for the credit card companies rather than the consumer. So I feel like it’s totally different and new, and that’s what attracted me.

The other side of cryptocurrency

The idea behind these credit cards was “different and new” for Iaximana, but it is not completely new. Credit cards that automatically invest your money in the stock market have been around for years. Fidelity, for example, launched a credit card in 2016 that offers unlimited 2% cash back when deposited into an eligible Fidelity account, such as a brokerage account or an IRA.

“You could get upside potential with less risk by doing something like buying an S&P 500 index fund with your cash back or through cards offered by Fidelity and SoFi,” says Ted Rossman, senior industry analyst for Bankrate credit cards. “But I still think crypto rewards cards appeal to a certain audience.”

Another counter argument is that you can’t beat the versatility of a traditional cashback card. For some, the ability to spend money on anything — be it crypto, a trip to the grocery store, or a splurge purchase — is better than being locked into crypto, even if that means manually investing your earnings and paying typical USD-to-cryptocurrency conversion fees. .

Finally, potential applicants should remember that credit card companies can remove benefits at any time. Considering the recent devaluation of many cryptos, this is a real threat. In fact, BlockFi announced in May 2022 that it was removing the 3.5% cash back introductory offer for new BlockFi Rewards Visa Signature cardholders. Crypto.com followed suit in June, reducing rewards rates and introducing monthly rewards caps for many of its card offers.

How much can you earn with a crypto rewards card?

It is safe to say that crypto enthusiasts are excited about crypto rewards cards. But how much do they actually earn?

One thing these crypto rewards cards and traditional rewards cards have in common: you’re probably not going to get rich off of them.

Pio says he charges most of his expenses to his BlockFi card, which he estimates at $4,000 to $5,000 per month. Since BlockFi offers 1.5% return, that means it earns and invests between $60 and $75 in Bitcoin every month. This is on top of the $200 he already invests in Bitcoin out of his own pocket each month.

“I know it’s a small amount, but I’m confident that Bitcoin will be – before I die or retire or my kids go to college – a multi-million dollar asset,” says Pio . “So I want [invest]even gradually.

Income distribution

This is how investing for the BlockFi card works. On a fixed date at the end of each month, the cash back you have earned is used to buy Bitcoin at its current market price. So even if your spending remains constant, the amount of Bitcoin you buy each month will vary depending on the price of the asset.

For example, the price of Bitcoin on January 31, 2022 was around $38,743. If Pio had spent $4,500 during this billing cycle, he would have earned $67.50 in cash back. At the end of the month, this would have bought around 0.00174 BTC. But now that the value of Bitcoin is lower, this amount of BTC is only worth around $35.03 (as of July 14, 2022). This investment has depreciated.

Of course, any investment is at risk of being devalued and cryptocurrencies are notoriously volatile; the market can pick up and double the value of these rewards.

When it comes to the current crypto market conditions, Pio is not worried. As a crypto investor since 2013, he says he’s used to volatility. When asked if recent events have caused him to consider going back to using traditional credit cards, he said no.

“If Bitcoin continues to fall, I will continue to buy it,” says Pio. “It’s such a unique asset and technology that I don’t think it will ever go away. Period. If it goes down to $10,000, $5,000, I’m going to pull the cash wherever I can to buy more.

Iaximana is also bullish. “My view of BTC is very long-term, so I don’t plan on selling anytime soon,” he says. “We are currently in a bear market…but now is arguably the best time to accumulate BTC because it is cheaper.”

The bottom line

During the Berkshire Hathaway shareholders meeting in April 2022, CEO Warren Buffett and Vice Chairman Charlie Munger both criticized Bitcoin. “In my life, I try to avoid stupid and evil things, and make myself look bad compared to someone else. And Bitcoin does all three,” Munger said.

Whether you should invest in crypto is a bigger conversation, but if you’re optimistic about the future of crypto (or even just crypto-curious), these rewards cards offer a fairly low-risk way to put some skin on. in the game.

“If you’re inclined to gamble, doing so when chips are cheaper (like they are now) probably makes more sense,” Wild says. “But it’s play, anyway.”