Summary: Today, the stablecoin market is over $150 billion. Because companies want your money — even in stablecoins — the “stablecoin wars” are heating up, creating new opportunities for investors to make money. Here are our top stablecoin strategies.
Stablecoins are crypto assets pegged to stable assets, such as dollars or Euros, at a 1:1 ratio. Therefore, they’re not subject to the radical price swings and volatility of other crypto assets like bitcoin and altcoins.
For investors, this means stablecoins can offer the best of both worlds: higher returns than traditional banking deposits, while being redeemable for dollars whenever you want.
|What it is||Digital assets backed by stable assets and/or cash reserves||Digital assets that rely on supply and demand|
|Risk level||Lower risk||Higher risk|
|Stable or Speculative||Stable||Speculative|
|Regulation||Subject to independent auditors and emerging laws||Largely unregulated|
|Use case||Payments and hedge against inflation||Trading, network utility, governance|
|Total market cap (as of this writing)||$150 billion||$950 billion|
Despite their name, not all stablecoins are stable. Their risks depend on the issuer, and the asset reserves backing them. The riskiest stablecoins have even lost their peg to the dollar, rendering them worth much less (or worthless).
In our view, the best stablecoins use a transparent, easy-to-understand model: they have cash reserves equal to the number of stablecoins in supply. USDC and USDT are examples of stablecoins that use this model.
Remember: the goal of investing in a stablecoin should be stability. Newer or smaller stablecoins are generally less stable then older, well-capitalized stablecoins. Why risk it?
Earning with Stablecoins: CeFi vs. DeFi
You can earn income with stablecoins in two ways: using a centralized company (CeFi), or by using decentralized finance (DeFi).
Earning on CeFi
Centralized companies work like banks: they take your crypto deposits, lend them out, then pay you a portion of the interest. Alternately, they may take your crypto deposits, stake them, then pay you a portion of the staking rewards.
We look for companies with a good track record, investor protection, and full KYC/AML compliance. Like a bank, opening an account with these companies takes time, but legally they need to confirm your identity.
These companies can often offer the highest interest rates, as they are underwriting your deposits with marketing dollars. (That high stablecoin yield may simply be the cost to acquire a new customer: you.) Like banks, they’re hoping if they offer you a higher rate now, you’ll stick around for the long term.
For example, a popular lending platform is Nexo, where you can earn up to 8% interest on stablecoin deposits. To start earning on Nexo:
- Point your browser to nexo.io.
- Create your account.
- Tap the profile icon at the upper right corner and select Profile to complete your KYC verification.
- You will be required to complete either Basic KYC, or Advanced KYC. Basic allows you to earn interest on all supported stablecoins and cryptocurrencies, while Advanced includes support for fiat (i.e., dollars).
- In the Profile section, select “Security” and enable two-factor authentication. We recommend using Google Authenticator to scan the QR code.
- After completing the KYC, select “Account” and choose the stablecoin you want to deposit. You can purchase the stablecoin on the platform directly from your bank, or transfer from an outside wallet. (See our guide to the Best Crypto Exchanges to Buy Stablecoins)
- Your interest will start to drop into your wallet automatically after 24 hours.
Earning on DeFi
DeFi is the “do it yourself” option: unlike centralized companies, Decentralized Finance relies on smart contracts. You’re responsible for managing your funds; the code handles the rest.
DeFi may be easier than CeFi: once you have the crypto, no additional KYC/AML is needed. (It’s better for privacy, too.) However the rates will generally be lower, because they’re not underwritten by CeFi revenues, or written off as a marketing expense.
A good example of DeFi earning is Compound. The online lending platform offers various interest rates for DAI, USDT, and USDT between 3% and 5%.
Here’s how to get started with Compound:
- Install a Web3 wallet like MetaMask or Trust Wallet.
- Point your browser to Compound.finance.
- Select the three horizontal lines at the upper right corner. From the drop-down menu, click “App.”
- Select “Connect Wallet” at the upper right corner and choose your wallet from the available options.
- Select the stablecoin you want to invest in and tap “Enable.”
- Enter the amount of crypto you want.
- Follow the on-screen instruction to complete the lending process.
Best Stablecoins for Earnings
In our view, the best stablecoins provide transparency in their holdings, have a high trading volume, and are backed by a credible reserve. Additionally, they can easily be exchanged for fiat and other digital currencies. Our top picks:
USDC (USD Coin): Issued by Circle, it is a popular stablecoin that has kept its stability even during the wild market swings of the past year, including the meltdown of the Terra Luna stablecoin. It is fully audited by independent auditors, who regularly confirm it is backed by real dollars.
USDT (Tether): The most popular stablecoin by market cap, USDT is a dollar-pegged coin issued by Tether. It is backed by cash reserves, which are also regularly audited, though Tether has had a bumpier ride with regulators than USD Coin.
BUSD (Binance USD): Another dollar-backed stablecoin issued by Binance, the world’s largest crypto exchange. It is regulated by the New York Department of Financial Services, but ranks third to Tether and USDC ($67B, $51B, and $20B, respectively).
DAI (Dai): A hybrid stablecoin, Dai is pegged to the US Dollar but backed by ETH and other crypto assets. It is “overcollateralized,” meaning they hold more than they need in case of a crypto crash: a scheme that is riskier than fiat, in our view, but Dai has held its peg surprisingly well since its founding in 2017.
Everything else (Pax Dollar, TrueUSD, Curve USD, Ghost, etc.): They might be great, but crypto runs on network effects. The more people who invest in a stablecoin, the more stable it tends to become. While all investing carries some risk, the more established stablecoins are generally the safer choices.
If you’re looking to earn significant interest without the volatility of holding traditional crypto, consider investing in stablecoins.
Stablecoins like the four mentioned above can provide higher yields than traditional banks, with the ease of swapping them out for traditional crypto assets whenever you want.
And if you’re looking at new or smaller stablecoins beyond our list above, remember: just because they call themselves “stable” doesn’t mean they are.
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