If you’re based in the US or Europe – you’ll know first-hand that bank account interest rates have never been so unfavorable. For example, most leading US banks average an annual interest rate of less than 0.1%. Things are only a smidgen higher in Europe.
Taking this into account – more and more people are considering alternative interest-bearing investments. In the case of stablecoins – which are digital currencies pegged to a fiat currency like the US dollar, it’s now possible to earn up to 12% per year on platforms like BlockFi and YouHodler.
Much like the peer-to-peer lending scene – this does present much higher risks than keeping your money in an insured bank account. With that said – this article explores everything there is to know about earning interest on your stablecoin holdings. This includes annual yields, supported coins, platforms, safety, and more.
Anyone can get hold of stablecoins by transferring their fiat currencies (EUR, GBP, USD etc) to a crypto lending platform or crypto exchange, then exchanging that fiat for the equivalent stablecoin.
What are Stablecoins?
Before I explain the nuts and bolts of earning interest on your stablecoin holdings – it’s best that I first give you a brief overview of how this segment of the digital currency arena works. Put simply, a stablecoin is a cryptocurrency token that has one key characteristic – it is pegged to the value of a fiat currency.
For example, the first and still de-facto stablecoin in the market is Tether (USDT). This stablecoin is pegged to USD and supposedly backed by US dollar reserves. In theory, this means that if there is $1 billion worth of Tether in circulation, the provider should have the same amount stored in US dollars in a bank account.
I cover the safety and legitimacy of stablecoins later on – as this is a key metric in considering the risks involved in this interest-earning opportunity. Nevertheless, the key point I am making here is that if you personally own $100 worth USDT tokens – you should have the ability to exchange them back to US dollars at any given time.
I should also note that Tether is not the only stablecoin active in this marketplace. On the contrary -there are many other options to choose from – most of which I would feel more comfortable holding than USDT. This includes the Gemini dollar (GUSD) and the USD Coin (USDC) – both of which have great credentials in the wider cryptocurrency industry.
To learn more about stablecoins, you might also be interested in my podcast with the creator of the EURS stablecoin, Gregory Klumov.
How Do you Earn Interest on Stablecoins?
So now that I have covered the basics of what stablecoins are – I am now going to briefly explain the main concept of how you earn interest. In a nutshell – if you are already familiar with how peer-to-peer lending works – you should already have a firm grasp.
This is because – by using a third-party crypto loan platform like BlockFi – you will be lending your stablecoins out. In return, you will be paid a rate of interest that in many cases is significantly higher than what you can get through a traditional savings account.
Your chosen crypto loan platform will charge the end-user a higher rate than what you receive in interest (called the spread) – this is how the provider is able to pay you.
Here’s a basic example of how a stablecoin interest program might work in practice:
- You open an account with a crypto loan platform (BlockFi, YouHodler, Coinloan etc.) that offers 10% interest on stablecoin deposits
- You decide to deposit $5,000 worth of GUSD
- You keep your GUSD stored on the platform for six months
- When you withdraw your stablecoins out – you receive the equivalent of $5,250 back
- This is because you made interest of $250 for keeping your stablecoins on the platform for six months
The above calculation does, of course, exclude the impact on compound interest. After all, most crypto loan platforms will distribute your interest payment every day. This allows you to reinvest your interest straight back into the crypto loan agreement – which will ensure your money grows at a faster rate.
I have discussed crypto loans and savings accounts many times over the past few months. With that said, much of this has largely centered on ‘traditional’ cryptocurrencies like Bitcoin. After all, it’s unlikely that you will be in possession of a stablecoin for investment purposes – as it retains its value to the respect currency it is pegged and backed by.
With that said, I should note that in many ways earning interest on a stablecoin is a lot more attractive than doing so through a conventional digital currency. This is because unlike Bitcoin, Ethereum, and Ripple etc. – you don’t need to consider the risk of the stablecoin going down in value.
- For example, let’s suppose that you bought Bitcoin with the intention of earning 8.6% per year in interest with BlockFi.
- Although this is an attractive rate of return – there is every chance that you will end up losing money.
- This will be the case if you end up cashing in your Bitcoin for less than you originally paid for it.
- Even with a buffer of 8.6% – Bitcoin could easily go down by more than this when you get around to selling.
This is the same as earning in excess of 17% in a Turkish bank account. Sure, 17% is huge – but the Turkish lira has collpased in recent years – meaning that foreign investors are still losing out even with such an attractive interest rate.
This is in stark contrast to how stablecoins work. That is to say, irrespective of how much you invest – you will always get the same value back in dollar terms.
- For example, let’s say that you obtain 1,000 USDC tokens at a price of $1 each. No matter when you decide to cash out – your 1,000 tokens will always carry a value of $1 each.
- This is because in theory – the tokens are backed like-for-like by US dollar reserves.
All in all, this allows you to invest your stablecoins into a crypto savings account and always know exactly how much your funds will be worth in the future – based on the respective rate of interest.
Risks of Earning Interest on Stablecoins
Before I get anywhere near discussing the best stablecoin savings account platforms – or the best stablecoins to hold – it’s crucial for me to talk about the risks involved.
In my view – as you don’t need to worry about market volatility – there are two specific risks that need to be taken into account. The first is the risk associated with the respective stablecoin and the second is that of the crypto loan platform you are investing through.
As this is the most important consideration to make before taking the plunge – below I dive a little deeper into these two identified risks.
Risk 1: Stablecoin Reserves
Put simply, if there is $500 million worth of particular stablecoin in issuance – then the respective provider should have ownership of a bank account that contains $500 million in cash reserves. Then, if the provider issues another $100 million of stablecoins into the market – the cash reserves should then stand at $600 million.
This is a fairly basic concept that at first glance – would indicate that the stablecoin in question is 100% risk-free. By this, I mean that at any given time – you can simply exchange your stablecoins back to US dollars at a like-for-like amount. This is because the stablecoins are backed by readily available cash reserves.
Unfortunately – it really isn’t this simple. After all, there needs to be a way to know how legitimate the claims of the stablecoin issuer are. For example, some of the questions that you need to be asking include the following:
- Is the respective bank account holding the fiat currency reserves audited by a reputable entity?
- If the stablecoin issuer runs into financial problems – will they have a claim on the reserves?
- How stable is the bank or financial institution holding the fiat currency reserves?
Now, I briefly mentioned earlier that I am not a fan of Tether and as such – this would not be a stablecoin that I would personally like to hold. This is because over the past few years – there has been a lot of controversy surrounding the credibility of USDT.
Some of the most notable alleged red flags include the following:
- In early 2018 – it was announced that Tether’s relationship with audit firm Friedman LLP had dissolved. The general consensus is that this was because Friedman LLP was unable to confirm with any certainty that Tether’s claimed US dollar reserves were in existence
- After being summoned by a court ruling, Tether finally went through another audit in 2019. In turn, it was discovered that just 74% of Tether’s circulating supply was backed. In fact, the 74% figure wasn’t based exclusively on US dollars. Instead, this also included Bitcoin, securities, and debtor payments.
- The fact that Tether and cryptocurrency exchange Bitfinex is owned by the same entity makes me somewhat uncomfortable. After all, there is a huge conflict of interest here – as funneling newly issued, non-back USDT through Bitfinex could go virtually unchecked.
With that said, the above red flags have not stopped people buying and trading Tether in their droves. In fact, at the time of writing this article – Tether is ranked number three in terms of market capitalization with a total value of over $39 billion. Many big names in the Bitcoin space have simply labeled the concerns about Tether as “Tether FUD”, and have dismissed it as one more drive by the media to taint Bitcoin and companies within the space. I’m not so sure though, as many of these same people have an interest in promoting Tether and Bitfinex.
Once again, in theory, this means that those behind the Tether project have US dollar cash reserves of the same figure. Whether or not this is the case remains to be seen. But, in my mind, I think there are much safer alternatives to Tether – which I cover shortly.
Risk 2: Crypto Savings Platform
The second key risk that you need to consider when chasing high-interest rates on your stablecoin holdings is the safety of the platform itself. After all, it is not the stablecoin provider that is paying you interest.
On the contrary, this is paid by a third-party that collects digital currencies from depositors and then lends the funds out via a loan agreement. As such, you need to have a firm understanding of how safe your chosen crypto savings account provider really is.
Before I get to the specific risks, I should note that there is a safety net of some sort in play. This is because most of the crypto loan sites that I have come across require collateral. At BlockFi, for example, the highest LTV (Loan to Value) on Bitcoin financing is 50%. This means that by depositing $10,000 worth of Bitcoin as collateral – you could borrow the equivalent of $5,000.
This is a game-changer – as it means that the collateral can and will be used to protect your investment funds. This might be the case if the borrower defaults on their loan or the value of the digital currency being used as collateral drops by a significant amount.
But of course, just because an LTV of 50% is in place – doesn’t mean that your money is 100% secure. In fact, many commentators will argue that crypto loan platforms are overly strong when the value of the wider digital currency markets is high. But, when there is a sudden market downturn – it remains to be seen how financially secure such platforms are.
Crucially, if your chosen crypto savings account provider did go bust – then there is every chance that you will not see your stablecoin investment again. This is why it is so important to understand what safety nets are in place when loaning your stablecoins out.
Best Stablecoins to Earn Interest
In this section, I am going to discuss my views on the best stablecoins to consider in your search for fixed-income.
USD Coin (USDC)
In my view, it doesn’t get much better than the USD Coin (USDC). As the name implies, this stablecoin is pegged 1:1 to the US dollar. The project was launched in 2018 between two major players in the cryptocurrency space – Coinbase and Circle.
In terms of the latter, Coinbase is one of the largest cryptocurrency exchanges with a reported 35 million customers under its belt. As a US-based entity, the exchange is heavily regulated and is a public company.
In the case of Circle, the firm was launched in 2013 and is involved in stablecoin technologies and payment systems. Notable backers of the company include Goldman Sachs – which has since invested $50 million into Circle. At the time of writing, there over $11.3 billion worth of USDC in circulation – all of which is backed by dollar reserves.
You can easily buy USD Coin at Coinbase with a debit card or bank wire.
Gemini Dollar (GUSD)
Another stablecoin with a great reputation is that of the Gemini Dollar (GUSD). This digital project is backed by Gemini – which is also a popular cryptocurrency exchange.
Although Gemini is somewhat pricey when it comes to trading commissions, it has one of the best reputations for safety, security, and regulation. In fact, not only is Gemini regulated by the New York Department of Financial Services but crucially- GUSD reserves are insured by the FDIC.
In simple terms, this means that the US dollar reserves backing GUSC are insured by up to $250,000 per user. In other words, if the unlikely happened and Gemini went out of business, the reserves are covered by the government-backed FDIC scheme.
In addition to this important safeguard, I should also note that Gemini regularly updates its website with information linked to auditing. In fact, audits concerned with its USD reserves are published every month.
Best Platforms to Earn Interest on Stablecoins
So now that I have established my favorite two stablecoins in terms of credibility and safeguards, I am now going to discuss my preferred platforms. These are the platforms specifically that pay you interest on your stablecoins – so it’s really important to choose wisely. Not only in terms of how much interest the provider pays – but how safe your capital is.
Primarily, YouHolder is a crypto loan platform. It offers loans backed crypto-asset collateral of up to 90% LTV. It requires liquidity for these loans – which is gets from investors that deposit funds to earn interest. The highest-paying stablecoin at YouHodler is Tether at 12.7% per year.
However, for the reasons I identified earlier, I would be more inclined to consider the USD Coin. You’ll get slightly less interest at 12% – but you know that the stablecoin is backed by a legitimate issuer. Unfortunately, YouHodler doesn’t support the Gemini Dollar. It does, however, also offer an interest rate of 12% on TUSD, EURS, DAI, PAX, and HUSD.
Now for the important part – safety. Like all platforms in the crypto loan space – and much like traditional peer-to-peer lending platforms, the main risk that you face is that of YouHodler itself. Like I mentioned earlier, loans are backed by collateral – which does offer an element of safety.
After all, if the borrower defaults then the collateral will be cashed out by YouHodler are used to contribute towards the debt. However, this in itself does not offer a guarantee of any sort. For example, if the wider cryptocurrency markets go on a prolonged downward swing – which wouldn’t necessarily be out of the ordinary, this could cause issues for the YouHodler business model.
Ultimately, the point I am making here is that were YouHodler to go out of business – it’s likely your stablecoin investment would be at serious risk. Additionally, YouHodler has crime insurance in place to protect its cryptocurrency holdings up to $150 million. However, this likely wouldn’t be anywhere near enough to cover a more severe platform collapse.
You can read my full YouHodler review here.
BlockFi operates a very similar business model to YouHodler. In addition to crypto loans and interest, it also about to launch a digital currency credit card. In a similar nature to YouHodler, the highest stablecoin interest rate on offer is USDT – albeit at a lower yield of 9.3%.
Once again, USDT isn’t something that I’m a fan of. As such, I would be much more interested in considering the USD Coin or Gemini Dollar – both of which yield 8.6% APY. This is much lower than the 12% available on USDC at YouHodler. But, if BlockFi offers greater safeguards – this could be worth the reduced rate.
In this respect, BlockFi is a registered money service business (MSB) in the US and it uses Gemini as its custodian. As I covered earlier, Gemini is regulated by the New York Department of Financial Services, and its USD reserves are protected by the FDIC scheme.
As such, you could consider using BlockFi to earn interest on Gemini Dollars. Additionally, BlockFi has received financial backing from a number of reputable firms – including Coinbase. BlockFi also claims to have robust risk management processes in place to ensure its remains financially stable.
With that said, in comparison to YouHodler, it appears that BlockFi has the edge when it comes to safety and risk-management – so it could be worth taking a lower yield. Or, perhaps the even smarter way to approach this is to spread your risk out across both YouHodler and BlockFi.
You can read my full BlockFi review here.
How to Earn Interest on Stablecoins – Quickfire Guide
So now that I have explained the ins and outs of how stablecoin investments work – I am now going to walk you through the process of getting started today. Irrespective of which provider you use – the steps requires are largely the same.
Step 1: Buy Stablecoin
The first part of the process is to buy a stablecoin so that you can invest it into a crypto interest platform. As I covered earlier, I like the look of USD Coin and the Gemini Dollar specifically – but there are many others.
In order to buy your chosen stablecoins, you will need to use an online cryptocurrency broker or exchange. Naturally, the USD Coin can be purchased at Coinbase and GUSD at Gemini. There are many third-party platforms supporting these stablecoins also.
Once you have purchased your chosen stablecoin, there is no requirement to withdraw the tokens out to a private wallet. Instead, you can make a direct transfer to your chosen crypto loan platform once you have created an account.
Step 2: Open an Account With a Crypto Loan Platform
Now that you have a collection of stablecoins, you now need to open an account with a crypto loan provider. In this guide, I have discussed the YouHodler and BlockFi, but many others exist.
Regardless of which provider you opt for, you will need to open an account. This will require some personal information from you – such as your full name, home address, nationality, date of birth, and contact details.
Step 3: KYC Process
A core requirement with all reputable crypto loan platforms that is you will need to go through a KYC (Know Your Customer) process. This means that you will need to upload a copy of your government-issued ID – such as a passport or driver’s license. Some crypto loan sites will also need you to verify your home address.
Step 4: Deposit Stablecoins
Once you have opened an account and uploaded ID to your chosen crypto loan platform – it’s then time to deposit your previously purchased stablecoins. This works in exactly the same way as depositing digital currencies into a cryptocurrency exchange.
That is to say, you will first need to copy your unique wallet deposit address at the crypto loan platform. Then, head over to the platform that you bought the stablecoins and request a withdrawal.
Paste the wallet address into the respective field and confirm the transaction. Once the withdrawal is processed, the stablecoins will arrive in the wallet at your crypto loan platform.
Step 5: Earn and Reinvest Interest
Many crypto loan platforms – such as YouHodler, distribute interest payments on a weekly basis. This is great, as it allows you to reinvest the payments back into your crypto savings account and thus – benefit from compound interest. This will allow you to grow your capital much faster.
You can keep your stablecoins at your chosen platform for as long as you wish and in most cases – withdraw your funds at any given time.
My suggestion would be to keep an eye on the health of the wider cryptocurrency markets. If there are signs of a prolonged downward market, it could be wise to pull your stablecoins out. This will allow you to avoid the risks of a platform default.
When the markets begin to settle and resume their upward trajectory, you might consider redepositing your stablecoins.
In summary, stablecoins offer the opportunity to earn sizable annual returns – with some platforms offering up to 12% annually. While the best stablecoins in the market – such as the USD Coin and Gemini Dollar look rock-solid, you do need to consider the risks associated with your chosen crypto loan platform.
Crucially, the underlying business model works much the same as peer-to-peer platforms – as your stablecoins will be used to facilitate loans. As such, make sure you diversify well and always consider the risks before taking the plunge.
If you want to learn more about stablecoins, I recommend listening to my podcast episode with Gregory Klumov, the founder of STASIS, the company behind the EURS stablecoin.