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How to Earn over 8% with USD Stablecoins (but with some non-tradtional risks related to crypto)

Holding USD "Stablecoins" at many institutions right now offer a very attractive APY (annual percent yield) much higher than traditional banks (below are a few examples).


APYFDIC Insured
BlockFi.com9.50%N
Gemini.com8.05%N
Coinbase.com0.15%N
National Average0.12%Y

What is a USD stablecoin?

  • It is a digital asset (crypto currency) that is backed by USD 1 to 1.  The more reputable ones are USDC - offered on Coinbase through a company called Circle and GUSD - offered through Gemini.  These 2 are companies are based in the US and have audited financials to verify the trust backing these coins have enough reserves to meet the 1 to 1 ratio.
  • These are purchasable and redeemable for USD
  • There are other Stablecoins that are not as transparent about holdings like TUSD or Tether.  And even other Stablecoins backed by a dynamic ratio of Etherium -> DAI.
  • Stablecoins and their market capitalization can easily be found at https://coinmarketcap.com/view/stablecoin/

How does it work?

  1. Purchase Stablecoins on a platform like Coinbase, Gemini, BlockFi etc
  2. Lend your Stablecoins out to a platform that provides the interest (e.g. on Gemini, they make lending the Genesis seamless; BlockFi itself is a lending platform)
  3. Collect interest until you want your Stablecoins back
  4. transfer Stablecoins somewhere else and/or redeem them USD

What are major risks?

  • digital asset / crypto currency is NOT backed by USD.  To mitigate this risk, USDC and GUSD are independently audited and findings can be found online.
  • cyber-attack / theft.  unlike a bank that has FDIC insurance if the digital assets are stolen in lending facility or from your wallet, there is not assurance you will get your money
  • self custody loss.  Since crypto currencies are bearer assets and self custody, if you forget your wallet password, you may have permanently loss access to your assets.

How are the yields so high?

  • users could be subsidized by either stablecoin issuer or custodian to incentive adoption
  • the marketplace has a demand to borrow them
    • this is most likely the case as Stablecoins are used to facilitate arbitrage across exchanges.  For example, if Bitcoin is trading at 2 different exchanges at different prices, arbitrageurs will want to buy on the cheaper exchange and sell on the more expensive as close to instantaneously as possible.  But the problem is that the arbitrageurs may not have enough money or collateral on both exchanges at the same time.  So the arbitrageurs can borrow assets to provide the collateral (Stablecoins) to make the trades.  So in this scenario, the APY is determined by the marketplace charging the arbitrageur interest to borrow the funds.
  • the forward curve for crypto currencies like Bitcoin and Ethereum price further futures higher in price.  This implies borrowing them should be at a high interest rate, as the curve is very steep.  The other factors besides interest are storage and transfer cost, which are negligible for crypto currencies.  

Closing thoughts

  • Stablecoins can provide a much higher APY compared to traditional banks, but that is because they carry risk that may not be appropriate for everybody
  • There is currently speculation that these will be more heavily regulated and potentially banned
  • There is also rumors of the FED creating a competitor.  I personally don't think they will as there would be too much technology risk to the government if the Stablecoins were compromised.  Can you imagine if the FED got hacked?  Most likely they will guide and regulate existing coins with USDC and GUSD "winning".

 

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