The prices of leading cryptocurrencies such as Bitcoin (CRYPTO: BTC) and ether (CRYPTO: ETH) routinely move 10% or more from highs to lows in a given week. For investors, this volatility can be stressful and frustrating. However, if you believe in crypto’s long-term thesis, volatility can work in your favor.
Exchanges like Nexo, BlockFi, Gemini and Coin base (NASDAQ: COIN) pay attractive interest rates on Bitcoin, Ethereum, stablecoins and other leading tokens. Like regular banks, these companies make money by lending their customers assets at a higher interest rate than they are paying. Let’s dive into a few different crypto assets and their interest rates to determine which is best for you.
1. Ethereum: brave, dynamic, but very risky
Bitcoin tends to be in the spotlight in discussions about cryptocurrencies, but the real star for the last year or two has been Ethereum. While Ethereum is over 50% below its peak, it’s still up 190% year-to-date and over 800% last year.
Ethereum has gained recognition for its versatility. For example, several well-known alternative coins such as Chain link and Polygon are hosted on the Ethereum blockchain. Most non-fungible tokens (NFTs) also work on Ethereum’s blockchain. An NFT represents digital ownership of an asset, be it a work of art, ownership of a car or house, or an NBA top shot moment.
In this way, Ethereum’s blockchain is similar to a smartphone in that it can host many different applications that serve different purposes. One of the most exciting use cases of Ethereum is smart contracts. Contract law can be very complicated. A smart contract hosted on the Ethereum blockchain enables two willing parties to enter into an agreement that is automatically executed based on the outcome of individual conditions. The benefits are immense. A 2018 paper from Harvard Law School states, “Human intervention, including from a trusted trustee or even the judicial system, is not required once the smart contract is deployed and operational, reducing the execution and enforcement costs of the contract become process. ”
Sergey Nazarov, the founder of Chainlink, used the example of crop insurance to describe the use of a smart contract. To paraphrase, a farmer can get crop insurance in the event of drought, flood, or any other circumstance that prevents crop yield. A smart contract could be written that automatically pays a predetermined amount of insurance based on a fixed set of risk factors. The advantages are that there is no need for a payment intermediary, judicial authority or other bodies to glue the process together. In theory, its simplicity would make the contract more transparent, accessible and cheaper by excluding third parties.
Companies like BlockFi pay up to 4% annual percentage return (APY) on Ethereum, which is distributed monthly. Coinbase pays 0% APY on Ethereum, but offers 5% APY when a customer wants to use their Ethereum tokens. Ethereum is moving from proof-of-work to proof-of-stake, which could help the token’s governance and reduce its environmental footprint. Staking prevents a user from trading Ethereum until that process is complete.
2. Bitcoin: Established, simple, but still risky
Bitcoin is far less dynamic than Ethereum – its simplicity is what makes it so attractive. Limited supply and a network that has proven stable despite numerous hacking attempts have helped Bitcoin gain international recognition. Bitcoin is far too volatile to be considered a viable currency, but its use cases as a commodity, especially a store of value, are becoming apparent.
Contrary to popular belief, Bitcoin doesn’t have to replace fiat currencies to be successful. Rather, it can be a globally recognized vehicle that offers value in the face of economic instability. Think hyperinflation, coups d’état, or the lack of safe banks. The benefits of Bitcoin aren’t that practical in the US because we have the US dollar – the world’s de facto fiat currency. But elsewhere, values have to be kept in a place that is protected from interference.
As the largest and most well-known cryptocurrency, Bitcoin tends to pay lower interest rates than other coins. Coinbase doesn’t currently pay interest on Bitcoin, but BlockFi offers an APY of up to 4% and Gemini pays a little more than 2% interest.
3. Stablecoins: A riskier version of a savings account
Unlike Bitcoin and Ethereum, stablecoins are tokenized versions of the US dollar. They are said to be trading at an unwavering $ 1 per token, which means they lack the benefits that Ethereum and Bitcoin have to offer. Two leading stablecoins, USD coin (CRYPTO: USDC) and Twins dollars (CRYPTO: GUSD), act as secure payment methods that add liquidity and stability to cryptocurrency exchanges. They are covered dollar for dollar by real US cash at banks. As with a savings account, virtually every crypto exchange offers interest rates on stablecoins. BlockFi pays 7.5% interest on the first $ 50,000 of USDC and GUSD. Gemini Earn, a savings platform from Gemini, pays 7.4% interest on GUSD, but not USDC. And just a few days ago, Coinbase released a brand new program that pays 4% APY on USDC.
USDC’s circulating supply is valued at $ 25.8 billion, much larger than Gemini’s $ 268 million. USDC is accepted by more exchanges and benefits from greater liquidity, but Gemini is unique in that it is tied to the Gemini exchange. As a US company, Gemini claims that it is regulated by the New York Treasury Department. Therefore, “GUSD reserves are eligible for FDIC insurance of up to $ 250,000 per user while held with State Street Bank and Trust.” The fine print indicates that the FDIC insurance only applies to USD reserves, not the tokens themselves, as they are categories in self-custody and are hosted on the Ethereum blockchain.
The bottom line
Just like stocks, Ethereum, Bitcoin, and stablecoins like USDC and GUSD all play different roles in a portfolio. Investors may find it useful to pre-set the percentage of their total investment portfolio that they want to tie into crypto and then focus on the allocation.
For example, a risk-tolerant investor might allocate a higher percentage of their crypto portfolio to Ethereum, while a risk-averse investor might gravitate towards Bitcoin and stablecoins. High interest rates on stablecoins could provide a unique opportunity for income investors interested in the crypto space to generate sizeable returns that are almost as good as the average annual return on the US stock market. Regardless of the allocation, an investor should likely avoid cryptocurrencies (including stablecoins) altogether if they don’t believe the asset class will grow.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.