Stock investors tend to view cryptocurrency as the Wild West of speculation, and the outsize volatility does seem to bear that out. However, income investors are starting to take on more risk in this low interest rate environment for a chance at far more substantial payouts.
The key for income investors who want to earn high interest in crypto with a steady price on their initial investment is to focus on stablecoins. One of the more popular stablecoins is USD Coin (CRYPTO:USDC), a Coinbase Global (NASDAQ:COIN) investment that can always be swapped 1-to-1 for U.S. dollars. Unlike some stablecoins that have slight fluctuations, USD Coin — or USDC for short — has been locked at a price of $1, and as long as Coinbase is financially viable it should remain that way. There is currently more than $34 billion of USDC in circulation.
The problem with owning USDC on Coinbase is that it currently yields just 0.15%. The world’s leading crypto trading exchange was hoping to roll out a Coinbase Lend program where it would offer income investors 4% in annualized interest if they let Coinbase borrow the stake to lend out until they needed it back, but the proposal was abandoned after meeting resistance from the Securities and Exchange Commission.
It’s against this backdrop that several smaller platforms have emerged as outlets for squeezing more yield out of USDC. Investors can earn at least 8% on their USDC through BlockFi, one of The Ascent’s best cryptocurrency apps and exchanges for November. Voyager Invest offers at least 9% on USDC, and this week it introduced a debit card that will let accounts spend their USDC wherever Mastercard is accepted. Celsius Network pushed its earnings rate on USDC up to 10.02% earlier this month.
Crypto.com — the exchange that made waves this week by securing the naming rights for Staples Center in Los Angeles — has tiered rates on USDC depending on how much you have and how long you’re letting Crypto.com use it. It can earn as little as 6% for less than $400 that can be withdrawn at any time, and up to 10% if you are willing to lock it up for at least three months. If you have more than $40,000 in USDC the three-month rate goes up to 14%.
Don’t underestimate the risks
Seeing these high rates for a cryptocurrency pegged to the U.S. dollar may seem tantalizing, but there are a few caveats that need to be covered. For starters, some of these chunky yields aren’t available in certain states, and even in the states where they are currently allowed there are no guarantees that they will stay that way.
The biggest caveat is that there are risks involved here. These aren’t banking products carrying Federal Deposit Insurance Corporation or Securities Investor Protection Corporation protection to make you whole if things go bust. The platforms are also taking on different layers of risks when they lend, pledge, or otherwise use the digital currency in their interest-earning programs.
Tread carefully, and don’t be shy about diversifying across different platforms if you decide that these are risks you are willing to take in chasing bigger yields. You don’t have to settle for low rates on your idle cash, but like everything else in the market there are greater risks out there in the pursuit of greater returns.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.