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HEALTH, WEALTH, AND HAPPINESS |
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| "Enjoyed your review of stablecoins. These seem to be a way to park cash, with a slightly increased risk and a premium reward, compared to US bank rates. Are the returns increasing as inflation increases?" - Eric K., Bitcoin Market Journal subscriber (The answer in today's newsletter!) |
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| For today's savers, stablecoins can be a solution. Banks are paying almost zero interest. Inflation is soaring. This means your dollar -- the money we all think is fixed and immovable -- is quickly losing its value.
If inflation is 8%, your dollar is losing 8% of its value each year. In other words, $100 this year is worth only $92 next year. Inflation is eroding your purchasing power. Fortunately, stablecoins can make money over the long term, even during periods of high inflation. As cryptoassets, they are in higher demand than dollars, and thus can pay higher rates of interest. (Before investing, please read our Guide to Stablecoins). For example, let's say you have $1,000 worth of USD Coin. If the long-term interest rate is 7.5%, then you would earn $75 in interest every year. After 10 years, you would have earned $750 in interest, a significant return on your investment.
(With compounding interest, the returns get even better: if that 7.5% interest rate holds for 10 years, you'll double your money.) Long-term interest rates matter. At Bitcoin Market Journal, we've been tracking the long-term interest rates of the top stablecoins, and here is a look at how they're averaging: |
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| Click for interactive chart.
Stablecoins: The Quick Summary If you're just joining us, stablecoins are a type of cryptocurrency that is becoming increasingly popular. Stablecoins are different from bitcoin and other cryptocurrencies, because they have lower volatility and are pegged to a stable asset, usually the U.S. dollar.
The interest rates on stablecoins are often much higher than those provided by traditional savings accounts, making them an attractive option for savers. However, there are some risks associated with stablecoins, such as the possibility of devaluation if the asset they are pegged to decreases in value.
Overall, stablecoins are a promising new option for savers and investors looking for stability and high interest rates. But the advertised interest rates fluctuate by the day, so smart investors will focus on long-term interest rates. Here are our top picks.
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USD Coin (7.5%) Risk and reward go hand-in-hand. USD Coin, in our view, is the safest of the stablecoins, as it is backed 1:1 by U.S. dollars and frequently audited. Because there is less risk, there is slightly less reward, compared with our other two stablecoin benchmarks. Remember that a 7.5% interest rate is still 125 times the average interest rate of banks, which are paying out 0.06%. (On the other hand, it's also slightly less than the rate of 8.5% that U.S. inflation hit in March.) Still, in our view, USD Coin is as safe as stablecoins get. |
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Tether (8.5%) Tether has a small risk premium -- and thus a slightly higher interest rate -- stemming from previous controversy that it was not actually backed 1:1 by fiat currency. (It settled this dispute with the Commodity Futures Trading Commission for a fine of $41 million in October 2021). For stablecoins, the backing matters. In times of market panic, if everyone withdraws their money at once, you want the assurance that there's "money in the vault." To be clear, this has not happened, and Tether has since strengthened its commitment to transparency. Still, the controversy lingers, so Tether tokens come with a bit more risk and a bit more reward. |
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Dai (9.7%) The Dai stablecoin is backed not by dollars, but by other cryptocurrencies. This makes Dai slightly riskier, as a collapse of the entire crypto market could cause a "bank run" on Dai, leaving the people in the back of the line empty-handed. In practice, Dai has done a good job maintaining its peg to the U.S. dollar, even through times of market turmoil. During the early days of the pandemic in 2020, the price briefly rose to $1.11, before regaining its peg. The elevated risk premium of Dai also results in a percentage point more of interest than Tether, and two percentage points more than USD Coin. |
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The Stability of Stablecoins What's remarkable is how the top stablecoins all have such similar long-term interest rates. (Over the long term, the stablecoin market is actually stable!) In the short term, however, the interest rate on any given week can be ridiculously high: 25% or more. Don't be fooled: these are not annual interest rates, even though they may be described as "Annual Percentage Yield" (APY). The APY is today's rate, if it held steady for a full year. (It won't.) The term "APY" is misleading for investors, but banks do it all the time. It would be better to call it "Today's Yield," then list a 12-month moving average for APY, similar to our chart above. There are, of course, many stablecoins beyond these three. However, we do not include algorithmic stablecoins like TerraUSD (UST), as we feel they're risky business for investors (see our Investor's Guide to UST). We are gradually adding support for others.
In a world of constant change, it can pay to stay stable.
(P.S. If you're interested in investing in stablecoins, see our Interest Rates page to learn where you can earn interest.) |
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| Health, wealth, and happiness,
John Hargrave Publisher |
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| Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It is created by Evamarie Augustine, Charles Bovaird, Mati Greenspan, John Hargrave, and Alexandre Lores.
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