View this email in your browser

Over 100,000 crypto investors trust the Journal.



HEALTH, WEALTH, AND HAPPINESS

Jan 28, 2022

“Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.” - Franklin D. Roosevelt

New Crypto Interest Calculator: Paid members can now download our new worksheet for estimating crypto interest on various platforms.

This valuable calculator shows you whether you're really making money, or losing it to taxes and fees. Download it here.

(Not a Blockchain Believer? Click here to subscribe.)

Crypto Bubble? It's Hard to Tell (New York Times): A good look at how hard it is to value crypto assets, before concluding that bitcoin and Ethereum are, in fact, valuable:

"By standard measures of value, the prices of Bitcoin and Ether are understandable. They are priced highly — with market capitalizations on Wednesday of nearly $690 billion and $290 billion — because they are well established and liquid, with broad user bases." (Our emphasis)

Investor takeaway: This is what we've been saying for years, and why BTC and ETH are the only two cryptos in our Blockchain Believers Portfolio, and make up the majority of our Future Winners Portfolio. Finally, the Times is getting it!

"The prices of cryptocurrencies have periodically outpaced the stock market," says the New York Times article, before showing this chart on the stock market (black line) vs. crypto (everything else):

Investor takeaway: "Periodically?" Periodically?! What they meant to say was, "The proces of cryptocurrencies have CONSISTENTLY outpaced the stock market."

It's as if the world still can't believe this is happening, but the numbers don't lie. Little by little, day by day, we are converting traditional investors into blockchain believers.

Historical CD rates, courtesy Bankrate

So if inflation is running at 7%, then simple math shows us that a 0.06% interest rate - 7% inflation = -6.94%. In other words, keeping your money in a traditional banking account means you’re slowly losing money: year by year, it’s being eaten away by inflation.

Holding your savings in cryptocurrency can offer much higher interest rates, allowing you to meet or beat inflation. In this article, I’ll explain the three common ways of earning interest (crypto sites call it “yield”), along with how to do it.

But first, here is some practical advice.

How to Tell Whether an Interest Rate is 'Real'

You’ll see all kinds of crazy interest rates on crypto sites. They advertise 10% APY or even 100% APY. (This means you’d double your money after a year.) We’ve even seen claims of 12,000% APY (for a limited time only).

Here are some simple rules of thumb.

• If it seems too good to be true, it probably is. Sky-high interest rates (let’s say anything over 10%) are usually from new projects trying to attract users. The APYs won’t last, and the projects are risky. Stay away.

• The "yearly" APY is not actually locked in for a year. Because APYs are calculated in real-time based on supply and demand, tomorrow’s APY may be different. But this is the way traditional banks calculate it, even though it's misleading.

What is APY in crypto? APY, or Average Percentage Yield, is a term borrowed from traditional banking. It refers to the amount of interest you’ll earn in a year, including compounding interest. Like banks, APYs can change at any time – but because crypto is more volatile, they can change radically.

• With greater reward comes greater risk. We’ve listed only the most reputable sites below, which have a track record of safety. The rule of thumb is to look for more established platforms (several years in business) with plenty of users (several million).

• Earning interest on crypto is legal, but unregulated. Because crypto is generally not regulated like banks, you always stand a small chance to lose your money. You may be better off just holding your bitcoin and Ethereum yourself, and letting them grow.

• Your “interest” is often paid in another token. Imagine putting money into a Bank of America savings account and getting “BankBucks” in return. You can still redeem BankBucks for U.S. dollars (for a fee), but the price of BankBucks will go up or down, as if it were Bank of America stock. That’s crypto.

• Fees are the silent killer. To participate in these crypto platforms, you’ll need to pay Ethereum “gas” fees (i.e., service charges). You will never hear crypto sites tell you about the fees, which can easily eat all your profits, and then some.

• Your interest is taxable. Finally, depending on the platform you’re using, the tax obligations can be confusing. Here's a good rule of thumb: you’ll be taxed for any token bought and sold for a profit, as well as any interest income you received. (Here’s a crypto tax guide.)

So, with all this, is it worth it?

For small amounts of money (let’s say anything under $1,000), you might be better off just holding it in bitcoin or Ether and letting that money grow.

If you do decide to earn interest, think long-term (5+ years). The outrageously expensive fees to move your money in and out, as well as the tax implications, mean that you’ve got to be really patient to make money with crypto interest.

But if you’re willing to wait, you really can earn interest on cryptocurrency, and at rates far more attractive than any bank. Here’s how.

Current interest rates on top tokens (see our DeFi Interest Rates page)

3 Ways of Earning Interest on Crypto

1) Lending. This is the most common method of earning interest on your crypto investments: loaning your crypto to other people who can borrow it. You never see these people: it’s all handled through online lending platforms.

As an analogy, it’s like depositing money in a traditional savings account. The bank pools together money from customers and uses it for loans. The bank makes money through the interest from the loans, and some of that interest is paid back to customers.

Crypto lending platforms work essentially the same way: you’re putting money into a “lending pool,” which borrowers can use to take out loans. They pay back the loans with interest, which is distributed back to lenders.

Who’s borrowing cryptocurrency? Mostly traders, who use the extra money to make bigger and riskier bets. However, this risk is generally not passed on to you, as the borrowers have to overcollateralize (or back up their loans with even more crypto), which will be automatically sold and paid back to you if they end up making a bad trade.

This may all sound like a house of cards, but so far it has worked surprisingly well. Even when crypto markets have had sudden crashes, the automated “circuit breakers” (also called “automatic liquidations”) will sell the collateral and pay back the lenders.

As the lender, you just keep earning interest. This all happens behind the scenes.

This doesn’t mean lending is entirely without risk: sometimes hackers will find bugs in the code. Again, the rule of thumb is to look for platforms with several years in business and several million users, which are good indicators that they are ready for prime time.

How to do it: First, you need to buy cryptocurrency (we recommend Coinbase or Binance), then move it to a browser-based crypto wallet (we recommend MetaMask). You then navigate to a lending site (the most popular is Compound) and “lock up” your crypto in a suitable “lending pool.”

To loan your crypto on Compound, you just switch on the “Collateral” slider. It’s really that easy.

You can withdraw your money at any time: unlike bank CDs, there is no lock-up period. Again, however, you will pay Ethereum fees when you deposit crypto, and when you withdraw crypto. You’ll see these fees before you approve the MetaMask transaction. (See our article on How to Avoid Crypto Fees.)

2) Staking. This is the second way of earning interest on your crypto investments, like storing your money in a savings account. In crypto platforms, the “staked” money helps keep the network running by validating transactions and paying you interest in return.

This “interest” is usually paid in the platform’s own token—and they want you to stake that token, too.

For example, the crypto exchange Binance has its own Binance token (BNB), which you can stake in what they call “Vaults." The revenues that Binance earns on its trading platform -- they take a fee every time someone makes a trade -- are then distributed back to stakeholders. That’s your “interest,” which is paid in BNB.

Sample rates for staking with BNB. (Real-time stats here)

How to do it: For Binance, open an account on Binance.com (U.S. users use Binance.US), then buy BNB and store it in one of their Vaults. The Full tutorial is here.

If you’re interested in staking beyond Binance, see our editor-curated list of Best Crypto Staking Yields.

3) Providing Liquidity. The third way of earning interest is for advanced users only. You need to be tech savvy, with more free time and a tolerance for risk. This is not a “set it and forget it” approach, but interest rates can be much higher.

We'll start by explaining crypto exchange sites like Uniswap, also called Automated Market Makers (AMMs). Think of the exchange kiosk at the airport that lets you swap dollars for, say, Euros:

Using an AMM, anyone can swap one token for another (say, ETH to USDC) instantly, within their browser. Of course, you can do this at an exchange like Binance, but with services like Uniswap, users are providing the funds (or “liquidity”) on the other side, rather than Binance. It's peer-to-peer.

If you're providing the funds for the trades (or "swaps"), then you are a Liquidity Provider (or “LP”). In essence, it’s like you’re the airport exchange kiosk.

As with lending, you never see the people making the swaps: you just lock up your crypto in Uniswap “pools,” and the platform handles everything behind the scenes. You receive a chunk of the service fees generated by the swaps.

Sample APYs you’ll earn from contributing to Uniswap lending pools. The number at right is how much money users have already locked up in these pools. (The real-time stats are here)

Given that swapping one token for another is one of the most common use cases for crypto, there is a lot of money to be made here. But again, with more reward comes more risk, and there is one huge risk that is misleadingly called “impermanent loss.”

Important: See our guide on Impermanent Loss: What it Is and How to Avoid It.

Savvy Liquidity Providers, then, are not a “set it and forget it” type of crowd. They’re monitoring price movements and trying to get out while they’re still ahead—which in the wild world of cryptocurrency is easier said than done.

How to Do It: Uniswap has a good guide for getting started as a Liquidity Provider here.

As an LP, you’re providing the crypto for the trade, and earning “interest.” (Courtesy Uniswap)

Yield Farming: Harder than Regular Farming

All these strategies are sometimes called “yield farming" (remember: farming is hard work), or "passive income" (which is a contradiction, like jumbo shrimp).

It's tempting to move your crypto from platform to platform, constantly chasing the highest interest rates. Between the research required, the sky-high fees, and the tax and accounting headaches, this is rarely worth it. It’s easier to stick with one interest-bearing platform for the long term.

(Note there are also platforms that will do the “yield farming” for you, with the promise that if you lock up your cryptocurrency, they’ll find the best rates automatically. The jury is out on whether this creates “taxable events” every time the platform buys and sells for you. Again, probably better to set it and forget it.)

Download Our Crypto Interest Rate Calculator

We’ve put together a crypto interest rate calculator, which can give you a rough estimate of how much you’ll really be earning with that too-good-to-be-true crypto APY. It figures in length of time, gas fees, and tax liabilities, with easy-reference numbers that you can customize. Paid members can download it here.

TLDR: Crypto interest rates are real, and can pay much better than a bank – but beware of offers that seem too good to be true. Use established platforms with good reputations. Think long term. Don’t forget taxes and fees. Then, set it and forget it.

Health, wealth, and happiness,

John Hargrave

Publisher

Bitcoin Market Journal

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 Steve Walters.

Paid subscribers get full access to our top crypto picks; both free and paid subscribers get content to build you into a better investor.

Upgrade to paid, and become a Blockchain Believer!