Earning Interest on Cryptocurrency Investments & Stablecoins
Back when Bitcoin and the other cryptocurrencies were in their heyday, many of the dividend investing community that I follow chose to invest in them. For those of us that held on, it has been a wild ride. I’m still a longterm believer in the viability of cryptocurrency and believe that Bitcoin will one day again surpass previous highs. It (and other cryptocurrencies) will once again be part of my “alternative investments.”
From a peak of over $20,000 per bitcoin in 2017 to its current price of $5420 on (3/17/2020). I initially read about Bitcoin on Slashdot when it was trading well under $1 per BTC and an average computer could mine several BTC per day. (Man, I wish I had mined Bitcoin or bought some back then!)
The mantra for Bitcoin and pretty much all the cryptocurrencies is HODL, which derives from a misspelling of hold, as in buy-and-hold. For those of us (i.e., Johnny) that have been buying and holding since well before the price of $400 BTC, even today’s price of $5420 is a remarkable growth rate.
The nice thing about buying-and-holding dividend stocks (especially with the market crash related to Covid-19), is that our buy-and-hold stocks don’t just sit there dropping in value. The dividends that those stocks pay goes into buying more shares. We compound our investments over time.
This wasn’t really possible with Bitcoin and other cryptocurrencies until relatively recently. There are now a couple of sites that allow you to deposit either cryptocurrencies or stablecoins and earn interest.
Most of you know what cryptocurrencies are. These are digital entities like bitcoin, ethereum, zcash, litecoin, ripple, etc. Stablecoins might be a newer concept. As I’m sure you are aware, cryptocurrencies have been anything but “stable.” Stablecoins are actually stable or at least as stable as any fiat currencyare digital tokens that represent a 1:1 ratio with a fiat currency, most commonly the United States Dollar.
If I deposit $100 USD, I could get 100 units of the stablecoin that (minus a very tiny fee), can be converted back into $100 whenever you want, but has the ability to nearly instantly be transmitted anywhere in the world and/or be used to buy cryptocurrencies without the usual hold while waiting for the ACH transfer to clear. The benefit of these is that they are not as volatile as the standard cryptocurrencies like bitcoin and may aid the use of cryptocurrencies by allowing businesses to sell products delineated in easier to understand amounts (for example, coffee could be sold for 2.5 GUSD vs 0.00046 BTC).
The most common of these include Tether (USDT), DAI, USD Coin (USDC), and Gemini Dollar (GUSD). The majority of these are verified by an independent auditor to insure that for every 1 unit in circulation, there is $1 held in a bank account.
If you were an early adopter, or just someone that has amassed a large amount of bitcoin, you are basically forced to just hold and see where bitcoin goes. Maybe it goes back to $20,000 and you liquidate, but maybe you hold on even longer because it could continue to go higher . You just don’t know. Or, it could just as easily drop 50% like it did a couple of days ago.
The point is that bitcoin (and other cryptocurrencies) fluctuate a lot in price. Just HODLing is a strategy but one that does not generate any money while you wait. Kind of like investing just in a growth stock…you rely solely on the growth of the stock and not on any dividends.
Now we are able to HODL while earning interest. We simply transfer our bitcoin and earn compounding interest while keeping the underlying assets intact.
In the next post, I will talk about three companies that allow you to earn interest on cryptocurrencies and/or stablecoins.
BlockFi, Celsius, and Nexo
Update: December 10th, 2022. So most of these have termed out to be scams or severely understated the amount of risk. I have since removed links to these sites and do not recommend opening an account with them even if they still allow it. The only way they were able to generate yields as high as they did was by doing very risky things with your crypto.
I thought I was getting yield that was backed by overcollateralized loans (and therefore more safe), but I was mistaken.