The cryptocurrency market can be highly volatile. It is not uncommon to see 30-40% swings over a few days. This price action puts many investors off because they are used to the more consistent stock market movement.
But what if there was a way to invest in the crypto market without having the wild price swings? There may be a way for investors to get solid returns in the crypto market with little to no price volatility. However, this stability and safety carry one big caveat.
Stablecoins are cryptocurrencies pegged to other assets such as dollars, commodities, or other cryptocurrencies. Because another reserve asset backs them, they tend to mimic the price action of that asset. There are three types of stablecoins; fiat-collateralized stablecoins, crypto-collateralized stablecoins, and non-collateralized stablecoins.
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Fiat-collateralized stablecoins hold the underlying reserve currency. For example, USDC (a stablecoin) has a one-for-one dollar-to-stablecoin ratio.
Crypto-collateralized stablecoins hold the underlying reserve crypto assets. However, because of crypto volatility, they have more reserves than they issue in stablecoins. For example, they may save $1 million in Ether but release $500,000 in stablecoins.
Non-collateralized stablecoins are not backed by a reserve asset but act more like a central bank. They use automated algorithms to keep the price of stablecoins stable.
Now that you know a little about stablecoins, what is the investing thesis for them? If stablecoins peg themselves to the US dollar, why would we want to invest in them vice holding cash? I see two primary positive reasons to invest in stablecoins and one giant negative.
Positive #1. Getting your regular money (i.e., USD) into the crypto markets can be a pain. It takes 3-5 days for the transaction to clear. You may be able to spend your money in seconds, but the actual transactions take a long time to process.
Getting your money into stablecoins early is a great way to be ready for the following buying opportunities. You may think of stablecoins as the money market account of your brokerage account—a place to hold cash until prepared to purchase other cryptocurrencies.
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Positive #2. Currently, centralized exchanges, like Voyager, are paying massive amounts of interest to entice people to keep large sums of money in stablecoins.
I see upwards of 8-9% interest being paid for stablecoins like USDC on the Voyager platform. This is insane. To get this type of return on a relatively safe investment is absolutely amazing.
Why do platforms pay that much in interest? Platforms will lend the cryptocurrencies out to other entities that are trying to achieve even more significant gains. These entities, such as investment houses, would love to pay 9-10% for a stablecoin and find an investment that could 5-10X. They can then return the money to the platform.
In the meantime, the platform pays you a lot of money to keep investing in stablecoins. Remember, stablecoins will not see the price action of other cryptos. So when the market is hot, stablecoins look bad, but when the market is cold, stablecoins look like an excellent investment.
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Negative #1. The only negative I can see for investing in stablecoins for the long-term is the uncertainty of the interest these platforms will pay you. Currently, I am getting 9% interest on Voyager for my investment in USDC.
Nothing is stopping the platform from lowering this amount to 3% or 1%. If you have a high-yield saving account, you will understand the dilemma.
I started my Discover high-yield savings account in June 2019 with a 2% interest rate on my dollars. Today, my account pays me 0.4%—this is very sad. Nothing is stopping this from happening to my USDC investment.
So, that is something to think about. I believe that the rates on fiat-collateralized stablecoins will remain high because there will always be a market for borrowers of this money. And, if the interest rates become lower, I can find other investments to dive into to keep my money working. My high-yield savings account doesn’t offer immediate options like this.
Investing in Stablecoins. The immediate investing thesis is to invest for the interest of these coins. However, they almost act like bonds in your stock portfolio. In “Stocks vs. Bonds”, I explain that stocks and bonds usually have an inverse relationship.
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With Stablecoins, the reactions aren’t as inverse as stocks to bonds because one is flat. Stablecoins stay balanced all the time. However, when times are good in the crypto space, you may think of selling stablecoin to gain quick profits elsewhere. When times are choppy, you may want to enter a position with stablecoins to ride out the wave.
I am an investor, so I consider my investment in stablecoins to be a long-term investment. I like the stability it brings during violate times on the crypto market. I also invest for income, even in the crypto world. Receiving a 9% return for relatively no-risk play is almost non-existent on the stock market.
So, keeping 20-25% of my crypto allocation does a couple of things for my crypto portfolio. It gives me a stable resource during the bad times, and it keeps paying me dividends. So I am pleased with Stablecoins. I try to add $100-$200/month to my allocation.
Do you like the idea of stablecoins, or are they too dull for you? Would you consider holding a large amount of Stablecoins if the interest rate was to your liking? These are some questions to ask yourself. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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