Stablecoins could be an attractive combination of a high-yield crypto investment and safety net for investors. However, the Federal Reserve's Chairman, Jerome Powell, has said that if stablecoins are going to be part of payments, then the U.S. needs to establish "appropriate framework" for them. The market gets nervous anytime the Fed suggests more oversight -- but happily for investors, stablecoins seem poised to be a solid income investment in the short-term. In the long-term stablecoins' ability to draw investors into other cryptocurrency should make them a solid long-term investment regardless of the actions the Fed may take.
Stable doesn't mean simple
Before exploring whether stablecoins are appropriate for investors, we first need to define what they are. A stablecoin is a crypto coin that should be worth $1. However, stablecoins don't always hold their $1 value, because they may invest in securities that vary in value more than treasuries or other safer investments. Investors might think of stablecoins as a riskier version of a savings account.
Buying stablecoins, and earning the best interest rates on them, requires multiple steps. First, open an account with a secure exchange such as Coinbase (COIN -4.00%). These exchanges boost security by verifying their accounts -- weeding out potential money launderers or other shady characters before they're allowed to sign up. Banks already have to do this, and if regulators require the same of crypto exchanges, sites like Coinbase will have a head start.
Next, connect either a bank account or debit card to make your first purchase. With some exchanges, buying a stablecoin may let you start earning interest.
However, investors looking for better returns will need to set up a crypto wallet and access another financial site such as Beefy Finance, Pancake Swap, or other crypto farms, where customers can stake (pledge) certain crypto assets in exchange for interest payments. These yields normally far exceed those of any savings, money market, CD, or bond-type investment.
What are stablecoins' risks?
Regulators in many countries, along with the Fed domestically, are looking at creating regulations for stablecoins, and they're considering requiring stablecoins to follow the same rules as traditional banks and investment firms. This could cause stablecoins to truly hold their $1 value -- and not just by virtue of being theoretically "pegged" to a fiat currency -- as issuers will be forced to make investments that ensure those holdings stay reasonably linked to the U.S. dollar's value. Money market funds must do this, but right now, stablecoins don't have to. If stablecoins are subject to the same regulations as money market funds at some point, issuers could be required to spend heavily to comply with new reporting requirements.
Another possibility is that central banks could end up issuing their own digital currency. In addition, Governments could charge lower taxes on their central banks' own issued crypto compared to private stablecoins, hurting investors in the latter assets.
What are stablecoins' rewards?
Despite the regulatory risks, investors should recognize the structural advantages that private stablecoins have over traditional banks and investment firms.
Investors looking for yield haven't had much to get excited about over the last several years. The 30-year treasury yield sits at around 2%. Some of the best money market rates barely exceed 0.5% APY.
By point of comparison, on the crypto farm Beefy Finance, the investment pair of Tether USD (USDT 0.12%) and USDCoin (USDC -0.02%), which are both worth about $1, offer an attractive yield. Investors can choose how much to invest and earn a present APY of 10.59%. There is a small fee to start the investment, usually paid in Binance Coin (BNB 3.08%) from the user's wallet. The superior yield makes this small fee worth the cost. Beefy Finance automatically compounds that interest back into the assets that make up the investment pair -- in this case, a 50-50 split between Tether and USDCoin.
At present, Beefy Finance offers eight different investment options pairing stablecoins, carrying APYs ranging from 7.58% to 28.91% with a minimal withdrawal fee of 0.1%. Bear in mind that these yields are not locked in like a CD; they are subject to change.
Two main factors affect interest rates at these yield farms. First, many smaller yield farms hoping to attract the attention of investors may offer a higher yield on similar assets than their larger rivals. Second, overall yields in the bond market may also affect rates. Stablecoin rates usually change once a day, so investors must monitor these changes to potentially adjust their strategy.
Though regulatory risk could change the value of investing in stablecoins in the future, their short-term rewards are clear. An investor who spends $10,000 on the Tether and USDCoin pair mentioned above, at an APY of 10.59%, will earn $88.63 in interest in a month. The same investor putting $10,000 into a high-yield money market at 0.5% APY will earn $4.17.
Over the long-term, stablecoins offer structural advantages over safer investments like CDs, money markets and the like. First, Stablecoins are transferrable worldwide through the blockchain at any time of day or night for a relatively small fee. This can be a significant advantage over traditional financial instruments, which operate primarily on a Monday through Friday schedule. Second, Many crypto sites offer debit cards that allow users to spend stablecoins on everyday purchases. Since stablecoins are easily transferrable through the blockchain, and many sites offer debit cards with which to easily spend them, savvy investors could use them as a particularly high-interest substitute for a checking account. Third, if market turmoil drives stablecoins below $1 each, investors may be able to buy them at that lower price and reap the gains when they bob back up again. Even if the Fed places regulatory guardrails on stablecoins, they serve as a pseudo-dollar option for trading more volitile crypto. As long as there are yield farms looking to draw customers, there will be a place for stablecoin pairings with strong yields.