Keep in mind that crypto lending has its risks. Most crypto lending programs stipulate in their terms that they're not responsible for lost funds. If borrowers default, you could lose money.
Unique risks
The biggest danger with stablecoins is that they're not guaranteed to maintain their pegs. It's easy to fall into the trap of assuming a stablecoin will always have the same value as the asset it follows, but plenty of stablecoins have failed over the years.
TerraUSD is a cautionary tale that illustrates what can go wrong with stablecoins. It was part of the Terra (LUNA -5.60%) ecosystem, and it attracted a huge number of investors because of Terra's Anchor Protocol. Anchor was like a savings account that offered users an APY of almost 20% on their TerraUSD deposits.
It worked out well until TerraUSD lost its peg during a period of heavy market volatility. The price dropped from $1 to less than $0.20 in a matter of days and eventually fell below $0.02. Investors who had put their life savings in TerraUSD lost almost everything.
That's (almost) a worst-case scenario, and there are more secure stablecoins. However, the bottom line is that no stablecoin is 100% secure. There's no guarantee that a stablecoin will always be exchangeable for the asset it's pegged to, and you don't get the same protections from stablecoins that you do from money in a bank account.
Are stablecoins a good investment?
Stablecoins generally aren't investments, but they can be a good choice for investors who want to build passive income streams.
Since stablecoins aim to maintain a set value, they aren't made for investing. The price of a stablecoin will ideally be the same in the future as it is today, in which case whatever you buy will be worth the same as when you bought it. If you're interested in cryptocurrency investing, you're better off buying coins that could increase in value.
Where stablecoins work very well is generating passive income through crypto lending. Crypto lending programs often pay high interest rates on stablecoins. Make sure to spend plenty of time researching both the stablecoin and the lending program to evaluate the security they offer.
Stablecoins are also a convenient way to invest in digital representations of commodities. Let's say you've decided to invest in precious metals and want to add gold to your portfolio. Instead of buying and storing gold bars, you could invest in a gold-backed stablecoin. Once again, it's important to research any commodity-backed stablecoins you're thinking of buying.
How to buy stablecoins
If you want to buy stablecoins and you have an account with a cryptocurrency exchange, check which options your exchange has available. Many of the biggest crypto exchanges sell at least one or two U.S. dollar stablecoins. The fastest option is buying on an exchange where you're already signed up.
If you want a specific stablecoin, check which exchanges have it available. Motley Fool Money, a Motley Fool site, provides information on cryptocurrency availability at major exchanges. This can help you track down the exchanges that carry stablecoins and other cryptocurrencies you want.
The best way to look at buying stablecoins is that you're really buying the organization that issues the stablecoin. You're trusting that organization to keep the value of the coin where it should be. Before you buy, spend time learning about the organization's reputation and review how the stablecoin maintains its peg.
