Different investments offer different returns. Generally speaking, the higher the return, the more risk is involved. By risk, I mean the potential to lose money. For example, the S&P 500, which is a common index used to measure the state of the US stock market, has (on average) a higher return than US Treasury Bonds. This is because you’re risking losing some, or all, of your money in the stock market. In contrast, US Treasury Bonds are largely regarded as having no risk, so the return on those bonds are considered guaranteed.

When you have some money, but don’t want to risk investing it or locking it up for a certain time period in bonds, you’re probably keeping it in a savings account with your bank. The problem with this, assuming you don’t plan on spending that money in the near term, is that you’re earning a very low interest rate on that money. The average annual interest rate on a savings account is 0.06% [Source]. Accounting for inflation, which the Federal Reserve is trying (unsuccessfully) to keep at 2%, you’re losing money. The money kept in your savings account is devaluing at a faster rate than you’re earning.

Once I made this realization, I looked for alternatives for my savings. But it’s hard to find an alternative to a savings account that:

1. generates a higher return than inflation

2. has no risk

3. is liquid (doesn’t require a lock up period like bonds do)

Unless?

Annnnnnnnd in comes crypto lending + stablecoins. Let’s break that down.

What is Crypto Lending?

It’s exactly what it sounds like. Think of how lending money normally works.

You have 2 parties: a lender and a borrower. The lender loans some money to the borrower and eventually the borrower pays back the principal with interest. You lend some money and in return, you earn some interest on that money and you eventually get your principal back. Crypto lending is exactly that, but with a cryptocurrency instead of your traditional, fiat currency (like the US dollar).

With crypto lending, you can earn much higher interest rates on your money with the rates varying depending on which cryptocurrency/platform you use. However, you’ve probably noticed how volatile certain cryptocurrencies can be and the unpredictability of the price of a token is a cause of concern. But lending with stablecoins eliminates the risk that volatile coins have. Stablecoins are cryptocurrencies that are tied to some asset, most commonly the US dollar, so that the price of the coin never changes (at least in theory). The most popular ones include Tether, USDC, BUSD, DAI, GUSD, and many more.

Can I trust stablecoins?

There are two main ways to make a cryptocurrency stable. Algorithmic stablecoins, like UST, rely on an algorithm that responds to the supply and demand of the coin to keep the price at a target price ($1). Asset-backed stablecoins, like USDC and GUSD, rely on having reserves to keep their prices stable. Each method has their respective pros and cons. For starters, TerraUSD (UST) is an example of a risk associated with an algorithmic stablecoin, which you can read about here. Tether (USDT) is an example of a risk associated with an asset-backed stablecoin, which you can read about here.

The lack of regulation in the crypto space by the US government can be unsettling for investors so it’s important that you do your own research and make your own decisions based on your risk appetite. The issuers of asset-backed stablecoins tend to have transparent audits that you can look through to see if the company is actually backing each stablecoin they’re issuing. An example of this would be Circle with their USDC or Gemini with their GUSD.

How do I go about earning this higher interest rate?

Now that you know about crypto lending, you’re probably wondering how you go about doing this.

1. pick a platform to buy stablecoins and lend through. Rates on lending coins can also vary from platform to platform.

2. convert your money into a stablecoin of your choice.

3. lend those stablecoins through the platform.

That’s it! Then you’re on your way to ensuring your money doesn’t waste away in a worthless savings account.

What would I recommend?

For the purpose of this article, I’ll only go into the platform and stablecoin that I personally use, but there are tons of others.

I’d recommend using Gemini as your platform. Gemini is just like many other cryptocurrency exchanges where you can buy and sell cryptocurrencies. They also have another function called Gemini Earn, where you can lend your crypto at a high interest rate. The app is simple to use, offers competitive rates, and has all the benefits of crypto lending that I would look for. No lock up periods, compound interest, and weekly interest payouts. If you use Gemini’s stablecoin (GUSD) to earn interest on the Gemini platform, you’ll be able to avoid any transaction fees that come with converting your fiat money into GUSD. On top of that, Gemini Earn offers the highest rate on GUSD vs other stablecoins.

It only takes a couple of minutes to get set up and start earning a higher interest rate on your savings. If you’re new to Gemini and want to set up an account, you can use my referral link below so we can both get a $10 worth of bitcoin for free.

Referral Code: https://gemini.com/share/vqrgv7ls8

How big is the difference really?

The difference is a lot bigger than you might think. Let’s use my savings account with Bank of America as an example. Assuming $1,000 in savings, I earn a penny in interest every month. A penny. With $1,000 worth of GUSD, I earn roughly $4 in interest the first month. That’s almost a 400x difference and that’s only for the first month. Every month after, that $4 in interest slightly increases. With a larger amount of money and over a longer period of time, keeping your savings in a traditional savings account can end up costing you hundreds of dollars.

How is it taxed?

There hasn’t yet been clear guidelines on taxing interest earned from lending/staking crypto in the US so you might be wondering what’re the tax implications of putting your money into this thing. Gemini (and other crypto exchanges) will issue you a 1099-MISC form to help you report your income/transactions to the IRS. However, this form is only issued if you’ve earned more than $600 through their platform. Here’s an excerpt from Gemini’s website that explains the process:

Gemini issues Forms 1099-MISC reporting income in Box 3, (other income) for non-exempt U.S. exchange account holders who have earned more than $600 (USD equivalent) in income during the calendar year. Forms will be issued to recipients by January 31 of the year following receipt of your earnings.

Given this $600 threshold, you would have to put in roughly $8,700 for 1 year into GUSD (at the rate of 6.9% APY as of 5/23/2022) on Gemini Earn for you to earn enough to be issued a 1099-MISC. I would assume most of the people reading this wouldn’t have over $8,700 laying around to throw into Gemini Earn. In the case that you do, I suggest talking with a tax professional to determine the tax implications. If not, then you wouldn’t be issued a 1099-MISC tax form to report on your taxes. So all in all, most people should be able to place their savings into Gemini Earn without worrying about the tax implications for now.

This is not financial advice or a sponsored post.