Cryptocurrencies are known to be highly volatile. The prices of these digital assets can fluctuate wildly in days, hours and even minutes. Stablecoins offer some protection from this volatility. The value of these coins is pegged 1:1 with real-world assets, such as gold or a particular fiat currency.
For instance, Tether (USDT) is a stablecoin pegged to the US Dollar, and its value is generally always around $1. The creators of USDT maintain a reservoir of physical currency equal to the amount of USDT in circulation. This allows it to maintain its $1 valuation.
While this steady valuation makes stablecoins ideal for crypto trading, they are not viewed as long-term investments as they generally do not rise in value. However, contrary to belief, investors can use stablecoins to make money and protect against taxes as well. Tag along to find out how.
Earning a passive income through stablecoins
Staking is the best way to earn a passive income with stablecoins. Today, several platforms offer decent returns for staking stablecoins. For example, Crypto.com offers up to 14 percent on USDT staking. The only catch is that you need to stake at least $40,000 worth of tokens and commit to a lock-in period of at least one month. One can also stake less than $40,000, but returns will be lower.
Tether is not the only stablecoin you can use to earn staking rewards. Crypto.com also offers up to 8.5 percent per annum on staked USDC. Another platform, Midas Investments, provides a boosted APY of 16.6 percent on USDC deposits. Similarly, one can opt to stake several different stablecoins. All that’s required is a good amount of research to find a reliable staking partner and a decent amount of coins to ensure better returns on investment.
Other companies, such as Binance and Ledger, also offer stablecoin staking and lending pools. You can compare returns and opt for the platform that provides the best value and terms.
Protection from volatility
When the market is in a downward spiral, you can convert a portion of your holdings into stablecoins. This will protect you against further losses as stablecoins are usually pegged 1:1 with a fiat currency. Moreover, you don’t have to exchange anything against actual cash, which could be a tax-efficient way to manage your exposure to volatile crypto markets.
Conclusion
The only risk with stablecoins is that they can lose their peg with the asset they follow. In most cases, these de-pegs are temporary and last for very short periods before the peg is re-established. However, in some cases, the entire stablecoin ecosystem can crash due to a prolonged de-peg. A good example would be the recent Terra-Luna meltdown wherein the platform’s stablecoin, UST, lost its peg with the dollar and fell to $0.
UST was an algorithmic stablecoin. In this case, the dollar-peg stability was maintained by algorithmically regulating the supply and demand of the coin, like a computer programme that balances the price of the coins. However, this algorithm can be exploited, resulting in significant and rapid de-pegging of a cryptocurrency.
Therefore, stablecoins with a physical reserve of fiat currency that is audited regularly offer investors a much safer alternative. The physical reserve ensures that a de-peg is easily overcome as every token in circulation is backed with a physical $1 held in reserve.
