Want a 9% return in 2022? Consider this crypto strategy

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With the end of 2021, investors may already be thinking about what it will take to meet their financial goals for 2022.

The long-term return of the S&P 500 is between 7% and 9%, depending on the time period. Over the past decade, however, the S&P 500 has produced a total return of over 360%, or a compound annual growth rate of just over 16%. Investors used to such high payouts can raise their eyebrows with a return of just 9%. But for most people, a 9% return is enough to meet financial goals and build wealth over time, especially if it involves less risk.

Let’s take a look at the risks of high yielding stablecoins like USD Coin (CRYPTO: USDC) to determine if they present a viable way to generate an attractive return in 2022.

Image source: Getty Images.

A necessary tool in the crypto market

Stablecoins are not a small industry. In fact, the market is estimated to be over $ 100 billion. The largest and most established stable coin, USD Coin’s outstanding supply is $ 42.1 billion.

Some exchanges will offer high interest rates for these coins. For example, BlockFi offers an Annual Percentage Return (APY) of 9% on the first $ 40,000 of USD coins and an APY of 8% for any amount thereafter.

Asset management expert Ben Carlson, one of my favorite financial minds, put it well when he described stablecoins as the crypto industry’s money market account. In other words, they provide a solid supply of capital that supports the larger crypto market.

Unlike the highly sophisticated workings of traditional financial markets, crypto exchanges have limited options for accessing capital. Stablecoins offer an easy way to do this. The exchanges are more than happy to pass high interest rates on to their clients as long as they can lend that capital at a higher rate than they are paying. The trader pockets the spread and the retail investor gets a high return. It’s a win / win if everything goes according to plan.

Risks to consider

The problem is that crypto interest accounts aren’t insured by the Federal Deposit Insurance Corporation (FDIC) like money held in a traditional savings account, or by the National Credit Union Administration (NCUA) like funds held. in a credit union. Aside from a lack of insurance, there are few regulations, let alone companies like BlockFi which are far less proven than, say, a big bank or a credit union. Risky lending practices could lead to financial stress or even insolvency.

USD Coin’s claim to fame is that it is a “fiat-backed stablecoin”, meaning that it is backed dollar for dollar by assets held in a bank. In theory, the coin’s price in USD should still not exceed a rounding error relative to $ 1. However, users must sell their stablecoins at the going rate to convert them back to US dollars. In this sense, if the crypto market became imbalanced and the price of the USD coin fell to, say, $ 0.95, then the holder could not simply demand $ 1 for each USD coin.

Over the summer, Circle Internet Financial LLC (Circle), which is the main operator of USD Coin, came under fire when it was reported that the sum of all USD Coin was backed by the “fair value” of several assets. In fact, Circle’s reserve allocation for July 2021 shows that cash and cash equivalents were less than 50% of assets, with the rest being a mix of bonds, CDs, US Treasuries, and commercial paper. . However, Circle’s most recent disclosure from October shows that 100% of its assets are now held for a dollar in cash and cash equivalents. Monthly disclosures showing Circle keeping its promise to back USD Coin with cash, not other vehicles, would add credibility to its product over time.

“Savings account” is a misnomer

Comparing the less than 1% interest rate available on most US savings accounts to the much higher yield on stablecoins is like comparing apples to oranges. Like everything in the world of finance, risk, returns and rates are all determined by market forces. Since the crypto market is so young and the market for retail investors in crypto through increasingly secure exchanges is even younger, companies do not have access to the same funding opportunities available to them. stocks or other securities.

There is a demand to use Bitcoin (CRYPTO: BTC), Ethereum (CRYPTO: ETH) or some other crypto as collateral to buy more crypto. It’s like using a home’s equity to buy another home, or owning stocks to buy more stocks on margin. Thus, the basic concept of using an existing asset to buy more of that asset for interest is not readily available in the crypto space. Stablecoins provide a solution to this challenge.

As the market matures, the likelihood that the interest rates on stablecoins will drop is very high. It wasn’t that long ago that brokerage houses charged $ 10 per trade to buy a stock. Nowadays, most of the platforms offer free exchanges. A larger and more sophisticated market could even put an end to the high yields of stablecoins in the future.

The term “savings account” or “interest account” is commonly used by companies offering high interest rates on stablecoins. But dig deeper and it’s clear that stablecoins are much riskier than cash in a savings account, properly insured by the FDIC.

How to approach high yielding stablecoins

For most investors, lower yield with less risk might be a better option than high yielding stablecoins. For example, investing in equal shares of Kinder Morgan, Clearway Energy, and Schweitzer-Mauduit is likely to produce a dividend yield of 5.5% in 2022, while diversifying the risk across multiple companies and leaving an upside just in case. shares would increase.

For crypto-interested investors who don’t want to buy Bitcoin or Ethereum at record highs, the 9% interest rate on stablecoins could provide a less volatile introduction to the crypto space.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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