How stablecoins can help you increase yield in a bear market
- Traditional and digital assets are in a bear market due to rising inflation and threat of interest rate hikes from the US Federal Reserve
- As a result, it’s hard to find opportunities to generate real yields
- Stablecoins represent one of the only remaining safe havens that offer inflation-beating returns
- Digital wealth platforms like Yield App offer stable passive annual interest rates of up to 13% p.a. on stablecoins like USDC, USDT and DAI
- Stablecoins are a lower volatility asset, but they are not without risk - be aware of this and don’t allocate what you can’t afford to lose
In recent weeks, both digital asset and traditional markets have been trending downwards. Investors across the globe have been spooked by rising inflation and expectations of interest rate increases by the US Federal Reserve, with stock markets and cryptocurrencies suffering as a result. Stablecoins offer an alternative to investors looking to continue making money, even in a bear market.
In the US, for example, inflation recently hit 7%. Meanwhile, despite the central bank signalling plans to start raising interest rates, they will be going up incrementally from a very low base – currently set at just 0-0.25%. In short, parking one’s savings in a bank and forgetting about them remains an unprofitable option, while market volatility makes investing difficult. During times like these, it is particularly important to have a strategy in place to continue protecting and growing your wealth.
In such market conditions, stablecoins could offer you an opportunity to sit-out the volatility of other digital assets or stock markets, while earning annual interest rates that can still comfortably beat inflation in the developed world. As such, they can be a useful and important part of any digital asset wealth strategy.
Stablecoins are a lower volatility alternative during bear markets, but they are not without risk. The golden rule is to never allocate assets you cannot afford to lose to digital asset strategies and always keep in mind the potential risks.
What are stablecoins?
Stablecoins are digital assets pegged to underlying assets such as gold or real-world “fiat” currencies, such as the US dollar. As such, stablecoins can be backed by commodities or fiat currencies to ensure their value remains linked 1:1 to the value of the underlying asset. An example of a stablecoin backed by the US dollar is USD Coin (USDC). These are also called centralized stablecoins.
There are also decentralized stablecoins, which are backed by digital assets or on-chain algorithms (also called algorithmic stablecoins). An example of this is DAI, a stablecoin issued by Maker DAO, which is backed by other cryptocurrencies. This allows DAI to remain decentralized, which is seen as an advantage by those who want to escape the traditional financial system.
According to CoinGecko, USD Tether (USDT) and USD Coin (USDC) are two of the largest stablecoins by market capitalization by far, sitting at $78 billion and $46 billion, respectively, as of January 20, 2022. DAI is the fifth largest, with a market cap of more than $9 billion.
Altogether, there are already more than 50 stablecoins in existence today, and this number is expected to continue growing. Most recently, news emerged that global payments giant PayPal is looking to issue its own stablecoin, dubbed PayPal Coin. Overall, 2021 saw 388% growth in the size of the stablecoin market, from $29 billion to $140 billion, according to the “2022 Digital Asset Outlook” report from The Block, and this growth is only expected to continue in 2022.
Stablecoins and bear markets
Due to their pegs to underlying assets, stablecoins tend to be much less volatile than other digital assets, such as Bitcoin and Ether, for example. They are the most boring of all cryptocurrencies and this can make them a useful alternative for times of market stress.
During volatile markets, stablecoins could represent a place for digital asset users to park their assets while they wait for markets to correct. For example, over the last 30 days (to January 25, 2022), the price of Bitcoin is down around 28%, according to CoinMarketCap. Over the same time period, the value of US dollar-pegged stablecoins has barely moved, while the US dollar itself has remained relatively stable against a basket of world currencies.
During rising markets, Bitcoin will typically far outperform stablecoins. However, during times of market stress, stablecoins offer protection from volatility. This is the equivalent of holding your assets in cash to avoid a market correction, with one big difference – stablecoin strategies, such as the ones offered by Yield App, pay annual interest rates that continue to beat rising inflation across the developed world.
However, users must always be aware that any exposure to digital assets carries a level of risk. Unlike a bank account, a stablecoin portfolio doesn’t offer any protection against provider failure, whereas cash in a bank is protected up to $250,000 in the US and up to €100,000 in the EU should the bank suffer a major event.
Inflation-beating interest rates
Currently, Yield App offers up to 13% p.a. on USDC, USDT and DAI strategies if paid in the base asset. To earn the highest annual interest rates, users must be Diamond Tier members, meaning they have locked or staked 20,000 YLD or more on the Yield App platform.
For example, a Diamond Tier Yield App user with 10,000 USDT who allocates to the Yield App USDT Portfolio will earn 10% a year in the base asset (USDT) and a YLD Tier reward of 3% a year, paid in YLD. This interest is paid on a daily basis, and users can choose to auto-compound their earnings back into their chosen portfolio, meaning they can take advantage of the power of compounding interest to grow their earnings further.
For example, a Diamond tier user with a $10,000 holding in the Yield App USDT Portfolio and turns on the auto-compounding option will have made $1,051.56 in total interest after one year, marking an effective annual interest rate of 10.52% due to the power of compounding.
As such, for users employing a long-term buy and hold strategy, the auto-compound option is a smart choice to maximize the annual income.
In the example above, the Diamond Tier user would also earn a 3% YLD Tier reward on their 10,000 USDT, paid in YLD on a daily basis. Users have the option to auto-stake these rewards on the Yield App platform, which would earn an additional 6% p.a. in YLD on YLD rewards.
With traditional bank savings accounts paying rock-bottom rates (currently at an average of 0.06% on savings accounts in the US), and stock markets firmly in the red (the S&P 500 index is down 7.95% over one month to January 25, 2022), there are not many places left for income seekers to hide. In this market environment, stablecoins have the opportunity to truly shine.
It should be noted, however, that the interest rates on stablecoin portfolios are set based on current market conditions. As such, they are subject to change. In turbulent market conditions, it is possible that rates can be adjusted downwards to reflect the economic backdrop. However, even with potential small downward adjustments, stablecoin portfolios remain one of the best passive income opportunities during bear markets.