Cryptocurrency Investing: Interest Accounts and Staking as Alternative Investments

With bank savings account interest rates close to zero, alternatives need to be found for both personal and business savings. This article will review recent alternatives utilizing cryptocurrency investing, including stable coins and other tokens. The term “cryptocurrency” sometimes invokes uncertainty, fear of scams, volatility and other factors that may deter consideration of these vehicles. Each investor, of course, determines their own level of risk averseness. This article does not look at speculating, but rather focuses on investments in crypto that are parallel to well known savings account strategies and stock investments. The strategies described herein can be utilized for personal savings as well as business account savings of for-profit and non-profit businesses.

This article should not be construed as investment advice; rather it is a comparison and a how-to for approaching these new vehicles.

If you are new to saving, investing and personal finance in general, the book Make It Rain by my good friend Vercie is an excellent basic and reference book. (Full disclosure: this link and other links in this article may be affiliate links which might pay us a few pennies. Where possible those funds will be used to support further writings and support a foundation Vercie is considering to promote financial education).

• Why Cryptocurrency Investing
• Factors to Consider When Investing in Cryptocurrency
• Acquiring Cryptocurrency
• Cryptocurrency Investing Alternatives to Bank Savings Accounts
• Cryptocurrency Investing Alternatives to Stocks with Dividends
• Cryptocurrency Investing Alternatives to Stop-Loss Orders

Why Cryptocurrency Investing

The main motivations for considering cryptocurrency investment in the current environment could be:

• Finding an alternative to the record low interest rates on bank savings accounts.
• Finding diversification away from a seemingly irrational stock market.

These alternatives have the following rough equivalents:

• Bank Savings Account => Cryptocurrency Interest Account (interest paid on an underlying asset). This would utilize companies such as BlockFi, Celsius, nuo and to some extent Coinbase.
• Stocks with Dividends => Staking certain crypto currencies (possible appreciation of the underlying asset plus a dividend percentage on the held amount). This would utilize cryptocurrencies such as Tezos and Blockstack (with their 2.0 release), and could be used through Coinbase and other centralized exchanges.

For more experienced investors, there are also the following equivalents:

• Stop-loss order => Rebalancing from a volatile cryptocurrency into one built to mimic global fiat currencies such as the US Dollar or the Euro

For investors wondering where to start the table below takes these strategies (and some not discussed in this article) to provide a relative ranking on complexity and difficulty. Those strategies that are discussed in this article are linked to from the “Crypto Strategy” column.

Familiar Strategy	Equivalent Crypto Strategy	Complexity of Strategy	Setup Difficulty	Notes
Bank Savings Account	Stablecoin Interest Account	Low	Low to Medium (will require only one step in some states/countries depending on Laws)	Current 1% interest w/bank savings vs. 8.6% with stablecoin savings account
Stock w/ Dividend	Non-stablecoin Interest Account	Low	Low to Medium Same steps as above	Both stock dividends and these crypto interest rates vary
Stock w/ Dividend	Staking	Low to High depending on token	Low to Extremely High depending on token	Beginners can stake in one step with some exchanges
Stop-Loss Order on Stock	Crypto Sets	High	High	Complexity may be worth the learning curve for downside protection
Stock Holding	Non-stablecoin Holding (HODL)	Low	Low	Volatile. Like non-stablecoin interest account but w/o the interest. Speculation.
Rate Arbitrage	Yield Farming	High	High	Volatile. Not covered in this article

Factors to Consider when investing in Cryptocurrency

The largest concerns with the average person investing in any type of cryptocurrency, or any investment vehicle are generally the following:

• Safety / Insurance (will my funds be safe in the event of a calamity)
  • In the banking world, deposits in a savings or checking account are insured by the U.S. Government (FDIC) up to $250,000 for most banks.
  • In cryptocurrencies, many of the stable coins that are tied to a fiat currency hold the amount of that currency equivalent to the value to the cryptocurrency issued. For example, USDC is backed by holdings of an equivalent amount of US dollars. Every month Circle, the company behind USDC, issues an audited transparency report to show this. For example, in the report for May 2020 there were 730,800,467 USDC tokens issued and outstanding, and $746,657,617 held in custody accounts for those tokens.
  • Since USDC is an Ethereum-based ERC20 token, the total number of USDC token can be found on the Ethereum public ledger by looking at the USDC Ethereum contract. This transparency is one of the benefits of cryptocurrency.
  • Each company provides insurance differently. For example, Coinbase provides the same FDIC insurance for US Dollar funds held in their accounts, and does insure online digital currency (link to insurance information).
• Liquidity (will one be able to retrieve funds when one desires)
  • With most of the companies discussed in this article, I’ve had no issues with the timing of getting funds in and out of their investment vehicles.
  • The main exception concerns transfers between these companies. In the U.S. there are rules to prevent money laundering. These rules apply delays which slow down transfers. As an example, when acquiring USDC for US Dollars at Coinbase, there is a waiting period before the USDC can be transferred from Coinbase to a higher interest bearing account at another company (e.g., BlockFi, nuo, Aave, Celsius).
• Diversification
  • Diversifying away from traditional investments could be motivation for pursuing these alternatives.
  • There is discussion that bitcoin and other limited supply cryptocurrencies can be a hedge against inflation. Since this is currently speculation and prediction (i.e., there are been little to no inflation since cryptocurrencies have been in existence), the future will tell.
• Stability
  • Each of the companies in this article should be examined by the investor to determine if they are suitable for the investors appetite for risk. Length of existence, deposits to back investments (as mentioned above with USDC) and investors backing the companies are all factors to be considered.
  • Blockchain businesses have shaken out, with most of the charlatans having run with their money and several other efforts consolidated or completely halted. This does not mean that investments should be taken lightly. As with non-crypto investments, trust must be established.

There is also the “pro” of supporting the cryptocurrency companies and technologies by investing. There is a contingent in the crypto world that supports de-centralized financing versus centralized, single controller investing (also known as the concept of owning one’s own “keys” or “wallet”). This article aims to simply compare current investment returns in crypto versus vehicles most may be familiar with and does not intend to add additional complexity to the strategies by examining the centralized versus decentralized debate.

Acquiring Cryptocurrency

The first step is, of course, to acquire particular cryptocurrencies. These can be assets called “stablecoins” which are cryptocurrencies tied to well-know currencies (e.g., the U.S. Dollar, the Euro) and/or other crypto assets. Depending on where you live, to get your assets into a higher interest account may take two steps – acquiring and transferring. For example, living in Texas I acquire USDC using Coinbase (which as of this writing only provides 0.15% interest on USDC), and then transfer to BlockFi (which currently provides 8.6%) .

Limitations by State. Residents of some states can buy direct with some of the companies discussed here that provide interest. Unfortunately there is little consistency. For example, in my home state of Texas, one must transfer US Dollars into one account (such as Coinbase) to exchange for USDC, and if one desires higher rates (as one should) transfer USDC from there to BlockFi. Because I live in the state of Texas, I cannot transfer USDC to Celsius (see the fine print at the bottom of this page) – though I can transfer non-stablecoins.. As an example of these limitations, this link has a current list of states that cannot directly purchase stablecoins from BlockFi.

Update Dec 2020: This has now changed. Residents of Texas can purchase directly to BlockFi, and no longer need to go through an intermediary step. For a step-by-step tutorial on setting up a BlockFi account, see this new article.

Fees. Similar to purchasing stocks, investors must understand and take into account fees. Below are examples of purchasing $1,000 of Ethereum through Celsius or through Coinbase. Celsius’ fee is $35, 3.5% of the total purchase, which would result in 4.2345 ETH at this point in time. Coinbase’s fee is $14.58 – no fee percentage is easily provide – which would result in 4.35 ETH at the same point in time. Be certain to check not only the price provided by the entity you purchase from, but the fees as well. Most companies will list their fees on their website (as examples, here are links to BlockFi’s fees).

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Ease of Transfer. There is a growing number of companies that will allow for the purchase of cryptocurrency. These include popular stock investment platforms such as Robinhood and specialized cryptocurrency platforms such as Coinbase. As of this writing many of these platforms do not allow the transfer or exchange of cryptocurrencies. Robinhood, for example, allows the user to only buy and sell; the platform holds the tokens, not the investor. This will surely change over time. Coinbase also holds the tokens, but allows the investor to transfer them into their own wallet (including a Coinbase wallet or other wallets) or send the crypto to another account. The examples in this article refer to Coinbase as the platform for acquiring crypto, for ease of use, lower fees and transferability.

Below are the steps for one possible implementation: setting up an account at Coinbase to acquire cryptocurrencies:

1. Clink this link to open an account on Coinbase
2. Verify your identity (similar to setting up a bank account or investment account, steps such as confirming your email address and providing other information depending on the level of account desired.)
3. Fund the account by linking a bank account
4. Secure the account.
5. Exchange funds for the cryptocurrency of your choice.

This second-to-last step is critical for all of the accounts in this article, and for any investment account. Accounts will of course have a password, but where offered take the time to set up additional protection such as two factor authentication (e.g., the account will text the associated phone number to confirm activity) and “whitelisting” (only the external accounts listed can send or receive to your new account).

In a future article a step-by-step guide with screenshots on setting up an account and acquiring crypto will be shown and linked to here.

Cryptocurrency Investing Alternatives to Bank Savings Accounts

Once the investor has determined a list of companies that fit their needs (safety, liquidity, diversification and stability as previously discussed) there are additional factors to consider when looking at alternatives to bank savings accounts. These are the interest rate, the frequency of payments and the currency of payment.

Interest rates. The website DeFiRate.com provides an up to date listing of current interest rates (called “lending”) for most web sites. There is also a tab to click that shows the 30 day average of the rates by company as well. For some reason they do not list Celsius among the many companies on their list; Celsius’ rates can be found here.

Interest Payment Frequency. As of this writing, the choices appear to be monthly (e.g. Coinbase and BlockFi) or weekly (e.g., Celsius).

Currency of Payment. With a traditional bank, the account earns interest in the same currency as the deposits. Most blockchain accounts provide this option, but some also provide the option to earn interest in an alternative cryptocurrency.

Below are the steps for one possible implementation: setting up an interest account using USDC, a stablecoin described above:

1. Open an account on Coinbase
2. Fund that account by linking a bank account
3. Purchase / exchange U.S. Dollars for USDC
4. Wait (through the anti-money laundering holding period). While you wait the USDC will earn interest on Coinbase, at a rate that is currently 0.15%.
5. Open an account on BlockFi
6. Transfer USDC to BlockFi. USDC will earn interest at a rate that is currently 8.6%

Update Dec 2020: This has now changed. Residents of Texas can purchase directly to BlockFi, and no longer need to go through an intermediary step. For a step-by-step tutorial on setting up a BlockFi account, see this new article.

This is, of course, just one route.

• Coinbase could be replaced with any crypto buying platform that allows the user to send assets to another platform.
• USDC could be replaced by the investor’s stablecoin of choice. On the BlockFi platform two other stablecoins, PAX and GUSD, are available with the same interest rate.
• BlockFi could be replaced by the investor’s DeFi platform of choice (nuo, Celsius, Crypto.com, etc.) assuming regulations regarding where the investor lives permits stablecoins in the platform selected.

These replacements depend on where the investor lives (i.e., what trading is allowed) and, as with bank savings accounts, which platforms fit the investor’s other criteria.

Cryptocurrency Investing Alternatives to Stocks with Dividends

For cryptocurrency that is not a stable coin (i.e., not tied to a fiat currency like US Dollar or euro), there are two methods that are similar to that of owning a stock that gives dividends. “Similar” is defined for these purposes as:

• the value of the underlying asset can rise or fall (appreciate or depreciate) while the investor is holding it; and
• the investor is paid a fee at some interval based on the value of the underlying asset.

The two methods are: Interest Accounts (similar to the accounts discussed in the previous section, but with an asset that is not a stablecoin), and Staking (where there are rules for the particular blockchain that reward proof of ownership of that blockchain’s tokens).

Investors should compare this with traditional stock holdings. This link has a comparison of holding cryptocurrency as an investment versus the stock market.

Interest Accounts. Similar to the previous section which compared holding and earning interest on stable coins, the same accounts and companies mentioned in that section can be utilized to hold non-stablecoin assets. These assets will earn interest but, as with traditional dividend stocks, the price of the underlying asset can rise and fall.

Staking. Some crypto assets provide renumeration if those assets are held, or staked. This is sometimes referred to as Proof of Stake, Proof of Ownership, Proof of Transfer or other terms. Simply put, if the investor holds the asset in a particular account, a “dividend” is provided to the investor for holding in the same asset. Blockchains do this for a variety of reasons, including ensuring stability of the blockchain itself. The current best example of this is holding the cryptocurrency Tezos. Ethereum and Blockstack will be offering staking (or “stacking” in the term of Blockstack) relatively soon. There are options for some cryptocurrencies to “delegate” your holdings or to hold it yourself. The trade-off is that delegating is simple but provides a lower rate of return; staking a crypto yourself can be complex but provides a higher rate of return.

As mentioned in the previous section, the rates provided for certain cryptocurrencies can be found by looking at the DeFi rate website. Celsius’ rates can be found here. Celsius provides a larger selection of different tokens that most websites. Be sure and check the different rates – Celsius currently offers rate for EOS and XRP tokens of 4.45% and 3.61% respectively. These are higher than any of the rates shown on the DeFi rate website.

Celsius also provides the user the choice of earning their interest in the cryptocurrency that is being held, or earn at a higher rate by choosing to earn their interest in CEL tokens, which is Celsius’ own cryptocurrency. A screenshot of the current Celsius’ Loyalty program, which shows the additional interest that can be earned in CEL, is shown to the right.

Binance, another centralized exchange, provides a variety of interest accounts, even offering higher interest for commitment to lock up tokens for a period of time. Binance supported tokens, interest rates and options can be found here.

This investment alternative can be accomplished with similar steps to the previous example.

• Interest Account on non-stablecoin assets. The exact steps listed in the previous section for interest on stablecoins can be followed to utilize Coinbase and BlockFi to earn interest on ethereum (currently 4.5%), bitcoin (6%) and litecoin (3.8%). As with the stablecoins, interest is paid out monthly or weekly depending on the platform.
• Staking. As an example, an investor can earn a staking return (similar to a dividend) while holding Tezos tokens. The investor can simply purchase those through Coinbase and opt-in for staking. Coinbase is currently paying just over 4% of the Tezos balance for Tezos via staking. This is the highest rate currently shown on the DeFi rate page. These staking rewards are paid out every few days (based on rules governing the Tezos blockchain). There are other ways to earn high rates for staking (e.g., staking your own tokens, holding your own tokens in a wallet and delegating staking to a higher interest providing source). While those methods do support the decentralized goals of blockchains they are more complex than the process described above.

This section has referred to alternatives that involve non-stablecoins. These types of tokens can be volatile. At this time in our history, more than any other, it is guesswork to say whether holding (or HODLing) tokens will be less volatile than holding stocks. Stocks have a much longer history, but history is often not a forecaster of future returns (read Nassim Nicholas Taleb’s Fooled By Randomness for an enjoyable take on this topic).

Cryptocurrency Investing Alternative to Stop-Loss Orders

An alternative to holding a potentially volatile token while earning interest is to employ a methodology similar to stock market stop-loss orders. A stop-loss order allows the investor to put an order in place at a price lower than the current price of a stock to limit the amount of losses incurred if the price drops. Certain cryptocurrencies offer a similar ability through the use of smart contracts. This article will not go into details on this topic, but will provide a brief description.

TokenSets provides, as the name implies, sets of tokens which can be utilized to limit loses and earn interest. For example, there is a set called “ETH 20 MA Crossover Yield Set“. This set holds ETH tokens. When the price of Ethereum tokens crosses the 20-day moving average (MA) of the price of Ethereum going down, the holdings are automatically moved to USDC, which earns interest. When the price of Ethereum crosses 20-day moving average price going up, the holdings (with interest) are moved back to Ethereum.

One difference with this strategy from the others described in this article is that all of these sets must be acquired using Ethereum tokens. The investor must again take a two-step approach and acquire ethereum through another company, as Ethereum cannot be directly purchased through TokenSets.

Below are the steps for one possible implementation for participating in this type of strategy:

1. Open an account on Coinbase
2. Fund that account by linking a bank account
3. Purchase / exchange U.S. Dollars for ETH (Ethereum)
4. Wait (through the anti-money laundering holding period).
5. Open an account on TokenSets.
6. Transfer ETH from Coinbase to the new TokenSets account (once the waiting period has expired).
7. Use this ETH to participate in either a RoboSet (one that has a trading strategy defined by the platform) or a SocialSet (one that has a trading strategy defined by a trader participating on the platform). Pay attention to fees – RoboSets normally have low to no fees, whereas SocialSets have fees taken by the trader similar to a stock brokerage account.

This is a more complex and potentially riskier strategy than the others discussed in this article. Here is an excellent article by Anthony who works at TokenSets listing the risks, with links to audits and other information.

This strategy is similar to setting a stop-loss order on stock holdings, but with the added value of moving the holdings into an interest-bearing token. There are much more complicated sets, and other platforms that provide unique token contracts.

Conclusion

If you’ve made it this far, thank you for reading. Hopefully this article provided an overview of cryptocurrency investing alternatives that are comparable to traditional investments and savings.

I’d like to thank Christabel, Eric, Ramzi and Vercie (connect with Vercie here) for reading drafts of this article and providing valuable and blunt feedback. And, as with every article, love and thanks to my gorgeous wife for reading my ramblings and making them clearer.