Earning Higher Passive Income Using Crypto Stablecoins

Disclaimer: This is not financial advice, just a reference for myself and it’s easier to just pass this link to anyone I want to explain the different options and risks to make your hard-earned money work harder for you while you sleep.

TL;DR If you want to earn higher interests for your cash deposits, exchange fiat currency to stable coins and stake for returns much higher than any SGD savings and money market accounts

Interest % for USDT/USDC
Blockfi8.6%
Celsius10%
Hodlnaut8.3%
Nexo8%
Binance earn6.31%

Crypto Space is Vast and Varied

You might have heard at least one relative or friend comment that crypto is very volatile, and is only for speculative play. That is true to certain extend. But since 2017, the crypto space has grown much bigger and while speculative play is still a large part of crypto world, a space for passive income has now appeared (thanks to DeFi developments)

Enter Stable Coins

Stablecoins are a subclass of cryptocurrency coins designed to match the value of traditional currency such as USD. Stablecoins like USDC, USD Tether (USDT) are also backed 1:1 by a physical USD and submit their treasuries to regular and independent audits for transparency. The innovative creation of stablecoins removed the price volatility when holding cryptocurrencies. I still remember a time where BTC was the main trading pair to all other coins and imagine your holdings are kept in BTC and waking up to a 20% dropped in value overnight. With stable coins, crypto traders and entities in crypto arbitrage now keep their reserves in stablecoins while waiting for an opportunity to enter the market.

Stablecoins for Passive Income

Today as stablecoins become the “reserve coin” and trading pair of choice, there is great demand for liquidity for stable coins. There are many places that will pay you an 8 to 10 annual percentage yield (APY) when you deposit stable coins with them.

Example of places you deposit stablecoins are in DeFi banking and centralized wealth management and lending platforms. In this article I will only focus on the centralized platforms.

Since by market cap, the most traded stable coin is USD Tether (USDT). I’m going to use USDT as basis for following discussion.

Wake Up Call – Power Of Compounding

An 8% APY difference between traditional finance instruments and crypto might not seem much, but when placed into a table showing the time required to double your initial sum, the difference can be made much more apparent. The table shows the percentage of SGD savings accounts vs crypto accounts and the number of years to double your initial pot of money

Percentage Yield (USDT)Number of years to double your money***Amount of money at the end of 10 years, $10K initial
Singapore Saving Bonds (SSB) Apr 21*1.56%44.78$11,674.19
DBS Multiplier**0.8%86.99$10,829.42
Syfe Cash+1.5%46.56$11,605.41
Blockfi8.6%8.37$22,819.09
Celsius Network10%7.2$25,937.42
Hodlnaut8.3%8.67$22,196.50
Nexo8%9.01$21,589.25
Binance Earn6.31%11.3$18,439.16
Generated from http://www.moneychimp.com/features/rule72.htm

*Taken from Apr SSB 10 year average rate. Meaning to have 1.56% have to hold for 10 years

** For DBS multiplier, 0.8% is the “realistic” interest rate for hitting the two criteria, 1) salary credited in the account 2) credit card spending.

***The figures are approximate only as some Annual Percentage Yield (APY) are compounded at different time. Some platforms interests are compounded daily, others are compounded annually. I have chosen to use annual compounding calculation for all.

I don’t know about you, but the rates look insane in the crypto realm when I collated the table. A small decision of choosing which instrument to hold the savings can result in significant savings in time.

Alternatives to Centralised Platform – Terra Anchor Protocol

If you thought the percentage was insane, things are even more crazily insane if you decide to get your hands dirty and stake stablecoins to a protocol directly. Example is Anchor protocol which gives 20% APY if you stake your USD in UST (terra) stable coin. You can find how to do that here in my previous post.

Percentage Yield (USDT)Number of years to double your moneyAmount of money at the end of 10 years, $10K initial
Blockfi8.6%8.37$22,819.09
Celsius Network10%7.2$25,937.42
Hodlnaut8.3%8.67$22,196.50
Nexo8%9.01$21,589.25
Binance Earn6.31%11.3$18,439.16
Anchor Earn20% (in UST)3.6$61,917.36

Risks

There’s no free lunch in this world, unfortunately. There are a lot of risks involved in using centralized platforms for passive income. Below are some risks to keep you up at night.

Risk 1: Centralized Custodian Account Risks.

Your custodian wallets with the centralized entity may be compromised, may not be able to access your assets while they are investigating or trying to recover the assets. The principle of a custodian account is this: Not your keys, not your crypto. Prepare to lose 100% of your deposits. Some past exchanges were compromised and the user assets in hot wallets were inaccessible for some period of time or even lost.

Case Study: Youbit Exchange Hacked

In 2017 Youbit exchange was hacked and lost 17 % of its assets. The Korean exchange eventually declared bankrupt, and all customers could only recover 75% of their funds in their custodian wallets with Youbit. Reference: Link

Case Study: Kucoin Exchange Hacked

In Sep 2020, the Kucoin exchange was hacked and $281 million worth of crypto assets were stolen. They managed to resume services in Nov 2020. Meaning customers had their funds locked up for two months. Kucoin was lucky enough to recover part of the stolen crypto and used insurance pay-outs to offset the rest. Reference: Link

Case Study: Celsius Third Party Compromise

In 2021, Celsius’ third-party marketing server was compromised, and threat actors gained access to a partial Celsius customer list. This resulted in phishing emails and SMS sent to customers (me included) the emails were very convincing. Reference: Link

Risk 2: USD to SGD exchange rate risks

Since stablecoins are pegged to USD, your holdings are exposed to fluctuations in the relative value between SGD and USD. Basically, your deposits will be positively (or negatively) impacted when the USD rises (or falls) against the SGD.

Case Study:

If you changed 10,000 SGD to 7081.15 USD on 04 May 2020 and put it in Celsius and after a year take it out on 03 May 2021 and change it back to SGD, how much do you lose due to the exchange rate change from USD/SGD 1.4122 to USD/SGD 1.33?

Exchange Rate 04 May 2020Principle amount in SGDPrinciple amount in USDCelsius APY Amount at end of one year (compounded weekly)Amount at end of one yearExchange Rate 03 May 2021Result Amount in SGD
1 USD = 1.4122 SGD10,0007081.1510%7,825.131 USD = 1.33 SGD10,407.42

If the interest rate remained the same, you should have gotten SGD11050.64 instead of SGD10,407.42. The effective interest rate after a year becomes 4.07%, eroded by the drop of 5.82% in exchange rate!

I don’t know what could be the interest rate in the future, but looking at the past 5 years exchange rates, the SGD/USD has been moving between the band of 1.3 to 1.45.

USD/SGD exchange rate past 5 years

Risk 3: Bugs or Vulnerability on New Protocols and Smart Contracts.

Even if you own the private keys when staking directly to protocol, it does not mean there are no risks of loss of funds. A bug in the developer’s smart contract code might be exploited and funds might be lost and locked up. Below are just two examples:

Case Study: Parity Wallet Smart Contract Bug

In 2017, on 6th Nov, 1 million ETH (!)was locked up forever due to exploitation of a smart contract bug by a user named devops199. Reference: Link

Case Study: Uranium Finance Vulnerability

In 2021, The attacker took advantage of a vulnerability that has been present in Uranium’s v2 contracts. A total of $50 million worth of tokens were stolen. Reference: Link

Conclusion

In the low interest rate environment, Crypto realm presents some innovative ways to grow your savings, if you can stomach the risks.

Referral links

Hodlnaut (Support local SG)!

Main Website Link: https://www.hodlnaut.com/
Referral Link: https://app.hodlnaut.com/signup?r=WioX-i-BW
Benefits: You receive a US$20 signup bonus after making an initial deposit equivalent of US$1000 on any of our supported assets. Bonus payouts are paid in the same asset deposited. I get a $20 Bonus and a 10% commission (don’t know how this works).

BlockFi

Main Website Link: https://blockfi.com/
Referral Link: https://blockfi.com/?ref=6fb82236
Deposits US$100 or more into your BlockFi Interest Account (BIA), you will earn US$10 in BTC. I will get US$10 in BTC too.

Celsius Network

Main Website Link: https://celsius.network/
Referral Link: https://celsiusnetwork.app.link/1604706b1a
You earn $40 in BTC with your first transfer of US$400 or more. I get $40 in BTC as well.

Binance.com

Main Website: https://www.binance.com
Referral Link: https://www.binance.com/en/register?ref=GWHP201L
You and I can earn a 10% commission rate when trading (I think it’s first trade only)