Inflation is up to about 7%, which means that the cash in your bank account or savings account or money market fund (all which pay almost nothing) is losing that much value in a year. That has spurred me to find other places to park cash.
There are plenty of high-yielding stocks (e.g., ARCC, ACRE stock symbols) which pay 7% or more, but their value can flop up and down. That is bad if the stock is down when you want to retrieve your money to make some other use of it. Therefore, I looked for things that have stable values while still paying high interest. The two I have found recently are the I-series U.S. savings bonds, and “stablecoin” cryptocurrencies.
The U.S. government offers a couple of savings bond options in limited amounts to its citizens. The way to buy and sell these bonds is through a “Treasury Direct” account. You can buy up to $10,000 per year of EE bonds and also of I bonds. You can obtain up to an additional $5,000 a year in I bonds if you purchase them using your tax refund. You can redeem both EE and I bonds after twelve months, though if you redeem them before holding them for less than five years, you forfeit three months of interest. These bonds are exempt from state and municipal taxes and may be completely tax exempt if used to pay for eligible higher education expenses. You only get taxed on them when you sell (redeem) them.
EE bonds pay a very low fixed rate of interest, currently 0.1%. Their big plus is that after you hold them for twenty years, their value doubles. For instance, if you bought $5,000 of EE savings bonds, for the first twenty years you would accrue a bit over $5 a year (i.e., $5,000 times 0.1%) in accumulated interest. Thus, there is little benefit to holding EE bonds for short or intermediate periods. But after you have held it for twenty years, their value suddenly becomes twice your purchase price, or $10,000. That doubling in twenty years works out to a guaranteed interest rate of 3.5% per year. That is the highest fixed-rate government-backed bond rate available.
Series I savings bonds also pay a fairly low fixed rate (typically 0.1%), but they pay additional interest at a rate approximately equal to the inflation rate, as measured by the Consumer Price Index (CPI). This inflation increment is updated every six months. For instance, if the inflation rate is 2.5%, the interest rate on an I bond will be 0.1% + 2.5% = 2.6%. Thus, an I bond will generally keep up with inflation. Unlike the EE bonds, this decent interest rate is effective immediately. This means that a I bond is an attractive vehicle for parking your cash for any period longer than a year. In times when inflation is running hot, the interest rate can be very high (e.g., 7% in late 2021) for a government bond. As inflation cools down, the interest rate on the I bond will dial down with it, but at least you are assured of keeping up with inflation. That is pretty good for a government-guaranteed security.
High Interest in Stablecoin Accounts
One reason for opening an account where you can purchase cryptocurrencies is to speculate on their price movements. There have been many cases where some coin has quadrupled in a few weeks, or gone up ten-fold in a few months, or even a hundred-fold within a year. On the other hand, they can drop in half in a matter of weeks. Such speculation is not my aim here. I am drawn instead to the so-called “stablecoins”, whose value is tied to some major regular currency such as the U.S. dollar. It turns out that you can get high, steady interest payments on those coins.
There are several crypto brokers which pay interest on coins you hold in your brokerage account (as opposed to keeping them in your private digital wallet). Some names include BlockFi, Celsius, Nexo, and Voyager Digital. Several such firms are reviewed here. Initially I leaned towards Voyager, since it gives access to lots of the new, little alt-coins where you can 10X your money if you pick the right ones and jump in early. However, I still do my own taxes, and the tax reporting from Voyager looked sketchy. Last I looked, they just provide a dump of all your transactions in a giant table, and it’s up to you to figure out capital gains/losses. The word on the street is that this is not as straightforward as it seems. Also, Voyager offered only mobile apps, not a desktop interface. All in all, Voyager seems more geared towards the intense younger Robin Hood/Reddit crowd, punching daring trades into their phones at all hours.
BlockFi is quite staid by comparison. It only offers a few, mainstream coins. However, it is one of the best-established firms, and it provides a nice clear 1099 tax reporting form at the end of the year. BlockFi is backed by major institutional partners, and manages over $9 billion in assets. As with all interest-paying crypto brokers, it makes money by lending out your coins, but it maintains strict safety guidelines as far as collateral from the borrowers. So far, no one has ever lost money that was deposited with BlockFi.
Unlike some of its competitors, it is U.S.-based, and as such it is structured to function well in this jurisdiction. Also, its interest payouts are straightforward. In contrast, many of its competitors incentivize you to receive your interest in special tokens issued by those companies, which adds another element of risk. Finally, BlockFi allows you to immediately transfer money in and out of your account by using a bank ACH link. I wanted that flexibility since I plan to keep a portion of my cash holdings in BlockFi instead of in the bank, but I want to be able to access those cash holdings on short notice and without penalty.
One peculiarity of BlockFi is that they utilize the Plaid financial app (as a convenience on their end) to manage the interface with your bank. Plaid requires you to give them your full bank account login name and password. That triggered privacy and security concerns for me, but I wanted BlockFi badly enough that I came up with a work-around: I set up a separate bank account for the purpose of interfacing with BlockFi and other crypto type companies. I can easily transfer a limited amount of funds from my main bank account into this second account, and then have Plaid transfer funds from that second account into BlockFi. It did take a little work to set this up, but it was worth it. See here for more details on how I did this.
All in all, BlockFi is boring in a good way. All I want to do is make steady money, with minimal distraction. Here is a listing of the interest rates paid for holdings of Bitcoin and Ethereum:
BlockFi only pays significant interest for smaller holdings of these coins. For Bitcoin, the interest rate is 4.5% for up to 0.10 BTC, which at today’s prices is about $4,700. After that, the interest plummets to 1%, and to a mere 0.10% for more than 0.35 BTC (about $16,000). There is a similar pattern for Ethereum. If your goal is to hold large amounts of these coins and earn substantial interest on them, there are probably better platforms than BlockFi.
However, the interest picture is brighter for the stablecoins. The biggest U.S.-based stablecoin is USD Coin (USDC), which is backed by significant institutions. Gemini Dollar (GUSD) is smaller, but also takes great pains to garner trust. Its issuer, Gemini, operates under the regulatory oversight of the New York State Department of Financial Services (NYDFS). It boasts, “The Gemini Dollar is fully backed at a one-to-one ratio with the U.S. dollar. The number of Gemini dollar tokens in circulation is equal to the number of U.S. dollars held at a bank in the United States, and the system is insured with pass-through FDIC deposit insurance as a preventative measure against money laundering, theft, and other illicit activities.” GUSD is the “native” currency within BlockFi, though users can easily exchange it for other coins. At this point I am holding just GUSD, though if I put in more funds, I plan to partially diversify into USDC. Besides being much bigger, USDC now runs on multiple platforms, whereas GUSD is limited to Ethereum; if Ethereum finally does switch from proof-of-work to proof-of-stake, it may be more subject to outages or hacking, so it would be nice to not be totally dependent on Ethereum.
For these two stablecoins, BlockFi currently pays 9% interest on holdings up to $40,000, and a still-respectable 8% on larger holdings:
A complete list of BlockFi interest rates (which change from time to time) is here.
I have been enjoying these 9% returns for several months now, and wanted to share this with my readership – – Happy New Year.
UPDATE MARCH 2022 – – BLOCKFI INTEREST ACCOUNT NO LONGER AVAILABLE. For some time now, state and federal government authorities have been hassling crypto exchanges that offer interest on crypto holdings. In February, the SEC fined BlockFi $100 million for allegedly violating securities laws, and shut them down from taking in any new funds for interest-bearing accounts. BlockFi hopes someday to provide a regulation-compliant interest product, but don’t hold your breathe.
Zealous state and federal regulators have been attacking other crypto firms offering interest, such as Celsius and Voyager. The main player still standing that I am aware of is Gemini. Gemini is very conscientious about audits and has always tried to work closely with regulators. It is offering about 6.5% interest on stablecoins (which is still way better than money markets or CDs), and a measly 1-1.25% on Bitcoin and Ethereum.
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