The Federal Open Market Committee (FOMC) meeting this past week has led crypto investors to worry. Already in the midst of the market crash, these investors are now bracing for multiple interest rate hikes, potentially halting the ripe crypto market that has soared since 2020. Sure, these investors might be right about where crypto is generally heading, but there are plenty of winners to be found as the Fed lays out its plan for the coming year. It looks like stablecoins are becoming some of the hottest cryptos to buy.
The Federal Reserve wrapped up its first meeting of the year this week. While Chair Jerome Powell wasn’t explicit on the timeline for interest rate hikes, the first is expected to come in March. It seems that as the Fed does its business, stablecoins are where investors are headed to hedge against inflation.
But to many, this doesn’t make sense. How is holding a dollar-pegged stablecoin better than holding $1?
The reasons people are flooding into the stablecoin market are plentiful. One of the most popular is stablecoins’ impressive ability to generate passive income. Indeed, through DeFi platforms, users can generate passive income at a much faster rate than through traditional banking. Annual percentage yields (APYs) on stablecoin staking, for example, are often multitudes larger than those offered by a savings account.
Sound interesting? If you are considering taking the plunge into stablecoins, here are three cryptos to buy:
- DAI (CCC:DAI-USD)
- Tether (CCC:USDT-USD)
- TerraUSD (CCC:UST-USD)
Cryptos to Buy: DAI (DAI-USD)
DAI is one of the biggest tokens in the world, boasting a market capitalization of nearly $10 billion. The DAI stablecoin also has to its advantage the entire world of DeFi. Indeed, DAI is one of the most popularly used cryptocurrencies for DeFi lending, which is where its strength lies as a hedge against inflation.
The world of decentralized lending continues to grow massively. Traditional loans are a pain; they often come with high interest rates and banks don’t recognize cryptocurrencies as legitimate collateral.
DeFi platforms like Compound (CCC:COMP-USD) eliminate these hinderances using DAI. Users can obtain a loan simply by providing the network with a crypto collateral, and they can obtain as much DAI as allowed by the protocol. While there is an interest rate to pay back, these rates are often much lower; Compound offers its DAI loans at an interest rate of about 2.5%, compared to the average 9%-10% traditional banks offer.
Users can then use the DAI they borrow to mint new DAI, increasing supply and helping them to pay down their debt. Other users, rather than borrowing, contribute DAI to the protocol to lend out. These users earn passive income on the interest their assets accrue. And unlike a traditional savings account, these users can withdraw their assets at any time
Tether (USDT-USD)
Tether is the largest stablecoin in the world, trailing behind only Ethereum (CCC:ETH-USD) and Bitcoin (CCC:BTC-USD) in market cap. Owing in large part to its size, Tether is one of the most commonly traded stablecoins, used as a medium between fiat currencies and other cryptos. Thanks to its popularity, it is also one of the best stablecoins to use for liquidity mining.
Liquidity mining is a different way to earn passive income. Through liquidity mining, one supplies a pair of cryptocurrencies to a decentralized exchange. The exchange adds these pairs into its liquidity pools. This ensures that the exchange will have enough liquidity to fulfill all trades of that given pair. In exchange, liquidity miners earn rewards, most commonly in the form of the transaction fees from the pool they are mining.
Obviously, contributing a more popular pair is better. More users will want to trade these popular pairs, meaning more rewards will follow. Given Tether’s status as a go-to stablecoin, it is a crypto that can generate massive annual percentage rates (APRs) for miners. For example, DeFi platform Cake DeFi (CCC:DFI-USD) currently offers a 63% APR for USDT-DFI liquidity pairs.
Cryptos to Buy: TerraUSD (UST-USD)
TerraUSD is another favorite stablecoin, offering both a way to earn income through arbitrage and through staking.
The 16th-largest crypto by market cap, it is the stablecoin underlying the increasingly popular Terra (CCC:LUNA-USD) ecosystem.
One of the big draws to UST is that you can use it to leverage earnings with LUNA. That’s because of the unique way UST is pegged to $1. UST maintains its dollar peg by keeping strict command of the relationship between UST supply and demand. It does this by allowing holders to convert their UST to LUNA and vice versa through the protocol’s price-stability algorithm. When the price of UST goes higher than the dollar peg, LUNA holders can convert their holdings to UST. The supply then outweighs demand enough to bring the value back down. When it dips below $1, users can convert UST to LUNA, restricting the UST supply and increasing the price to $1.
But aside from this unique model, UST is also the stablecoin used by Anchor (CCC:ANC-USD), a DeFi lending platform which promises astonishingly high and consistent APYs on UST staking. Anchor, another member of the Terra ecosystem, has its own complex method of keeping its rates fixed. This model allows the platform to offer 20% APYs on UST staking.
It’s worth noting that UST is coming under fire this week. The stablecoin was briefly knocked from its dollar peg after drama surfaced surrounding another DeFi platform that heavily collateralizes UST pairings. Chatter around related coins and tokens continues to circulate, so keep this in mind while evaluating UST today.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
