Staking stablecoin, good or bad idea?

Investing / Cryptocurrencies
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I have seen that some platforms like https://crypto.com/ offer 14%-15% APY on Stablecoin like USDC.
Would you sell your stocks and buy usdc to earn yield?

This post explains a bit how the APY can be so high Why Do Stablecoins Offer Such High Rates of Interest?

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As of now, Stablecoin lending isn’t regulated.

I like to look at history and ask myself: what has happened to money markets in the past? What has happened to mortgage backed securities? Both were/are considered very safe assets, akin to cash (money markets) or very safe bonds.

Come 2008, which showed that a lack of regulation in both sectors actually came with a pretty decent chunk of risk.

Money Markets have shown to be vulnerable to a run for the bank: if too many people loose faith in the system and try to redeem their money, the provider has to come up with liquidity, which they may not have: Money Market Mayhem: The Reserve Fund Meltdown

Mortgage backed securities are at the center of the subprime crisis, which has shown what happens when an asset that is presented as safe is actually exposed to more risk than displayed (credit risk, in the case of subprimes).

So, in order to lend stablecoins, you have to:

  • Trust the lending platform not to go bankrupt.
  • Trust it is lending the coins to people who won’t default all at once.
  • Trust the stablecoin to stay liquid and worth very close to 1 Whatever-fiat-currency-it-is-linked-to.
    OR
  • Be ok with the idea of your capital not returning to you.

In a non-regulated environment.

Each of us should make their own risk assessment but, for me, we’ve built regulations specifically because we have experienced crises where these specific risks have arised in assets that were previously not regulated. If there’s a fuse on my electrical network because we’ve learned from the past that people can get electrocuted without those, I like my electrical network to have fuses. But we can take the risk, in most cases, everything goes fine. It’s just important to stop and ponder that, every once in a while, someone gets electrocuted because they’ve decided that using an electrical network without fuses was totally fine.

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To add to the list of valid points @Wolverine has already mentioned:

  • please be aware that you have to declare the staking profits as income
  • if you plan to change CHF to USD and then to USDC, keep in mind the currency conversion rate. Tax office will use the average annual conversion rate, so if you exchange for a lower rate, your annual yield will also be lower.

no, No and NO! You might want to ask yourself some more questions:

  • what’s the probability of the whole stock market still existing in 10 years vs. staking stablecoins (where we have many now, not only USDT and UDSC) still existing in 10 years?
  • is the higher reward really worth the higher risk?

You can do it with some small pocket money, but personally I wouldn’t put more than 5% of my net worth into staking.

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Summary: No insurance, largely unregulated.

No.

If I’d want to YOLO my money into a speculative investment, I would not “invest” in a currency that is pegged to the US Dollar.

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You have several good platforms to do it, it is safer than what the others are saying but I would not do it instead of owning stocks, rather as a way to gain additional yield on disposable savings. Just one watch out, make sure to understand how the unstacking and withdrawal of money works, it is not “that easy” even though not too difficult either.

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  • please be aware that you have to declare the staking profits as income

I was checking this point with tax office and they sent me a pdf about crypto taxing. There were a lot of things, but exactly this staking in stable coin or any crypto was not on it. I wonder how to pay income tax on BTC if it can cost anything between 30k-70k CHF. I find it incorrect to declare it with the exchange rate of 31st December as I got the income throughout the year, on a weekly basis.

Long story short, the taxing for crypto is very advanced in Switzerland but still behind the technology and options.

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I think it’s pretty easy. You stake throughout the year, and you get paid in $whatevercoin (BTC, USDC, ETH). You just need to keep track of the amount of $whatevercoin you gained during the year, and declare this as income for the whole year (with the exchange rate on 31.12.2021).

I get it that you might want to cash out those coins earlier (e.g. to exchange to CHF, USD etc), but if you would have HODLed until 31.12.2021, that’s the amount you have earned over the whole year.
So from my point of view, it is fair to tax you with the exchange rate on 31.12.2021.

I totally agree. Still, Switzerland is light years ahead compared to taxing for cryptos e.g. in Germany.

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For dividends in foreign currency, the tax administration’s reference exchange rate at the dividend date is used. I’d expect the tax office to accept the equivalent for staking as well. However, you may have to create your own spreadsheet for this and attach it to your tax declaration.

You can find the daily reference rates for BTC and a few other cryptos on ICTax - Income & Capital Taxes (“Currencies” on the right).

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I do also staking of some stable coins on different protocol mainly in the BSC universe. The yields so far are really good. However, one can not outline that to many times. It’s high risk as the entire cryptospace and definitely not comparable to stocks or ETF. However, I also have an exposure to P2P (lend.ch and Mintos) which makes up for about 10% of my total portfolio and after some years now I will reduce these as I think that the reward/risk ratio is actually better for the stable coins compared to P2P. However, 10% of my portfolio would be to much to feel good. Hence. I will divide the P2P money in ETF and some crypto