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With interest rates down near zero, conventional low-risk sources of passive income deliver yields so low these days they're hardly worth the bother.
Savings accounts at banks, which in the 1970s and 1980s routinely offered yields of 5.25% or more, now offer interest rates below 0.10%.
The yields on U.S. Treasuries run below 0.25% until you get to the three-year notes and below 1% until you get to the 20-year notes.
Certificates of deposit (CDs) aren't much better. Even longer-term CDs only offer a yield of 1.25% to 1.4% – and you're required to keep your money locked up for three years, five years, or longer.
Dividend stocks and REITs (real estate investment trusts) offer much better yields – some in double-digit territory – but they come with much higher risk.
But income investors have some new options now, thanks to some innovative cryptocurrency-based fintech companies. And better still, these options are great alternatives for long-term crypto investors who are "HODLing" as well.
Cryptocurrency Comes to the Rescue of Passive Income Investors
Crypto companies around the world have sprung up over the past few years to make it easier for people to earn more on their crypto deposits while using those same deposits to make low-interest loans to others.
And by more, I'm not talking about a few fractions of a percent. I'm talking a lot more.
Interest rates on deposited cryptocurrencies like Bitcoin and Ethereum run between 3% and 6%.
The rates on "stablecoins" – cryptocurrencies with values linked to the U.S. dollar – are even more impressive, ranging from 8% to 9%. Even 8% is a better yield than 88% of the stocks that pay dividends – with very little risk.
And in most cases, you don't need to lock up your money for any set period. You can withdraw it whenever you want with no penalty.
This is ideal for passive income investors looking for a place to park their money while earning a nice return. It also fits the mindset of crypto investors determined to hold for the very long term.
Note that using a stablecoin means you're not exposed to the wild volatility that affects cryptocurrencies like Bitcoin and Ethereum. If you deposit $1,000 on Jan. 1, your principal will still be $1,000 on Dec. 31. But you'll also have an extra $85 or so in interest.
This is part of a trend called "decentralized finance," or "defi" for short. It's a great example of how crypto can disrupt financial services in a way that benefits individuals.
How It Works
Paying customers interest to attract deposits to lend out to other customers isn't new, of course. It was the bread and butter of community banks for decades.
But many banks now see their customers as profit centers. Basically, crypto has made it possible to revive the idea of the community bank but do it in way that's better for customers than banks ever were.
"We lend out and do all the functions banks do but with crypto-assets," Alex Mashinsky, founder and CEO of Celsius Network, said in a recent Forbes interview. "Unlike most banks and financial institutions, I turn back the majority of my profits to my depositors."
Celsius is one of the most prominent crypto fintech companies usurping the role of traditional banks.
Mashinsky's explanation of how Celsius works roughly applies to other companies that also pay "crypto dividends."
"When you look at the yields that we pay, it looks too good to be true – that is the first thing people say because they got used to [earning] almost nothing on their deposits," he said. "We lend crypto to institutions and charge them interest. Instead of keeping 100% of it like banks do, we share 80% of these revenues with our customers."
At the same time, there are caveats to using crypto for passive investing:
- No insurance. Unlike bank deposits, funds deposited with crypto "banks" are not FDIC insured. If the company goes out of business or gets hacked, you could lose some or all of your money.
- Regulatory limitations. Because of the patchwork of regulations that governs crypto in the United States, many companies that offer interest on crypto deposits cannot serve U.S. customers. Even among the four I review below, there are some exclusions and limitations.
- Two–factor authentication. Just about every crypto service requires this. Basically, you need an app on your phone such as Authy or Google's Authenticator that generates a number you must type in when you log in.
- Wrong addresses. Cryptocurrencies use long strings of letters and numbers as addresses when transferring funds from one wallet to another. But you must be very careful, as sending funds to an address for a different crypto will usually result in the loss of those funds. Sending Bitcoin to an Ethereum wallet, for instance, will result in the permanent loss of that Bitcoin.
- Taxes. Gains from interest on crypto investments are taxable just like any other gains. But many crypto companies won't send you a year-end statement, or will only do so if you meet a particular threshold (typically $600 of earnings). You'll likely need to keep your own records.
With that out of the way, here's a look at four crypto-oriented passive investing services I recently tested…
The Best Sites for Earning Crypto Dividends
Before I get to the details of these services, I want to point out that for the most part the interest payments are not generated by what's known in crypto as "proof of stake." (Coinbase is one exception, as noted below.)
Proof of stake is a form of network verification in which users post a "stake" to secure the network and earn crypto rewards for doing so. It differs from "proof of work" systems such as Bitcoin in which miners secure the network by devoting computing power to a math problem (and earning rewards for solving it).
Proof of stake cryptocurrencies could be considered a form of crypto-based passive investing, but I won't be covering that here.
Some companies require KYC (know your customer) steps when you set up your account. That means providing your Social Security number and some sort of photo ID such as a driver's license. You then have to await approval, which usually takes about 24 hours.
Now here are my thoughts on five interest-paying services:
Interest-Bearing Cryptos Offered: 2
Requires KYC: Yes
Ease of Use: 10/10
Competitive Rates: 2/10
Coinbase is best known as one of the easiest places to buy and sell crypto for U.S. dollars. In fact, I've recommended it to those just getting started with crypto. While it's great for buying crypto, though, Coinbase is limited in the rewards you can earn. It offers interest on only two cryptos: Tezos (4.9%) and the stablecoin USD Coin (0.15%).
You may have noticed those returns are on the low side compared to the numbers listed above. It gets worse. Coinbase takes a 25% commission on these rewards. So your gain is even less than the posted rates.
Rewards are compounded and distributed monthly. Coinbase doesn't make loans, so the Tezos rewards are based on that network's proof of stake; the first payout takes 35 to 40 days but is paid out about once a week after that. However, you can watch your interest accrue in real time. The numbers continuously update, which is fun to watch. I did buy some Tezos, but also used Coinbase to purchase the USD Coin I moved to the other services I tested. That may be the best role for Coinbase when it comes to passive investing.
- Celsius Network
Interest-Bearing Cryptos Offered: 25
Requires KYC: Yes
Ease of Use: 7/10
Competitive Rates: 9/10
Celsius is based in the UK and is one of the largest crypto companies offering banking services. It currently has $634 million in assets under management. Celsius loans out the deposits it takes in. Customers can get better loan rates by holding crypto with Celsius as collateral. Interest rates change often depending on loan demand for each crypto. This also helps explain why the stablecoin rates tend to be higher. Interest, which is compounded, is calculated on Fridays and paid out on Mondays.
Celsius offers higher rates that it pays in its own Cel tokens, but that's not an option for U.S. customers. The Cel tokens aren't easy to trade, either, so U.S. customers are better off ignoring them. Celsius is also only available as a mobile app on your iPhone or Android smartphone. You can't use the website to deposit or withdraw crypto; it only has background information and a help center. The Celsius app is OK, but I'd really like the services offered on the website as well. The main drawing card here is that Celsius generally has the highest interest rates.
Interest-Bearing Cryptos Offered: 5
Requires KYC: No
Ease of Use: 7/10
Competitive Rates: 7/10
Nexo is based in Switzerland. At 10 years old – ancient in the crypto world – the company historically has drawn most of its business from European customers. Still, it's easily accessible from the United States. And if you're only depositing crypto to earn passive income, there's no KYC, either. (You do need KYC to get a loan, though.) In fact, Nexo is designed mainly as a crypto loan company, with deposits intended to collateralize the loans. Still, Nexo offers a competitive 8% interest rate on the five stablecoins it offers as well as two fiat currencies: the euro and the British pound. The interest is compounded and credited to customer accounts daily.
Nexo's strongest selling point is the high caliber of its partners. It is audited by Deloitte, and its deposits are insured by Lloyd's of London. Its custodian is BitGo, a well-respected crypto financial services company founded in 2011 and based in Silicon Valley. Like Celsius, Nexo has its own token that offers some impressive benefits (such as periodic dividends), but is probably best avoided for investors simply seeking safe passive income.
Interest-Bearing Cryptos Offered: 6
Requires KYC: Yes
Ease of Use: 9/10
Competitive Rates: 8/10
Based in New Jersey, BlockFi uses the well-regarded Gemini as its custodian, so it earns high marks for security. Gemini is the crypto exchange and custodial company founded by the Winklevoss twins. Like Celsius, BlockFi takes deposits in order to fund loans. So it, too, sets its interest rates based on demand for that crypto from those seeking loans. It also offers better rates to customers who can collateralize their loans with crypto in their BlockFi account.
The interest rates on deposits adjust monthly. Interest compounds monthly and is paid on the first business day of each month. Regulatory issues prevent BlockFi from offering interest payments to residents of New York state, however. One benefit to BlockFi is that it places no upper limit on what a customer must earn to receive a 1099 tax form at the end of the year. Overall, BlockFi offers a nice balance of security, ease-of-use, and competitive rates on money you want to park somewhere.
Interest-Bearing Cryptos Offered: 12
Requires KYC: No
Ease of Use: 7/10
Competitive Rates: 7/10
CoinLoan is based in Estonia and so caters more to the European market, particularly in how customers can deposit fiat currency. U.S. customers are better off just transferring crypto to the CoinLoan wallet. Using this method also bypasses the KYC process, which is impossible to avoid on most sites. Note that there is a $100 minimum deposit. The deposit process is a bit cumbersome, requiring a deposit in a wallet before you can move funds to an "interest account." CoinLoan also offers perks associated with its own token, CLT, but for most folks, it's more trouble than it's worth.
CoinLoan, as the name suggests, also loans out its deposits and bases its interest rates on the loan demand for its cryptocurrencies. For security, the company not only keeps its crypto assets in "cold" wallets (wallets not accessible online), but processes all withdrawals manually. CoinLoan offers an app, but it is not required; you can do everything you need to right on the website. While BlockFi is the better site overall, the ability to avoid KYC makes it worth considering for those reluctant to transmit personal data over the Internet.