I’ve mentioned it a few times in past newsletters, but the difference between saving and investing is one of the most important personal finance concepts to understand.
Let's take a look at a quick example:
The average interest rate on savings accounts in the US is .06%
That means if you have $10,000 saved, you’d earn $6 in interest each year.
The average historical return of the stock market is 8%
That means in theory if you had $10,000 in the stock market at the beginning of the year, you would earn $800 in returns by the end of the year.
Over 100x the returns of cash in a savings account.
With inflation historically hovering around 3%, anytime your money isn’t earning more than 3% it’s losing value.
Right now, inflation is closer to 6-7% as the Bureau of Labor Statistics reported 6.8% on December 10th...
So there's a need for higher returns than the .06% the banks provide.
But the stock market doesn't actually provide a consistent 8% return every year either.
One year could be a 25% gain and then the next loses 10%.
So is there a solution that can provide consistent returns that outpace inflation?
Bonds have been a relatively safe place to park money in the past, but even those interest rates aren't the most attractive. And with bonds, your investment is generally locked up for a set number of years while the bond pays out interest to you.
Bonds don't fare too well in an inflationary environment, however, there are solutions such as I-bonds and TIPS that are designed to help protect your investment against inflation.
These can be good options, but are there any other solutions you can diversify into?
After I earned my Certified Digital Asset Advisor designation last year, I continued going down the rabbit hole of digital currencies to figure out how they can best be used in a traditional personal finance setting.
Now, I believe that 99% of the cryptocurrencies that exist don't belong in someone's financial picture – but for the right person, there are some that could.
One of the most interesting forms of digital currencies to me is stablecoins.
They're the exact, complete opposite of meme coins.
The goal of stablecoins is to maintain a stable price (shocker) - commonly $1.
They don't go to the moon and they don't make headlines.
Stablecoins are like the "dollar" of crypto. They're designed to bring stability to an overall volatile market and are most commonly used to earn interest and to easily transfer funds from person-to-person. Stablecoins are the closest crypto to a true currency because the value remains relatively flat unlike a more volatile crypto, like bitcoin or ether. They can be purchased on exchanges like Coinbase and Gemini and on decentralized exchanges, like Uniswap or Sushiswap.
Also read: Why are stablecoins important?
But to give you an idea of how a stablecoin could be used in personal finance, let's take a look at what would happen if you placed 10% or 50% of your savings into one and earned interest.
One of the most popular stablecoins is Gemini Dollar (GUSD).
This is not investment advice and these are not specific recommendations.
Here are 3 different scenarios of savings & returns with $10,000:
100% cash //
Interest rate: .06%
Amount saved: $10,000
Annual return: .06% ($6.00)
10% of savings in Gemini Dollar //
Cash Interest rate: .06%
Cash amount saved: $9,000
Annual return on cash: $5.40
GUSD Interest rate: 8.05%
GUSD amount saved: $1,000
Annual return on GUSD: $80.05
Total Return with 10% of Savings in GUSD: .85% ($85.45)
50% of savings in Gemini Dollar //
Cash Interest rate: .06%
Cash amount saved: $5,000
Annual return on cash: $3.00
GUSD Interest rate: 8.05%
GUSD amount saved: $5,000
Annual return on GUSD: $402.50
Total Return with 50% of Savings in GUSD: 4.05% ($405.50)
To summarize - in this example, placing 50% of the savings into GUSD and leaving 50% in cash would result in earning 60x higher returns than being in 100% cash.
Now, I use Gemini Dollar as the example because I've personally put money into it and can confirm it does pay out 8%.
But Gemini isn't even close to the only option out there.
Another way to earn interest on stablecoins is through Argent Wallet. Again, not a recommendation or advice - just making you aware of the options available:
While the higher returns may look attractive, of course, you also have to pay tax on your interest earnings so your after-tax return may be dragged down a percent or two.
With this strategy, you're also limiting your downside risk.
Because if you only place a portion of your savings into something other than cash, if it was to lose value or go to $0, you would still have your traditional cash portion left.
But if the non-cash portion doesn't significantly drop in value, you can capture the upside returns while still being covered on the downside.
That's why I gave three different examples - 100% cash would be "risk free" and higher proportions of Gemini Dollar would increase risk/returns but with limited downside risk because you didn't place all of your funds into it.
But with returns comparable to average stock market returns, it begs the question - should part of your investment allocation consist of stablecoins?
If they fit your risk tolerance, they help you get closer to your goals, you’ve funded some traditional investment vehicles first, and you believe in them, why not?
Overall this example may sound great - you can earn more on your money - so what are the risks of using GUSD (Gemini Dollar)?
First, the interest rate could go down. There's nothing stating that it's set to be 8% forever.
And 8% is pretty high, but would it go lower than .06%?
It’d be tough.
A common concern in the digital asset world is safety and legitimacy:
"GUSD is audited on a monthly basis by BPM, a private and independent accounting firm that ensures there is parity between the amount of USD in reserve and the amount of GUSD in circulation. To further maintain transparency, anyone may view GUSD’s transaction history along with its current price, market cap, and other pertinent data on an Ethereum network block explorer"It is subject to New York banking laws and the regulatory authority of the New York State Department of Financial Services (NYDFS).
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.Gemini achieves stability for GUSD by pegging its value in a 1:1 ratio to the U.S. dollar and directly collateralizes each Gemini dollar against a U.S. dollar held in a Gemini Trust account. In other words, for every GUSD in existence, Gemini holds one U.S. dollar. This specialized account is maintained at State Street Bank and the balance is audited monthly by BPM LLC, an independent accounting firm that publishes its audit publicly on a monthly basis.
The cash portion of these GUSD reserves may be eligible for FDIC “pass through” insurance for Gemini customers, in the event of the failure of a bank holding the U.S. dollar deposit portion of the GUSD reserves.
The biggest risk with legitimate, transparent stablecoins in my opinion is regulation risk because digital assets are still so new, regulations could be created by the SEC that limit or reduce the impact stablecoins have.
Outside of being a digital asset, purchasing and owning a stablecoin like GUSD is very similar to opening a bank account or a Robinhood account.
You have to go through ID verification and different security measures — including full Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) screenings — to ensure that GUSD remains transparent, secure, and regulated for its users.
It's commonly believed that people who invest in crypto are trying to dodge taxes and hide from the government - but there couldn't be a worse currency to try to do that with.
Because cryptocurrencies exist on blockchain, they are unbelievably traceable and exchanges like Gemini and Coinbase send tax reports and forms to the IRS, just like regular investment companies do.
In summary - with a strategy in place, you can potentially earn more on your savings by diversifying out of cash and placing a portion of your savings into a higher-interest asset, such as stablecoins. You can limit the risk of pursuing higher interest assets by only using a certain percentage of your savings rather than the entire amount.
And whenever you hear someone talking about money or investments, always:
We covered a lot of detailed information here, but I hope you walk away having learned something new. And if you have any questions about digital assets or the role they can play in personal finance, my DMs are open - always happy to help!