I considered that crypto could be useful for financial independence a few months ago, as one of my experiments. How is it getting on?
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How about that crypto volatility?
For your regular, run-of-the-mill crypto assets that sit on an exchange, the world has seen rising demand in the last year. You would have been very unlucky to buy a crypto token from a mainstream crypto exchange and not been in profit at some point this year.
Yet, I’ve also seen a lot of downside risk. I’ve written about the negatives of having a large crypto exposure before. At one point, the utility tokens I had were down 40% from my portfolio highs, which is a bit of a test of faith.
I mitigate this by using stablecoins which earn crypto interest as a big part of my crypto portfolio. Stablecoins are effectively a cash voucher that lives on a blockchain, so that you can do blockchain things with it but exchange it for its cash value (minus a small fee) at the end. That said, they’re not cash, and come with more risk than cash.
Stablecoins… revisited
In an interesting turn of events, many of the bigger stablecoin providers (Tether, Circle and Paxos) have revealed details in the last week about how they back their tokens. All are valued at 1 US$, but not all are alike.
Tether USDT
Tether’s USDT is backed largely by commercial paper and debt instruments. This is a problem because commercial paper is effectively a high-risk corporate bond, but completely unregulated. There’s no way for us to know how risky or safe the borrower is. What’s the good in a corporate bond if the company paying the loan back goes bust? Well, not much. Better than a share in a bust company, but this is a company we don’t know about and haven’t chosen.
I’m steering clear of Tether.
USDC
Circle’s USDC is backed by a lot more US government debt and stable securities, but commercial paper still makes up a chunk of its reserves. Not bad, a lot safer, but the securities aren’t particularly liquid and aren’t as solid as I had been led to believe.
I’ve got some USDC. I’m not overly worried that the USDC coin will collapse and there will be a run on the bank, as USDC is branching out across several blockchain networks. They’d all have to fail first. However, I’m not putting all my stablecoin eggs in one basket.
Pax / Binance USD
I learned something recently. In my previous post on the topic I mentioned Pax Gold, a gold-backed stablecoin. The company behind it, Paxos, is a US trust company. I learned that the Binance USD stablecoin is actually a Paxos white-label product.
What’s impressive though is that Paxos responded to Tether and Circle’s publication of how they back their stablecoins, then published their own. It turns out that Paxos Standard and BUSD are 96% backed by cash and cash equivalents and 4% by US Treasury bills, i.e. US government bonds. That’s pretty good.
“Cash equivalents” can be a lot of things, though. In this case, however, it largely means more short-term government bonds.
Paxos published a blog post on the topic, which is a good read if you’re interested. Suffice to say, I’m impressed by BUSD and Paxos, and this is something I will add in to my stablecoin interest pot as a way to reduce the risk a little.
Gemini USD?
Gemini is a crypto exchange platform that has its own US$ stablecoin. I hadn’t thought much about it before, but it turns out that Gemini is a trust company registered in New York, like Paxos, so is actually audited rather than attested and has a genuine financial services regulator.
News to me. I’ll keep an eye out for opportunities.
What I’m doing about stablecoins
Stablecoins are low-volatility risk, but as I’ve alluded to above can be high liquidity risk. This means that if there’s a bank run on Tether’s USDT or Circle’s USDC, neither Tether nor Circle could pay it. Now, Circle’s position is less bad than Tether’s, so I will leave my USDC where it is, but I’m steering clear of Tether.
To mitigate the counterparty risk of a stablecoin backer screwing me over, I’m going to diversify a bit. Paxos/ Binance USD looks like it’s about to be part of my future.
There’s a good article by Frances Yue of CoinDesk that goes into a bit more detail and links to the various breakdowns of each stablecoin’s backing. There’s also this great YouTube video from the Coin Bureau, which is the only crypto channel that I trust at all – and even then, I check everything they say before I make any decisions.
Why I’m still going to invest in crypto
Despite the huge volatility, my paper gains have been incredible. I can generally rely on 7-12% nominal growth on a stablecoin portfolio, which compares favourably to my ISA, although this is taxable. I have been buying the odd utility token (mainly Polkadot and Tezos of late) when prices sink, and I have been using some decentralised finance (DeFi) applications on Tezos, which have generated a good rate of return so far.
I absolutely don’t recommend putting everything into crypto. I’m well-read into the topic, I have just spent six months professionally working in a field relating to it, and I enjoy it. Even then: this is a high-risk play and might backfire completely.
The downside risk for me is simply that I miss my target for CoastFi and have to work a bit longer. I’m quite young, it won’t kill me (physically…) to have to extend my working life. However, the upside risk is huge, so I’m going to take it while I’m still trying to build my financial independence pot.
I have two approaches to adding crypto for financial independence: utility tokens and stablecoins.
My approach: utility tokens
A utility token is your average, “I make the network operate” token. Ethereum is the classic utility token. Bitcoin sort-of is a utility token, but it’s only used for transferring value on a blockchain ledger.
Of the utility tokens, I prefer proof-of-stake tokens. These are the ones where you lend them back to the network to be used to secure traffic, in exchange for some interest which keeps you in line with network inflation. Their value doesn’t shoot up as much, but they’re significantly more environmentally friendly. You can usually tell if a token is proof-of-stake because you will get the opportunity to stake/ bake/ fold tokens for an interest rate, which is paid in its own token.
I usually buy utility tokens when there’s a panic in China, or when Elon Musk says that he’s not going to accept Bitcoin after all. I also only use spare money from my side hustles or budget: I don’t buy these regularly.
My favourites at the moment are Polkadot and Tezos. Polkadot has the ability to connect to every other smart contract blockchain (i.e. the ones that do stuff other than move themselves around), which is pretty cool. Tezos however is a finished product, and to be honest is a bit like a poor man’s Ethereum at the moment. I like Tezos because it’s upgradeable without having to “fork” the network (i.e. create a whole new version). Tezos is also cheap to play with, which means I’ve used it to send NFTs and to use in DeFi. You can actually view the NFTs I’ve bought on Hic Et Nunc if you’d like – it’s free to look. No, these aren’t those record-breaking ones you hear about: these cost me about 70p each at the time. I just liked supporting the artist, I don’t think these NFTs will make me a millionaire.
These aren’t recommendations, by the way. You do you: don’t buy crypto because some random on the internet does!
Growing the utility token pot
I use the Kraken exchange to “stake” Polkadot. This means that I lend it to them and they pay me 12% annual interest in kind. That works for me, I’m pretty confident that Polkadot will be valuable in the future and having 12% compounded growth in token numbers should amplify my returns.
With Tezos, it’s easy to use a Tezos wallet to “bake” with a nominated baker on the Tezos network and earn interest in Tezos. You don’t need to lend your coins to anyone else and can keep hold of them.* I stake them through either a web wallet or a hardware wallet.
*OK, there’s a whole host of technological reasons why you never actually “hold” or “store” crypto, but that’s way beyond what I want to do in this blog post. If you’re into this, there’s a lot of free educational material out there.
When a token increases in value by more than double (that’s actually happened to me quite a lot), I sell off half and put it into stablecoins. That’s it.
My approach: stablecoin interest
The main thrust of how I use crypto for financial independence is to lock up stablecoins with a provider in exchange for interest paid in those stablecoins. This is usually 8-12% interest per year.
Not so hot on Celsius anymore?
I have previously used Celsius. Part of my logic was that they pay the gas fees for withdrawals, which means it’s free to withdraw from a Celsius account. One of the things that you’ll be surprised by if you’re new to crypto is that actually moving stuff (called a “transaction”, even if you haven’t bought anything) costs you, usually in expensive fractions of utility tokens.
This year, Celsius have changed their terms and conditions. Essentially, the Financial Conduct Authority (our financial services regulator in the UK) have raised the bar for anti-money laundering practices on crypto businesses, so Celsius has ceased to use its UK entity to hold the tokens in the accounts. This means a couple of things:
- You can’t join it as a UK customer, anymore. Just us old customers can still use it; and
- Any crypto with Celsius is now held by its US entity and the governing law is that of the USA – which I don’t know much about.
That’s not catastrophic and I might use Celsius again in the future. Crypto isn’t regulated by the FCA like a conventional investment, it’s only businesses which are regulated for anti-money laundering, so this looks a lot more damning than it actually is. Still, the interest rates had dropped, and that made me look elsewhere.
Current platform for staking crypto tokens
I’m now using Crypto.com to stake my stablecoins. The interest rates are comparable if not better, however the advantage is that Crypto.com is cheaper if I want to buy more stablecoins to grow my pot, as Crypto.com is an exchange.
There’s also a cool thing pre-paid crypto Visa debit card operated by Crypto.com. If I decide that I want to spend my stablecoins like they were money, in a regular shop, I can allocate my tokens to this card for payment purposes. Technically, a lot happens, but as far as I need to know as a user this means that I can spend stablecoins in regular shops and so on. I have recently paid the money to stake Crypto.com’s own token, CRO, so that I can get a 2% cashback on my train tickets, but I haven’t used it yet.
Remember, though: stablecoins aren’t cash, even if they’re designed to work a lot like it. I think that the interest rewards compensate for the risk, but that’s a decision I’ve made and you might disagree.
How much of my financial independence portfolio is in crypto?
In terms of money paid in? About 5%.
In terms of value as of time of writing? About 30% of liquid assets (i.e. not pension or house). It’s just grown a lot over the last year; I’m expecting this performance to slow down over time. 2020-2021 has just been a good period for it all.
I’ve also made good use of free crypto sources, particularly the Coinbase earn programme. This adds up over time, plus it’s educational.
