Four Income Investing Opportunities Offered by Cryptocurrencies

Four income investing opportunities offered by cryptocurrencies are not widely known but can be tapped by those who are drawn by the prospect of profiting from these nontraditional assets.

The four income investing opportunities offered by cryptocurrencies feature a technique called staking that uses cryptocurrency to support blockchain network operations, collecting interest and dividends, as well as crypto lending. Additional methods exist to produce crypto-based income in other countries, but this investment column will focus on domestic opportunities.

Four Income Investing Opportunities Offered by Cryptocurrencies: Staking

Staking is an alternative way to earn income, rather than a direct dividend payout, said Tim Skousen, who takes the lead in offering cryptocurrency investment recommendations in the TNT Trader advisory service. For investors, staking is similar to putting money in a bank and receiving interest that can be compounded.

Skousen explained that staking allows investors in certain crypto currencies to collect 3-10%. Those who own those cryptocurrency coins can stake them to produce income but there is risk involved.

“Let’s say you bought some Ethereum (ETH) on Coinbase and plan on holding it for a long period of time,” Skousen said. “You can stake your ETH on the Ethereum Blockchain Network, which is similar to putting it in the “Bank of Ethereum,” where it will earn 3.15% annually and it is compounded every few days. The Ethereum Network will then use your staked ETH much like a bank, lending it out to people looking to borrow ETH for a variety of projects.”

Tim Skousen loves cryptocurrency investing and the outdoors.

Four Income Investing Opportunities Offered by Cryptocurrencies: Illiquidity Risk

A caveat is that it can take up to eight days to un-stake one’s ETH to get it back, said Skousen, who has helped his in the TNT Trader advisory service subscribers profit with cryptocurrency trades.

“So, if you needed your money right away, you would be forced to wait,” Skousen said. “The un-staking period for ETH is six days once the request is processed, which can take anywhere from one hour to 72 hours, depending on how much traffic is on the network.”

Right now, Solana is paying 5%, while Cosmos and Polkadot both pay over 9%, Skousen told me. Each cryptocurrency that allows staking has a different un-staking period. Some require keeping a cryptocurrency staked for a minimum number of months, while others allow un-staking in 24 hours or less, he added.

“The biggest risk, of course, is that while you are staked, if the value of the cryptocurrency plummets, you are unable to un-stake and sell for a period of time,” Skousen counseled. “So, I only stake coins I know I plan on holding through the ups and downs for a long period of time.”

Even though staking generally pays the highest interest of the various income-producing crypto opportunities, it poses liquidity risk if the owners cannot “un-stake” in a timely fashion, Skousen said. It sometimes can take more than a week to regain possession of one’s cryptocurrency, he added.

Four Income Investing Opportunities Offered by Cryptocurrencies: Collect Interest

Cryptocurrency holders also can gain income from interest-bearing stable coins like USDC and Tether, Skousen said. For example, Coinbase Global Inc. (NASDAQ: COIN), which rose 7.66% on Dec. 8 alone, currently pays 1.5% APY for holding USDC tokens.

Chart courtesy of www.stockcharts.com

“Of course, the underlying cryptocurrency is tied to the value of the dollar, so your loss of principal is highly unlikely unless the stablecoin collapses entirely,” Skousen said. “You get paid in the stablecoin, so it automatically compounds. But right now, you can find better places to make interest higher than 1.5%.”

Coinbase is just one of many cryptocurrency exchanges that pay interest on cryptocurrency.

Four Income Investing Opportunities Offered by Cryptocurrencies: Dividends

There are a few dividend-paying cryptocurrencies available to U.S. investors. VeChain is one of them, Skousen counseled.

“By owning it, they pay you a small dividend in the form of their VeThor token, which is a token they use within their network,” Skousen said. “The dividend rate is low, but if you like a crypto project like VeChain, which uses blockchain technology to provide provenances for all kinds of products, it’s great that you get a bonus.”

Their VeThor token can increase in value, as well, Skousen told me. So, if VeChain rises, the dividend increases in value, he added.

Four Income Investing Opportunities Offered by Cryptocurrencies: Lending

Crypto lending is not offered on most exchanges in the United States. However, cryptocurrencies like Aave and Compound can lend your crypto to others to obtain interest on the loan, Skousen said.

“The concept is exactly like it sounds,” Skousen counseled. “You lend someone your crypto and they pay you interest. But, like a bank that doesn’t qualify the people they lend money to, you are at risk that the loan won’t be paid back.”

Most people who borrow crypto use their Bitcoin as collateral, Skousen continued. But if Bitcoin drops dramatically, the collateral can disappear, he added.

Such a result would leave the lender without the crypto that someone else had borrowed.

“This happened recently when Three Arrows Capital borrowed millions against their Bitcoin only to file bankruptcy,” Skousen said. “This is more of a high-risk, high-reward situation, so beware.”

Four Income Investing Opportunities Offered by Cryptocurrencies: Double-Digit Gains

Skousen partners on in the TNT Trader advisory service with his father, Mark Skousen, PhD, who also heads the Forecasts & Strategies investment newsletter and serves as an economics professor and presidential fellow at Chapman University in California. The TNT Trader advisory service produced a 164.8% return on an 86-day investment in Grayscale Bitcoin Trust (OTCMKTS GBTC) that closed in 2021.

Mark Skousen, scion of Ben Franklin and partner in TNT Trader, talks to Paul Dykewicz.

Another successful trade involved Cosmos in March 2022, when an eight-day trade turned a profit of 3.35%. The duo also have two current cryptocurrency recommendations in the TNT Trader advisory service. Both are up by double-digit percentages. Plus, they are recommending an exchange-traded fund related blockchain technology that also has risen by double-digit percentages.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Holiday gift buyers should consider purchasing Paul’s inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing on multiple-book purchases. Paul, who can be followed on Twitter @PaulDykewicz, also is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper, after writing for the Baltimore Business Journal and Crain Communications.