Home Coinbase 1 Reason to Use Coinbase’s New 4% Savings Account, 1 Big Reason Not to

1 Reason to Use Coinbase’s New 4% Savings Account, 1 Big Reason Not to

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Believe it or not, there used to be a time when one could actually earn decent returns in a bank savings account. But these days, we are in an era of extraordinarily low interest rates. The national average yield on bank savings accounts is a paltry 0.07%, according to Bankrate.com. Sure, some newer branchless banks may offer “high-yield” savings accounts, but those still typically yield only around 0.5% at the very highest rates.

However, cryptocurrency brokerage Coinbase (NASDAQ:COIN) is looking to give consumers a high-yield alternative that may actually compete with corporate bonds and dividend stocks. Last week, the company unveiled a savings account with a 4% APY (annual percentage yield), taking aim at U.S. banks, fintechs, and other brokerages alike.

Here’s why the new savings account may be a great option for the fixed-income portion of your assets — but with a big caveat, which may give savers a reason to tread with caution.

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Image source: Getty Images.

Coinbase: conservative relative to peers, with a company guarantee

To use the high-yield savings account, savers will need to convert their dollars to USDC (CRYPTO:USDC), a stablecoin whose value is pegged to the U.S. dollar. So, the good news is that you won’t have to convert your dollars to a volatile cryptocurrency, such as Bitcoin or others.

Coinbase isn’t the first crypto company to offer a high-yield USDC savings account. For instance, rivals Celsius, Hodlnaut and Nexo offer yields of 8.69%, 10.5%, and up to 12% on USDC accounts, respectively. However, there’s a big catch with all of these “savings” accounts. These crypto brokerages use their savings deposits to fund margin lending against crypto assets, so your savings are still subject to the downside of a crypto crash.

Compared to equities, cryptocurrencies are more volatile, and end holders can be more difficult to track. That means brokerages may have some difficulty seizing cryptocurrencies during margin calls. After all, Deutsche Bank lost $5 billion on its margin loans to hedge fund Archegos Capital, and that was only for loans against equities and options. Cryptocurrencies are more volatile, and the crypto market is less mature than the equity market, so crypto margin lending may come with outsized risks.

That being said, Coinbase is seeking to carve out its name as the most responsible crypto margin lender. Coinbase makes those looking for a margin loan fill out an application, and it caps the amount that can be borrowed. This is in contrast with some other crypto exchanges, which may have looser criteria — or lend to unauthorized third parties, something Coinbase says it won’t do.

More importantly, Coinbase is guaranteeing the principal balance of these USDC savings accounts, so savers can take comfort in the stability of their savings at Coinbase relative to other higher-yielding crypto exchanges.

But a company’s guarantee isn’t as good as a bank’s

While a company guarantee is nice, there’s a big difference between Coinbase’s guarantee of your principal, and the guarantee on savings accounts at big U.S. banks. That’s because U.S. banks are insured by the Federal Deposit Insurance Corporation (FDIC), which guarantees checking and savings accounts up to $250,000. Coinbase’s new savings account isn’t an FDIC-backed account, since Coinbase isn’t a bank. The FDIC was formed in 1933 after the Great Depression, in order to prevent the runs on the banks that occurred during the 1929 crash and its aftermath from ever happening again.

So, while Coinbase’s high-yield savings account may be safer than other crypto-focused brokerages, those savings aren’t guaranteed by the U.S. government. That means if Coinbase were to go bankrupt for some reason, there’s no guarantee that your savings account principal at Coinbase would be safe.

That being said, Coinbase doesn’t appear to be at risk of bankruptcy any time soon. The company had about $2 billion in cash at the end of last quarter, against just $550 million or so in convertible notes. However, the company also just raised another $1.25 billion in convertible debt in May, so should Coinbase get into any sort of trouble over the next few years. those convertible notes would act like debt. But despite this higher level of convertible debt, Coinbase is still pretty flush with cash for now.

Is Coinbase safe enough to be worth that 4%? That’s something for every investor and saver to consider, based on their risk tolerance and belief in Coinbase’s business, as its fortunes are closely tied to the health of the cryptocurrency market. The new savings account may very well be a nice option for those seeking better yields on their savings — just be aware of the risks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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