How To Borrow To Earn Interest on Stablecoins (Free Money*)

DCV - November 6, 2021


At the time of writing this article, there are many centralized finance (CeFi) crypto apps like Celsius and Gemini that offer relatively high interest rates for depositing stablecoins on their platforms. Stablecoins are just cryptocurrencies whose value is pegged to some fiat currency like the US dollar. The idea behind it is that a user of the platform deposits stablecoins like GUSD or USDC, and in return, the platform pays the user interest as a percentage of the deposit. 

For example, I deposit $1000 USDC into Celsius paying me a rate of 8.8% APY. After one year, I will have roughly $1090. These programs are sometimes called “crypto earn” programs. If I’m depositing stablecoins, they can be thought of as very high yield savings accounts, and I’m basically lending my stablecoins to the platform.

How can I take advantage of these stablecoin earn programs? Obviously, I can deposit stablecoins and earn the interest, in some cases, compounding interest. 

To take this one step further, I can take out a loan that has favorable terms, use those funds to purchase more stablecoins, and deposit into a crypto earn program to earn even more interest. Theoretically, as long as the interest earned covers the interest owed on the loan, it’s almost risk-free money. I detail in the rest of this article how I did this. 

Please be aware, I am not a financial advisor, and this is not financial advice. Always do your own research.

The apps and platforms I use in this post to employ this strategy are (affiliate sign up links below):



M1 Finance and M1 Borrow

I know the world is all hyped on crypto, and there are indeed many exciting projects and platforms in this space that offer real utility and disruption in finance. However, traditional financial instruments are also innovating. One such company is called M1 Finance, and I am specifically talking about their M1 Borrow program as an M1 Plus member.

I’ve used M1 Finance for years now to essentially build my own ETF of stocks. It has an awesome tool that fosters long term buying and holding while maintaining my asset allocation. One feature that I’ve started using is M1 Borrow as an M1 Plus member. 

Being an M1 Plus member has an annual fee of $125 but the first year is free as a promotion. Currently, this allows a more favorable borrowing rate on loans, as low as 2%. The loan that I get is collateralized by my stocks.

For example, if I have $10,000 worth of stocks in M1, I can borrow up to $3,500 or 35% of the value of my stocks. Since the loan is backed by my stocks, the approval process is super fast (3 clicks) and funds are available in a couple of days. No underwriting, no fees, no hassle.

Here is the M1 Borrow view on the M1 Finance app:

Here are the interest rates that M1 Borrow charges and how they compare to typical industry rates:

As an M1 member, I get these advantages:

Finally, here is my M1 Borrow dashboard. Although I censored some numbers, it shows what I owe, how much credit I have left to borrow, when a maintenance call would be issued considering the debt-to-equity ratio, and how much interest will be billed to me in the coming months.

Since I don’t want to disclose my numbers publicly, let’s just say I ended up borrowing $1k from M1 Borrow to allocate towards earning interest from stablecoin deposits.

Crypto Earn

The next step in my research was to determine what CeFi platform to choose when leveraging their stablecoin earn program. I wanted to use a platform that gives a high enough interest rate but also with a track record of being safe and transparent. For a resource on various CeFi platforms and the interest rates they offer on crypto, click here to check out this table.

I narrowed the options down to Gemini and BlockFi. They both have interest rates on stablecoins of at least 8% APY. They both have free withdrawals of at least 1 crypto/stablecoin withdrawal per month.

And finally, they are both capable of connecting with my SoFi bank account which is the main account I move my funds around with. Just in general, BlockFi and Gemini are very US resident/USD friendly. For a comprehensive table of fees (withdrawal, trading, etc.) related to CeFi crypto platforms, check them out here.

I would’ve also considered Celsius with their 8.8% APY but I already have some stablecoins earning interest there and wanted to spread my risk out.

There are other CeFi solutions out there with higher interest rates like CoinLoan (up to 12.3%) but their fiat deposit option for me had a lot of friction. 

I decided to use both the BlockFi and Gemini platforms to spread out my risk. Here is the process I went through to deposit stablecoins. I'll just go through the process for Gemini since BlockFi is similar.

1. On Gemini, I tapped "Earn", then selected Gemini dollar, then tapped "Earn" again. I tapped "Buy new crypto", and then proceed to make a one time purchase.

2. Then, I enter the amount I want to deposit to earn interest. I select the bank account where my M1 loan funds are sitting. I read the terms and accept them.

3. I confirm my transaction and that's it. Now my borrowed stablecoins are earning interest for me.

Numbers Breakdown

I, hypothetically, now have a total of $1k worth of stablecoins earning interest. Annually, here are the numbers based on a borrowed principal of $1,000 USDC/GUSD:


  • Earning (from crypto earn programs): +$89 per year
  • Interest payments (paid to M1 Borrow): -$20 per year
  • Net Profit: +$69 per year

As a result, my return on investment is about 6.9% compounding for basically doing nothing, and I started WITHOUT any of my own liquid funds.

Risks

Here are some risks associated with this strategy.


  • Margin (AKA maintenance) calls: Since I’m borrowing from M1 using my stocks as collateral, the lender may ask me to add funds to my account if the value of the stocks decrease below a certain point. For example, if my stock portfolio is worth $10,000 and I borrow $3,500, the total value is now $13,500. The value of the stocks is $10,000/$13,5000 which is roughly 74%. If that percentage gets below 30%, then a margin call happens.
  • M1 Borrow increases their loan rate: I’m currently borrowing at a 2% rate as an M1 Plus member. This rate is variable and is dependent on the Federal Funds Rate. So, it may increase and cause my strategy to lose money.
  • Stablecoin deposits are not insured: When I deposit my stablecoins into Gemini or Celsius or BlockFi, they aren’t FDIC or SIPC insured so if something happens to those companies like them going bankrupt, I may lose all my stablecoins with no recourse.
  • Stablecoin interest rates may decrease: The earned interest rate Gemini, BlockFi, and Celsius may decrease at any time. They are not constant values. This can also cause my strategy to lose money.

Conclusion

Keeping the risks in mind, that’s how I’m earning at least 8% APY on my borrowed funds while only paying a 2% interest, netting at least 6% of “free money”. What’s nice is that the deposited stablecoins are also increasing at a compounding rate since Gemini and BlockFi offer APY rates. For an article explaining the difference between APY and APR, check this out.

Check out the YouTube version of this post here:



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