Is Staking Tether a Smart Way to Make Passive Income?

Throw a rock in any direction and you could hit upon a way to generate passive income. Of course, you’re probably more likely to break someone’s window. But still, the point is that there are plenty of ways to make money without actively working for it.

One of the more intriguing of these methods is to stake cryptocurrencies. You can earn rewards by committing your crypto assets for use in confirming blockchain transactions.

This option is available with many cryptocurrencies, but staking stablecoins has especially become popular. Tether (USDT -0.08%) ranks as the biggest stablecoin based on market cap. Is staking Tether a smart way to make passive income?

Juicy yields

How much can you make staking Tether? It depends on several factors. Different crypto exchanges offer different yields. The levels can also vary by how long you lock up your tokens for staking.

However, you can definitely find some juicy yields for staking the popular stablecoin. The highest yield that I’ve found is on Youhodler. The website offers a 12.3% annual percentage rate plus compounding interest. Youhodler pays on a weekly basis. It also allows withdrawals at any time — a big plus. 

Some crypto exchanges have more complicated terms. For example, Binance allows investors to stake up to 2,000 Tether tokens to earn an annualized yield of 10%. The yield declines to 3% for staking between 2,000 and 75,000 tokens and to only 1% for staking more than 75,000 tokens. But you can earn a 5% annualized yield on any amount of Tether staked if you lock up your coins for 30 days. 

Several other exchanges offer annual yields in the general range of 4% to 10%. The bottom line is that investors can make attractive returns by staking Tether.

A glaring risk

The glaring risk with staking any cryptocurrency is that its price could plunge a lot more than the yield you receive from staking your coins. A 12% yield from staking won’t look so great if the underlying value of the cryptocurrency sinks 20% or more lower.

Stablecoins are intended to have stable prices, though. In theory, staking them is much less risky than staking other tokens. However, the crash of Terra (LUNA 59.48%) after its sibling stablecoin TerraUSD (UST -1.48%) lost its peg to the U.S. dollar certainly highlighted the risk of staking. 

Tether teetered with heavy selling pressure in the aftermath of the Terra debacle. It even temporarily lost its peg to the dollar. The good news, though, is that the stablecoin ultimately held up pretty well.

TerraUSD is an algorithmic stablecoin that isn’t backed by hard reserves. Tether, on the other hand, is backed 100% by a mix of assets, according to the company behind the coin. However, there’s no ironclad guarantee that one Tether token will be redeemable for $1.

Other alternatives

For anyone who buys Tether, staking is a smart idea. It’s the only way you’ll actually make any money since the cryptocurrency is designed to maintain a stable price. However, there are other alternatives that might be even more appealing.

USD Coin is the second-biggest stablecoin based on market cap. BinanceUSD is the third-biggest stablecoin. Both claim to be fully backed by either cash or short-dated U.S. government obligations. 

You can also earn yields from staking these two stablecoins that are in the ballpark of those available for staking Tether. Staking these cryptocurrencies could be an even smarter way of making passive income.