1 reason to use Coinbase’s new 4% savings account, 1 big reason not to

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

However, cryptocurrency brokerage Coinbase (NASDAQ: COIN) seeks to provide consumers with a high yielding alternative that could in fact compete with corporate bonds and dividend stocks. Last week, the company unveiled a savings account with an APY of 4% (annual percentage return), targeting both US banks, fintechs and other brokerages.

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

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Coinbase: conservative compared to its peers, with a company guarantee

To use the High Yield Savings Account, savers will need to convert their dollars into USDC (CRYPTO: USDC), a stablecoin whose value is pegged to the US dollar. So the good news is that you won’t have to convert your dollars into a volatile cryptocurrency, such as Bitcoin or others.

Coinbase is not the first crypto company to offer a high yield USDC savings account. For example, rivals Celsius, Hodlnaut, and Nexo offer returns of 8.69%, 10.5%, and up to 12% on USDC accounts, respectively. However, there is a big problem with all of these “savings” accounts. These crypto brokerages use their savings deposits to fund margin loans against crypto assets, so your savings are always subject to the downsides of a crypto crash.

Compared to stocks, cryptocurrencies are more volatile and end holders can be more difficult to follow. This means that brokerage firms may have difficulty entering cryptocurrencies during margin calls. After all, German Bank lost $ 5 billion on its margin loans to hedge fund Archegos Capital, and this only on loans against stocks and options. Cryptocurrencies are more volatile and the crypto market is less mature than the equity market, so crypto margin lending can come with inordinate risk.

That being said, Coinbase is looking to make a name for itself as the most responsible crypto margin lender. Coinbase requires those looking for a margin loan to complete an application and caps the amount that can be borrowed. This contrasts with other crypto exchanges, which may have more flexible criteria – or lend to unauthorized third parties, which Coinbase says it won’t do.

More importantly, Coinbase guarantees the main balance of these USDC savings accounts, so savers can be reassured by the stability of their savings on Coinbase compared to other higher yielding crypto exchanges.

But a company’s guarantee is not as good as a bank’s

While a corporate guarantee is nice, there is a big difference between guaranteeing your capital by Coinbase and guaranteeing savings accounts at major US banks. This is because US 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 is not an FDIC backed account, since Coinbase is not a bank. The FDIC was established in 1933 after the Great Depression to prevent the bank runs that occurred during the crash of 1929 and its aftermath from happening again.

So while Coinbase’s high yield savings account may be more secure than other crypto-focused brokerages, these savings are not guaranteed by the US government. This means that if Coinbase were to go bankrupt for any reason, there is no guarantee that the principal of your savings account at Coinbase would be safe.

That being said, Coinbase doesn’t appear to be at risk of bankruptcy anytime soon. The company had about $ 2 billion in cash at the end of the last quarter, compared to just about $ 550 million in convertible notes. However, the company also just raised an additional $ 1.25 billion in convertible debt in May, so should Coinbase have problems over the next few years. these convertible notes would act as debt. But despite this higher level of convertible debt, Coinbase is still quite cash rich at the moment.

Is Coinbase Safe Enough To Be Worth That 4%? This is something every investor and saver should consider, based on their risk tolerance and belief in the business of Coinbase, as their fortunes are closely tied to the health of the cryptocurrency market. The new savings account may very well be a good option for those looking for better returns on their savings – just be aware of the risks.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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