Cryptocurrency traders celebrated when Coinbase announced in April it was adding Ethereum to the handful of cryptocurrencies that pay interest for those willing to let the exchange stake it on their behalf. The risk — that to its credit was explicitly stated by Coinbase — is that Ethereum pledged to Coinbase’s staking rewards program could not be traded until the crypto’s transformation to proof of stake. With that milestone still months if not longer away, Coinbase could have a problem soon.
It’s staking so long
Ethereum’s shift from proof of work to proof of stake will be huge for the world’s second-most valuable cryptocurrency. It will make it easier to process more transactions and cheaper to move around. It will also ease the argument of the eco-unfriendly nature of the mining process that has dogged the leading proof-of-work digital currencies. It’s a win all around, and improving the scalability and security functionality could make it the most valuable crypto on the planet before long.
The rub for Coinbase is that it had to provisionally convert the staked Ethereum to the new Ethereum 2 that doesn’t currently have a market. The price quoted is the same at the original, but there’s no way out.
Right now this isn’t such a big deal. Ethereum is hitting new highs this week, so crypto traders with itchy trigger fingers who are staking Ethereum through Coinbase should be grateful. It will be a different story when the crypto starts to go the other way.
Making matters worse, Coinbase initially teased a rate on the interest earned as high as 7.5% that was whittled down to 6% by the time it officially introduced the platform. That 6% became 5% in June, and it’s 4.5% now. Coinbase had made it clear that the interest could move up or down, and unfortunately it’s been heading lower for the locked crypto.
Most income investors would love to be generating 4.5% passive income on an asset with strong prospects for appreciation, but it’s a different story in the wild world of decentralized finance. There are plenty of crypto exchanges and hubs that will pay interest for folks willing to either stake or lend out the deposited cryptocurrencies. Several sites and apps are generating more than 4.5% on Ethereum. Some of the more popular options include:
- CoinLoan: 7.2%.
- Crypto.com: 6.5%.
- Nexo: 6%.
- Celsius: 5.35%.
- BlockFi: 5%.
- Voyager: 4.6%.
There are risks inherent in all of the alternatives, and Coinbase has the stable financial advantage of being the top dog in this market. However, none of the other platforms require their accounts to wait until the Ethereum migration to proof of stake is complete.
The good news here is that Coinbase has said that it may offer the ability to exchange or sell staked Ethereum on its platform before the completion of the network upgrade. It has not announced that window’s availability, or what would happen to the interest generated in rewards if someone were to bow out early. Again, this isn’t something weighing on Coinbase right now. You can’t stake your Ethereum on the platform before acknowledging that it will be locked through the migration process, and that the rate will fluctuate. It will be a different story if Ethereum starts to plunge and the Coinbase exit doors are locked.
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.