Better Stablecoin Buy: Tether vs. USDC

Key Points

• Stablecoins let you earn beefy annual yields on your "waiting money" while staying ready to buy crypto dips instantly.

• Your stablecoin yields depend more on which platform you use than which coin you choose.

• Coinbase favors USDC while most others treat these two stablecoins equally.

• 10 stocks we like better than USDC ›

Investing is all about growing and protecting your wealth over time. But you don't always have to focus on maximum returns. Stablecoins may look pointless if you only want to beat the market, since they are designed to hold their value steady forever.

But here's the deal with stablecoins in your profit-focused portfolio. You're absolutely right that they won't grow in value -- a dollar stays a dollar. But think about them like this: They're your "ready money" that actually earns something.

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Stablecoins sound boring, but hear me out

First, let's think about why an investor would hold stablecoins at all. They are mostly transparent tools that make your crypto-investing process a little bit smoother, but that's not the whole story.

Remember how frustrating it is when you're waiting for a stock to dip, always hovering just above the buy-in price you're willing to pay? Your investable cash is just sitting in your brokerage account earning basically nothing, right?

With stablecoins, that waiting money can earn 5% to 15% annually. It's like getting paid to be patient.

Here's where they actually help you make money. When Bitcoin (CRYPTO: BTC) or whatever value-building crypto you're watching drops 30% in a day, you can buy instantly with your stablecoin funds. No waiting for bank transfers, no missing the bounce because it's the weekend. Your money is already there, ready to go. Most of the leading crypto-trading services out there don't really carry cash balances in your name, preferring to convert your incoming cash into a dollar-based stablecoin instead.

Plus, here's something interesting -- when you sell your winning crypto investment for stablecoins instead of regular dollars, you're still "in" crypto. The investment isn't converted back into dollars until you prepare to transfer it back to an old-school bank, and in many cases, that's where you would activate taxes on your crypto gains. Hence, converting cash from one cryptocurrency to another -- including stablecoins -- may carry lower a tax burden. (Though you should definitely check with your tax advisor on this, since every situation is unique!)

The yields can be pretty sweet too. While your trusty high-yield savings account might paying an annual percentage yield (APY) of 4%, you could be earning 8% or more on the same "safe" money with stablecoins. Sure, it's not the market-beating 10-fold return you want from your investments, but it beats letting cash wither away while you wait for opportunities.

Think of it this way: If you keep 15% of your portfolio in stablecoins earning 10% yearly, that's not a failed investment. That's your hunting fund that pays you while you stalk better prey. You're not parking money there forever, just keeping it warm and productive between moves.

Meet the two biggest names in digital dollars

Let's start with the basics of USDC (CRYPTO: USDC) and Tether (CRYPTO: USDT).

These are two of the largest names in the stablecoin market. Tether has the fourth-largest market cap of any cryptocurrency, worth $168 billion as of September 3. USDC is not far behind, guarding a seventh-place ranking with a $72.7 billion cap.

Technically, both stablecoins are primarily ERC-20 tokens on the Ethereum (CRYPTO: ETH) blockchain network. Ethereum provides data security and a flexible digital transaction ledger. The backing group behind Tether is Bitfinex parent iFinex, while USDC was launched as a collaboration between Coinbase Global (NASDAQ: COIN) and Circle Internet (NYSE: CRCL). In both cases, the digital asset's market cap is backed by the same amount of dollars in the form of interest-bearing government debt papers.

As you might imagine, USDC is the official stablecoin of Coinbase, and the default conversion target whenever you transfer money to a Coinbase account. Tether isn't the official coin of any particular crypto exchange, including the closely related Bitfinex platform, but it's the largest and most respected option on the market today. As a result, most crypto-trading services that don't have a stablecoin of their own will often default to using Tether.

Image source: Getty Images.

Show me the money!

That's all well and good -- Tether and USDC are highly reputable stablecoins with solid cash backing. But what about their yields?

Well, that depends. You see, the coins themselves don't actually come with a built-in APY. It's up to each trading platform to set up lending programs, where other users can borrow your stablecoins and pay you a percentage in return.

So the returns can vary between different stablecoins, but also between different services offering the same digital dollar coin.

• Today, Coinbase's APY is 4.1% for USDC holdings and 0% for Tether balances.
• On the Kraken crypto service, both Tether and USDC holdings earn a 5.5% APY.
• Binance lets you apply Tether and USDC balances to a variety of interest-earning programs. The annual yields vary from 3.65% to 11.81%, depending on how much risk you're willing to handle.

So if you want to treat stablecoins as an interest-earning version of good old savings accounts, most services will treat either options almost the same. The exception of the popular Coinbase platform, which promotes using its own USDC token.

If you're just looking for a smooth crypto-trading experience and perhaps some tax advantages, your choice should largely depend on which crypto exchange you prefer. Again, Coinbase goes hand in hand with USDC and most of its rivals prefer Tether.

The smart move? Don't put all your eggs in one basket. Maybe keep most in USDC for peace of mind, assuming you're a Coinbase user, but have some Tether for when you need to trade on platforms that don't accept USDC. It's like having accounts at different banks; each serves a purpose in your overall strategy. And in the upside, most of the stablecoin choices are automated by your crypto exchange anyway.

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Anders Bylund has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.