3 Cryptos to Buy to Win When the Fed Hikes Interest Rates

The Federal Open Market Committee (FOMC) meeting last week left crypto investors worried. Already in the midst of the stock market crash, these investors are now bracing for multiple interest rate hikes, potentially halting the mature crypto market that has soared since 2020. Of course, these investors may be right about the direction that crypto generally takes, but there are plenty of winners to be found as the Fed lays out its plan for the year ahead. It seems that stablecoins are becoming some of the hottest cryptos to buy.

The Federal Reserve closed its first meeting of the year this week. Although Chairman Jerome Powell has not been explicit about the timing of interest rate hikes, the first is expected to take place in March. It seems that while the Fed is doing its business, stablecoins are where investors are headed to. hedge against inflation.

But for many, that doesn’t make sense. Why is it better to hold a dollar-pegged stablecoin than to hold $1?

There are many reasons why people flock to the stablecoin market. One of the most popular is the impressive ability of stablecoins to generate passive income. Indeed, through DeFi platforms, users can generate passive income at a much faster rate than through traditional banking services. The annual percentage yields (APY) on stablecoin staking, for example, are often multitudes larger than those offered by a savings account.

Looks interesting? If you’re considering getting into stablecoins, here are three cryptos to buy:

  • Attached (CCC:USDT-USD)
  • TerraUSD (CCC:UST-USD)

Cryptos to buy: DAI (DAI-USD)

Source: Vladimir Kazakov / Shutterstock.com

DAI is one of the largest tokens in the world, with a market capitalization of nearly $10 billion. The DAI stablecoin also has everyone in DeFi to its advantage. Indeed, DAI is one of the most widely used cryptocurrencies for DeFi lending, which is where its strength lies as an inflation hedge.

The world of decentralized lending continues to grow massively. Traditional loans are a pain; they often come with high interest rates and banks do not recognize cryptocurrencies as legitimate collateral.

DeFi platforms like Compound (CCC:COMP-USD) remove these barriers using DAI. Users can get a loan simply by provide the network with cryptographic collateral, and they can get as many DAIs as the protocol allows. Although there is an interest rate to repay, these rates are often much lower; Compound offers its DAI loans to a interest rate of around 2.5%, compared to the average offer of 9% to 10% of traditional banks.

Users can then use the DAI they borrow to create a new DAI, increasing supply and helping them pay off their debt. Other users, rather than borrowing, contribute DAI to the protocol to lend. These users earn passive income interest accrued on their assets. And unlike a traditional savings account, these users can withdraw their assets at any time.

Tether (USDT-USD)

A conceptual token for the Tether (USDT) cryptocurrency.

Source: DIAMOND VISUALS / Shutterstock.com

Tether is the largest stablecoin in the world, behind only Ethereum (CCC:ETH-USD) and Bitcoin (CCC:BTC-USD) in market capitalization. Due in large part to its size, Tether is one of the most commonly traded stablecoins, used as a medium between fiat currencies and other cryptos. Thanks to its popularity, it is also one of the best stablecoins to use for liquidity mining.

Cash mining is another way to earn passive income. Through liquidity mining, a provides a pair of cryptocurrencies to a decentralized exchange. The exchange adds these pairs to its liquidity pools. This ensures that the exchange will have enough liquidity to complete all trades in that given pair. In exchange, liquidity miners earn rewards, most often in the form of transaction fees from the pool they mine.

Obviously, contributing a more popular pair is better. More users will want to trade these popular pairs, which means more rewards will follow. Given Tether’s status as a go-to stablecoin, it is a crypto that can generate massive Annual Percentage Rates (APRs) for miners. For example, the DeFi platform DeFi Cake (CCC:DFI-USD) currently offers a 63% APR for USDT-DFI liquidity pairs.

Cryptos to buy: TerraUSD (UST-USD)

A conceptual image for the TerraUSD (UST) crypto.

Source: Shutterstock

TerraUSD is another favorite stablecoin, offering both a way to earn income through arbitrage and staking.

The 16th largest crypto by market capitalization, it is the most popular underlying stablecoin Earth (CCC:LUNA USD) ecosystem.

One of the great advantages of UST is that you can use it to leverage income with LUNA. This is because of the unique way the UST is pegged to $1. UST maintains its peg to the dollar by strictly controlling the relationship between UST supply and demand. It does this by allowing holders to convert their UST to LUNA and vice versa through the protocol price stability algorithm. When the price of UST rises above the dollar peg, LUNA holders can convert their holdings into UST. Supply then outweighs demand enough to drive down the value. When it drops below $1, users can convert UST to LUNA, restricting the UST supply and raising the price to $1.

But apart from this unique model, UST is also the stablecoin used by Anchor (CCC:ANC-USD), a DeFi lending platform that promises surprisingly high and consistent APYs on UST staking. Anchor, another member of the Terra ecosystem, has its own complex method to maintain fixed prices. This model allows the platform to offer 20% APY on UST staking.

It should be noted that the UST is under fire from critics this week. The stablecoin was briefly knocked off its dollar peg after drama surfaced around another DeFi platform that strongly guarantees UST pairings. The chatter around coins and related tokens continues to circulate, so keep that in mind when evaluating the UST today.

As of the date of publication, Brenden Rearick had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.

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