Investing Archives | Page 4 of 233

Mar

2023

Cryptocurrency Rules & Regulations You Should Know

By Laurel Tincher | Cryptocurrency, Growing Wealth, invest, Investing | No Comments

Crypto regulation in the U.S. is one of the murkiest topics in the finance space. While the federal government has started to turn the wheels on developing new rules for the space, as of early 2023 it’s still something of a free-for-all.

While crypto has over the past decade grown considerably in both adoption and popularity, crypto rules and regulations have, conversely, not changed or evolved at the same pace.

In addition, there are differing rules in different countries, and there have been some notable changes and moves in regards to crypto regulation from some U.S. agencies — e.g. regarding the question of whether crypto is a commodity or a security.

It can be difficult to keep up with, but given the potential impact on crypto investors, it’s critical to try and understand what’s happening regarding crypto regulation at a high level.

Note: This article is only a high-level overview of crypto regulations. And, as crypto is not currently regulated (which is discussed below), it is highly volatile to invest in and comes with significant risk.

Background on US Crypto Regulations

The U.S. government, at various levels and through numerous agencies, makes decisions about how to regulate new or developing technology all the time — though it’s not always fast. The process can take years — for instance, we’re only now beginning to hear about potential rulemaking for tech like artificial intelligence (AI).

Regulation has been slow to come to blockchain technology, too, though it’s been around for many years now. It’s complex but can be applied in many industries, and cryptocurrencies are just one part of the broader usage possibilities of this technology.

Though a lack of crypto regulation has been appealing to many in the crypto space, it has its downsides, too. For example, it’s prevented some U.S. citizens from participating in new crypto offerings, and has also led some blockchain and crypto companies to set up shop outside of the country.

Although the U.S. has been slow to release comprehensive laws and regulations about cryptocurrencies, the Securities and Exchange Commission (SEC) has, in recent years, started to crack down on certain aspects of the crypto industry. That includes initial coin offerings (ICOs), and the agency has even gone after individuals in the space for insider trading.

But actions have mostly occurred on a case-by-case basis, and there is still a lack of an overall regulatory framework at the federal level that relates to crypto. That isn’t novel to crypto, though, as in the U.S., a regulatory landscape is typically created over time as issues arise.

Recommended: Understanding Different Types of Crypto

Current US Regulations

It’s very difficult to get a sense of the current state of U.S. crypto regulations, as there are many balls in the air. Though the Biden Administration did release a framework for regulating crypto in 2022, the implementation of new rules is still likely years away. As such, different agencies like the IRS, SEC, CFTC, and others, are taking different approaches to dealing with crypto, given a lack of unifying guidelines.

For investors, here’s where things currently stand.

Cryptocurrencies are currently viewed by the IRS as assets or property, which means that capital gains taxes apply. Crypto is not considered legal tender (a currency, in other words), but rather an asset like real estate, or shares in a company.

The SEC, through various actions, has determined that some cryptocurrencies can be considered securities. It’s unclear if its goal is to apply securities laws to the industry across the board, but if that does happen, it would affect everything from exchanges to ICOs to companies that develop crypto wallets.

There are numerous ongoing lawsuits involving crypto companies and the SEC as well, such as the case against the payment and exchange platform, Ripple (XRP).

Unlike the SEC, the Commodity Futures Trading Commission (CFTC), which governs some financial institutions, considers Ether (ETH), the second-most traded cryptocurrency, as a commodity, rather than a security. This stance, and the resulting regulations attached to it, would be more crypto-positive than the SEC’s position, because it would allow ETH to be traded on commodities markets.

This difference in how crypto is viewed among agencies (securities vs. commodities) has also created something of a turf war between the CFTC and SEC regarding financial regulation, which is ongoing.

Congress, which traditionally passes legislation, has introduced many bills related to cryptocurrency over the years. But it has yet to pass meaningful, expansive rules that other agencies and crypto companies can follow and use as guidelines. The wheels are turning, but again, as of early 2023, Congress has yet to create regulatory guidance or even clarity.

Future Regulations

As noted, the U.S. has been taking its time in solidifying cryptocurrency regulations, but that doesn’t mean there haven’t been, and aren’t, continued discussions on Capitol Hill concerning crypto.

The troubles experienced by the crypto markets for most of 2022, and the subsequent collapse of big crypto exchanges, may end up spurring action among Congressional leaders faster than anticipated.

The Challenge of Regulating Crypto

Although the ultimate shape and form that crypto regulation takes in the U.S. won’t please everyone, many companies and participants in the crypto space welcome it, as it will finally provide some clarity, and help them ensure they’re not doing anything illegal.

It’s important to remember that cryptocurrency technology is complex, and there are many factors to take into consideration. Unfortunately, the technology is changing very quickly and policymaking is generally very slow, which may result in regulations being passed that are already out of date or irrelevant.

Part of the delay is due to the fact that there isn’t a particular or single regulating body to pass and enforce cryptocurrency regulations. As mentioned, the SEC and the CFTC can step in if an exchange does something they deem illegal, but state-level laws actually apply to most money-transmitting operations. Congress could potentially form a new regulatory body for cryptocurrencies.

At this point, we simply don’t know what will happen, and current regulation of the crypto market appears to rest in the hands of agencies like the SEC and CFTC, while everyone waits on Congress to act.

Also, the way that cryptocurrencies are currently taxed could lead to an investor seeing a large tax bill. Navigating crypto taxes requires a more in-depth level of attention and knowledge than many investors have, as they tend to think of their holdings as currency, rather than property.

This is another area in which investors could use clarity and guidance.

Stablecoin Regulations

Stablecoins are cryptos that maintain a fixed value and often function like fiat currencies. They’re typically pegged to fiat currencies, too, like the U.S. dollar, which means they’re often the subject of special considerations when discussing regulation.

Currently, stablecoins are not subject to special regulations, but may be among the first to become regulated or subject to new rules in coming years. As of early 2023, a new U.S. House of Representatives subcommittee on digital assets and financial technology has said that working out stablecoin regulations was at the top of their to-do list — with the idea of tinkering with the framework that could eventually regulate the entire space.

Crypto ETF Regulations

Exchange-traded funds, or ETFs, are a common investing tool, and yes, there is such a thing as a crypto ETF. These ETFs offer exposure to price movements of certain cryptos, but not cryptos themselves, as the SEC has not given them the official green light to begin trading.

That said, if you want to invest in a crypto ETF, there are ways to do it, but the ETFs will track crypto-exposed or adjacent companies, rather than the underlying crypto itself.

Cryptocurrency Tax Evasion

Tax evasion is when you fail to pay your taxes or otherwise try to deceive the IRS regarding any potential tax liabilities you have. And given that crypto investing can and will produce a tax liability, investors need to know that they could be charged with tax evasion if they don’t follow the rules.

Generally speaking, investors will be on the hook for capital gains taxes as related to crypto investing. The tax liability is triggered when they sell crypto — at that point, they bought the crypto at one price and sold it at another, creating a gain or a loss. They will owe taxes on any gain, and the amount they owe will depend on numerous other factors.

But again, many crypto investors may overlook their tax liabilities, which could lead to problems down the road. The IRS has, until this point, given crypto investors a lot of leeway with their taxes, but that could change in the coming years.

Global Cryptocurrency Regulations

There is currently no global regulation standard for Bitcoin and other cryptocurrencies. Regulations, instead, are handled individually by each nation. There has been some coordination on the international level, however, to stop money laundering and other illegal activity.

One example: In June 2019, the Financial Action Task Force (FATF) released regulations requiring virtual asset service providers, which includes cryptocurrency companies in more than 200 countries, to verify the identities of anyone sending more than $1,000 in a transaction as a part of anti-money laundering rules framework. Exchanges and ICOs, which may operate in other countries. previously had to comply with certain “know your customer” (KYC) rules, needed to adjust to the new guidelines.

In the interim as well, members of G-20 (a group of leading international countries and economies) have debated the future of crypto and how to regulate it. Even so, each country is taking its own approach to crypto, with some outright banning it (like China), with others partially banning it (Russia, India, Vietnam).

Crypto Regulations in Other Countries

Again, each country has its rules regarding crypto. And over time, broader rules are developing and guidelines are coming together. Some countries have even launched their own digital currencies through their central banks — called central bank digital currencies (CBDCs).

In 2018, Malta became the first country to release a comprehensive framework for the use of cryptocurrencies. Under that framework, businesses need to acquire certifications, go through specific processes to run ICOs, and more.

Malta set something of a precedent with its guidelines, and other countries have followed suit in recent years. Nations like Japan, Australia, and more have since issued their own rules and regulations to help mold their domestic crypto markets, which often include requiring businesses to get licenses or authorizations to operate in the crypto sphere.

Others, however, have gone a different route, banning crypto outright. China is the largest country to do so to this point. Similarly, when Ecuador attempted to launch their own cryptocurrency, they banned others to eliminate competition — a decision which may be revisited in the future.

As of February 2023, there are 132 countries where Bitcoin use or trading is unrestricted, and a handful (mostly in Asia) where it is illegal or restricted.

Canadian Crypto Regulations

Similar to the U.S., crypto rules and regulations in Canada are still taking shape. Like in the U.S., Canadian regulators do not consider crypto to be legal tender or fiat currency, and crypto is taxed similar to commodities.

There are scenarios in which Canadian regulators consider crypto to be a security, but it’s typically done on a case-by-case basis. Further, crypto exchanges or trading platforms need to register with respective provinces, and crypto investment companies likewise need to register with the government. It’s also worth noting that there are many crypto ETFs that trade on the Toronto Stock Exchange.

EU Crypto Regulations

Crypto legality is left up to individual countries that comprise the European Union (EU), but it is mostly legal. There are varying tax levels, too, and some broader EU anti-money laundering rules do dictate how some countries are required to regulate their specific crypto markets.

There is new legislation in the pipeline, too. The Market in Crypto-Assets (MiCA) rules, which will introduce new crypto regulations to all 27 EU members, are expected to become law at some point in 2023.

Australian Crypto Regulations

Australian crypto regulations deem crypto property, the same as the U.S. Exchanges also need to register with the country’s government and follow existing rules and guidelines. There are also rules regarding ICOs, and interestingly, the Australian government banned exchanges from offering privacy coins. Similar to most other countries, too, Australia has more regulations cooking, though it’s unclear when or if they’ll be made law.

Pros and Cons of Crypto Regulation for Investors

Rules and regulations sound like they’re designed to kill the crypto party, but they can have upsides and downsides for investors.

Pros of Crypto Regulation

Increased Stability

The crypto markets are notoriously volatile, and regulation could help smooth things out for investors.

More regulations may also make it possible for larger funds, banks, and other established financial players to get involved. However, more regulations may cause certain cryptocurrency users to move away from exchanges and toward peer-to-peer transactions in order to keep the privacy characteristics intact.

More Confidence from Investors

Some consumers have not invested in cryptocurrencies because of the fear of crypto scams and the halo of uncertainty around the space, so it’s possible that regulations will encourage them to get involved.

Making the Crypto Space Safer

Many exchanges and ICOs have turned out to be scams and have been vulnerable to hackers. Regulations may not have prevented all of those financial losses, but they could have helped with some. Business requirements such as insurance, cybersecurity requirements, and audits can all be positive for the industry.

Cons of Crypto Regulation

Loss of Privacy and Anonymity

Privacy is one of the overarching principles of cryptocurrencies, and is nearly impossible to regulate. Governments may want to be able to track cryptocurrency transactions in order to prevent crime, but also so that they can collect taxes.

Policymakers can require that exchanges take users’ information, but you don’t necessarily need to go through an exchange to use cryptocurrencies.

US Investors Could Be Shut Out of Some Market Elements

Many cryptocurrencies, such as Bitcoin, don’t have a central authority or founder, so there isn’t any business or team that can be regulated or shut down. Certain privacy coins may be at risk if regulators attempt to require identification for all transactions.

Unfortunately for U.S. investors, the lack of legal clarity has caused some exchanges and businesses to base themselves in other nations and exclude U.S. participation. U.S. customers have not been able to invest in certain ICOs for this reason.

Accreditation May Be Required for ICOs

In certain circumstances, the U.S. only allows accredited investors to participate in investments — like how accredited investors can take part in certain IPO private placements. This may come to the crypto market, too, and if certain thresholds were required for ICOs, for example, it could stymie the growth of the industry and would block many would-be investors from participating.

Pros and Cons of Crypto Regulation
Pros	Cons
Stability	Loss of privacy and anonymity
Investor confidence	U.S. investors could get shut out of some crypto market elements
Safer crypto markets	Possible need for accreditation for investors

How Do Regulations Affect You as an Investor?

Currently, as a U.S. investor you can buy, sell, or trade cryptocurrencies on numerous exchanges and investment platforms. That could change, depending on how the government chooses to regulate crypto. It’s really all up in the air.

But know this: Regulations can have a huge effect on investors. Sometimes it’s positive, sometimes it’s negative — it’s often a mix of both.

Changes to how crypto is taxed could spur a host of different investing and crypto tax-loss harvesting strategies, for one. And increased enforcement could chase some investors out of the crypto space all together. Further, changes to ICO rules could also complicate things.

Changes to how crypto is classified (a security, a commodity, or something else entirely) could also have big ramifications. It could change how crypto is traded, who or what is allowed to facilitate those trades, when they can be done, and more. Again, it’s hard to speculate (and probably wise not to) since we simply don’t know what might happen, and what the fallout could be.

The Takeaway

There’s no getting around it: Crypto is at a critical period in its history, and it’s hard to make heads or tails of the rules and regulations surrounding it. As it stands in the U.S. the space is largely unregulated — but some agencies are debating new rules, and Congress and the White House have also started to ramp up their work on regulatory framework.

For investors, a good rule of thumb is to do your best to follow the rules as you understand them, stick to known exchanges and cryptos, and keep records. Also, don’t forget to pay your crypto tax liabilities.

It’s easy to keep track of your crypto portfolio on a compliant investing platform like SoFi Invest®. And SoFi Invest now offers SoFi Crypto as part of its platform. Learn more about cryptocurrency by tracking up to 40 different cryptocurrencies and their prices, and trade Bitcoin, Litecoin, and Ethereum — all on the SoFi app.

Trade crypto and get up to $100 in bitcoin! (Offer is available through 12/31/23; terms apply.)

FAQ

Are cryptocurrencies regulated at all?

To a degree, yes, but it’s hard to say how, exactly, and by whom. While there still are no federal guidelines or regulations put into place by Congress, some agencies like the SEC and CFTC are regulating certain cryptos.

Who regulates cryptocurrencies?

Currently, agencies such as the SEC and CFTC are doing the lion’s share of crypto regulation in the U.S., although neither exactly has crypto within their respective purviews. That could change, however, if wider crypto regulations are adopted.

Is Bitcoin regulated? If so, how?

Bitcoin is not regulated, at least not in any cohesive or comprehensive manner. It is possible that investors could still run afoul of regulatory agencies, though, like the IRS, SEC, or CFTC.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0622023

Mar

2023

Guide to Aave Crypto

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Aave is a cryptocurrency platform that gives users and participants the ability to borrow and lend crypto without a middleman. In effect, it’s a sort of lending system in the crypto space that let’s users lend and borrow, and earn interest as a result.

The platform also has its own crypto tokens, and is a sort of Web3 version of more typical financial lending and flash loan systems. If you’re interested in the ability to lend out your crypto holdings and potentially beef up your returns for doing so, understanding what Aave is and how it works may be of use.

What Is Aave Crypto?

Aave’s definition has changed over time, as the company has evolved. On a technical level, Aave is a decentralized finance (DeFi) protocol that enables the borrowing and lending of cryptocurrency, including so-called flash loans. Flash loans are considered the first uncollateralized loan option in the DeFi space.

Aave is built on the Ethereum platform, and it’s considered one of the biggest DeFi projects, and one of the top that focus on lending and borrowing cryptocurrency through a pooled liquidity system. Lenders can earn relatively low-risk, passive income from interest paid on loans, without having to engage with third-parties or middlemen.

What Does Aave Mean?

Fun fact: the word “aave” means ghost in Finnish. As the company evolved (more on that below), its initial identity as ETHLand was renamed Aave, as a reflection of the organization’s imaginative, evolving nature.

How Does Aave Work?

Aave’s DeFi protocol allows users to provide loans using a system that is, in many ways, the inverse of how a bank would issue a loan.

First, there is no financial institution, and no intermediary that oversees or grants loan requests based on creditworthiness. Instead, Aave is a “trustless” network that utilizes smart contracts to execute the loans, removing the need for middlemen.

Where a bank would grant a loan in dollars (or another fiat currency), Aave lends cryptocurrency.

There are no widely accepted credit checks or scores in the DeFi space, thus, users must post collateral in order to get a loan on Aave.

» Looking for more guides? Check out our glossary of crypto coins.

What Is a Flash Loan?

A flash loan began as a unique feature on the Aave platform (other platforms now offer flash loans as well). They are uncollateralized products that are possible thanks to the way the Ethereum blockchain network functions — Aave is built on the Ethereum blockchain network.

Flash loans are automated, rapidly executed loans that must be repaid within one Ethereum transaction. If the principal and interest are not repaid in that time, the loan is effectively reversed, the transaction removed from the blockchain as if it had never occurred.

Liquidation

Users who deposit or pledge their crypto into liquidity pools (see below) are adding liquidity to the overall network. That means they’re increasing the amount of crypto that could potentially be borrowed. Collateral is important for crypto loans, as most crypto loans (except for flash loans) often need to be overcollateralized.

As such, crypto loans made on Aave that drop below a certain loan-to-value ratio may initiate an automatic selling process of the underlying collateral in order to pay back the loan.

In many ways, this is similar to a margin call, which can occur in margin accounts within a brokerage.

Liquidity Pools

Whereas a traditional bank would secure a loan using physical collateral (e.g. a home is the collateral for a mortgage), Aave relies on liquidity pools. In a liquidity pool, users deposit crypto funds they’re willing to lend, which is combined with other investors’ crypto. This increases the total potential amount of crypto that can be loaned through the network.

Borrowers can then use these pools to take out a loan. Borrowers pay interest on the funds they borrow; lenders receive Aave tokens (aTokens) that entitle them to a cut of the interest earned on the money they lend, a process that’s called yield farming.

How Does Aave Pay Interest?

Lenders who earn interest receive it in the form of whatever type of crypto they deposited into liquidity pools. There isn’t a limit to how much lenders can supply to liquidity pools, and how much lenders earn in interest varies. Withdrawing interest earnings is easy — it’s as simple as using the Aave user dashboard to initiate a transaction.

What Tokens Does Aave Use?

Aave issues two different tokens.

The first type are called aTokens, which are given to lenders so they can receive interest on their deposits. The second type are called AAVE tokens, the native token of Aave. AAVE performs more than one function and works like several other types of cryptocurrency, being both a governance token and an exchange token that offers users discounts on fees within the Aave protocol.

💡 Recommended: What Is a Governance Token and How Are They Used?

Aave is an open-source protocol, meaning anyone can see and verify how it works. As noted, the platform runs on the Ethereum blockchain. Unlike Bitcoin mining, which uses a highly complex and resource-intensive proof-of-work process, AAVE coins are based on the ERC-20 standard. A collection of smart contracts provides decentralized financial options to users.

AAVE Coin Price

Aave is one of the largest DeFi platforms, and as of February 20, 2023, AAVE crypto was the 47th largest cryptocurrency on the market with a market cap of nearly $1.3 billion. The price of one AAVE coin was around $91.That’s down considerably from a peak of more than $629 in May 2021.

There are 14 million total AAVE tokens in circulation — 88% of the eventual total 16 million. You can also take a look at AAVE live value using SoFi’s platform.

History of Aave

Aave launched in September of 2017, and was originally known as ETHlend. Aave was created by Stani Kulechov, who, at the time, was not happy with the fact that there were relatively few lending applications built on Ethereum.

In September 2018, the protocol was rebranded and became Aave.

An initial coin offering (ICO) for AAVE was held in November 2017, and $16.2 million was raised in a sale for one billion AAVE tokens (then called LEND), and an additional 300,000 for investors. In 2020, LEND was replaced with AAVE coins, with every 100 LEND being converted to 1 AAVE, resulting in 16 million coins extant.

What Can You Use AAVE Crypto For?

AAVE is designed to be used on the Aave platform, similar to how ETH is designed to be used on Ethereum, and can provide several benefits to its holders.

Holding AAVE tokens typically gives users discounted trading fees on the platform. Borrowers who offer up AAVE tokens as collateral for their loans may also get discounts on fees. These borrowers also gain the ability to take out larger loans. On the other side, users can lend AAVE and collect interest.

Finally, AAVE crypto borrowers can take out fee-free loans when those loans are denominated in the token.

Similar to some other DeFi tokens, like Uniswap (UNI), the AAVE coin is also a governance token. Holding AAVE crypto gives holders the ability to vote on upcoming proposed changes to the Aave protocol.

Traders can also speculate on the price of AAVE, hoping to buy low and sell at a higher price later. Short-term traders are required to pay cryptocurrency taxes when they sell coins, however, which is important to keep in mind.

There are more than 30 different types of crypto users can lend or borrow on the Aave platform: e.g. ETH (the native token of Ethereum), DAI, and stablecoins like Tether or USDC, among others. Note, too, that Aave has also started deploying GHO, its own decentralized stablecoin, into the crypto space, too.

Should You Invest in AAVE?

Investors who believe that decentralized lending will continue growing may find AAVE crypto appealing. But whether or not you should invest in AAVE, or any other cryptocurrency, will depend on your specific investing goals and financial situation — there is no right or wrong answer. If you’re looking to increase the level of crypto diversification in your portfolio, however, it may be worth a look.

To determine whether investing in AAVE is wise, consider your risk tolerance, time horizon, and how crypto fits into your overall investing strategy. It may be worth it to consult a financial professional for additional insight, and to review Aave’s documentation to make sure you understand the project top to bottom.

Be aware, though, that AAVE, like any other crypto, is far from a safe investment. Cryptos have their own unique risks, and it may not be in every investor’s wheelhouse to dip into the crypto space.

Pros and Cons of Aave

Investing in Aave has its pros and cons, too.

Owning AAVE gives users special privileges on the Aave platform, as noted above, including discounts on transactions and fees. And because Aave is one of the biggest DeFi lenders, AAVE has high liquidity.

In terms of stability, longevity, and commitment to innovation, the Aave platform continues to be one of the largest in the DeFi space.

That said, investing in crypto requires a deep familiarity with how various platforms, tokens, and coins work, and the potential risks involved. Unlike the markets for stocks and bonds or even ETFs, which are long established and highly regulated, the crypto markets are relatively new, largely unregulated, and rapidly evolving. While this presents many possible opportunities for investors and traders, there are no guarantees of positive outcomes, given the volatility of this space.

Pros and Cons of Aave
Pros	Cons
AAVE holders get discounted trading fees	Volatile value
Ability to earn interest lending crypto	AAVE only has utility on the Aave platform
High liquidity	Unregulated, evolving market

AAVE Fees to Be Aware of

There are fees associated with using the Aave platform. For one, there are transaction fees for using the Ethereum Blockchain, generally called “gas fees,” which are used to facilitate transactions on the network. There are also fees associated with borrowing crypto on the Aave network, as mentioned, which are partially paid to lenders or those who contribute to liquidity pools.

How to Buy AAVE Cryptocurrency

Buying AAVE is similar to most other cryptocurrencies. Here are the basic steps that a user needs to know.

1. The first thing required is an account on a crypto exchange. Make sure the exchange provides trading for the AAVE cryptocurrency. AAVE trades on many popular exchanges like Binance, Huobi Global, Kraken, CoinTiger, and SoFi Invest®.

2. After creating an account, a user can then deposit either some Bitcoin, dollars (or other local fiat currency), or a stablecoin, depending on what trading pairs the exchange currently trades.

Buying crypto directly with a credit card might also be an option, but doing so often involves higher fees (not only might the exchange charge additional fees, but credit cards often treat crypto purchases as a cash advance, which comes with even more fees).

3. At this point, a user can buy AAVE. Simply select the trading pair that includes AAVE and the currency deposited during step number two.

For example, if a user had bitcoin and wanted to buy AAVE, they would select the pair called “BTC/AAVE.” If they had dollars, it might be “USD/AAVE.” For a stablecoin like USDC, it might be “USDC/AAVE.” Enter a buy order for the desired amount of coins at a desired price. Alternatively, on exchanges that include order books in the user interface (like Binance), simply select the top sell order and buy from it.

Alternatively, investors could use a decentralized exchange (DEX) to acquire AAVE. Using a DEX generally requires only a crypto wallet, of which there are many to choose from. Users don’t have to create an account and can simply swap coins on the platform.

After buying AAVE tokens, some users may want to consider moving their crypto into a crypto wallet that supports AAVE. This method of crypto storage provides extra security, as the coins can be taken offline and put into cold storage where it’s less likely that hackers might access them.

Buying AAVE With SoFi

Aave is a cryptocurrency platform which allows users to borrow digital assets and earn interest on deposits and loans. It’s an open-source, decentralized lending protocol built on the Ethereum platform, primarily known for its flash loans. Users can also take advantage of lending and borrowing crypto using Aave’s liquidity pools.

AAVE crypto is one of two tokens used on Aave, with the other being aToken, which enables more accurate tracking of payments. Users who wish to borrow funds can post AAVE tokens as collateral, potentially earning a discount on loan fees.

If you’re interested in getting more involved in the DeFi space and specifically with protocols that focus on lending, Aave may be worth a deeper look. That’s easy to do when you open an account on the SoFi Invest® crypto trading app. SoFi Invest makes it simple and straightforward to trade crypto, stocks, and ETFs. With SoFi Invest, your crypto is kept secure, and you can trade 24/7.

Trade crypto and get up to $100 in bitcoin! (Offer is available through 12/31/23; terms apply.)

FAQ

Is Aave crypto a good investment?

It’s impossible to say that any cryptocurrency is a “good” investment, given the risks involved with investing in crypto. But as with any investment, there is a chance that it could garner big returns for investors, and Aave also allows for the lending of crypto, which can help earn additional returns.

Why is Aave crypto so popular?

Aave gained popularity due to its flash loans, and is now one of the larger DeFi lending platforms on the market. The ability to lend and borrow without a middleman has advantages for users, and the ability to earn interest or staking rewards may be particularly attractive to investors.

Does Aave gain value?

Aave has gained value in the past, and likely will in the future. Cryptocurrencies are volatile investments, though, and gain and lose value often — as such, it’s likely that Aave will gain value at some point in the future.

Photo credit: iStock/RgStudio

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0223007

Mar

2023

Bull Markets, Explained

By Rebecca Lake | Growing Wealth, invest, Investing, Terminology | Comments Off

A bull market occurs when a broad market index rises at least 20% over two months or more. Bull markets signal higher levels of investor confidence and optimism about the future of the market. They are generally a sign of a strong, healthy economy.

The opposite scenario, in which stock prices fall by 20% over an extended period, is known as a bear market.

If you’re investing in the stock market, it’s important to know the nature of bull markets and their potential impact on your returns.

What Is a Bull Market?

When asset prices generally rise over time, the upward trend is known as a bull market. The traditional benchmark for identifying a bull market is an increase of 20% or more in a market index over a two-month period. For example, stock experts might look closely at the Dow Jones Industrial Average (DJIA) or the S&P 500 to determine whether a bull market exists.

Bull markets can imply that the economy is in good shape, with unemployment low and new jobs being created. Investors tend to view a bull market favorably because it suggests that stock prices may continue to rise over the long term. People who buy stocks early in a bull market may benefit later from the investments’ significant price appreciation.

Why Is It Called a Bull Market?

Although there’s no single explanation for how bull and bear markets got their names, people often suggest that the descriptive names are meant to reflect the nature of each animal.

Bulls, for instance, have a reputation for charging or attacking. In a bull market, eager investors may rush in to buy stocks in the hope of capitalizing on future price increases.

Bears, on the other hand, are often seen as being defensive animals that only attack when threatened. In a bear market, it’s common to see investors pull back out of caution and sell off stocks they own or avoid buying new ones. Those behaviors are often driven by fear and uncertainty about the market trending down.

Characteristics of a Bull Market

Identifying when a bull market begins or ends is sometimes challenging, given the nature of stock prices and how rapidly they can move up or down. Generally, there are three indicators that stock experts use to determine whether a bull market exists.

• Stock prices, or prices for a broad market index, have increased by 20% or more over a set period of time, typically two months or longer.

• Investor confidence is high and those buying into the market have an optimistic outlook toward the future.

• Overall economic conditions are largely positive, with low unemployment rates and, ideally, low inflation rates as well.

These three signs usually indicate that the market is on a sustained upswing. Other indications of a bull market can include strong earnings reports and marked increases in investors’ dividends.

What Causes a Bull Market?

Bull markets are usually driven by changing undercurrents in the economy. They tend to reflect the business cycle.

The business cycle experiences periods of expansion, followed by periods of contraction. Real gross domestic product is a commonly used metric for determining which of four phases the economy is in.

• Expansion. During the expansion period, the economy is growing and domestic production is up. There may be a bull market for stocks during this period.

• Peak. A peak occurs when the economy exhausts its ability to grow. At this stage, the bull market typically hits its highest levels before entering the next phase.

• Contraction. During the contraction period, the economy shrinks. Companies may cut back on spending or hiring to save money and stocks may enter bear market territory.

• Trough. The trough is the lowest point in the business cycle. It’s followed by the beginning of the next expansion phase, which can open the door to a new bull market.

The business cycle also influences when bear markets occur. In addition, there are times when a bull or bear market is triggered by something other than the business cycle. For example, in early 2020 there was a short-lived bear market caused by uncertainty over the emerging COVID-19 pandemic.

Example of a Bull Market

The bull market that began in 2009 following the shock of the financial crisis is the longest on record, lasting until the bear market that occurred in early 2020.

Several factors contributed to the sustained length of the bull market, including strategic moves to manage monetary policy on the part of the Federal Reserve, and tax breaks delivered by the 2017 Tax Cuts and Jobs Act.

Many stockholders benefited from steady dividend payouts, and the real estate market also delivered a strong performance during that time.

Bull Market vs Bear Market

Bull markets and bear markets are opposites in terms of how participants behave and what the outcomes can mean for investors. Bull markets typically involve upward movement of stock prices while bear markets indicate a downturn.

In a bull market, investors tend to take a positive view of the market. Bear markets, on the other hand, can trigger pessimism, fear, or other negative feelings among investors.

Bull markets are usually marked by thriving economies and high levels of corporate growth. Bear markets point toward a slowing economy and limited growth. In extreme cases, a bear market could suggest that a recession may be on the horizon (although a recession can offer certain opportunities as well).

Investing Tips During a Bull Market

Investing in a bull market isn’t one-size-fits-all, so your personal approach may be different from other investors’. There are, however, a few overall strategies that could help you to maximize gains while taking on a level of risk you’re comfortable with.

Keep Your Goals In Sight

It’s easy to be tempted to follow the crowd when investing in a bull market or a bear market, but it’s important to stay focused on your individual goals, especially if you’re a beginning investor. If you already have a financial plan in place, that plan can act as a guide for how to choose the right asset allocation during a bull market.

Diversify Your Portfolio

Diversification is an important tool for managing risk in a portfolio. When you’re diversified across different asset classes or industries, it helps to limit your exposure to certain kinds of investment risk. If one investment begins to decline in value, your other investments can help to bolster your portfolio.

A higher allocation to stocks may be optimal if stock prices are rising, but you may want to balance those out with less risky investments, like bonds.

If you’re investing in mutual funds or exchange-traded funds (ETFs), consider what assets each one holds to avoid becoming overweighted in one particular industry or sector.

Go Long in Your Positions

Going long simply means adopting a buy-and-hold approach when investing in a bull market. The end goal is to buy stocks at a low price, then sell them later for a higher price to maximize returns. The key is knowing how to identify the impending end of a bull market so that you can sell before prices drop.

The Takeaway

Bull markets, in which asset prices rise and investors feel optimistic, are a natural part of the market cycle. A bull market begins when a market index rises 20% or more over a two-month period, and it can last months or years. Generally, during a bull market, maintaining a diverse portfolio and a clear idea of your goals can help you manage your investments prudently.

If you’re not investing yet, it’s never been easier to get started. With SoFi, you can open an online investment account and start building a portfolio. You can choose between self-directed trading or automated trading as you begin your journey to growing wealth. SoFi doesn’t charge management fees, and investors can choose between stocks, ETFs, crypto, and more.

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Is a bull market a good market?

A bull market usually signifies that the market is strong. A market where stock prices are generally increasing can offer an opportunity to buy and hold stocks — if you can purchase them before prices rise too high.

How long can a bull market last?

Bull markets have no set duration; they can last months or even years. When a bull market occurs, it typically sticks around for a longer period of time than bear markets do.

Should you sell stocks in a bull market?

Selling stocks in a bull market could make sense if you’re able to sell them for substantially more than you paid for them. Essentially, it all comes down to timing and what makes sense for your individual goals and tolerance for risk.

Photo credit: iStock/GOCMEN

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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Mar

2023

The Ultimate Guide to Investing for Retirement at Age 60

By Michael Flannelly | Growing Wealth, invest, Investing | Comments Off

Retirement is a milestone that many people look forward to with great anticipation. While the freedom of having more time to spend with loved ones, pursue hobbies, or travel is certainly something to be celebrated, it is also important to plan, save, and invest so this future can be a reality.

It’s never too late to start saving and investing for these future goals, even if you’re nearing 60. And if you’ve been saving for years, it’s still smart to continue to invest for retirement when you reach 60. However, your investment strategies may need to change as you near the end of your working years. In this guide, we’ll explore key factors to consider when investing for retirement at age 60, as well as some low-risk investment options that may be suitable for those nearing retirement.

Investing for Retirement at 60

As you approach 60, retirement may be just around the corner. Maybe you’ve been saving for retirement your entire career. Or perhaps you started saving late and need to grow your nest egg quickly for your golden years. No matter the case, as retirement nears, you may wonder what to do to ensure financial stability.

Investing for retirement is critical to help you reach a comfortable financial position. But planning for retirement at age 60 may seem overwhelming. After all, there are several investment accounts you could open or continue to invest in, not to mention the various types of investments you could have in those accounts. With a little bit of research and planning, you can put yourself on the path of living comfortably in retirement.

If you’re beginning your investment journey, it’s better to start immediately rather than putting it off because you’re overwhelmed by the prospect of failing to meet your financial goals. It’s better to save and invest in different types of retirement plans now rather than put it off and have nothing down the road.

Options for Investing for Retirement at Age 60

Investing for retirement at age 60 can be a confusing and daunting process, particularly for those new to investing. But with some planning, retirees can find the best options for their needs. The following are some options to help you invest for retirement at age 60:

Recommended: Which Retirement Plan is Right for You?

401(k)

A 401(k) is an employer-sponsored, tax-advantaged retirement savings plan that can be a valuable tool for someone who is 60 years old and looking to save for retirement. A 401(k) plan allows you to save for retirement on a tax-deferred basis, which means that your contributions could reduce your taxable income for the current year, and your investment earnings grow tax-free until you withdraw the funds in retirement.

If your employer offers a 401(k), it can be particularly advantageous for someone who is 60 years old as it provides several features that can help to maximize your retirement savings:

• Catch-up contributions: If you are over 50, you can make catch-up contributions to your 401(k) plan, which allows you to contribute more money to your account each year than younger participants. In 2023, the annual catch-up contribution is up to $7,500 more than the standard $22,500 contribution limit.

• Employer matching contributions: Many 401(k) plans offer employer matching contributions, which can help to boost your retirement savings. Maxing out your employer match can be an effective way of increasing savings.

• Several investment options: A 401(k) plan typically offers a range of investment options, including mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds. These investment options allow you to diversify your portfolio and manage risk.

• Loan options: Some 401(k) plans allow you to borrow from your account, which can be helpful in times of financial need.

IRA

An individual retirement account (IRA) is a tax-advantaged investment account that provides a way to save for retirement outside of an employer-sponsored plan, such as a 401(k). An IRA can be an option for someone who is 60 years old and looking to save for retirement. There are two main types of IRAs: traditional and Roth.

For someone who is 60 years old, an IRA can offer a number of benefits in terms of retirement savings:

• Tax benefits: A traditional IRA provides tax-deferred growth on your contributions, meaning that you can deduct your contributions from your taxable income for the current year and pay taxes on the funds when you withdraw them in retirement. A Roth IRA provides tax-free growth on your contributions, meaning you can withdraw the funds in retirement without paying any taxes on the investment earnings.

• Catch-up contributions: Like a 401(k), you are eligible to make catch-up contributions to your IRA If you are over 50. These catch-up contributions allow you to contribute more money to your account each year than younger participants. For 2023, the annual catch-up contribution is $1,000 more than the normal $6,500 contribution limit.

Recommended: What is an IRA?

Real Estate

Investing in real estate is another option to save for retirement. Real estate investments provide a source of passive income, which may help supplement your retirement savings and hedge against inflation. There are several ways that someone who is 60 years old can invest in real estate, including:

• Rental property: Investing in rental property can provide a steady stream of rental income, which can help to supplement your retirement savings.

• Real estate investment trusts (REITs): Some REITs own and manage income-producing properties. Investing in REITs can provide exposure to a diverse portfolio of real estate assets without the responsibility of managing the properties yourself.

Annuities

Annuities may be an attractive investment vehicle for someone saving for retirement. An annuity is an investment product that provides a guaranteed income stream in exchange for a lump sum payment or a series of payments. It’s important to note that there are several types of annuities, each with unique features and benefits.

An annuity can offer many benefits for retirement savings:

• Guaranteed income: An annuity provides a guaranteed stream of income, which can help to provide financial stability in retirement.

• Protection from market downturns: Certain types of annuities can provide protection from market downturns, which can help to mitigate the impact of stock market losses on your retirement savings.

Things to Consider When Investing for Retirement at Age 60

Regardless of your financial situation, you can continue or start to invest for retirement at age 60. However, before you start investing at age 60, you should consider the following:

Retirement Goals

You want to figure out your desired lifestyle that you’ll have during retirement and how much money you will need to support it. You may want to travel the world. Or you want to live a low-key life near your family. Depending on your retirement goals, you’ll have much different needs.

Figuring out your retirement goals will help you determine how much you need to save and invest and what types of investments may be most suitable for your needs.

Time Horizon

One of the most important things to consider when investing for retirement at age 60 is your time horizon. With only a few years remaining until retirement, it’s important to consider how much time you have to invest and how long your investments need to last. This may affect the types of investments you choose, as you’ll likely want to focus on more conservative options that have a lower risk of losing your initial capital.

Risk Tolerance

Your risk tolerance may change as you get closer to retirement. At age 60, you may be less willing to take on the risk of losing your initial investment, as you’ll want to ensure that your savings last throughout your retirement. With a risk-averse outlook, you may consider lower-risk investment options such as certificates of deposit (CDs), dividend-paying stocks, or bond funds made up of US Treasuries and high-grade corporate debt.

Current Savings

Another critical factor to consider when investing for retirement at age 60 is your current savings. The amount you have already saved will play a significant role in determining how much you can invest and how much you will need to save. It’s also important to consider whether you have any other sources of retirement income, such as a pension plan or Social Security.

Social Security

Social Security is an important source of retirement income and can help supplement your other investments. When you turn 62, you can start receiving Social Security benefits. However, your benefits may be reduced if you start taking them early. Therefore, you want a holistic view of how your Social Security benefits will fit into your retirement plan.

Health Care Expenses

Healthcare expenses can significantly impact retirement savings, as they can be one of the largest expenses for individuals during their retirement years. Thus, you should factor in the potential for the need to pay for health care in your retirement savings plans.

According to the Fidelity Retiree Health Care Cost Estimate, the average 65-year-old couple retiring in 2022 can expect to spend approximately $315,000 on healthcare expenses throughout their retirement. This amount can quickly eat into an individual’s retirement savings, leaving them with less money for other costs such as housing, food, and entertainment.

Taxes

Some investment options have different tax implications, and it’s important to consider how your investments will be taxed in retirement. For example, traditional IRAs and 401(k)s are tax-deferred, meaning that you won’t have to pay taxes on the money you invest until you withdraw it in retirement. On the other hand, Roth IRAs and 401(k)s are taxed upfront, so you won’t have to pay taxes on the money you withdraw in retirement.

Cost of Living

Inflation, or the rise of the cost of living, can erode the value of your investments over time, so you want to factor in how inflation may affect your savings in the future. This can include investing in assets that may appreciate in value, such as stocks, or in assets that generate income, such as bonds and rental property.

Recommended: How Does Inflation Affect Retirement?

Open an Online IRA With SoFi

People may think that by the time they turn 60, they should have enough money to retire and live comfortably. However, like anything in life, things sometimes work out differently than you planned. So if you don’t have the retirement nest egg you envisioned by the time you turned 60, it doesn’t mean you should avoid saving altogether. By assessing your current financial situation, selecting appropriate investments, and taking advantage of retirement plans, you can ensure a secure financial future even if you’re starting at 60.

If you’re ready to start investing for retirement, you can open an online retirement account with SoFi. SoFi offers Traditional, Roth, and SEP IRAs for investors looking to reach their financial goals for retirement. With a SoFi Invest® active IRA, you’ll be able to access a broad range of investment options, like buying and selling stocks, exchange-traded funds (ETFs), and fractional shares with no commission.

Help grow your nest egg with a SoFi IRA.

FAQ

Are you able to invest for retirement at 60?

It is possible to invest for retirement at age 60. However, it is also important to consider other factors, such as your current savings, retirement goals, and overall financial situation, to determine if investing for retirement at 60 is your best course of action.

Can you open a retirement account for investments at age 60?

You can open retirement accounts for investments at age 60. Several options are available, such as a traditional IRA or a Roth IRA. Additionally, these accounts allow catch-up contributions for people aged 50 or over.

How much money does the average 60-year-old invest for retirement?

The average amount a 60-year-old has saved for retirement can vary greatly depending on several factors, such as their current financial situation, savings habits, and overall financial goals. According to a report by Vanguard, the average and median retirement savings balance for individuals between the ages of 55 and 64 in 2021 was $256,244 and $89,716, respectively.

Photo credit: iStock/sureeporn

Mar

2023

What Is Broker Call, or Call Money Rate?

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

The broker’s call — also called “call money rate” or “call loan rate” — refers to the interest rate that brokerage firms pay to banks when they borrow money.

Brokerage firms borrow money from banks in the form of call loans in order to offer loans to traders and investors with margin accounts. As such, the interest rate that brokerages pay banks is what’s referred to as the broker’s call, or call money rate.

Banks can call those loans back from brokerages at any time (hence the name “call loans”), which may cause brokerages to call the money they lent to traders or investors (in the form of margin). That’s one example of what’s referred to as a “margin call.”

Broker Call Rate Definition

The broker call rate is the interest rate that brokerage firms pay banks for borrowing money that they, in turn, loan to traders and investors to pursue margin trades. Since many brokerage firms allow investors to trade “on margin,” the brokerages need to have access to a pool of money that they can borrow from.

In effect, banks lend money to brokerages, and the brokerages lend money to investors — each loan carries a different rate. The broker call rate, again, is the interest rate that the brokerages pay to the banks.

Investors and traders that are using margin to trade will be on the hook for interest payments to the brokerages, and the applicable interest rate for those traders are called margin rates.

But, in terms of a broker call rate, that is only referring to the interest rates that brokerages pay to banks, not the margin rates traders pay to brokerages for their margin accounts.

In addition, although the broker call rate is quoted as an annual rate, these loans are typically for much shorter periods of time. As such, the fees are assessed daily. If the annual rate is 5%, the overnight rate is 5% divided by 365 days or roughly 0.014% per day.

Margin rates, or the rates charged to traders, would be higher.

Explaining Call Money Rate

Although the terms sound quite different, the broker call rate and the call money rate are essentially the same thing: it’s the interest rate that brokers pay to banks for borrowing money. That typically comprises short-term loans that the brokers then turn around and lend to traders or investors for use in margin accounts.

Brokerages will typically include a service charge, expressed as a percentage, on top of the call money rate to get their margin rates. So, in effect, traders or investors using margin accounts pay a premium, plus interest, to trade with margin loans.

As an investor is deemed capable of borrowing more money, the gap between the broker call rate and the margin rate narrows.

Brokerages drive extra revenue by exploiting the difference in interest rates, just as investors do the same via interest rate options.

The Use of the Term ‘Call’

A quick side note: You may have noticed that the term “call” is a common financial term with various meanings, including:

1. A brokerage issuing a “margin call” requiring a borrower to increase the cash in their account or sell assets to raise cash for their account.

2. A lender “calling a loan” on a borrower, requiring them to repay their debt.

3. Yield to call is another example of the word that in this phrase refers to bonds.

What Is a Call in Options Trading?

A “call” is also a common type of option (the two main types of options are puts and calls), but the sense of the word here is quite different. A call option is a derivative contract that gives investors the right, but not the obligation, to buy a certain number of shares of an underlying asset.

While options trading and margin trading are similar in that they use leverage, margin trading specifically involves borrowed funds. A margin account is not required for options trading.

How Is the Broker Call Rate Calculated?

The broker call rate in the U.S. fluctuates continuously, but generally increases along with interest rates across the board due to the Federal Reserve lifting benchmark rates. Conversely, as the Federal Reserve cuts rates, the broker call rate falls as well.

The broker call rate and the Federal Reserve funds rates are tightly linked, but they are not required to be the same.

It’s also important to know that the broker call rate fluctuates on a daily basis, much like other interest rates. With that in mind, the broker call rate’s calculation is less of a calculation, and more based on a benchmark, such as the London InterBank Offered Rate, or LIBOR rate.

LIBOR serves as a benchmark interest rate that lenders around the world use when they lend to another financial institution on a short-term basis. As such, it makes sense that it would serve as the benchmark for the broker call rate.

But LIBOR is being phased out as of the beginning of 2022, and is being replaced in most instances by the Secured Overnight Financing Rate (SOFR). The transition won’t fully replace LIBOR until 2023, however.

How Does It Affect Margin Traders?

Margin traders utilize leverage to attempt to supercharge their returns. That is, they’re borrowing more money than they actually have in order to make bigger trades. This increases their investing risk, but can also increase their gains.

And, as discussed, it’s pretty obvious how the broker call rate can affect margin traders. Since brokerages need to borrow money from banks, and pay the associated costs for doing so (in the form of interest), they need to turn a profit through their own lending activities. Lending to margin traders, by charging interest plus a service fee or other related cost, helps them cover those costs.

So, the higher the broker call rate, the more interest brokerages need to pay banks in interest charges. That gets passed down to margin traders, who, in turn, end up paying more in interest charges to brokerages when they use margin. This is one of the drawbacks when using a cash account versus a margin account — there are additional costs to consider for using margin, which can eat into returns.

Broker Call Rate Example

Here’s an example of how the broker’s call rate may come into play in the real world:

Brokerage X needs to offer margin funds for its clients with margin accounts, but doesn’t have the money to cover its needs. So, it borrows the money from Bank Y at a predetermined broker call rate. Bank Y decides that the rate will be the current LIBOR rate, plus 0.1%. So, if the LIBOR rate is 3%, for example, the broker call rate is 3.1%.

Brokerage X then uses the borrowed funds to offer margin funds to its clients, for which it charges a margin rate of 4%, plus a $10 service fee. By doing so, Brokerage X drives a little extra revenue through its lending activities, and when the traders pay the margin funds back, it can return them to Bank Y, paying the 3.1% broker call rate for the privilege of borrowing.

Current Call Money Rate

The current call money rate is published daily by the Wall Street Journal, and others. As it fluctuates often, margin traders, or others who may be subject to those fluctuations, can or should make a habit of looking at the current rate in the event that it changes their strategy.

Due to the Federal Reserve raising benchmark rates in an effort to blunt high inflation, the call money rate has seen rapid increases throughout 2022. As recently as June 2021, for instance, the call money rate was only 2%.

Margin Trading With SoFi

The broker call rate is the interest rate that brokerage firms pay banks for borrowing money that they, in turn, loan to traders. Since many brokerage firms allow investors to trade “on margin,” the brokerages need to have access to a pool of money that they can borrow from.

Brokerages typically charge a fee, expressed as a percentage, on top of the call money rate to get their margin rates. So, in effect, investors using margin accounts pay interest to trade stocks with margin loans — plus a little extra.

Leveraged trades are complicated and can be risky. While using borrowed money lets traders place bigger bets, and possibly see bigger gains, they also risk steep losses.

If you’re interested in opening a margin account, you can start by opening a new investing account with SoFi. From there you can apply for a margin loan and start trading. SoFi doesn’t charge commission, and SoFi members have access to complimentary financial advice from professionals.

Get one of the most competitive margin loan rates with SoFi, 7.00%*

FAQ

Who decides the call rate for margin trading?

A brokerage ultimately decides the costs associated with margin trading for investors. But as far as what determines the broker call rate, it goes back to the rate as determined by the prevailing benchmark interest rate, such as LIBOR, or the Secured Overnight Financing Rate (SOFR), which is taking precedence as LIBOR is phased out.

What is the overnight call rate?

The overnight call rate refers to the interest rate that banks use when lending or borrowing overnight. Again, since the call money rate is constantly fluctuating, the overnight call rate may or may not be different from the call money rate during normal trading hours.

Photo credit: iStock/YakobchukOlena

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
*Borrow at 7.00%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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