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Oct

2021

How to Use a Bitcoin ATM: How Bitcoin ATMs Work

How to Use a Bitcoin ATM in 7 Easy Steps

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

While most Bitcoin transactions take place online, sometimes cryptocurrency users have physical cash that they want to convert to Bitcoin. In that case, they’d want to use a Bitcoin ATM.

What is a Bitcoin ATM?

A bitcoin ATM is a standalone machine or kiosk that serves as a portal for customers to deposit cash and receive bitcoins. Some crypto ATMs offer only bitcoin, while others also allow users to take out other cryptocurrencies.

Around the United States and the world, bitcoin ATMs are popping up in gas stations, convenience stores and other locations. As of October 2020, there were more than 9,000 bitcoin ATMs, according to Coin ATM Radar. Some estimates list a total of 14,000 bitcoin ATMs in the world. The companies that operate these ATMs sometimes require that you use their particular cryptocurrency trading platform, or their proprietary wallet. For this reason, some bitcoin ATMs only work for customers who have an account with a particular platform.

Many bitcoin ATMs have strict minimums and maximums for each transaction. The Financial Crimes Enforcement Network (FinCEN) requires that all bitcoin ATM operators in the United States observe and follow the anti-money laundering provisions of the Bank Secrecy Act (BSA). As a result, users who make larger transactions on a bitcoin ATM may have to provide personal information. That information may include a mobile phone number to use for transaction verification. In addition, some users may have to scan a government-issued identification, such as a passport or driver’s license, to verify the identity of the person making the transaction.

A bitcoin ATM provides a fast and easy way to buy bitcoin with physical cash. Otherwise, users would need to deposit the cash into a traditional account and then transfer it into a crypto exchange in order to do the transaction.

Recommended: 12 Benefits of Owning Crypto in 2021

How Do Bitcoin ATMs Work?

Despite the name, a bitcoin ATM doesn’t work like a bank’s automated teller machine (ATM). Those traditional ATMs typically allow customers to withdraw cash, deposit cash and checks, or to transfer the money between accounts in the same bank.

Like a traditional ATM, a bitcoin ATM is connected to the internet. But bitcoin ATMs, by contrast, receive hard fiat currency, such as dollars, from the user, and give them bitcoin or other types of cryptocurrencies in return.

It delivers that cryptocurrency to the user’s crypto wallet, which the user identifies by scanning a unique quick response (QR) code into the machine. Most ATMs offer a real-time exchange rate, but they also charge users a fee for the convenience of the bitcoin transaction.

The dollar-to-bitcoin rate changes from minute to minute. And the rate offered by a machine may carry a larger financial impact on the transaction than the fees themselves. So, investors who plan to use a bitcoin ATM on a regular basis to turn cash into crypto may want to take a close look at the exchange rates offered by different bitcoin ATM providers, in addition to their fees, as they may be significantly higher than what you’d see in a crypto exchange.

While most machines do not dispense cash in exchange for the bitcoin a user owns, some newer machines have begun to offer this capability. A user can confirm that their cash purchased bitcoin or another form of crypto by checking their crypto wallet. But the transaction may take several minutes to show up.

For users who want to buy bitcoin from a bitcoin ATM but don’t have a crypto wallet, some bitcoin ATMs will generate a new wallet for them.

How to Use a Bitcoin ATM

Using a bitcoin ATM requires several steps:

1. Get a crypto wallet.

Before using a bitcoin ATM, you’ll need a wallet in which to deposit the bitcoin that you purchase. Those assets live on the blockchain, but the crypto wallet tracks your balance and lets you access your cryptocurrency with an alphanumeric key. Those wallets can be web-based or can be hardware devices.

2. Prepare the wallet.

Make a note of the alphanumeric code for your wallet, or download a QR code to allow for quicker access.

3. Find a bitcoin ATM.

There are many guides, such as this one , to help you find a nearby bitcoin ATM machine. Many work like maps, in which you simply type in your ZIP code to receive a list of addresses where you can find a bitcoin ATMs and the company that operates the bitcoin ATM. They also list the company that operates the bitcoin ATM.

4. Set up an account.

To use a bitcoin ATM, set up an account with the ATM operator. This process will require you to enter some personal information.

5. Enter your wallet information.

At the ATM you will follow a prompt to indicate your wallet – via QR code or alphanumeric key.

6. Insert cash.

When you physically deposit cash, the bitcoin ATM operator transfers that into bitcoin or the other forms of crypto you requested. If you insert $200, for example, you’ll receive $200 of bitcoin at its current market price, minus the ATM provider’s operating fee. Some ATMs also charge a miner’s fee, which they deduct from the deposit amount.

7. Confirm the purchase.

This is your last chance to review and confirm your purchase and what fees you’re paying, before making the transaction.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Bitcoin ATM Fees

When users buy bitcoin or other forms of crypto at a bitcoin ATM, they have to pay a fee. While you may be familiar with the single-digit percent-of-withdrawal fees charged by traditional ATMs, the fees are much higher for bitcoin ATMs.

Like the fees charged by cash ATMs, the fees charged by a bitcoin ATM are not a flat dollar amount, but a percentage of the transaction. According to Coin ATM Radar, the average fee for buying crypto at a bitcoin ATM is 8.4%. Some research shows that there are bitcoin ATMs that charge fees of more than 25%, while others commonly charge between 10-15%, so it can pay to shop around.

The Future of Bitcoin ATMs

Most bitcoin ATMs only allow users to deposit cash, often at very high fees. But there has been a movement among some operators to make them more like traditional ATMs and allow for cash withdrawals. Some bitcoin ATMs have the capability for both types of transactions.

The process for converting crypto into cash and withdrawing the cash will work like the current deposit process, but in reverse.

Given the high fees available to bitcoin ATM operators, it’s likely that these machines will continue popping up with greater frequency, offering more features, and hopefully competing more aggressively on the prices they charge for their services.

The Takeaway

Bitcoin ATMs are increasingly common. They offer convenience to some crypto investors, but often they also charge extremely high fees and require the user to have a crypto wallet.

Photo credit: iStock/farakos

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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

SOIN0721307

Oct

2021

How to Mine Dogecoin

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

Mining DOGE requires less computing power than some other crypto currencies. But Dogecoin is a proof of work crypto, like Bitcoin, so it requires access to sophisticated computers — and for a lower reward than Bitcoin.

Some people join Dogecoin mining pools, which provide a lower stakes way to mine DOGE.

Here’s what you need to know about mining Dogecoin:

Basics of Crypto Mining

Here’s a quick, simplified rundown on crypto basics and how the mining process works.

• Blockchain networks are the highways on which cryptocurrencies travel.

• A blockchain is a type of distributed ledger technology (DLT).

• The computers, called “nodes,” maintain the blockchain network.

• Some nodes, called “miners,” can add new blocks of transactions to the network.

• Miners solve complex mathematical problems to process transactions and achieve consensus on the network, ensuring everyone agrees on the validity of transactions.

Mining crypto is like mining for gold in that the process requires time, equipment, and energy. But unlike gold mining, computers do all the work in crypto mining.

A Brief History of Dogecoin

Developers Billy Marcus and Jackson Palmer launched Dogecoin as a fun way for people to learn about cryptocurrency. The meme coin traded at a price of a tiny fraction of a penny, so people could send it to each other for fun while learning how to use crypto wallets.

Dogecoin began in 2014 as a joke. Based on a famous meme of a Shiba Inu dog with grammatically incorrect phrases surrounding it like “much style,” “very fashion,” or simply “wow,” DOGE had almost no real value for several years.

In 2018, the altcoin reached more than $0.01 as cryptocurrency began to go mainstream for the first time. The price of DOGE then crashed and stagnated for several years. Then, in 2021, Dogecoin reached record highs around $0.70 before crashing down to about $0.24 at the time of writing.

DOGE is currently the #10 largest cryptocurrency by market cap. You don’t have to mine Dogecoin in order to acquire it. You could also purchase it on an exchange, or use a Dogecoin faucet.

What is Dogecoin Mining?

Mining Dogecoin involves running powerful computers known as nodes that process transactions for the network. In exchange for this work, miners receive block rewards of newly minted DOGE.

A new block of transactions is mined approximately every minute on the Dogecoin network. The block reward is 10,000 DOGE, or about $2,000 currently. Unlike Bitcoin, which releases fewer coins over time, there is no limit on how many Dogecoin miners can ultimately find.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

How to Start Mining Dogecoin

There are several things you’ll want to consider before you begin mining Dogecoin.

Requirements Before You Get Started

The requirements before getting started include:

• Basic personal computer knowledge

• Familiarity with cryptocurrency wallets

• A reliable source of electricity

• A desktop or laptop computer with Windows, Mac OSx, or Linux

• A DOGE wallet

Running mining software can take a lot of CPU power, so the computer being used for the job probably won’t be much good for anything else while the miners are up and running.

Both the miners and the computer running them will need to be plugged in almost 24/7 for maximum profits. Miners can also generate substantial amounts of heat. This is something worth keeping in mind, as you may need additional fans or other cooling equipment.

Solo vs Pool: Dogecoin Mining

Miners will need to decide whether they want to mine solo or with a pool. The benefit of mining solo is that 100% of the block reward will go directly to you. But it could be weeks or months before you find a block because there is so much competition.

Most miners choose to join a mining pool. Pool miners receive rewards in proportion to the amount of hashing power they contribute. However, they also have to pay a small fee in exchange for using the pool.

Those who are new to mining might find using a pool to be the best option.

Dogecoin Mining Hardware

While it could be possible to mine DOGE with your computer’s CPU, it could damage the device due to overheating and might not be very profitable.

Instead, you might consider either a GPU (graphic processing unit) or a Scrypt ASICs (application-specific integrated circuits), which is a device specifically created to mine cryptocurrency.

The prices of these types of hardware vary, but a low-end GPU might cost around $400. Scrypt ASICs, which are used to mine Scrypt-based coins like Litecoin and Dogecoin, can cost anywhere from $700 to $17,000 or more.

A single desktop or laptop computer can run numerous mining machines.

Dogecoin Mining Software

Once you’ve chosen a mining pool, and obtained the necessary hardware, the final step in mining Dogecoin is setting up the appropriate software.

Make sure the mining software is compatible with the mining hardware you’ve chosen.

Once you’ve connected your hardware to the computer that will run the software, you connect the pool with your crypto wallet, where it will deposit your Dogecoins. The pool owners and software developers have instructions for that on their websites.

Some mining software options include programs like CudaMiner, CGMiner, or EasyMiner. CudaMiner is only for GPUs while CGMiner and EasyMiner work with either GPUs or ASICs.

Dogecoin Cloud Mining

If you opt to mine through the cloud, you won’t need physical hardware or software. This mining option simply involves buying a contract for a certain amount of hashing power over a certain amount of time. In essence, you’re renting computing power from someone else.

Be careful though, there have been many cloud mining scams over the years.

Recommended: What is Bitcoin Cloud Mining?

Is Dogecoin Mining Worth It?

Mining Dogecoin may or may not be worth it depending on several factors.

The most important variable in any mining profitability equation is the cost of electricity. Having access to low-cost electricity can make mining much more profitable. Renewable energy sources like solar and hydroelectric are popular among miners for this reason.

If figuring out how to mine Dogecoin, acquiring the needed hardware, and accessing affordable electricity don’t seem like difficult hurdles to conquer, then Dogecoin mining could be worth it.

The other big factor is, of course, the price of DOGE in relation to a miner’s local fiat currency or in relation to Bitcoin (when Bitcoin goes up or down, many altcoins tend to follow).

Dogecoin mining could also be an interesting way to learn about cryptocurrency mining in general. Using smaller miners that don’t take much electricity, you might choose to mine some DOGE for the learning experience. This is commonly referred to as “hobby mining.” Hobby mining generally isn’t profitable unless the coin being mined happens to see a huge price spike at just the right time.

How to Sell Your Mined Dogecoin

Unless you’re planning to HODL your Dogecoin, you’ll likely want to sell you DOGE after you’ve mined it. Selling DOGE requires using a crypto exchange. You can choose from a number of centralized or decentralized exchanges.

After getting set up on an exchange, find the public key address (also known as a deposit address) for your DOGE wallet. This is the address you will need to send the mined Dogecoins to in order to sell them.

Once the coins have arrived on the exchange, you can trade them for the currency of your choice. That could be U.S. dollars, a stablecoin like USDC, or Bitcoin, for example.

The Takeaway

You don’t have to be a tech genius to mine Dogecoin. But having some previous experience with computers and crypto will be an advantage. The process also requires a substantial investment required in terms of time and money to get started.

Photo credit: iStock/Aleksandr Zotov

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

SOIN0721285

Oct

2021

What is a Private Blockchain? Public vs Private Blockchain

What is a Private Blockchain and How Does It Work?

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

The term “blockchain” most often implies a public blockchain. The Bitcoin blockchain, the first ever created, is a public blockchain, and for a time it seemed like all blockchains functioned the same.

But in the 12 years since the creation of Bitcoin, many individuals and organizations have experimented with different versions of blockchain technology. As a result, the answer to the question “what is blockchain” has become somewhat more complicated. In this article, we will examine the differences between a public vs private blockchain.

Basics of Blockchain

Blockchain technology is a form of decentralized ledger technology (DLT). A distributed ledger consists of multiple servers that can be spread across different geographical regions. The ledger can be used to record transactions or other information without relying on a single computer.

A blockchain is unique in terms of DLT in that blockchains are decentralized, permissionless, and create an immutable public record of transactions. The servers in a blockchain are referred to as “nodes,” which are computers that make sure everyone on the network agrees on the blockchain’s history, a feat known as “consensus.” At least, that’s the case for the Bitcoin blockchain, which was the first ever created.

Since the launch of Bitcoin in 2009, many variations of the original blockchain technology have sprung up. Some are more centralized, require permission to use, or use different consensus mechanisms.

Recommended: What Happens When Bitcoin Forks?

What is a Public Blockchain?

A public blockchain is one that is decentralized, can be used by anyone, and maintains a public ledger of all network activity.

Bitcoin is a good example of a public blockchain. All Bitcoin transactions are recorded on the blockchain and can be seen by anyone using a simple block explorer like blockchain.info. There are also more advanced tools, like those created by companies such as Chainalysis, that can analyze blockchain data for more specific details. Those details can be useful for finding illicit transactions or hacked coins, for example.

Bitcoin is also a permissionless blockchain, meaning anyone can use it without needing permission. This makes the network equitable in that there are very few barriers to entry. All anyone really needs to initiate a Bitcoin transaction is either a home computer or a smartphone and a Bitcoin ATM.

What is a Private Blockchain?

A private blockchain can be thought of as the opposite of a public blockchain. It’s kind of like a personal blockchain for whoever runs it.

Rather than a decentralized network of nodes achieving consensus on a network that can’t be owned or controlled by any single person or group, private blockchains represent a different kind of system.

Private blockchains are more like centralized distributed ledgers. Some might even argue that they are not blockchains at all, given that decentralization is often thought to be a key feature of blockchain technology.

How Do Private Blockchains Work?

Rather than being decentralized, a private blockchain is owned and controlled by one person, group, or organization. This party will control:

• who can participate in the network (users must be invited and verified, meaning that private blockchains are also permissioned blockchains)

• how consensus will be achieved between the nodes

• how mining rights and rewards will be distributed

• how the ledger will be maintained

Whereas public blockchains create an immutable ledger, the owner of a private blockchain can override, reverse, or delete transactions as they see fit.

When it comes down to it, a private blockchain is a distributed ledger that functions as a closed database based on cryptography. The only parties who can run full nodes on a private blockchain are those that have received permission from the owners of the network.

Readers interested in learning more about a specific private blockchain example could research projects like Ripple, Quorum, or Hyperledger Fabric.

Recommended: What is Ripple XRP?

Pros and Cons of Private Blockchains

Private blockchains offer some pros and cons that are distinct from those of public blockchains.

Pros of Private Blockchains

There are a number of pros of private blockchains, including potentially lower energy usage, higher transaction throughput, and more control over unwanted network activity.

Lower Energy Usage

The computing power required to run thousands of nodes around the world to achieve consensus on a public blockchain can add up to a significant amount. In contrast, centralized private blockchains use less energy because they run on just a handful of servers.

Ability to Remove Unwanted Activity

A private blockchain gives its owner the ability to reverse or delete transactions. So, if someone steals funds or information, that problem can be solved easily.

Faster Transactions

Private blockchains can scale more easily than public ones. The number of authorized participants will be much less in a private blockchain, allowing it to process many more transactions per second than a public blockchain.

Cons of Private Blockchain

There are a few downsides to a private blockchain, both of which trace back to its centralization.

Potential for Censorship

Private blockchains face the same challenge as all centralized systems: They require users to put full faith in whomever runs the system. If that person or group decides to take actions that benefit themselves and hurt network participants, there is often little anyone can do. And if the network operators want to exclude certain people from participating in the network for whatever reason, they can do so.

Decreased Security

Private blockchains may be seen as less secure because they create a single point of potential failure. If attackers can seize upon this single attack vector, the network could be in big trouble. Public blockchains, in contrast, have greater blockchain security because controlling the network requires controlling 51% of the network’s nodes.

Recommended: What is a 51% Attack?

Public vs Private Blockchains: Main Differences

In many ways, the distinctions between a public and a private blockchain are easy to point out because they are polar opposites. Here is a recap of their main differences.

Public Blockchain	Private Blockchain
Anyone can run a full node.	Only selected participants can run a full node.
No one needs permission to use the network.	Only selected participants can use the network.
An immutable public ledger is maintained in a decentralized manner.	The ledger can be altered by the entity that controls it.
It’s owned by no one.	It’s owned by a single centralized entity.

Is a Public or Private Blockchain Better?

There is no definitive answer as to whether a public or private blockchain is better.

Private blockchains might have some specific use cases in private industry. But because they can be centrally controlled, some might argue that private blockchains defeat the entire purpose of blockchain technology.

Yes, a private blockchain could consume less power, enable faster transactions, and give greater privacy to its users. But the tradeoff is that power becomes concentrated into the hands of whoever controls the network, and they can change the rules anytime they like.

An open, public blockchain like the one that Bitcoin runs on is the most equitable approach and makes the system nearly immune to censorship or corruption. No one can stop someone from using Bitcoin, and no single person or entity can control Bitcoin. Changing the rules on a decentralized network requires a majority of nodes to come to an agreement.

The Takeaway

Public and private blockchains couldn’t be more different from each other. And while the permissioned approach of private blockchains may result in higher speed and efficiency, it can also come with a higher potential for corruption.

Photo credit: iStock/anilakkus

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0721305

Oct

2021

What Is a Credit Spread? Explained and Defined

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

The term “credit spread” refers to two separate financial terms.

A credit spread is an important indicator of investor sentiment that compares the yields offered by Treasuries and corporate bonds as a way of understanding how optimistic or risk-averse investors are feeling.

But credit spread also refers to an options-trading strategy where an investor sells a high-premium option and simultaneously purchases a low-premium option on the same underlying security.

Credit Spread – the Market Indicator

A credit spread is the gap between the interest rate offered to investors by a U.S. Treasury bond versus another debt security with the same maturity. The differences in the yield of the different bonds, or credit spread, typically reflects differences in credit quality between Treasuries and other bonds.

Investors will also sometimes call credit spreads “bond spreads” or “default spreads.” For investors, credit spreads give investors a quick shorthand for comparing a particular corporate bond versus its risk-free alternative.

When investors refer to credit spreads, they usually describe them in terms of basis points, each of which is a percent of a percent. For example, a 1% difference in yield between a Treasury bond and a debt security of the same duration would be called a credit spread of 100 basis points.

For example, if a 10-year Treasury note offers investors a yield of 3%, while a 10-year corporate bond offers to pay investors a 7% interest rate. There would be a 400 basis-point spread.

Recommended: What is Yield?

The bonds issued by the U.S. Treasury are the benchmark of choice because the financial-services industry considers them relatively risk-free, given their backing by the U.S. government. Investors consider corporate bonds, on the other hand, riskier, even when they’re issued by the largest, longest-tenured and most highly rated companies in the most stable industries.

To purchase debt securities with that added risk, investors look for compensation in the form of extra yield. That’s why investors sometimes look at a debt security’s credit spread as an indicator of the perceived riskiness of a company’s bonds or the creditworthiness of the company itself.

Because they have a lower risk of defaulting, higher quality bonds can offer lower interest rates – and lower credit spreads – to investors. Conversely, lower quality bonds have a greater risk default, and so they must offer higher rates – and higher credit spreads – to compensate investors for taking on that risk.

Recommended: Pros and Cons of High-Yield Bonds

Why Do Credit Spreads Fluctuate?

The credit spreads of the bonds issued by a given company may change over time for a number of reasons. They may change because of macroeconomic fluctuations such as inflation, or the degree of market enthusiasm for the company issuing the bond.

When the equity markets seem headed for a downturn, both institutional and retail investors often sell stocks and corporate bonds, and then reinvest in U.S. Treasuries. That pushes down the yields offered by U.S. Treasury bonds as investors flee to safety, while the yields paid by corporate bonds rise in order to entice skittish investors. The result is a general widening of credit spreads across the board.

That dynamic is one reason that investors look at average credit spreads as a window into the overall market sentiment, in which wider credit spreads indicate declining investor sentiment. Narrower credit spreads typically signify more bullish sentiment among investors. That’s because during a bull market the safety of Treasuries holds less appeal to investors, forcing the notes to offer higher rates. Meanwhile, that same confidence leads investors to see corporate debt as less risky, allowing companies to issue bonds with lower yields.

What Is a Credit Spread in Option Trading?

Sometimes, investors use the term “credit spread” to refer not just to the difference in yield offered by a Treasury bond and a similar security, but also as a specific options trading strategy. The strategy is also sometimes known as a “credit spread option” or a “credit risk option.”

In an option credit spread strategy, an investor buys and sells options on the same underlying security with the same expiration, but at different strike prices. The premiums the investor receives on the option they sell should be higher than the premiums they pay on the option they buy, which leads to a net return for the investor.

The strategy takes two forms:

Bull Put Spread

In the bull put spread, in which the investor buys and sells options in which they’ll make a maximum return if the value of the underlying security goes up.

A bull put spread is often also called a put credit spread. In it, an investor sells a put option and purchases a second put option with a lower strike price. For the strategy to work, the investor buys the same amount of both options and, both options will have the same expiration date.

In a bull put spread strategy, as long as the price of the underlying security remains above a certain level, the strategy will begin to produce profits as the differences between the value of the two options begins to evaporate as a result of time decay. Time decay is how much the value of an options contract declines as that contract grows closer to its expiration date.

As the name indicates, the bull put spread is a strategy used by investors who are bullish on a security. And the higher the underlying security rises during the options contract, the better the investor will do. But if the underlying security falls below the long-put strike price, then the investor can lose money on the strategy.

Bear Call Spread

The other credit-spread is called the bear call spread, or a call-credit spread. That strategy is, in many ways, the mirror opposite of the bull put spread. Investors in this strategy expect that a security’s price will go down. In it, the investor buys and sells two options on the same security, with the same expiration date but at prices where the investor will receive the maximum return if the price of the underlying security sinks.

A bull put spread can be a profitable strategy if the investor remains under a certain level over the duration of the options contracts. If the security is below the short call’s strike price at expiration, then the spread seller gets to keep the entire premium, giving the investor a healthy return. But the risk is that if the price of the security rises above the long-call strike price at the expiration of the strategy, then the investor faces a loss.

Recommended: A Guide to Options Trading

The Takeaway

A credit spread is an important indicator of investor sentiment. It’s also an options strategy where a high premium option is written and a low premium option is bought on the same security. Understanding the meaning of terms like credit spread is an important step for new investors who are just starting to invest in stocks.

The SoFi options trading platform is a great way to get started, thanks to its user-friendly design. Investors can trade from the mobile app or web platform. And should any questions come up along the way, there’s a library of educational resources about options available.

Trade options with low fees through SoFi.

Photo credit: iStock/Astarot

Oct

2021

What Is Yield Farming in Crypto & DeFi?

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

Yield farming involves lending crypto in exchange for high returns, also called yield, typically paid out in crypto. It requires a liquidity pool (smart contract) and a liquidity provider (an investor).

Yield farming has been one of the biggest factors driving the growth of decentralized finance (DeFi), blockchain-based platforms providing financial services, such as borrowing and lending, without a centralized authority like a traditional bank or lender.

What is Yield Farming?

Yield farming crypto protocols reward liquidity providers (LPs) for locking up their crypto in a liquidity pool governed by smart contracts. In this way, the LPs are effectively lending their crypto. The rewards generally come in one of three forms:

• A percentage of transaction fees

• Interest from lenders

• A governance token

Regardless of the method of payout, returns are expressed as an annual percentage yield (APY). The more funds added to the pool by investors, the lower the value of the issued returns will fall.

In the early days of yield farming, most investors staked stablecoins like USDC, DAI, or USDT. But today, the most well-known DeFi protocols run atop the Ethereum network and provide governance tokens as an incentive for “liquidity mining.” In exchange for providing liquidity to decentralized exchanges (DEXs), tokens are farmed in liquidity pools.

💡 Recommended: What Is a Liquidity Pool, Exactly?

With liquidity mining, yield farming participants earn token rewards as an additional form of compensation. This type of incentive gained traction when the Compound network began issuing COMP, its rapidly appreciating governance token, to users of its platform.

The majority of yield farming protocols today reward liquidity providers in the form of governance tokens. Most of these tokens can be traded on centralized and decentralized exchanges alike.

How Does Yield Farming Work?

Yield farming uses an order-matching system known as the automated market maker (AMM) model.

The AMM model, which powers most decentralized exchanges, does away with the traditional order book, which would contain all “bid” and “ask” (buy and sell) orders on an exchange. Rather than stating the current market price of an asset, an AMM conjures liquidity pools through smart contracts. The pools then execute trades according to preset algorithms.

This DeFi yield farming method relies on liquidity providers to deposit funds into liquidity pools. These pools provide funding for DeFi users to borrow, lend, and swap tokens. Users pay trading fees, which are shared with liquidity pools based on how much liquidity they provide to the pool.

How to Calculate Returns in APY

Estimated DeFi yield farming returns are calculated on an annual basis. The key word here is “estimated,” because interest rates can change dramatically over the course of the year, or even the course of one week.

There’s no particular method to calculate exactly how much APY a protocol will earn. Word tends to spread quickly about a yield farming strategy that earns high returns. The masses then rush in, pushing down yields.

There’s another variable factor: the token in which rewards are denominated. If investors are paid in the form of a DeFi token of some kind, and that token drops in value relative to other currencies, even high percentage gains could be reduced or wiped out.

Yield Farming vs Staking

Staking is different from yield farming. Proof-of-stake (PoS) tokens allow users to become transaction “validators” who confirm transactions on the network by locking up tokens for a set period of time. In exchange, users earn interest on their tokens.

While both staking and yield farming involve depositing tokens and earning a kind of crypto dividend (which is why the terms “staking” and “locking up tokens” are sometimes used interchangeably), what’s going on behind the scenes is much different in each case.

Staking crypto involves validating network transactions and earning a portion of newly minted block rewards. This action happens directly on the blockchain of the network of the token being staked. Staking serves the same function on PoS networks as mining does on proof-of-work networks — that of achieving consensus. Through staking, all nodes in a network agree on which transactions are valid.

Yield farming is participating in a decentralized financial product, earning interest on crypto that has been loaned out to someone else. These transactions are facilitated by smart contracts, most commonly on the Ethereum network.

What Are the Risks of Yield Farming?

This application of DeFi is as risky as it is volatile. At best, LPs might find themselves earning far less interest than expected, since rates can swing upwards or downwards quickly. At worst, they can lose everything they invested — in some cases thanks to hackers, and in other cases to what’s known as a “rug pull” scheme.

How Can Yield Farming be Hacked?

Software-related vulnerabilities can lead to hacking. For example, in 2020 Harvest Finance was hacked when flaws in the smart contracts used to govern the protocols were exploited by attackers. It resulted in more than $420 million of investor funds being lost. Those funds can never be recovered and there is no regulatory authority that investors can appeal to.

What is a “Rug Pull” Scheme?

A rug pull involves a group of people creating a seemingly promising new platform that is in fact a scheme to steal user funds. Once enough unsuspecting liquidity providers have bought into the scam by depositing tokens, the protocol goes offline — and the creators make off with all the invested funds. Investors lose everything and have no recourse. Simply search for the term “defi rug pull” and a long list of related stories will come up.

Beyond the risk of hacks and schemes, there are also additional risks like high gas fees, the complexity of interacting with the protocols themselves, and the fact that DeFi applications depend on several underlying applications to work correctly. If something goes wrong on any layer, it could disrupt the whole thing.

Is Yield Farming Right for Me?

Yield farming is likely to appeal to a very select group of people — those who have both the required technical skill and high risk tolerance.

If you’re reading an introductory article on the idea of yield farming, chances are it’s not for you. This kind of risk-taking isn’t for crypto beginners or those who can’t risk losing much capital.

Recommended: A Beginner’s Guide to Cryptocurrency

The Takeaway

Yield farming can be a high-risk, high-reward venture for the curious, tech-minded few who are comfortable with the possibility of losing their principal investment.

Since the summer of 2020, when DeFi was at the height of its popularity, enthusiasm has waned somewhat. Tales of extravagant returns have been tempered by tragedies of hacks and rug pulls.

Photo credit: iStock/PeopleImages

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