Dec 17, 2021
As crypto assets gain in popularity, financial institutions are finding new ways to profit from them. One such method, yield farming, is garnering most of the attention.
First, let’s try and simplify what yield farming is. Let’s say you have an asset that I want to borrow. Maybe I believe that asset is going to appreciate by 100% in the next few months but I don’t want to spend the money to actually buy the asset. Instead, I make you an offer. If you lend me your asset (or deposit it with me), I’ll pay you 10 or 20% in interest. After all, I’m expecting the asset to appreciate 100%, so giving back a little in exchange for not having to actually buy the asset outright seems fair.
So long as the asset increases in value, we both make money. And because I don’t want to be too concentrated in just one asset, I might borrow several other types of assets from other people. That is basic yield farming. Borrow for a fee in hopes the speculative returns exceed the borrow rate. In all likelihood, some of those firms borrowing assets are creating more complicated packages of assets which are then sold to even more aggressive investors looking to generate alpha. That’s just how the system works. Speculate on speculation, charge a fee and just don’t get caught without a chair when the music stops.
I swear I’ve seen this movie before. While I can’t recall the title, I seem to recall it ended badly.
Creating new ways of generating wealth is good. Offering investors a return on their assets is good. But when the rates of return being offered from unregulated institutions become disproportionately large relative to anything else out there, maybe that’s a good time to quickly glance down and make sure you haven’t run off the side of the mountain.
Crypto is the wild west of finance. That’s not necessarily a bad thing. A lot of people made a lot of money during the gold rush. During that same period though, a lot of people got scammed and lost everything. It’s good to embrace risk, but you have to understand it.
If crypto prices fall, the speculators paying interest on borrowings; the speculators dependent on asset prices increasing in order to make those payments, are in trouble. It’s challenging enough to understand the extent of speculation in regulated markets. In an unregulated market, all bets are off, or something to that effect. So before depositing your crypto with someone offering you a very high rate of return, ask some questions. Understand your exposure and risk. Then ask yourself if it makes sense.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastytrade is a trademark/servicemark owned by tastytrade.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).
tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.