Most cryptocurrencies have been trading in a range-bound environment for weeks. This makes it tough to be profitable when you need movement in the price. But this is the perfect environment for earning interest (called staking rewards) and earning commissions (called farming interest rates). To earn commissions, you deposit different types of assets to be available for other people to trade. Gate.io has special software that will automatically do the work for you and allow other customers to trade the assets you allocated, paying you a commission fee each time they do.
How Does Yield Farming Work??
Having these funds/assets available for others to trade when they like, is called “providing liquidity”. However, the main problem with earning commissions by providing liquidity is the movement of the price of the assets because the commissions earned could be lower than the losses from price movement. To understand how yield farming works, let’s use the example of Apples and Oranges.
To Control Your Risk, You Need to Understand Impermanent Loss
Let’s pretend for a moment with this hypothetical example that you are in the business of exchanging Apples and Oranges. You are acting as a market maker. Anyone who comes along to buy an Apple, you will sell them an Orange. And anyone who asks to buy an Orange, you will give them an Apple. After you exchange your Orange for their Apple, you now have extra Apple inventory and less Orange inventory. 5 minutes later, someone else could want your extra Apples, for Oranges. But if in those 5 minutes, the price moves against you, (Apple price down, Orange price up) then you might lose more on the price movement than you made on the commissions you charge. This loss is nicknamed by the industry “impermanent loss”.
However recently we have had such low price volatility that it’s the perfect environment for farming yield. The probability of the impermanent loss is lower, while the benefit of the high yield for assuming this risk makes this an attractive strategy from a risk-to-reward perspective. When you deposit cryptocurrencies in a pool at Gate.io, you are acting as a market maker between those two assets (let’s say Bitcoin and Ethereum). You are no longer concerned with trying to capture these minuscule movements in a range that is chopping back and forth, making it difficult to even capture 2% in a single direction.
Hodl & Earn
In addition to farming pools, Gate.io offers a “Hodl & Earn” program that allows users to earn high-interest rates without acting as a market maker. The risk here is the potential decline in the price of the cryptocurrencies you are earning interest in. However, because volatility has been suppressed for weeks, time is moving in your favor. As “nothing is happening” you are earning top dollar while taking minimal risk. The advantage of Gate.io is that many of the Hodl & Earn programs have a high annual interest rate, but a short lock-up period. So you might earn let’s say 40% annually, but for a period of 7 days before you have to renew it. This makes it ideal for earning interest while cryptocurrency is staying within a range-bound environment, but gives you the flexibility to liquidate the assets if the overall market starts to break down below the bottom end of the current ranges. Normally the traditional credit markets like bank certificates of deposit or bonds do NOT work like this. With bank certificates of deposit and bonds, you have to lock up for a long period of time to get a higher yield.
The bottom line is this: If cryptocurrency is doing nothing, then you may as well get paid.
Learn more at Gate.io.
