After its launch in 2020, Yearn.finance (YFI) quickly became one of the fastest-growing DeFi projects, attracting over $800 million in digital assets in its first month. In eight months, the total value locked (TVL) on the platform had grown to $1 billion. Yearn Finance offers a range of lending and trading services that provide impressive earning potential for crypto asset holders.

What is the Yearn Finance platform?

Yearn.finance (YFI) is a decentralized finance platform consisting of a group of protocols built on the Ethereum blockchain. These protocols allow users to maximize their digital asset-earning potential through staking, lending aggregation and yield generation services.

The aim of the Yearn Finance project is to make DeFi (decentralized finance) trading less complicated and more accessible to less technically-minded traders. The platform utilizes automation to allow traders to maximize profits from yield farming.

Yearn Finance consists of four core products:

• Earn – establishes the highest interest rates that users can earn from lending crypto assets. 
• Zap – groups together several trades in one click, reducing costs and labor.
• APY – comprehensive data table that analyzes interest rates across various lending protocols. 
• Vaults – investment strategies developed to yield the highest returns from other DeFi projects.

Through locking supported cryptocurrencies in Yearn Finance smart contracts integrated into the Curve DeFi and Balancer trading platforms, users earn YFI tokens and can engage in yield farming practices. The more crypto assets that users lock into these protocols, the more tokens they receive.

In order to operate efficiently in a decentralized manner, Yearn Finance built an impressive system of automated incentives rewarding participants who act in accordance with the outlined governance proposals with its YFI tokens. These proposals are voted in by YFI holders.

Who created Yearn Finance (YFI)?

Yearn Finance was launched in February 2020 by a prominent contender in the crypto space, Andre Cronje. Cronje led the launch of the platform having received no funding or reserving any tokens for himself, an exceptionally rare occurrence in the crypto assets and DeFi projects space. 

On top of that, he also holds important roles at smart contract ecosystem Fantom and CryptoBriefing - a premier go-to resource for anyone interested in Initial Coin Offerings (ICOs) or crypto media.

How does the Yearn Finance (YFI) platform work?

Yearn Finance offers users custom-built tools that act as an aggregator for other DeFi projects such as Aave, Compound, and Curve DeFi trading platforms. 

Built on the Ethereum blockchain, Yearn Finance deploys contracts on other compatible decentralized exchanges such as Balancer and Curve to maximize the earning potential for its users. 

These contracts can be categorized into the four core products mentioned above, with most of the platform's services centered around lending or trading digital assets, and generating a passive income.

Earn

The earn product acts as a lending aggregator and searches across a selection of reputable different lending protocols to find the best interest rates, allowing users to tap into the best rates when lending cryptocurrencies. Users can then deposit USDT, USDC, DAI, sUSD, or TUSD into liquidity pools directly through the Yearn Finance platform to tap into those interest rates. 

Zap

Saving time, costs and transaction fees, the zap product allows users to conduct several transactions in one click. For example, a user can trade DAI for yCRV in one smooth movement, as opposed to several transactions on other DeFi projects. 

APY (annual percentage yield)

Aggregates the earning potential on an annualized basis based on how much capital is invested by searching across the various lending protocols utilized by the Earn product. 

Vaults

The more complex of the services offered by Yearn Finance, the Vaults product allows users to tap into active investment strategies designed by the platform's own self-executing code. These essentially work as actively managed mutual funds with Yearn Finance being the financial intermediary.

Users looking to engage in this product, noting that it is still in experimental stages, would need to have some technical know-how to investigate how these strategies work as they are presented in Solidity (a smart contract-orientated programming language). Utilizing the product, however, is less complicated, simply requiring users to deposit USDC or DAI in each strategy which then invests the funds in various liquidity pools.

What is the YFI token?

Launched in July 2020, the YFI token is based on the ERC-20 token standard and operates as a utility and governance token across the ecosystem. While anyone can make a proposal, only YFI holders are able to vote on proposals put forward regarding the governance and future development of the platform. The higher one's YFI token holding, the more voting power the YFI holders have. A proposal requires more than 50% of the votes in order to be passed.

The maximum supply of YFI tokens was 30,000, however, YFI holders voted to increase this. Following the successful proposal, the total supply is now 36,666 YFI tokens.

Holders are able to earn YFI tokens through revenue received through fees charged on the platform. These are generated through the 0.5% fees charged for using the Earn feature and 5% for the Vault service. Users can also earn YFI tokens by providing liquidity on the platform.

How can I buy the Yearn Finance token?

Whether looking to actively engage in the yearn.finance (YFI) platform, other DeFi protocols, or simply acquire and hold the YFI token, Tap provides a simple and secure solution. Fully regulated and licensed, the Tap mobile app requires users to create an account and complete the account verification process in order to gain access to a wide range of vetted cryptocurrencies. 

Once approved, users can buy, sell, store and trade the YFI token or any of the other supported cryptocurrencies from the convenience of their mobile phone. 

‍

‍

The world of cryptocurrency is constantly evolving, as are the threats that come with it. As hackers and cybercriminals are always looking for new ways to steal or compromise digital assets, bank-grade security has become a vital component needed when engaging in custodial wallet solutions.

By implementing bank-grade security measures, platforms and services can ensure the safety and protection of customer funds, build trust and confidence with users, and attract new investors. 

The importance of bank-grade security in crypto custodial wallets

When it comes to cryptocurrencies, bank-grade security is crucial for any platform or service that provides custody or storage solutions for digital assets.

It involves a set of protocols, technologies, and procedures that are specifically designed to protect cryptocurrencies from theft, hacking, and other cyber-attacks.

In terms of custodial and non-custodial wallets, custodial wallets have a third-party manage the custody of a user's private keys, assuming responsibility for managing the private key, safeguarding assets, and signing transactions. As the responsibility is now shifted away from the user, it becomes increasingly important that the correct security measures are put in place.

At Tap, we understand the importance of bank-grade security in managing and storing cryptocurrencies. We are committed to providing our clients with the highest level of security measures to ensure the safety and protection of their crypto assets.

So what are the benefits of using bank-grade security when dealing with cryptocurrencies? Before we answer this let's first take a look at the difference between custodial and non-custodial wallets.

Custodial wallets vs non-custodial wallets

Custodial wallets and non-custodial wallets are two types of digital wallets used to store and manage cryptocurrencies. As mentioned above, custodial accounts are provided by third-party services, such as crypto exchanges or wallet providers, and they hold the private keys to the user's cryptocurrencies.

Non-custodial wallets, on the other hand, allow users to hold and manage their own private keys without the involvement of a third-party service.

In terms of security, custodial wallets have some advantages and disadvantages compared to non-custodial wallets. Custodial accounts offer convenience and ease of use, as the third-party service takes care of the security and management of the user's assets. This can be particularly helpful for beginners in the crypto space who may not have the technical knowledge or experience to manage their own wallets.

However, custodial accounts also come with some risks. Since the third-party service holds the private keys, users are essentially trusting the service to keep their assets secure. If the service provider is hacked or experiences a security breach, the user's assets could be lost or stolen. Hence the importance of these services implementing stringent security measures.

Non-custodial wallets such as hardware wallets, on the other hand, offer users complete control over their assets. In this case, the user holds the private key and has full control over their cryptocurrencies ensuring that they are stored and managed securely.

Non-custodial wallets can also be considered more private, as users are not required to share their personal information with a third-party service.

While non-custodial wallets hold one's crypto investments they typically do not provide the range of services offered by a third-party service provider.

Protecting your private keys with bank-grade security measures

First and foremost, bank-grade security offers a high level of protection against cyber threats. Cryptocurrencies are often considered a prime target for hackers and cybercriminals due to their decentralized nature and lack of regulation.

When using a custodial crypto wallet, the platform on which you are storing your cryptocurrencies is therefore responsible for your private key and responsible for keeping your personal information safe.

With bank-grade security measures in place, crypto assets are stored in secure offline wallets, protected by multi-layered encryption, and monitored 24/7 by a team of security experts. This significantly reduces the risk of theft or loss of cryptocurrencies from a crypto wallet.

How bank-grade security can attract institutional investors to crypto

In addition to protecting against cyber threats, bank-grade security also provides peace of mind for investors and traders. When dealing with traditional financial institutions, customers expect a certain level of security and protection for their assets. The same should be true for cryptocurrencies. By implementing bank-grade security measures, platforms and services can build trust and confidence with their customers.

Additionally, bank-grade security can help attract these investors to the world of cryptocurrency. Institutional investors, such as hedge funds and pension funds, often have strict requirements for custody and storage solutions. They need to know that their crypto wallet and assets are secure and protected from theft or loss.

By offering bank-grade security measures, platforms and services can appeal to these investors and open up new opportunities for growth and expansion.

The role of HSMs, multi-factor authentication, and encryption in crypto wallets

Investing in cryptocurrencies requires a high degree of security and protection, and bank-grade security measures are essential to ensure the safety and protection of crypto assets stored in crypto wallets. Hardware security modules (HSMs), multi-factor authentication, and encryption are three critical components of bank-grade security measures that play a significant role in protecting crypto wallets.

HSMs are specialized hardware devices that provide secure storage and management of cryptographic keys. They are designed to prevent unauthorized access to assets by requiring multiple layers of authentication and verification. HSMs are widely used in the financial industry and are considered one of the most secure methods for storing and managing cryptocurrencies.

Multi-factor authentication is another key component of bank-grade security. It involves requiring users to provide more than one form of authentication to access their crypto wallet. For example, a user may be required to enter a password and a one-time code sent to their mobile phone. This significantly reduces the risk of unauthorized access and ensures that only authorized users can access their custodial or non-custodial wallet.

Encryption is also a critical component of bank-grade security. It involves transforming assets into an unreadable format that can only be deciphered with a decryption key. This ensures that even if a hacker manages to access the custodial or non-custodial wallet, they will not be able to read or use them.

By implementing bank-grade security measures, platforms and custodial account services can ensure the safety and protection of their customers' crypto holdings, build trust and confidence, and attract investors.

Bank-grade security vs other types of security measures used by a crypto exchange

What makes bank-grade security different from other types of security measures is the combination of technology and protocols used to securely store the crypto wallet. Crypto exchanges typically implement bank-grade security solutions that include a combination of hardware and software-based security measures, such as HSMs, multi-factor authentication, and encryption.

Looking ahead, the importance of bank-grade security in the world of cryptocurrency exchanges is only going to increase. As more people adopt cryptocurrencies and the market continues to grow, the need for secure storage and custody solutions will become even more pressing. Platforms and custodial account services that can offer bank-grade security measures will be better positioned to compete and succeed in this rapidly evolving industry.

In conclusion

Bank-grade security is essential for anyone who wants to use cryptocurrencies safely and securely. It ensures the protection of custodial wallets and instills a degree of trust in those utilizing the custodial wallets on offer.

Whether you're an investor, trader, or simply someone who wants to store your assets, bank-grade security measures provide peace of mind and protection against cyber threats through implementing strong security measures. At Tap, we take security very seriously and are committed to providing our customers with the highest level of protection for their assets and crypto wallets.

While the term “investment” is thrown around rather loosely these days, the fact of the matter is that there are only three basic categories when it comes to investments: lending, cash equivalents, and ownership. 

Lending vehicles include savings accounts and bonds while cash equivalents include money market accounts. The ownership category encompasses instruments such as real estate, stocks, and commodities. While education and consumer products are often labeled as investments, this is not necessarily the case as the primary purpose behind investments is to provide income or profit, or ideally both. 

Below we explore these three core categories. 

Lending Investments

Lending investments are a type of investment in which an individual or an organization lends money to another party with the expectation of receiving interest payments on the loan. The borrower could be an individual, a company, or a government entity.

This investment category can take various forms, including savings accounts, bonds, personal loans, business loans, and peer-to-peer lending. In general, the interest rate on a lending investment depends on the creditworthiness of the borrower, the duration of the loan, and the prevailing market conditions.

Overall, lending investments can be a valuable component of a diversified investment portfolio, providing both income and diversification benefits. Two of the more popular options include bonds and savings accounts.

Bonds

Bonds are an umbrella term encapsulating a vast range of investments, ranging from U.S. Treasuries, government bonds and international debt instruments to corporate junk bonds as well as credit default swaps (CDS).

Compared to other ownership investments, bonds pose a much lower risk and offer smaller returns. The risks and yields associated with different types of bonds vary considerably.

Savings Accounts

Placing money in a savings account is an investment of sorts, as the investor entrusts their funds to the bank, essentially lending money to it to earn interest. The bank then pays out interest on deposits made and earns its profits by lending out these same funds at higher rates to businesses. While the returns are low, there is essentially zero risk. 

Lending investments can be a good way to generate steady income with relatively low risk, especially when compared to other forms of investment such as real estate or trading on the stock market. However, there is still a risk of default, which means that the borrower may not be able to repay the loan as agreed. Therefore, it is important to conduct due diligence on the borrower's creditworthiness before investing in any lending opportunity, as you would with any types of investments.

Cash Equivalents

Cash equivalents are a type of investment that is considered to be highly liquid and low risk. They are typically short-term investments that can be quickly converted into cash without a significant loss in value. As such, this category is often used by investors as a safe haven or a temporary parking place for funds until a more attractive investment opportunity presents itself.

Cash equivalents are often classified as a separate category of investment, alongside stocks, exchange traded funds, bonds, and other asset classes. They include instruments such as money market funds, certificates of deposit (CDs), commercial paper, and treasury bills.

Money market funds

Money market funds are a type of mutual fund that invests in short-term debt securities, such as commercial paper and Treasury bills. These can typically be bought at a bank and function in a similar way to a savings account, only the lock-in period is fixed and ranges from roughly 3 months to a year. Money market funds also provide higher returns when compared to a savings account. 

Certificates of deposit (CDs)

CDs are bank deposits that offer a fixed rate of interest for a specified period of time. 

Commercial paper

Commercial paper is a short-term debt security issued by companies to fund their operations.

Treasury bills

Treasury bills are short-term government securities issued to finance the national debt.

Cash equivalents are generally considered to be a low-risk investment, as they offer a high degree of liquidity and are backed by the creditworthiness of the issuer. However, they may not offer a high rate of return compared to other types of investments, such as stocks or bonds. As such, they are often used as a component of a diversified portfolio, providing a measure of stability and liquidity in times of market volatility.

Ownership investments

Ownership investments are a type of investment in which an individual or an organization purchases an ownership stake in a company or asset with the expectation of receiving a return on their investment. They include investments in publicly traded stocks, privately held companies, real estate, and commodities.

Stocks

Publicly traded stocks are securities that are traded on a public exchange, such as the New York Stock Exchange (NYSE) or the Nasdaq. Private companies, on the other hand, are not publicly traded, and ownership stakes in these companies are typically obtained through private equity investments.

Real estate

Real estate is another type of ownership investment, in which an individual or an organization purchases a physical property with the expectation of generating rental income or appreciation in the property's value over time. 

Commodities

Commodities, such as gold or oil, are also considered to be ownership investments, as they represent a physical asset that can be bought and sold. Precious metals fall into this category as well.

Ownership investments can offer the potential for high returns but also come with a higher degree of risk compared to other types of investments. The value of an ownership investment can be affected by a variety of factors, including economic conditions, industry trends, and company performance.

Overall, ownership investments when compared to different types of investments can be a valuable component of a diversified portfolio, providing the potential for long-term growth and income. However, it is important to conduct due diligence on any potential investment and to consider the risks associated with owning an ownership stake in a company, physical asset or precious metals.

In conclusion

There are three main different types of investments: lending investments, cash equivalents, and ownership investments. 

Lending investments involve lending money to another party with the expectation of receiving interest on the loan. Cash equivalents are highly liquid and low-risk investments that can be quickly converted into cash. Ownership investments involve purchasing an ownership stake in a company or physical asset with the expectation of generating a return on the investment. 

Each type of investment has its own unique characteristics, benefits, and risks, and can be used to create a diversified investment portfolio that balances risk and reward. Ultimately, the choice of investment strategy will depend on an individual's investment objectives, financial goals, and risk tolerance.

‍

Considering going on a last-minute travel adventure? While we’ve been programmed to think that last-minute travel equates to more expensive, this isn’t necessarily always the case. In this article, we’re dishing out the top 5 last-minute travel tips and ways in which you can score big and tap into great last-minute travel deals. 

From tips on how to google flights to finding hotel rooms with perks and everything else you might need for your last-minute bookings, we've got you covered right here.
‍

1) Be flexible

Flexibility is key to saving on any last-minute travel needs you may have. And the number one way of doing so is by being f.l.e.x.i.b.l.e.

Whether it’s with your travel dates, flight times, or destination, flexibility can save you a lot of money in the long run. Accommodation and flight prices depend on a plethora of factors such as whether it's in-season or off-season, if you're only looking at popular destinations, or if there are events taking place nearby at the same time, i.e. a conference.

Be sure to check out a range of options before deciding on a specific date and time, just a day’s difference can equate to hundreds of dollars. You might end up surprised by how much money you can save on your last-minute travel adventure by just going with the flow.
‍

2) Fly wise, fly cheap

The most significant savings come from hotel deals and package deals—not airplane tickets. Flight prices usually go up in cost as the date of departure gets closer, but there is hope for last-minute travel deals. If you want to fly out of town within the same week that you book your seats, try buying your tickets on a Sunday or Tuesday, airlines frequently discount their fares on these days and offer the best deals.

You'll be saving some decent money by avoiding flying on Fridays and Mondays as fares are expected to be higher since they're the most popular days for weekend travelers. Opt for mid-week travel if possible.

Another top tip that many individuals are unaware of is that their browser keeps track of the terms they search for on a regular basis. If the platform notices that someone is searching for anything related to holidays or last-minute flights, the price will rise.

To avoid paying more for the same thing, make sure to open your browser in an incognito window before you google flights and thus prevent being tracked or leaving a history of your searches. The same applies to airline websites and online travel agencies. Not just a last-minute travel hack, but one to use across all varieties of travel.
‍

3) Be on the lookout for perks

If you're looking for a more affordable way to vacation, then pay attention to the perks and benefits offered by travel companies and accommodations, especially when it comes to last-minute travel. Consider booking accommodation that includes free breakfast and/or complimentary parking, every little bit helps. 

You will be surprised at how much money some of these perks can save! For instance: free breakfast could save you about $20 to $25 per day while parking can easily range from anything between $30 to $45 a day if you opt to get a rental car.

Always do the math before deciding if a specific accommodation is worth it. Check out platforms like Booking.com, Travago, and a specific hotel website you like for the best deals and last-minute travel options, as well as travel apps for any last-minute deals.
‍

4) Read the fine print

When it comes to a last-minute trip, be aware of the fine print when booking your flight, adventure, or accommodation. Make sure to read up on their cancellation policies as many airlines now offer relaxed rules for changing plans at short notice which means you may be able to change dates without penalty if necessary.

While last-minute deals and spontaneity are exciting, sometimes life has a way of getting in the way so be sure to know the specific terms of your flights and hotels.
‍

5) Prep like a pro

If you're looking to travel on a budget, there's more to think about than just withdrawing cash from an ATM. With a little planning ahead, you can become a savvy traveler and save yourself some money - even with last-minute travel!

Many of us have been abroad and had to pay outrageous ATM and credit card fees. And all because we didn’t do our research and plan ahead. By taking your Tap card with you, you’ll save a substantial amount of money on your ATM withdrawal fees and foreign exchange fees thanks to its low to zero fees plans compared to that of traditional banks. 

All operated through the app, you can stay up to date on your transaction history and your balances in real-time, and easily - and instantly - transfer funds between accounts. The card also allows you to swipe at merchants worldwide and make quick payments no matter where in the world you might be.

It's also worth doing your research on whether the place you are traveling to prefers guests paying cash or if it is more card transaction based. You would hate to have to travel around with a wad of cash that is difficult to get rid of.

Be wise

Booking for a honeymoon, anniversary, or simply a romantic getaway? Last-minute travel might not be appropriate for you if you’re set on a particular type of accommodation at a particular location or must go during specific travel dates. 

If everything has to be in harmony with your plans, we would strongly recommend you book ahead of time instead of opting for a last-minute trip. You wouldn’t want to cut corners to save money on your once-in-a-lifetime memories. 

Travel smart to travel far

Embrace all that life has to offer by exploring different corners of the globe and get more bang for your buck with these 5 travel tips. From saving a few bucks here and there, you could end up saving big on your last-minute trip.

Be sure to switch to incognito mode and start searching for your dream holiday, it might be just around the corner! 

In the chronicles of cryptocurrency folklore, few events are as groundbreaking or as heartily celebrated as Bitcoin Pizza Day. This annual commemoration observed on the 22nd of May, looks back to one of the earliest real-world transactions involving Bitcoin. It's a momentous occasion that serves as a delicious reminder of the humble origins and astonishing growth of Bitcoin and the broader cryptocurrency ecosystem.

On May 18, 2010, a Florida-based programmer named Laszlo Hanyecz made a legendary post on the BitcoinTalk forum. In this post, he stated that he wanted to buy two large pizzas in exchange for 10,000 Bitcoins. He laid out his preferences for the pizza toppings and expressed his desire to have the pizzas delivered to his house, hoping to make the transaction as simple as possible​.

In a surprising turn of events, just four days later, a fellow Bitcoin enthusiast named Jeremy Sturdivant, aka "jercos," stepped up to the plate and accepted Laszlo's tasty offer. The deal was sealed, and before long, two piping-hot pizzas arrived at Laszlo's doorstep. 

‍

This marked the first-ever recorded real-world transaction using Bitcoin as a currency, setting a precedent for future use cases​.

Now, you might be wondering, "What's the big deal? It was just $25 worth of pizza, right?" Well, my friend, hold onto your appetites. At the time, those 10,000 Bitcoins were valued at a mere $41. But fast forward to today, and they would be worth millions! That's right, Laszlo's pizza purchase turned out to be one of the most valuable slices of all time.

The Bitcoin community cherishes this moment, not just for its historical importance, but for the staggering financial implications of the transaction. And so, every year, Bitcoin enthusiasts and crypto communities around the world come together to celebrate Bitcoin Pizza Day.

It's a time to reflect on Bitcoin's humble origins and its remarkable growth into a globally recognized asset class. We raise our forks and cheer for Laszlo, who unwittingly set in motion a revolution in the world of finance and beyond.

But Bitcoin Pizza Day isn't just about looking back; it's about looking forward too. The blockchain technology that underpins Bitcoin has evolved and found its way into various industries, from finance to supply chain management and even healthcare. 

Cryptocurrencies themselves have diversified, with thousands now available, each with its unique features and use cases. While Bitcoin was the first cryptocurrency and remains the most widely recognized and valued, the crypto landscape has blossomed since Laszlo's pizza adventure.

Laszlo Hanyecz's simple act of buying two pizzas has grown into a grand annual tradition. The power of his story lies in its illustration of Bitcoin's potential and the limitless possibilities of cryptocurrency. This tale is often shared with newcomers to the crypto space, serving as a poignant reminder of Bitcoin's transformative journey and its potential for future growth.

Bitcoin Pizza Day serves as a reminder of how far we've come and a celebration of the potential yet to be realized. It's a testament to the power of a community and the revolutionary potential of a good idea. As we chow down on our own slices this Bitcoin Pizza Day, let's raise a slice to Hanyecz, to Bitcoin, and to the incredible journey of cryptocurrencies.

To learn more about the history of Bitcoin, you can explore the original Bitcoin whitepaper published by Satoshi Nakamoto in 2008. If you're new to the crypto space and want to understand more about blockchain technology, this comprehensive guide is a great place to start.

Happy Bitcoin Pizza Day to all! 🍕 May your celebrations be filled with joy, laughter, and, of course, lots of tasty slices. Cheers to many more slices of history yet to be made!

If you’re new to trading it is likely that you’ve come across the term “bid-ask spread”. A bid-ask spread provides a good measure of the market’s liquidity and in simple terms refers to when the ask price for an asset exceeds the bid price when trading. It’s important for traders to consider the bid-ask spread when buying or selling an asset as it affects the profitability of their trades. 

In this article, we break this concept down along with bid price and ask price, and explore how they work and why it's relevant.

Bid price and ask price definitions

Before we get started, let's cover what the terms bid price and ask price mean.

Bid price

The bid price is the highest price that a buyer is willing to pay for a financial asset, such as a stock or a currency pair. It is the price at which a buyer is willing to purchase the asset from the seller. In other words, the bid price represents the demand for the asset, as buyers are willing to pay this price to acquire it.

Ask price

The ask price is the lowest selling price that a seller is willing to accept for an asset. It represents the price that a seller is willing to sell the asset to a buyer. The ask price represents the supply of market, as sellers are willing to offer it at this price.

What is a bid-ask spread?

As touched on above, a bid is the highest price a buyer is willing to pay for an asset, indicating the demand in the market, while the ask is the lowest price a seller is willing to accept, indicating the supply.

The bid-ask spread, therefore, refers to the difference between the bid price and ask price and represents the profit margin for market makers and other intermediaries who facilitate trades in the financial markets.

The bid-ask spread is a fundamental concept in trading, as it represents how liquid the market is. A narrow bid-ask spread indicates a more liquid market with tighter competition, while a wider spread indicates a less liquid market with fewer buyers and sellers. 

How bid-ask spreads work

Market makers, many of which are employed by brokerages, process orders for traders and collect the spread (more on this below). This is often referred to by brokerages as “crossing the spread”, a means by which the business earns revenue.  

The bid-ask spread represents a reflection of the supply and demand for an asset. If there are more people who want to buy than sell, this equates to a narrow bid-ask spread, while a wide bid-ask spread will indicate a less liquid market.

The depth of the bids and asks can affect the spread, and traders need to be aware of the spread when placing orders. Sometimes, market makers will widen the spread to protect themselves from risk, and some traders try to make money by exploiting changes in the spread.

Example of how a bid price and ask price works

Say a stock price is listed on an exchange with a bid price of $50 and an ask price of $55, this makes the bid-ask spread $5. This value might also be presented in percentage form, calculated as a percentage of the lowest ask or bid price. 

This would be calculated by dividing the bid-ask spread by the lowest ask price. In this case, $5 divided by $50 multiplied by 100. 

$5 / $50 x 100 = 10%

This spread would close if a seller offered to sell that stock at a lower price or a buyer offered to purchase the stock at a higher price. This value would then be collected by the market maker. 

What are market makers?

A market maker is a financial firm or individual that facilitates the buying and selling of financial instruments in a particular market. Market makers are typically investment banks, brokerage firms, or other financial institutions that maintain an inventory of certain financial assets and are willing to buy and sell these assets at publicly quoted prices.

Market makers provide liquidity to a financial market by offering to buy and sell financial assets at prices that are close to the current market price. They do this by quoting both a buy and a sell price for the assets they trade, and they make a profit by buying assets at a lower price than they sell them for.

Market makers play a crucial role in financial markets, as they ensure that there is a continuous supply of buyers and sellers for financial assets, even during times of market volatility or uncertainty. This helps to keep prices stable and reduces the risk of market disruption or illiquidity.

Bid-ask spreads and market liquidity

The degree of bid-ask spread differs across various assets due to their varying liquidity. The more liquid an asset is in the market, the lower the bid-ask spread. Take currencies for example, due to their highly liquid market they have one of the smallest spreads in the industry. Metals on the other hand, like platinum, have a wider bid-ask spread due to lower trading volumes.

Less liquid assets will therefore have a higher bid-ask spread, often indicating to professional investors that it is a more risky asset. 

In conclusion

The bid-ask spread is a concept used in trading that indicates the gap between the maximum price that a buyer is willing to offer for an asset and the minimum price that a seller is ready to take. The bid-ask spread also reflects how liquid the market is, indicating how many buyers and sellers that particular asset has.

‍