What is a Private Blockchain? Public vs Private Blockchain

What is a Private Blockchain and How Does It Work?

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.

For those interested in exploring the world of crypto, the SoFi Invest® investment platform is a good place to start. With SoFi Invest, investors can trade more than two dozen cryptocurrencies, including Bitcoin, Litecoin, Cardano, Dogecoin, Solana, Enjin Coin, and Ethereum.

Find out how to get started with SoFi Invest.

Photo credit: iStock/anilakkus


SoFi Invest®
The information provided is not meant to provide investment or financial advice. 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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 or products 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

Read more
What Is the Chicago Board Options Exchange (CBOE)?

What Is the CBOE?

While you may already be familiar with the New York Stock Exchange and Nasdaq, those aren’t the only exchanges that investors use to trade securities.

One such exchange is Cboe Global Markets, the world’s largest option trading exchange. Cboe has also created one of the most popular volatility indices in the world.

What Is the CBOE Options Exchange?

CBOE, or CBOE Global Markets, Inc., is a global exchange operator founded in 1973 and headquartered in Chicago. Investors often turn to CBOE to buy and sell both derivatives and equities. In addition, the holding company facilitates trading over a diverse array of products in various asset classes, many of which it introduced to the market.

The organization also includes several subsidiaries, such as The Options Institute (an educational resource), Hanweck Associates LLC (a real-time analytics company), and The Options Clearing Corporation (a central clearinghouse for listed options).

The group has global branches in Canada, England, Ireland, Netherlands, Hong Kong, Singapore, Australia, Japan, and the Philippines.

CBOE is also a public company with a stock traded on the cboe exchange.

What Does CBOE Stand For?

Originally known as the Chicago Board Options Exchange, the company changed its name to Cboe in 2017.

History of the Chicago Board of Options Exchange

Founded in 1973, CBOE represented the first U.S. market for traders who want to buy and sell exchange-listed options. This was a significant step for the options market, helping it become what it is today.

In 1975, the Cboe introduced automated price reporting and trading along with The Options Clearing Corporation (OCC).

Other developments followed in the market as well. For example, Cboe added “put” options in 1977. And by 1983, the market began creating options on broad-based indices using the S&P 100 (OEX) and the S&P 500 (SPX).

In 1993, the CBOE created its own market volatility index called the Cboe Volatility Index (VIX). In 2015, it formed The Options Institute . With this, Cboe had an educational branch that could bring investors information about options.

CBOE continues its educational initiatives. The Options Institute even schedules monthly classes and events to help with outreach.

From 1990 on, Cboe began creating unique trading products. Notable introductions include LEAPS (Long-Term Equity Anticipation Securities) launched in 1990; Flexible Exchange (FLEX) options in 1993; short-term options known as Weeklys in 2005; and an electronic S&P options contract called SPXpm in 2011.

Understanding What the CBOE Options Exchange Does

The CBOE Options Exchange serves as a trading platform, similar to the New York Stock Exchange or Nasdaq. It has a history of creating its own tradable products, including options contracts, futures, and more. Cboe also has acquired market models or created new markets in the past, such as the first pan-European multilateral trading facility (MTF) and the institutional foreign exchange (FX) market.

The Cboe’s specialization in options is essential, but it’s also complicated. Options contracts don’t work the same as stocks or ETFs. They’re financial derivatives tied to an underlying asset, like a stock or future, but they have a set expiration date dictating when investors must settle or exercise the contract.That’s where the OCC comes in.

The OCC settles these financial trades by taking the place of a guarantor. Essentially, as a clearinghouse, the OCC acts as an intermediary for buyers and sellers. It functions based on foundational risk management and clears transactions. Under the SEC and CFTC, it provides clearing and settlement services for various trading options. It also acts in a central counterparty capacity for securities lending transactions.

CBOE Products

Cboe offers a variety of tradable products across multiple markets, including many that it created.

For example, Cboe offers a range of put and call options on thousands of publicly traded stocks, exchange-traded funds (ETFs), and exchange-traded notes (ETNs). Investors use these tradable products for specific strategies, like hedging.

Or, they use them to gain income by selling cash-secured puts or covered calls. These options strategies give investors flexibility in terms of how much added yield they want and gives them the ability to adjust their stock exposures.

Investors have the Cboe options marketplace and other alternative venues, including the electronic communication network (ECN), the FX market, and the MTF.

Recommended: How to Trade Options

CBOE and Volatility

The Cboe’s Volatility Index (VIX) gauges market volatility of U.S. equities. It also tracks the metric on a global scale and for the S&P 500. That opens up an opportunity for many traders. Traders, both international and global, use the VIC Index to get a foothold in the large U.S. market or global equities, whether it be trading or simply exposing themselves to it.

In early 2021, Cboe Global Markets announced a change that would occur later in the year. The market operator intends to extend global trading hours (GTH) on Cboe Options Exchange for its VIX options and S&P 500 Index options (SPX) to almost 24 hours per business day, five days a week. Using this update, they hope to give further access to global participants to trade U.S. index options products exclusive to Cboe. These products are based on both the SPX and VIC indices.

This move allows Cboe to meet growth in investor demand. These investors want to manage their risk more efficiently, and the extended GTH will allow them to do so. With it, they can react in real-time to global macroeconomics events and adjust their positions accordingly.

Essentially, they can track popular sentiment and choose the best stocks according to the VIX’s movements.

Recommended: How to Use the Fear and Greed Index to Your Advantage

The Takeaway

While Cboe makes efforts to educate and open the market to a broader range of investors, options trading is a risky strategy that investors should fully understand before implementing it. Investors should recognize that while there’s potentially upside in options investing there’s usually also a risk when it comes to the options’ liquidity, and premium costs can devour an investor’s profits. That means it’s not the best choice for those looking for a safer investment.

For some investors, options are the right choice. Others may need further guidance. If you want help with your trading strategy, consider using the SoFi Invest® stock trading platform. While it doesn’t offer options trading, it does have automated investing options that help you stay within your risk tolerance goals. Alternatively, if you’re confident, the Active investing route allows you to trade in a range of products, all without commission or account minimums.

Photo credit: iStock/USGirl


SoFi Invest®
The information provided is not meant to provide investment or financial advice. 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
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.
SOIN0821357

Read more
What Is a Credit Spread? Explained and Defined

What Is a Credit Spread? Explained and Defined

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.

Recommended: What Investors Should Know About Stock Spreads

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.

While SoFi does not currently offer options trading, the SoFi Invest investing platform provides a great way to get started investing. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs without paying SoFi management fees and commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a management fee.

Photo credit: iStock/Astarot


SoFi Invest®
The information provided is not meant to provide investment or financial advice. 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
SOIN0921375

Read more
What is Filecoin (FIL)? How to Buy FIL

What is Filecoin (FIL)? How to Buy FIL

By now most people have heard of established cryptos, like Bitcoin or Litecoin. But it seems like every day there’s another newcomer on the scene. Filecoin (FIL) is one such cryptocurrency that is drawing curiosity.

While you may be familiar with some of the bare essentials of the crypto world — such as the basics of investing in crypto, or common crypto rules and regulations — you may have questions about under-the-radar assets like Filecoin. Just what is Filecoin? What is the Filecoin price? Is Filecoin a worthwhile investment?

Here, we’ll tell you everything you need to know about Filecoin crypto, including how to invest in it.

What is Filecoin (FIL)?

Filecoin is an open-source, decentralized, digital payment system. But it’s also more than that — it’s a cloud storage marketplace and protocol as well. And while Filecoin, or “FIL,” as it’s otherwise known, isn’t quite a household name like Bitcoin or Ethereum, it’s among the largest cryptos on the market.

The Filecoin network is a cloud-based online storage system that’s decentralized — it’s operated by users, not a central company or owner. FIL is the token that’s used as a currency on its own network.

The History of Filecoin Crypto

Filecoin is made by Protocol Labs, and it hit the market after an ICO, or “initial coin offering,” in 2017. It was founded by Juan Benet, the creator of the Interplanetary File System , on which the Filecoin system operates. Effectively, the Filecoin system rents out hard drive space, those deals are registered using blockchain technology, and FIL is used to facilitate those deals.

What drives Filecoin’s value is the scarcity of hard drive space and available data storage. Pretty much everything these days (online, at least) relies on the ability to store and recall data. Consider how much data, code, and information is needed to keep even just one website up and running.

Filecoin’s data storage network provides additional storage to the market, and often at lower prices than bigger names in data storage, which control the lion’s share of “the cloud.”

How Does FIL Work?

Filecoin doesn’t use a central server. Instead, data is stored on a peer-to-peer blockchain — effectively on users’ computers. The Filecoin network lets anyone buy or rent out space on their hard drives, augmenting the data storage market. And within the FIL network, there are a few groups of users:

•   Clients: Those who pay to store or retrieve data or information.

•   Storage miners: Those who store a client’s data in exchange for a reward.

•   Retrieval miners: Those who can retrieve a client’s data when it’s requested.

These three groups interact with each other within the network, exchanging data as part of the storage or retrieval process, and issuing micropayments to each other, using the FIL token.

Filecoin Price

FIL’s value really started to take off in early 2021, peaking at more than $190 in April, but falling below $140 in the months that followed. As of mid-October 2021, its price hovered just over $70.

FIL tokens are valuable because they have utility on the decentralized cloud storage network. FIL tokens can be purchased or traded for, like most other cryptocurrencies. That means that traders or investors, anticipating an increase in FIL’s price, can trade dollars or other currency for them.

Should You Invest in FIL?

As with any crypto, investing in FIL has its risks. Aside from the inherent volatility of the crypto market, traders and investors may be on the hook for cryptocurrency taxes if they transact in FIL.

In addition, it has limited use: FIL is illiquid outside of a crypto exchange or on the Filecoin network. For example, it’s unlikely anyone would be able to, say, pay for an oil change for their car, or buy a pizza using FIL. You’d have to trade it for U.S. dollars to then make your purchase unless you can come to an agreement with a business owner for a good or service.

That said, there’s always a chance that FIL could gain value in the coming months and years, potentially earning investors a solid return. But nobody can predict the future — and even past performance is not an indicator of future success.

How to Buy FIL Cryptocurrency

Adding FIL to one’s crypto holdings is pretty much the same procedure as, say, buying Bitcoin or another cryptocurrency. Here’s how to do it:

1.    Open and fund an account with a crypto broker or exchange. Make sure you have a solid idea of how crypto exchanges work so that you know what to expect — and confirm that your intended broker allows you to trade FIL.

2.    Get a crypto wallet. You’ll need a wallet to hold your crypto. Some brokers provide users with a wallet, but doing some research will help you figure out what type of wallet, and what level of protection, is right for you.

3.    Use your funded account to trade. With money in an exchange or broker’s account, you should be able to simply look up FIL on the platform, decide how much you’d like to trade, and execute. It’s more or less the same process as buying stock from a broker.

4.    Transfer your FIL to your wallet. If you’ve decided to use a specific wallet (not provided by your broker or exchange), you’ll want to transfer your holdings out of the exchange and to your wallet for crypto storage.

Recommended: What is a Crypto Wallet?

The Takeaway

The Filecoin network is a decentralized cloud-based online storage system, and its token, FIL, is used on the network as payment between clients, storage miners, and retrieval miners. As an investment, this crypto is as volatile as any other cryptocurrency, with potential for gains and losses (and no way to predict which will happen when, if at all).

If you’re looking to add cryptocurrency to your portfolio, try the SoFi Invest® online trading platform. You can trade dozens of cryptocurrencies including Bitcoin, Litecoin, Cardano, Dogecoin, Solana, Enjin Coin, and Ethereum.

Find out how to get started with SoFi Invest.

Photo credit: iStock/tiero


SoFi Invest®
The information provided is not meant to provide investment or financial advice. 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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 or products 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.
SOIN0521214

Read more
couple holding keys

Should You Use Your 401k as a First-Time Home Buyer?

Withdrawing money from a 401(k) to buy a house may be allowed by your company-sponsored plan, but this tactic is not always advisable, especially for first-time home buyers.

When it comes to using money from a 401(k), first-time home buyers need to keep in mind a few things, including the rules and penalties around early withdrawals from a 401(k) account — as well as the potential loss of retirement savings.

Before you consider using a 401k to buy a house, consider alternatives like withdrawing funds from a Roth IRA, seeking help from a Down Payment Assistance Program (DAP), or seeing if you qualify for other types of home loans.

Let’s take a look at the pros, cons, and important considerations that can help prospective homebuyers make a more informed decision about using funds from a 401(k) to buy a home.

Can You Use a 401(k) to Buy a House?

Before you quickly search up “401k first time home buyer,” here’s the answer: If you’re a first-time home buyer, and your employer plan allows it, you can use your 401(k) to help buy a house. There are a couple of ways to access the funds.

First, it’s possible for a first-time homebuyer to take a loan from an existing 401(k). Your employer generally sets the rules for 401(k) loans, but you typically must pay back the loan, with interest, within five years. You pay yourself interest to help offset the loss of investment growth, since the funds are no longer invested in the market.

You can take out a 401(k) loan for a few different reasons (e.g., qualified educational expenses, medical expenses), depending on your plan’s policies. Those using a loan to purchase a residence may have more time to pay back the loan.

In certain rare circumstances, in the case of an “immediate and heavy financial need,” the IRS will allow you to make a 401(k) hardship withdrawal to purchase a primary residence. Hardship withdrawals do not cover mortgage payments, but using a 401(k) for a down payment for a first-time home buyer could be allowed.

The IRS has very strict rules for qualifying for a hardship withdrawal . And if you don’t meet them, the funds you withdraw will be subject to income tax and a 10% early withdrawal penalty.

How Much of Your 401(k) Can Be Used For Home Purchase?

Generally, home buyers who want to use their 401(k) funds to finance a real estate transaction can borrow or withdraw up to 50% of their vested balance or a maximum of $50,000 — whichever is less. This limit typically applies to any 401(k) loan, not only a home purchase.

4 Potential Drawbacks of Using Your 401(k) to Buy a House

Taking money out of a 401(k) to buy a house may be allowed, but it’s not always recommended.

1. Withdrawal limits

Since there are limits on the amount you can withdraw or borrow for a home purchase, bear in mind that the total amount you can access may not cover all the costs (e.g., the down payment and closing costs) of the transaction. Be sure to run the numbers, to ensure that a 401(k) loan makes sense.

2. Lost contributions

Homebuyers who borrow from their 401(k) plans can’t make additional contributions to the accounts or receive matching contributions from their employers while paying off the loan. Depending on how much they were contributing, these home buyers could miss out on years of retirement contributions while they’re paying back the loan. That could take a substantial bite out of their overall retirement savings.

3. Automatic repayment terms

Generally, it’s not up to you to repay the loan; your company will deduct the loan payments automatically from your paycheck. This could be viewed as a convenience, since you don’t have to think about it, or as an inconvenience, as it lowers your take-home pay.

4. Loan terms change if you leave your job.

Finally, if an individual borrows from their 401(k) to purchase a home and leaves employment at their company (whether voluntarily or via layoff), the loan balance may be deducted from their remaining 401(k) funds in what’s called an offset. An offset is then treated like an early withdrawal, and potentially subject to taxes and a 10% penalty if the borrower is under 59½.

As an example: Derek is 35 and has $100,000 in his 401(k) and borrows $30,000 for a home purchase. He pays back $5,000 including interest, but still owes $25,000 when he takes another job. The remaining $25,000 would be deducted from his 401(k) as an offset, leaving $75,000 in the 401(k) or rollover IRA. Worse, the $25,000 would be treated by the IRS as an early withdrawal or distribution, and Derek would owe taxes, plus a 10% penalty ($2,500).

Terms may vary depending on the terms of your loan, the plan rules, and whether you were impacted by Covid-19, and would be considered a “qualified individual” under the CARES Act.

Pros and Cons of Using a 401(k) to Buy a House

Here are the pros and cons of using a 401(k) to buy a home, at a glance:

Pros of Using a 401(k) to Buy a House

Cons of Using a 401(k) to Buy a House

Individuals may be able to purchase a home that they might otherwise not be able to afford. Individuals can’t make regular contributions to their 401(k) while making loan payments.
When using a 401(k) loan, individuals are borrowing money from themselves, so they don’t owe interest to a bank or other institution. Borrowed or withdrawn funds aren’t growing inside the 401(k) account, potentially derailing an individual’s retirement savings.
Interest rates are generally low. If a person doesn’t qualify for a hardship withdrawal and they’re under age 59½, withdrawals would be subject to income tax and a 10% early withdrawal penalty.
You don’t have to meet any credit requirements. If a person leaves their job before the loan is repaid, the balance owed could be deducted from the remainder of their 401(k) funds as an offset. For those under 59½, the amount of the offset would be considered a distribution and the borrower would owe taxes and a 10% penalty (some Covide-related exceptions may apply).

What are the Rules & Penalties for Using 401(k) Funds to Buy a House?

Here’s a side-by-side look at some key differences between taking out a 401(k) loan and withdrawing funds from a 401(k).

401(k) loans

401(k) withdrawals

•   Must be repaid with interest in a certain period of time — usually 5 years.

•   Qualified loans are penalty free and tax free, unless the borrower defaults or leaves their job before closing the loan.

•   The maximum loan amount is 50% of the vested account balance, or $50,000, whichever is less. (For accounts with a vested account balance of less than $10,000, the maximum loan amount is $10,000.)

•   Interest accrued on the loan goes back into the 401(k), so the borrower is basically paying interest back to themselves. The interest is also tax-deferred until retirement.

•   If the borrower doesn’t repay the loan on time, the loan is treated as a regular distribution (a.k.a. withdrawal) and subject to taxes an early withdrawal penalty of 10%.

•   Do not have to be repaid.

•   Usually allowed only in the case of “financial hardship,” which can include medical expenses, funeral expenses, and primary home-buying expenses, if the individual meets strict IRS criteria for “hardship.”

◦  Subject to income tax and a 10% early withdrawal penalty for people under age 59½.

•   One can only withdraw enough to cover the immediate expense (a down payment, for example, not future monthly mortgage payments), with a limit of 50% of the vested balance or $50,000—whichever is less

•   You can only withdraw enough to cover the immediate expense (a down payment, for example, not future mortgage payments), with a limit of 50% of the vested balance or $50,000 — whichever is less.

What are the Alternatives to Using a 401(k) to Buy a House?

For some first-time homebuyers, there may be other, more attractive options for securing a down payment than taking money out of a 401(k) to buy a house. Here are a few of the alternatives.

Withdrawing Money from a Roth IRA

Using a Roth IRA to help buy a first home can be a smart alternative to borrowing from a 401(k) that might be beneficial for some home buyers. Unlike 401(k)s, Roth IRA contributions are made with after-tax dollars.

Contributions can be withdrawn at any time, tax free; earnings can be withdrawn without a penalty at age 59½ or older, as long as you’ve held the account for at least five years.

If you’re under 59½ or don’t meet the five-year criteria, some exceptions may apply for a first-time home purchase.

•  After the account has been open for five years, Roth IRA account holders who are buying their first home are allowed to withdraw up to $10,000 in investment earnings with no taxes or penalties. (Meaning a person could withdraw the amount of their total contribution plus up to $10,000 in investment earnings.) The $10,000 is a lifetime limit.

•  Roth IRA funds can be used to help with the purchase of a first home not only for the account holders themselves, but for their children, parents, or grandchildren.
One important requirement to note is that time is of the essence when using a Roth IRA to purchase a first home: The funds have to be used within 120 days of the withdrawal.

Low- and No-Down-Payment Home Loans

There are certain low- and no-down-payment home loans that homebuyers may qualify for that they can use instead of using a 401(k) for a first time home purchase. This could allow them to secure the down payment for a first home without tapping into their retirement savings.

•  FHA loans are insured by the Federal Housing Administration and allow home buyers to borrow with few requirements. Home buyers with a credit score lower than 580 qualify for a loan with 10% down, and those with credit scores higher than 580 can get a loan with as little as 3.5% down.

•  Conventional 97 loans are Fannie Mae-backed mortgages that allow a loan-to-value ratio of up to 97% of the cost of the loan. In other words, the home buyer could purchase a house for $400,000 and borrow up to $388,000, leaving only a down payment requirement or 3%, or $12,000, to purchase the house.

•  VA loans are available for U.S. veterans, active duty members, and surviving spouses, and they require no down payment or monthly mortgage insurance payment. They’re provided by private lenders and banks and guaranteed by the United States Department of Veterans Affairs.

•  USDA loans are a type of home buyer assistance program offered by the U.S. Department of Agriculture to buy or possibly build a home in designated rural areas with an up-front guarantee fee and annual fee. Borrowers who qualify for USDA loans require no down payment and receive a fixed interest rate for the lifetime of the loan. Eligibility requirements are based on income, and vary by region.

Other Types of Down Payment Assistance

For home buyers who are ineligible for no-down payment loans, there are a few more alternatives instead of using 401(k) funds:

•  Down Payment Assistance (DAP) programs offer eligible borrowers financial assistance in paying the required down payment and closing costs associated with purchasing a home. They come in the form of grants and second mortgages, are available nationwide, can be interest-free, and sometimes have lower rates than the initial mortgage loan.

•  Certain mortgage lenders provide financial assistance by offering credits to cover all or some of the closing costs and down payment.

•  Gifted money from friends or family members can be used to cover a down payment or closing costs on certain home loans.

The Takeaway

Generally speaking, a 401(k) can be used to buy a house, either by taking out a 401(k) loan and repaying it with interest, or by making a 401(k) withdrawal (which is subject to income tax and a 10% withdrawal fee for people under age 59½).

However, using a 401(k) for a first-time home purchase is usually not advisable. Both qualified loans and withdrawals have some potential drawbacks — primarily the possibility of owing taxes and a penalty under certain conditions. Fortunately, there are other options. Certain Roth IRA withdrawals can be made tax and penalty free. Qualified homebuyers can also seek financial help from down payment assistance programs and other low- or no-interest plans.

As you weigh your choices, you can use SoFi as a resource to help you start saving and planning, including the option to take out a SoFi Home Loan. Opening a SoFi Invest® online trading account is easy and could help you make a financial plan for specific goals. SoFi Members can access complimentary financial advice from professional advisors, who may be able to help you walk through different options.

Find out how SoFi Invest can help you meet your goals.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Advisory services are offered through SoFi Wealth, LLC an SEC-registered Investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.

SOIN20185

Read more
TLS 1.2 Encrypted
Equal Housing Lender