Investing Archives | Page 150 of 221

Nov

2022

ICO Investing: How to Purchase Initial Coin Offerings

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Initial coin offerings, or ICOs, are like IPOs but in the crypto space. When new cryptocurrencies make their debut on the public markets, they go through the ICO process — which is more intricate and involved than many people may believe. Given that it can pay off big to “get in early” on investments, ICOs understandably capture the attention of many crypto traders and investors.

Read on to learn more about initial coin offerings, how to invest in ICOs, where to find ICO listings, and what you should take into consideration before betting on a new crypto.

What Is an Initial Coin Offering (ICO)?

As mentioned, ICOs are similar to IPOs (initial public offerings) which mark the first time that the public can purchase a stock on an exchange. The big difference is that ICOs concern the public sale of cryptocurrencies, while IPOs concern stocks.

And just as some investors take part in IPO investing, they can likewise participate in ICO investing. That basically means buying a stock, or a cryptocurrency, as soon as it hits the market, with the hope that it increases in value.

How an Initial Coin Offering (ICO) Works

Companies go public in an effort to raise money. They’re essentially selling pieces of their ownership for cash. The same logic applies to ICOs, which are crowdfunded efforts to fund a new cryptocurrency.

As such, ICO stands for “initial coin offering,” and allows crypto investors to get in on the ground floor of a cryptocurrency startup. These investors are among the first wave piling into new crypto, and as such, stand to potentially benefit the most if (and it’s a big “if”) the crypto in question appreciates in value.

As for how an ICO actually works? It’s different from an IPO, which has a very standard process involving multiple parties and regulators. Bringing a new crypto to the market is more of a do-it-yourself process. In short, the person or team behind a new crypto outlines their plans in a white paper, explaining what the crypto is and how it’ll work.

After that, the crypto creators focus on a marketing push to get people to invest and buy into the currency. Those who opt to participate and become investors will exchange money for the new project’s coin or token.

Cryptocurrency creators collect money from some investors by making the coin available pre-ICO for sale. During this period, they typically issue coins at a discounted value, often in order to get capital to continue building out the currency.

This is, of course, a basic overview — the process can get much more granular. But this should give you an idea of how ICOs work.

Types of ICOs

Initial coin offerings can use a variety of structures to achieve their end goal: Additional financing for a crypto project. Here are a few of the main types of ICOs:

Static Supply and Static Price

An ICO involving a static supply and static price has a specific funding goal. That means that each token being sold has a preset value, and that there is a fixed supply of tokens. The tokens are then sold at the predetermined price until the supply is exhausted.

Static Supply and Dynamic Price

An ICO utilizing a static supply and dynamic pricing model does not have a specific funding goal. There is a predetermined number of tokens, however, but the value or price of those tokens can change, and consequently, the total amount of funding raised at the end of the process.

Dynamic Supply and Static Price

An ICO with dynamic supply and static pricing is one in which tokens have a predetermined value or price, but the supply is not static. Again, this would mean that there is no set funding goal, and the total raised would depend on the number of tokens sold.

3 Types of ICOs
Static Supply & Price	Static Supply/Dynamic Price	Dynamic Supply/Static Price
Preset token value	No preset token value	Preset token value
Fixed token supply	Fixed token supply	Undetermined token supply
Predetermined funding goal	Funding goal undetermined	Funding goal undetermined

How to Value ICOs

IPO valuations typically reflect careful research into the underlying company’s books and performance. But the process of valuing ICOs is different, since there is no underlying company with financial records (or history) to comb through.

As such, hype and investor sentiment represents a big underpinning of ICO valuations. Crypto assets, in general, derive their value either from functioning as cryptocurrencies, or as security or utility tokens for specific networks and systems. That makes it difficult to determine a monetary value out of the gate.

Investors typically determine the value of an ICO value based on potential uses the coin may have in the future, which could lead to price appreciation. The more hyped investors get, the higher potential values can soar, but the reverse is true as well.

Negative investor sentiment can lead to negative first-day returns for an ICO, which can impact the performance of the currency for at least six months.

That makes ICOs a notoriously risky investment. Hype men and con artists can easily take advantage of investors with little knowledge of the crypto space, and government regulators have only recently started outlining potential regulations for the industry.

Factors to Consider Before Investing in ICOs

It bears repeating: ICOs are incredibly risky — they are the opposite of safe investments. Because of that, there are some key considerations to make before putting your money on the line.

First and foremost is that investors will have little, if any protection if an ICO goes awry. As the crypto space is still largely unregulated and investors aren’t afforded many of the same protections that those in the stock market may see, there’s a real chance you could lose your money.

Finally, know that you may not receive your tokens, even if you paid for them. There are no guarantees in crypto, at least not yet, so if you’re particularly risk-averse, then ICO investing may not be for you.

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How to Buy ICO Tokens in Five Steps

Wondering how to buy ICO tokens? Follow these five steps:

Step 1: Do Your Research on the ICOs

As a crypto investor, you should always be doing some homework and research on a specific token before putting your money on the line. As mentioned, this can be tricky in crypto, since there’s limited historical data and information related to many projects out there, but you should do the best you can.

In crypto, your research usually begins with the project’s white paper; you’ll want to learn everything you can about the development team behind it, and whether it has attracted much interest from other investors. If the white paper does not have details about token’s code or security features that’s a potential red flag that may require more due diligence.

Step 2: Register for the ICO

Once you’ve found an upcoming ICO that appeals to you, sign up to take part in it. This may require some legwork, but you can track down a pre-ICO list and ICO listings on numerous crypto-focused websites.

Be aware, though, that each ICO typically has different registration procedures. So, if you’re interested, poke around to learn the appropriate procedure, and follow it as needed.

Step 3: Set Aside Funds for Payment

Next, you’ll need to prepare to actually invest when you’re ready to put some money up. This means having money set aside in order to facilitate the investment.

You’ll need to have either fiat currency, such as dollars, or some other crypto ready to make an exchange, as needed (typically, either Bitcoin or Ethereum, the two biggest cryptos). You’ll also need to have money and or crypto standing by in a digital wallet so that you can make the trade.

💡 Recommended: How to Send Bitcoin to Another Wallet

And finally, be sure that you’ve joined the appropriate or correct crypto exchange for the ICO. Some exchanges only allow investors to trade certain cryptos. You’ll want to be sure the ICO you’re targeting is listed on the exchange you’re working on.

It’s also a good idea to do a little research on any platform that you plan on joining. There are factors that make a good crypto exchange, and not all are created equal.

Step 4: Make the Exchange

This part is pretty simple: Execute the trade! The specifics here will depend on the individual ICO, exchange, and procedures.

Step 5: Receive and Store Your ICO Purchase

Ideally, after the execution of the trade, your new coins will go right into your crypto wallet (whichever of the many types you choose) for safekeeping. From there, ICO investors are largely at the mercy of the market to dictate what happens with your new investment.

It may be worth it to closely watch the ICO and other news around the new crypto, so that you can make wise decisions about when or if you should sell. One upside to ICOs compared with IPOs is that there’s no IPO lock-up period preventing sales.

How to Buy Tokens After an ICO

After a crypto token completes an ICO, it’s now available for purchase on the open market. So, if you want to buy tokens that recently made their market debut, all you need to do is buy them on an exchange or through a brokerage. The key, though, is making sure you’re using an exchange that trades the token you’re looking for.

Similar to how stocks trade on the open market following an IPO, tokens are on the secondary markets following an ICO. It’s just a matter of investors making sure they’re on the right exchange to trade them.

The Takeaway

ICOs involving bringing new crypto tokens to the market, just like an IPO brings new stocks to the market. The ICO process varies from project to project, but ICOs give investors a chance to get in early on a new or emerging crypto asset. But investors should keep in mind that ICOs are risky, and do their homework before putting their money into this type of investment.

FAQ

Who can participate in an ICO?

For most projects, anyone can participate in an ICO granted they’re registered, and have a crypto wallet and cryptocurrencies to trade with. Depending on the specific ICO, prospective investors may need to join a certain exchange to facilitate the transaction, too.

What’s the difference between an ICO and an IPO?

The main difference between an ICO and an IPO is the asset that’s being debuted. ICOs involve crypto tokens or cryptocurrencies, whereas IPOs involve stocks, or shares of companies going public.

Who can launch an ICO?

Anyone can launch an ICO, granted they know what they’re doing. Because the ICO and crypto markets are lightly regulated in the U.S., anyone with a crypto project can bring a new crypto to the market.

Is an ICO legal?

Yes, ICOs are legal. But there are some considerations to make before engaging in one. Regulators in the U.S. may consider an ICO a securities offering, and as such, could enforce securities law on those engaging in an ICO. As always, it’s best to consult with a professional about the details.

What is an ICO used for?

An ICO’s primary purpose is to generate funding for a crypto project. The project sells tokens which generates money, which can then be reinvested in the project.

Photo credit: iStock/ismagilov

Nov

2022

What Are Bitcoin Mining Pools?

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

Bitcoin mining pools provide a way for multiple parties to “pool” their efforts when mining Bitcoin. Over time, mining Bitcoin has become increasingly difficult and resource-intensive. As such, pooling resources can make it easier and cheaper to become a Bitcoin miner.

In a Bitcoin mining pool, many network participants combine their computing power into one collective effort. The block rewards are then split among the pool members in proportion to the amount of computing power they contributed.

How Does a Mining Pool Work?

The mining process for a proof-of-work cryptocurrency like Bitcoin involves numerous miners attempting to find and solve a block on a blockchain network. The first miner to find a block receives the rewards for that block in the form of newly minted Bitcoin. Currently, the block reward is 6.25 BTC. It also takes around 10 minutes to mine one Bitcoin as a part of a pool.

💡 Recommended: Proof-of-Work: How It Works

As more and more miners join the network, however, mining difficulty rises. This is thanks to one of the ingenious aspects of the Bitcoin protocol, known as the difficulty adjustment.

Approximately every two weeks, mining difficulty will rise or fall according to how much hashing power is currently on the network. If the hash rate is higher, difficulty will rise, and the lower the hash rate, difficulty will fall.

In general, a high hash rate is good because it helps keep a crypto network secure. But with today’s hash rate hovering near record highs (and tending to rise higher over time), finding a block as an individual miner has become difficult for all but the largest of miners with the most powerful equipment.

That’s where Bitcoin mining pools come in.

A crypto mining pool gathers together connections from miners, potentially around the world, that could be all over the world and pools their hash rate together. This way, they are all mining at a higher level, giving them better odds of solving a block.

After a block has been solved, the rewards are split up among mining pool participants according to how much computing power each contributed.

This calculation is made using a set “Share Difficulty” for each miner and a “Share Time” for the pool. Basically, pools establish a time when hashes will be submitted by all participants, while also assigning a difficulty to each individual miner (more powerful miners have a higher difficulty).

All miners will automatically send a “share” of their hashes at set intervals, e.g., every five seconds, with miners who contribute more receiving a larger number of shares each time according to their higher difficulty rate. Pool participants are then paid out with block rewards proportional to their shares.

Is a Bitcoin Mining Pool Worth it?

For the average person looking into mining Bitcoin, a miner pool may be the only feasible option if you hope to earn a return. But when it comes to asking “is a Bitcoin mining pool worth it,” it all depends on how the term “worth it” is defined.

For those who believe in Bitcoin technology and simply want to help the network thrive by processing more transactions, mining might be worth engaging in, even if it’s not profitable.

For those who are looking to make a profit, however, the answer is more complicated.

Mining is a complex and difficult process for all but the most technical of crypto users. While there are services that help make the process easier for the average person to get into, there are still many nuanced factors that contribute to whether or not mining will be a profitable endeavor.

Those factors can include, but are not limited to:

• Cost of equipment

• Cost of electricity

• The amount of time it will take to recoup equipment costs

• How difficulty adjustments might impact profitability

• How BTC price fluctuations might impact profitability

• When it will become necessary to upgrade to new computers or machines

These considerations have to be calculated and recalculated if a miner wants to stay profitable. There are a lot of unknowns, particularly concerning the fluctuation of Bitcoin prices and difficulty adjustment, which are constantly changing.

When Bitcoin was first created, the calculations involved in mining were so simple they could be accomplished by the average laptop computer.

But over time, the calculations became more complex, eventually requiring high-powered graphics-processing units (GPUs). Today, the majority of mining is mostly done with advanced Application Specific Integrated Circuit (ASIC) machines. These are computers created for the express purpose of mining Bitcoin.

The hardware required is constantly evolving. Every so often, existing machines become obsolete due to difficulty adjustments. An ASIC that was powerful enough to be profitable six months ago might not be able to produce enough coins to match the cost of electricity needed to run that same ASIC today. When this happens, miners must acquire new, more advanced hardware.

Finally, it should be noted that mining is perhaps the most difficult way to acquire Bitcoin or any other mineable cryptocurrency. The easiest way is to simply buy cryptocurrency on a crypto exchange.

💡 Recommended: How Does a Crypto Exchange Work?

Functions of a Bitcoin Mining Pool

The primary function of a Bitcoin mining pool, or any cryptocurrency mining pool, really, is to make mining more accessible to prospective miners no matter what resources they have at their disposal.

Secondarily, mining pools can serve as a sort of introduction to mining for beginners who don’t have the know-how to try and get started on their own. In effect, pools may help you learn the ropes of mining without making too much of an investment in equipment and resources.

What Is the Best Bitcoin Mining Pool?

There are dozens of Bitcoin mining pools out there, and for the most part, there’s not a whole lot of difference between them. Besides the small fee they may charge participants, pools only differ based on whether or not they are open to the public and what proportion of the network’s total blocks they mine on average.

Some of the world’s largest Bitcoin mining pools are located in China and include names like F2Pool and Antpool. Together, those two pools mine 36.5% of all Bitcoin, as of 2022. The biggest pool is Foundry USA, which mines almost 25%.

How to Join a Bitcoin Mining Pool

Bitcoin pools allow users to get started mining with any amount of mining power. The process of joining a Bitcoin mining pool involves programming mining software to direct its efforts to a particular pool, which can be done in a few simple steps:

1. Choose which pool you want to join.

2. Add the stratum addresses of the selected mining pool to your mining software client.

3. Connect the wallet you wish to deposit mined coins into.

4. Configure your mining client for your chosen mining pool.

Finally, the information needed to complete this process will be provided by the pool itself.

What to Consider When Choosing a Cryptocurrency Mining Pool

Joining a Bitcoin mining pool will have its pros and cons, so there are some considerations to make before diving in.

First, there are some clear positives to joining a mining pool. The most obvious, as discussed, is that they are beginner-friendly ways to get into mining, and you don’t need a lot of expensive equipment to get started. And since you’re pooling your resources, there’s probably a better chance that you’ll end up seeing rewards in some shape or form, which may be much more difficult to do if you’re flying solo.

On the other hand, a key consideration is that you likely won’t make much, if any, money. Any coins you do mine will get divided up, and you could be disappointed with what you take home. There may also be fees to join a pool, so you’ll want to do some research on any pool you’re thinking of joining.

Finally, don’t forget that mining isn’t free. You’re using resources, like electricity, to contribute your computational power to the pool. Even if you don’t take home any coins, you may still be burning money.

Mining Pools Beyond Bitcoin

There are numerous types of mining pools out there, not just for Bitcoin. For example, there are pools for mining Ethereum; but note that Ethereum has recently moved to a proof-of-stake model, so you can no longer mine it.

If you’re interested in joining a mining pool, an internet search will yield some results. But know that many cryptos are moving away from mining-based protocols due to their resource demands. So, it may be more difficult to find a pool today than it was a couple of years ago.

The Takeaway

A cryptocurrency mining pool provides a way for multiple smaller miners, or even beginners, to pool their resources and combine their hashing power. Mining at this higher collective hash rate benefits everyone in the miner pool as it increases the odds of earning rewards, and allows miners to leverage whatever level of computing power they have at their disposal.

Those interested in learning about the mining process first-hand could consider experimenting with smaller mining machines and joining a mining pool. But for the average person looking to acquire Bitcoin, buying cryptocurrency from an exchange might be a lot simpler.

FAQ

Can I mine Bitcoin without joining a pool?

You can mine Bitcoin without joining a pool, but most individual miners likely lack the equipment and computing power to effectively turn a profit through mining. As such, many people may benefit from joining a pool to increase their chances of actually realizing a return.

Can anyone join a mining pool?

Yes, anyone can join a mining pool, as they’re designed to be open to miners with all sorts of “rigs,” or no matter where they’re physically located in the world.

How do mining pools share rewards?

In simple terms, a pool that is rewarded for its mining activity divides up the reward (or coin) into shares, and doles it out based on how much work each member contributed to the pool. The more work your computer puts into the mining pool, the bigger your share, in other words.

Photo credit: iStock/MicroStockHub

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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.

²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0922053

Nov

2022

What Is ERC20? A Guide to the Ethereum Token Standard

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

ERC20 refers to a standard for creating and deploying smart contracts on the Ethereum blockchain. ERC20 tokens are digitized tokens that live on that blockchain and adhere to those standards.

The Ethereum blockchain was built specifically for smart contracts, which are virtual agreements that can be programmed to execute automatically when certain conditions are met. This functionality provides for the ability to create many kinds of new decentralized applications, so many other platforms and their tokens are built on top of the Ethereum blockchain.

Quite a few of the most popular utility tokens and decentralized finance (DeFi) applications are built on Ethereum. But there are certain standards (ERC20) that developers must follow if they want their tokens to be accepted by the network.

In this crypto guide, we will answer the question, What is ERC20?, as well as how it relates to tokens issued on the Ethereum blockchain.

What Is ERC20?

ERC20 is a standard for the creation and deployment of smart contracts on the Ethereum blockchain. ERC20 tokens are a form of token that can be issued on Ethereum (and only Ethereum) that also represent a set of standards that cryptocurrencies can adhere to.

The primary purpose of ERC20 tokens is to work with smart contracts and define a common list of rules that all tokens on the Ethereum blockchain abide by.

While Ether (ETH) is the native cryptocurrency of the Ethereum network, the ERC20 token represents a specific standard — or set of rules — that developers can follow to make Ethereum-based tokens. They are, in the truest sense, the standard-bearer for the Ethereum network.

This token standard is only for fungible tokens, and not non-fungible tokens (NFTs). As such, one ERC20 token can be exchanged with another, as they’d have equal value.

ERC20 smart contracts use ERC20 tokens to facilitate transactions when its protocol calls for it. Any smart contract that utilizes transaction functionality will therefore pay the user in the form of an ERC20 token. Many popular stablecoins, like USDC and DAI, are ERC20 tokens.

Which Tokens Are ERC20?

ERC20 has enabled the creation of many new tokens. These are the 10 largest and most popular ERC20 tokens by market cap, as of September 2022:

• Binance USD (BUSD)

• Multi-Collateral Dai (DAI)

• SHIBA INU (SHIB)

• Wrapped Bitcoin (WBTC)

• UNUS SED LEO (LEO)

• Uniswap (UNI)

• ChainLink (LINK)

• Cronos (CRO)

• ApeCoin (APE)

The largest, by both trading volume and market cap, is Binance USD, a stablecoin pegged to the U.S. dollar. Stablecoins are popular among traders looking to lock in profits quickly without converting to fiat currency, as well as those seeking to earn a yield on their crypto. They aim to be more “stable,” as the name implies, than other, often volatile cryptos.

A number of decentralized finance (DeFi) and metaverse tokens are ERC20 tokens as well.

Enjin Coin (ENJ) help users perform functions or create items in video games and virtual or augmented realities. Uniswap (UNI), the native token of one of the largest DeFi platforms, allows users to borrow and lend funds to one another.

How Does ERC20 Work?

ERC20 is a standard protocol, not a program or piece of software. The ERC20 protocol governs the creation of new tokens, ensuring that they meet the required technical specifications. If a token doesn’t conform to the appropriate technical standards defined by ERC20, it won’t fit the definition of an ERC20 token, and therefore, won’t be issued on Ethereum.

It may help to think of ERC20 as similar to HTTP, the Hypertext Transfer Protocol used for websites. HTTP defines how messages on the internet are formatted and transmitted, and how servers and browsers should react in response to various commands.

Similarly, ERC20 specifies the essential features that Ethereum-based tokens should have and how they should function. Tokens that don’t comply cannot be issued, traded, or listed on exchanges.

The ERC20 Standard

Smart contracts that want to use ERC20 tokens have to follow the appropriate ERC standards. There are currently nine rules in total, and six of them are mandatory. The other three are optional. These include:

Mandatory rules	Optional rules
Allowance	Token Name
Approve	Decimal (Max: 18)
TransferFrom	Symbol
Transfer
BalanceOf
TotalSupply

Here’s a brief rundown of how the mandatory standards apply to the creation of tokens.

TotalSupply: Outlines the total number of tokens to be created.

Approve: Helps to eliminate the possibility of counterfeit tokens being created by requiring approval of smart contract functions.

BalanceOf: Allows users to check their balances by returning the total number of tokens held by an address.

TransferFrom: Allows for the automation of transactions when desired.

Transfer: Allows for the transfer of tokens from one address to another, like any other blockchain-based transaction.

Allowance: When a smart contract wants to execute a transaction, it has to be able to see the balance held by the Ethereum wallet trying to transact. The allowance function allows the contract to carry out the transaction if the user has sufficient balance or cancel the transaction if they do not.

These six rules must be programmed into a token for it to be considered ERC20. Without clear instructions for these rules or standards, the token wouldn’t be able to interact with smart contracts effectively, which could cause numerous issues.

History of ERC20

“ERC20” actually stands for “Ethereum Request for Comments 20,” and was first proposed by Fabian Vogelsteller, a blockchain developer and programmer, back in 2015. At the time, it was a proposed standard that outlined common rules that could be implemented into the Ethereum network, mostly with the goal of ensuring that new projects or coins would function correctly when utilized on it.

That goal ultimately came to fruition, as the standards were adopted by the Ethereum network officially in 2017. Since then, ERC20 has served as a guiding light for Ethereum developers.

The Importance and Impact of ERC20

The ERC20 standard made many initial coin offerings (ICOs) possible in recent years, and the standard makes it easy for developers to create decentralized applications (dApps) on Ethereum.

To be more explicit, the standard makes implementing new tokens simpler for developers of decentralized applications (dApps) since there is a standard protocol to follow. ERC20 tokens can be made to offer high liquidity, and smart contract transactions are thought to be low-risk if the programming is done correctly.

How to Store ERC20 Tokens

To hold ERC20 tokens, users need an ERC20 wallet, as with any other crypto. But what’s important is to make sure that the crypto wallet in question supports tokens of this nature. Fortunately, some wallets have been specifically designed for the purpose of storing ETH and ERC20 tokens, including:

• MetaMask

• MyEtherWallet

• Trust Wallet

• Mist Wallet

• Atomic Wallet

Wallets like these can also be used to interact with other blockchain-based platforms, such as DeFi apps and NFT marketplaces.

Remember, though, that when storing crypto in any wallet, it’s generally considered good practice to back up your private keys and seed phrase. Giving someone else access to your keys or phrase could allow them to take ownership of all the crypto in that wallet.

The Takeaway

ERC20 represents a set of standards and rules used on the Ethereum blockchain, and is also used for the creation of tokens issued on Ethereum. Many popular utility tokens are also ERC20 tokens, a list that includes Basic Attention Token (BAT), Shiba Inu (SHIB), and Crypto.com Coin (CRO).

The important thing to know about ERC20 is that it provides a set of standards on the widely-used Ethereum network. That, in some ways, helps the crypto space self-manage and continue to operate efficiently.

FAQ

What is an ERC20 wallet?

An ERC20 wallet is a crypto wallet that is either compatible with, or specifically designed to hold and secure ERC20 tokens. There are numerous ERC20 wallets on the market, and they may come in a variety of forms, such as hardware, mobile, or desktop wallets.

What’s the difference between ETH and ERC20?

ETH, or “Ether,” is the native cryptocurrency of the Ethereum network, and is used to facilitate transactions on the Ethereum blockchain. ERC20 is the protocol standard for creating Ethereum-based tokens, which can be utilized and deployed in the Ethereum network.

Photo credit: iStock/fongleon356

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

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.

²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0922052

Nov

2022

Should We Expect Another Bitcoin Bull Run in 2023?

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

That end of 2021 saw a Bitcoin bull run like few assets have ever had — and then for most of 2022 that bull run came to a crashing halt for Bitcoin and for countless other cryptocurrencies.

To the extent that Bitcoin is the oldest and largest cryptocurrency, it can be something of a market leader — or it has been lately, with many other cryptos also succumbing to the long “crypto winter” of 2022.

The price of Bitcoin (BTC) started 2021 at around $30,000, only to more than double and hit north of $60,000 by mid-April. After falling again, it then spiked back up to nearly $68,000 in November 2021, marking two dramatic bull runs within a calendar year.

All that said, 2022 has been quite a different story, with BTC prices falling below $20,000 — and cryptocurrencies like Ethereum (ETH) and Dogecoin (DOGE), showing similar dramatic drop-offs in value. Now the big question for crypto traders is whether they can expect another crypto bull run in 2023.

Let’s take a look at some of the key indicators, crypto predictions, and possibilities for Bitcoin and other cryptocurrencies during the next few months.

Table of Contents

Can Past Crypto Trends Help Predict Future Ones?
Bitcoin Prediction: What Determines a Crypto’s Price?
What Determines the Price of Crypto as a Whole?
What’s Holding Bitcoin Back?
What Happened in the First Half of 2022?
What Will Happen in 2023?
Market Competition
Downside Risks

Can Past Crypto Trends Help Predict Future Ones?

Crypto Trends

While it’s hard to accurately make Bitcoin projections — or crypto predictions in general — a look back at Bitcoin’s recent history may be helpful in determining if another bull run is ahead for BTC, and potentially other crypto.

Bitcoin investors likely remember the bull run of 2017, during which the cryptocurrency reached a valuation of nearly $20,000. Much of that rally was fueled by hype over several initial coin offerings (ICOs) — including Brave and Kik — and people who hoped to benefit from rising prices in the short term.

ICOs are when companies raise funds by issuing new tokens to investors who become backers of the blockchain project. But after the ICO bubble popped in early 2018, Bitcoin’s price subsequently crashed. While many of today’s top cryptocurrencies didn’t yet exist, a few also stumbled at this time, including ETH, DOGE, and ADA.

This wasn’t surprising to many experts, who often say that the cryptocurrencies markets are likely to be turbulent, as they fight for credibility.

In 2019, Facebook announced its Libra cryptocurrency, which contributed to another Bitcoin rally, with values topping out at around $11,000. However, when some supporters of the Libra project backed out and Congress questioned CEO Mark Zuckerberg about regulatory concerns, Bitcoin’s price declined to $6,000 and $7,500 during the second half of 2019, along with many other cryptocurrencies. The Libra project, renamed Diem, has since shuttered.

Bitcoin climbed to a new record in 2020, as stimulus packages, meant to prop up economies during the Covid-19 pandemic, led to money finding its way into fringe markets like cryptocurrencies.

How the Crypto Competition Grew

However, there were also signs that different types of cryptocurrencies were gaining wider mainstream acceptance. Prominent investors announced they were buying Bitcoin as a hedge, and payment providers like PayPal announced they would allow customers to use cryptocurrencies.

Accordingly, the crypto markets gained steam. That was led by Bitcoin, which saw its value break its previous high-mark of $20,000 in December 2020. Then, during the first several months of 2021, the bull run continued until Bitcoin hit more than $61,000. Its value did fall to less than $30,000 in the subsequent months, but that drop was a precursor to another bull run.

Between July and October 2021, Bitcoin again saw its value soar, hitting almost $67,000. But after that, its value fell. The economic climate, including high inflation and drops in the stock market, have coincided with a bear run for Bitcoin, and as of November 4, 2022, Bitcoin was trading at around $20,000.

Bitcoin Prediction: What Determines a Crypto’s Price?

Numerous factors affect the price of any crypto, including Bitcoin, and since it is a global currency, Bitcoin’s value can be affected by events around the world. No central actor or authority determines the price of most crypto; it’s set by the market, and by supply and demand from traders and investors. The price can also vary from one exchange to another.

Market Demand

The main factor that determines any crypto’s price is whether investors want to buy or not, or what we typically refer to as “demand.” If good news comes out about Bitcoin or other cryptocurrencies, or bad news comes out about another type of investment, that can cause people to buy Bitcoins (increase demand) and hike the price up.

Conversely, bad news about cryptocurrencies can cause people to sell. News doesn’t necessarily have to be overtly negative to spook the market, either.

Similarly, the rules of supply and demand affect the Bitcoin market. Only 21 million Bitcoins will ever be created, and if investors see a strong long-term market for Bitcoin, they may want to own a piece of the pie.

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Altcoins

Although Bitcoin is the biggest and likely most well-known cryptocurrency, there are thousands of other altcoins available on the market. When good news comes out about other projects, may investors sell off some of their Bitcoin to purchase altcoins.

Also, new projects offer ICOs which can sometimes have a high return in a short amount of time. If a promising ICO comes to market, it might draw attention away from Bitcoin.

Market Manipulation

Both large financial institutions and individual investors can have an effect on the market. Some crypto holders, known as “whales,” own a significant enough amount of a particular crypto that they can move its price if they make a large purchase or sale.

Cost of Production

The main costs associated with producing Bitcoin are electricity and mining equipment. Although Bitcoin is a digital currency, it must still be mined. The way Bitcoin is designed, only about one block on Bitcoin’s blockchain network can be mined every ten minutes.

If more miners join the network, the more competitive mining becomes, which makes the cost of producing each Bitcoin more expensive. Miners have to invest in new, faster equipment and are less likely to receive a pay out. These costs can have an effect on Bitcoin’s price.

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Regulations

Each country has different definitions and regulations for Bitcoin and cryptocurrencies, or none at all. When news comes out about regulatory decisions, it can cause investors to buy or sell. It is important to note that cryptocurrency is currently unregulated in the United States, though that’s likely to change in the coming years.

Cryptocurrencies faced regulatory hurdles in the U.S. in 2021. The Securities and Exchange Commission rejected several applications for a Bitcoin exchange-traded fund, damping hopes that an ETF version of the cryptocurrency will be trading on U.S. stock exchanges anytime soon. In September 2022, the Biden administration released a first look at potential crypto regulations framework.

In addition, cryptocurrencies experienced volatility after China clamped down on the market, issuing warnings about trading and mining.

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Fiat Currency Crises

Crypto has become the preferred currency for many people around the world who may not have access to banking, or who are living in a country going through a fiat currency crisis.

In Venezuela, for example, Bitcoin’s popularity has grown as inflation and sanctions have resulted in the devaluation of the Venezuelan Bolivar. El Salvador, too, even went so far as to make Bitcoin its official legal tender in 2021.

💡 Recommended: Take a closer look at what fiat currency is.

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What Determines the Price of Crypto as a Whole?

The same market forces that determine the value of Bitcoin can and do drive value for the crypto market as a whole. Supply and demand is obviously the key driver, but there are a few other key things at play as well.

Demand

As mentioned, investor demand is perhaps the primary driving force propelling values in the crypto market overall. This will likely become more apparent as the crypto space grows over time; more coins or tokens will likely be created, but they won’t all be in demand. As such, their values will likely remain low.

Expected Growth

Demand can be spurred by the expected growth, in value or in market cap, of the crypto space. If investors expect the crypto market, as a whole, to grow, they might be inspired to buy cryptocurrencies in anticipation of that growth, with the idea being that they’re “getting in early” on an investment. That, in turn, increases demand.

Public Sentiment

The markets owe a lot to sentiment. If people are pessimistic about the future, they may be less willing to spend or invest money. Conversely, if they’re optimistic, they may be looking to invest or prepare for what’s ahead. For example, if they expect the crypto market to grow, as mentioned, they’re feeling optimistic about the space, and increase demand for tokens, driving the market higher.

Returns From Conventional Investments

A final factor that may play a role in determining the crypto market’s performance is how well conventional markets are performing. If investors are not getting their desired returns from the stock market, they may be looking at alternatives to generate those higher returns. Over the past few years, the high returns and growth in the crypto space has been an obvious candidate. As more investors pile into the crypto market, the higher the demand, and thus, the higher valuations can go.

However, as we’ve seen, the crypto market is very volatile, and presents big risks for investors chasing high returns.

What’s Holding Bitcoin Back?

While there are big economic factors at play that have led to Bitcoin’s decline during 2022, a few other factors have been holding it back from seeing bigger, significant growth in recent years.

Adoption and Use

Since Bitcoin is a relatively new technology, it takes time for companies to build up tools and use cases for it. At this point, the infrastructure is getting stronger and it’s easy for novice investors to buy and sell Bitcoin at the touch of a button.

However, many people holding Bitcoin don’t own it because they plan to use it for everyday purchases, but rather, because they view it as a long-term, safe-haven investment with a lot of potential upside. It should be noted, again, that investing in Bitcoin and other cryptocurrencies is inherently very risky.

Traditionally, there haven’t been many retailers that would accept Bitcoin. Now, you can use bitcoin or other cryptocurrencies at Starbucks, Amazon, Nordstrom, and many other retailers. Retailers may change their policies, however, which is something to keep in mind.

Lack of Clear Regulation

Experienced investors tend to be very careful about what they invest in. If an asset doesn’t have clear legal regulations and guidelines, they may not choose to take the risk of investing in it. As mentioned, the Biden administration has outlined some frameworks for regulating the crypto space, and it’s likely that formal rules will be introduced in the next few years.

Waiting on Institutions

If large corporations start holding some of their wealth in Bitcoin, or financial institutions otherwise demonstrate support of cryptocurrencies, that could add legitimacy, which could drive new investors to the market.

A survey released in 2021 by Fidelity Digital Assets found that 52% of institutional investors — which could include pension funds, family offices, investment advisers and hedge funds — owned digital assets like Bitcoin.

However, a separate survey by JPMorgan released in 2021 found that 78% of institutional investors are not planning on investing in crypto. However, the survey also found that a majority also think crypto is “here to stay.”

What Happened in the First Half of 2022?

A combination of economic headwinds, mostly related to the Covid-19 pandemic, seemingly crashed together in early 2022, slowing the economy, driving up inflation rates, and dragging down the value of stocks, precious metals, and even the crypto markets.

Crypto Market Crash

Between May and June 2022, the crypto markets lost roughly $1 trillion in value. It’s hard to say what, exactly, caused it. But as mentioned, asset classes of all types saw similar drawdowns. In what is now being called the “crypto winter,” the down market has persisted into the second half of 2022.

Effects on Bitcoin

Bitcoin was not spared from the ongoing crypto winter. You need look no further than the massive drop in Bitcoin’s value to see the effects: Bitcoin started the year trading at nearly $48,000, but by the middle of June, was trading at less than $19,000.

Effects on the Crypto Market as a Whole

Bitcoin’s value was just one victim of the market’s crash; the crypto market as a whole went down with it. Again, the crypto market crash, and subsequent flattening between the beginning of 2022 and the end, as trillions of dollars in value were wiped out in a manner of months. All of the major coins were affected, too, including Ethereum. Some stablecoins were destabilized, too.

A few crypto firms and related financial firms even went belly-up as well.

NFT Values Wiped Out

Non-fungible tokens, or NFTs, also saw their value effectively wiped out during the first part of 2022. After NFTs saw a huge bull run in 2020 and 2021, as investors bought into the hype, the average price of NFTs nosedived in 2022. In fact, the average price of NFTs fell from nearly $4,000 to less than $300 in just a couple of months, a similar downward trajectory to what was seen among many cryptocurrencies.

What Will Happen in 2023?

It’s easy to look at most of 2022 and walk away convinced never to invest in the crypto space after such a monumental drop in value. But it’s important to remember that this year has seen a rare combination of both global events and economic headwinds leading to an overall downturn.

That said, there are some things to keep an eye on to try and get a read on what might happen in the crypto space during the remainder of 2022, heading into 2023.

The US Economy

The U.S. continues to face a number of major economic and sociopolitical unknowns. There are midterm election results to deal with, rising interest rates, high inflation, and the prospect of a recession, for instance. And in many respects, the economy is still recovering from the pandemic.

It’s hard to say how that might affect Bitcoin, but some economists believe that a U.S. recession could be rocket fuel for a Bitcoin bull run. If investors lose faith in the U.S. dollar and the stock market, they may turn to the cryptocurrency market once again as a safe haven. Although, to be fair, it hasn’t proven to be much safer than the stock market this year.

Key Technical Indicators

Some technical indicators could signal that Bitcoin is heading towards a bull run, but technicals are not always trustworthy predictions. Depending on how you combine charts and analysis, which likely will involve some advanced knowledge and skill, the market can also look like it’s heading towards a downward spiral.

New Regulations

As mentioned, China has been cracking down on the cryptocurrency market, causing volatility in prices. Meanwhile, the U.S. government is already discussing future rules and regulations for the crypto space. The Biden administration has made it clear that regulation is coming, but it’s also worth noting that changes to the composition of Congress after the midterm elections may disrupt things.

Stablecoins Around the World

Numerous countries are considering developing or already working on their own digital currencies and stable coins. The U.S., Russia, India, and France and other nations have announced plans to enter the digital currency market. In addition to several Caribbean nations, China is probably the farthest along out of the major economies, having launched a central bank digital currency (CBDC).

As these projects progress, they could add legitimacy to the market and challenge some fiat currencies. Bitcoin’s price may go up in the short term as these announcements come out, but whether its value will hold in the long run as the world transitions towards digital currency has yet to be seen.

Market Competition

Of course, Bitcoin is not the only game in town, and other crypto projects are giving it a run for its money.

Another top-tier cryptocurrency is Ethereum. Ethereum has had a boom given the interest in NFTs, which often take the form of digital versions of art or collectibles that are linked to a blockchain , which is one of the many potential uses of blockchain.

Dogecoin had a meteoric rise in 2021, mostly fueled by social platforms that have also been behind the rallies of meme stocks like GameStop and AMC. Elon Musk was a proponent before an appearance on the TV show Saturday Night Live, when he called Dogecoin a “hustle.” Since such developments, the price of Dogecoin has suffered, losing much of its value.

Downside Risks

As is the case with any investment, it’s crucial for investors to do their own research and take expert predictions with a grain of salt. The cryptocurrency market is still in its infancy relative to other markets, so there isn’t much data to go on when making predictions, and unpredictable circumstances can have significant effects on the market.

Bitcoin is a risky investment. Investors should consider making their own decisions about their level of risk based on a proper analysis of all the various factors that come into play.

Finally, remember that the past is not a prediction of the future, and just because trend lines indicate a bull run is coming doesn’t mean they’re correct. In such a complex, fast-changing market, it’s important to stay informed and do due diligence.

The Takeaway

2022 has been an eventful year for cryptocurrencies, although not in a way that most investors would have liked. The crypto market has lost a lot of value, but that doesn’t mean a bull run couldn’t be around the corner — especially when you consider the rise and fall of crypto values across the board, over the last decade or so.

For keeping track of the market, buying crypto, or buying and selling more traditional assets, using a streamlined secure app might be the way to go.

FAQ

How long do crypto bull runs typically last for?

It’s difficult, if not impossible to say, given that the crypto markets have only been in operation for a little more than a decade. The market has experienced bull and bear markets during that time, but it’s likely too early to determine what a “typical” bull run’s duration could be.

What do people think Bitcoin will be worth in 2025?

Expert opinions are all over the place, with some people predicting another massive bull run for Bitcoin, while others thinking that it’ll continue to dwindle. Nobody knows for sure. Prospective investors should be prepared to stomach big losses, though, if they’re willing to chase big potential gains.

How high is Bitcoin’s price likely to go?

There’s no limit to how high Bitcoin’s price could go, with some people thinking that it could top six-figures at some point in the future. Again, nobody knows what will happen, so just as Bitcoin’s price could soar, it could also drop further.

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2022

What Is a Decentralized Exchange (DEX)?

By Matthew Warholak | Growing Wealth, invest, Investing | Comments Off

A decentralized exchange (DEX) is a digital currency exchange that allows users to buy crypto through direct, peer-to-peer cryptocurrency transactions, all over a online platform without an intermediary. It differs from a traditional centralized exchange, where a typical transaction involves a third-party entity (e.g. bank, trading platform, government institution, etc.) that takes custody of user funds, and oversees the security and transfer of assets between two parties.

Decentralization is a fundamental philosophy of blockchain technology and the crypto space. It redistributes authority from a central power, and places it in the hands of users. And the concept of decentralization is reengineering how many conventional financial services operate.

Decentralized exchanges have also grown in popularity over the past couple of years, with spot trading volume slowly shifting away from centralized exchanges, up until early 2022, when “crypto winter” set in.

Spot Trading Volume Percentage, DEX vs. CEX
Timeframe	CEX	DEX
January 2020	98.93%	1.07%
June 2020	97.01%	2.99%
January 2021	93.22%	6.78%
June 2021	93.2%	6.8%
January 2022	77.08%	22.92%
June 2022	82.93%	17.07%

How a Decentralized Exchange (DEX) Works

Decentralized exchanges provide a decentralized platform that allows users to exchange assets without having to trust their funds with another entity.

With a decentralized exchange, a blockchain, or distributed ledger, takes the place of the third party. By moving critical operations onto a blockchain, the underlying technology may help to eliminate single points of failure, allowing users to have greater control of their assets, and support safer and more transparent trading.

DEXs use smart contracts to execute market transactions by allocating transactions’ operations to autonomous code, but there are multiple variations of order fulfillment with differing degrees of decentralization.

Like digital currencies, decentralized exchanges were created in response to flawed and archaic financial systems that passed along risks of a centralized system to its users. Those risks often include insufficient security, technical issues, and a lack of transparency.

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Different Types of Decentralized Exchanges

Full decentralization is more of a philosophy than a rule of thumb, as it’s not very practical based on first-layer blockchain scalability limits. As a result, most decentralized exchanges are actually semi-decentralized, using their own servers and off-chain order books to store data and external programs or entities for the exchange of user assets.

Due to this reliance on centralized components, semi-decentralized exchanges’ operations may be subject to government oversight. However, and perhaps most importantly, users still maintain control of the private keys to their funds.

Although DEXs continue to evolve and operate cross-chain with other DApps, DEXs typically operate a single blockchain. One thing all decentralized exchanges have in common is that they execute orders on chains with smart contracts, and at no point do they take custody of users’ funds.

The Different Types of DEXs
Type	Features
On-Chain Order Books	Processes transactions on a blockchain network, without the inclusion of a third-party
Off-Chain Order Books	Utilizes an off-chain, centralized entity to process transactions and govern the order book
Automated Market Makers	Uses algorithms to automatically price asset pairs in real-time
DEX Aggregators	Compile data from numerous DEXs to increase options and liquidity for traders

On-Chain Order Books

For some decentralized exchanges, transactions are processed on-chain, including modifying and canceling orders. Philosophically, this is the most decentralized and transparent process, because it circumvents the need to trust a third party to handle any orders at any time. However, this approach is not very practical in execution.

By placing all stages of an order onto the blockchain, DEXs go through a time-consuming process of asking every node on the network to permanently store the order via miners, as well as pay a fee.

Some criticize the decentralized crypto exchange model because its slow transaction times allow for front-running, which is when an investor watches the price of an asset closely, waiting at the last minute to buy or sell right before they anticipate the price rising or falling. (Note that this type of “front-running” is different from stock front-running, where an investor purchases a security based on insider information, such as a future event that will impact stock price.)

Others counter that since all orders are published on a public ledger, there is no exclusive opportunity for any select individual to front-run from a traditional perspective. However, it has been questioned whether a miner can front-run by noticing an order before it’s confirmed and force their own order to get added to the blockchain first.

Off-Chain Order Books

DEXs with off-chain order books are still decentralized to some degree, but are somewhat more centralized than their on-chain counterparts. As opposed to orders being stored on the blockchain, off-chain orders are posted elsewhere, such as a centralized entity that governs the order book. Such an entity could exploit access to the order books to front-run or misrepresent orders, however, users’ funds would still be protected from the DEXs non-custodial model.

Some ERC-20 tokens on the Ethereum blockchain provide a DEX that operates similarly. Though some degree of decentralization is sacrificed, a DEX can provide a framework for parties to manage off-chain order books through smart contracts. Hosts can then access a larger liquidity pool and relay orders between traders. Once the parties are matched, the trade can be executed on-chain.

These models can be more advantageous for users than relying on slower on-chain order books. With less congestion and quicker confirmation times caused by primitive blockchain iterations, off-chain order books can provide faster speeds.

Automated Market Makers (AMM)

An automated market maker (AMM) reinvents order books with pricing algorithms that automatically price any asset pairing in real-time (e.g. Bitcoin-U.S. dollar).

Unlike traditional market-making, whereby firms provide an accurate price and a tight spread on an order book, AMMs decentralize this process and allow users to create a market on a blockchain. No counterparty is needed to make a trade, as the AMM simply interacts with a blockchain to “create” a market. Instead of transacting directly with another person, exchange, or market-maker, users trade with smart contracts and provide liquidity. Unfortunately, there are no order types on an AMM because prices are algorithmically determined, resulting in a sort of market order.

As with other DEX models, an on-chain transaction must occur to settle any trade. As opposed to some DEXs, AMMs tend to be relatively user-friendly and integrate with popular cryptocurrency wallets.

DEX Aggregators

DEX aggregators are precisely what they sound like: aggregators that compile various trading pools. Their main advantage is that they can increase liquidity for traders, particularly for those who are looking to expand their options or trade smaller tokens.

How these aggregators work is similar to a search engine, in that they compile and accumulate information and data from different exchanges to give users more options.

Tips for Using Decentralized Exchanges

Using a DEX has its advantages and risks. While you’re likely using a DEX for its advantages, it’s important to keep those risks in mind. Perhaps most importantly, remember that decentralized exchanges are, for all intents and purposes, operating off the radar and outside of regulatory authorities.

Also remember that as the popularity of DeFi as a whole grows, so too will the use of DEXs, and their features and functions. These are changing platforms and technologies, so do some research to make sure you know what you’re doing, and that you’re keeping your keys, phrases, and assets safe.

Pros of Decentralized Exchanges

There are many reasons fans and followers of crypto have embraced decentralized exchanges. These are some of the pros of decentralized exchanges:

No KYC/AML or ID Verification

DEXs are trustless, meaning users’ funds, privacy, and limited personal data are well preserved. Decentralized exchange users can easily and securely access a DEX without needing to create an on-exchange account, undergo identity verification, or provide personal information.

No Counterparty Risk

Because users don’t have to transfer their assets to an exchange (or third party), decentralized exchanges can reduce risks of theft and loss of funds due to hacks. DEXs can also prevent price manipulation or fake trading volume, and allow users to maintain a degree of anonymity due to a lack of Know Your Customer (KYC) cryptocurrency rules and regulations.

All Tokens Can be Traded

With a DEX, users can trade new and obscure cryptocurrencies that may be difficult to exchange elsewhere. Typically, centralized exchanges only support a dozen or so projects, and most only support the most popular cryptocurrencies, making smaller and less popular tokens more difficult to trade, especially as those exchanges restrict users from other countries.

Reduced Security Risks

As mentioned, decentralized exchanges may be more secure than their centralized counterparts. That’s because no single entity is in charge of assets, and instead, smart contracts and decentralized applications (dApps) automate transactions. It’s all handled by users, in other words, making it very difficult for a hacker or bad actor to infiltrate a centralized pile of assets and steal them.

That said, a bad or poorly developed smart contract could cause issues, which is something to be aware of.

Utility in the Developing World

Many parts of the world lack basic financial services, nevermind access to the crypto markets. That’s another pro for DEXs, which can be used by individuals anywhere in the world regardless of financial infrastructure.

In fact, DEXs may be the most beneficial to users in the developing world, giving businesses a way to transact assets without the need for a third party, where those parties may not be available or willing to operate.

Cons of a Decentralized Exchange

While decentralized exchanges offer some groundbreaking benefits, they also come with a few drawbacks.

Specific Knowledge Is Required

There’s no getting around it: You’ll need to know what you’re doing, at least to a degree, to use a decentralized exchange. Centralized exchanges exist for a reason: They’re relatively easy to use, and handle most of the complicated stuff for users. But when using a DEX, it’s all on the user. There’s no hand-holding, and as such, you’ll want to be confident that you know the ropes before using a DEX.

Smart Contract Vulnerabilities

Another thing we previously mentioned is the fact that smart contracts may be poorly constructed, leading to problems on a DEX. A smart contract is only as smart as the person or entity that created it, and there’s no guarantee that it will work as hoped all of the time.

Smart contracts themselves are similar to bits of code or commands that automate a process, and if there’s an error in the smart contract, it could produce unanticipated results.

No Recovery Ability

Unlike centralized exchanges run by private companies with employees, DEXs fundamentally have no recovery ability for lost, stolen, or misplaced funds. Due to a lack of a KYC process or ability to cancel a transaction in the event of a compromised account or loss of private key, users are unable to recover data or be returned their assets.

As discussed, there is no support team or help hotline to notify of missing funds or a lost private key, as users themselves are in control of the process. Because all transactions are processed and stored in smart contracts on the blockchain without any owners or overseers, refunds are incompatible with the network’s model and users are generally unable to regain access to their assets.

Unvetted Token Listings

The crypto space is rife with scams and junk tokens, and given that there’s no central authority in a DEX, it’s relatively easy for some of those junk tokens or coins to find themselves in the listings. Put another way: There is little or no vetting process for what’s listed on a DEX (though it may differ from exchange to exchange). Making sure you’re not falling for a scam coin, then, is on the user.

Low Liquidity

Many traders prefer centralized services with a greater liquidity pool, choice of instruments, currency pairs, and order types. Decentralized exchanges usually have lower liquidity than centralized platforms because they are newer and smaller, with a smaller potential client base (since DEXs are more difficult to use than CEXs). Yet, paradoxically, they must also attract new users to generate more liquidity.

Limited Speed

Transactions take time to be checked and validated on a blockchain network, and the processing speed depends on the network’s miners or validators, not the exchange itself.

Limited Trading Functionality

Decentralized exchanges tend to focus on executing simple buy and sell orders. As such, users may find advanced trading functions such as stop losses, margin trading, and lending are unavailable on most DEXs.

Scalability Issues

DEXs have suffered from the same network congestion issues relating to scalability issues as their underlying blockchain networks like Ethereum. Ethereum’s first network iteration, like other blockchains, was built to function securely at a smaller scale before scaling solutions were later implemented. Though a transformative network upgrade designed with massive scalability solutions has been in development since 2018, DEXs remain subject to first-layer network transaction ceilings.

Challenges to DEX Adoption

With sophisticated technology, potentially fewer blockchain security risks, and the ability to self-custody funds, further adoption of decentralized exchanges seems likely. But DEXs, for the most part, remain out of the mainstream. Despite the launch and rise in popularity of numerous DEXs within the past few years, some factors may slow down adoption.

Many investors may lack awareness surrounding:

• The security risks of centralized exchanges

• Self-custody as a security option

• How to securely self-custody funds (managing private keys)

• The existence of decentralized exchanges

• The advantages of decentralized exchanges

DEXs also present a few technical barriers to entry:

• Not user-friendly enough

• Network congestion during periods of high volume

• Transactions on current network iterations take time to be validated on blockchains

• High transactions fees during periods of high volume

• Users will only join a DEX with high liquidity

• Cross-chain interoperability must exist for DeFi platforms to interact with each other

• The need for fiat on-ramps and less volatile token prices

The Takeaway

Decentralized exchanges are a trustless solution that allows users to buy and sell cryptocurrency without roping in a third party. Though full decentralization is not yet a reality, different types of DEXs provide varying levels of security, privacy, and efficiency from which crypto traders can choose.

As DEXs continue to develop, evolve, and become more practical for users, user adoption may become a focal point as DEXs look to offer greater liquidity. The good news is that DEXs present only one of numerous ways to get involved in the crypto space.

FAQ

How do DEX fees work?

A DEX facilitates peer-to-peer trading, and levies network fees in order to facilitate those transactions. While fees from DEX to DEX may vary, they differ from centralized exchanges, which may charge trading fees or commissions for executing transactions.

What’s the difference between a decentralized exchange (DEX) and a centralized exchange (CEX)?

A decentralized exchange allows individual users to connect and transact assets without a third party. A centralized exchange, conversely, acts as a third party and takes custody of funds or assets during the transaction. The key difference is that a CEX acts as a central authority.

Are decentralized exchanges legal?

Yes, DEXs are legal, though they do operate in something of a gray area (like most of the crypto space) in that they’re unregulated by a central government authority. Some exchanges may be illegal in certain jurisdictions, too. That may change in the future, though, as regulators outline plans and potential rules for the crypto space.

How can I create a decentralized exchange?

If you want to create your own DEX, you’ll need a lot of background knowledge involving blockchain architecture and more. You would need to know how to code, identify key features that your DEX would have, and much, much more. You’re likely better off using an existing DEX, rather than creating one from scratch.

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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.

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²Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount		Bonus Payout
Low	High	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

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