Investing Archives | Page 157 of 221

Sep

2022

How to Create, Buy, and Sell NFTs: Easy Guide

Simple Guide to Buying, Selling, and Making NFTs

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

Non-fungible tokens (NFT) have become one of the most popular parts of the crypto world. From 2020 to 2021, the NFT market skyrocketed; NFT sales totaled $24.9 in 2021, up from $95 million in 2020. And though the market cooled off in 2022, NFTs still play a significant role in the crypto market, the metaverse, and Web3.

Many famous artists and celebrities have created and sold NFTs and NFT collections. Digital artist Mike Winkelman, known as Beeple, recently sold an NFT for $69 million, and soccer great Lionel Messi launched his own NFT collection. But you don’t have to be famous to create or trade NFTs. Read on to learn more about the NFT market, and how you can create and use these digital assets.

Understanding NFTs

Non-fungible tokens, commonly called NFTs, are collectible crypto assets intended to represent a unique digital item that can be bought, sold, or traded.

NFTs exist on blockchain technology and, unlike digital assets such as cryptocurrencies, each NFT is unique and cannot be replaced by another token. This is because NFTs are non-fungible. The term “fungible” refers to something that can be exchanged or traded for something else just like it. A dollar bill, for example, is fungible because all dollar bills are more or less the same. And one dollar bill represents $1.

An NFT acts as a representation and proof of ownership for either digital or physical items. Some of the most popular NFTs represent ownership of digital artwork, virtual real estate in a game, or collectibles, like basketball or Pokemon trading cards. These NFTs can then be sold and purchased.

The first NFT was created in 2014, and the market for NFTs has grown rapidly in recent years.

How to Create and Sell NFTs

For those more interested in creating NFT art, minting a piece of NFT artwork is relatively straightforward and does not require in-depth knowledge of the crypto industry. The following steps can help you create an NFT.

1. Create a Piece of Art

You first need to create a piece of art that you’ll want to turn into an NFT. You may decide to make a digital image, audio production, or video. Most marketplaces support NFTs that represent JPEG, MP3, MP4, TXT, and other digital files.

2. Choose a Blockchain

A creator must figure out which blockchain they want to issue their NFTs. Ethereum is the most popular blockchain service for this purpose at this time, but a variety of other blockchains are gaining in popularity, such as:

• Tezos

• Polkadot

• Flow

• Binance Smart Chain

Each blockchain has its unique NFT standards, marketplaces, and wallet services. If someone were to create NFT tokens on Binance Smart Chain, traders could only use those NFTs on platforms that support Binance Smart Chain assets. So, they couldn’t sell them on an NFT marketplace like OpenSea, which supports Ethereum and Klaytn blockchains.

3. Get a Wallet

You’ll need to set up a cryptocurrency wallet to pay a marketplace’s fees and receive payment once you sell your NFT.

Since Ethereum is the most commonly used NFT ecosystem, let’s look at what’s needed to create a new NFT on the Ethereum blockchain. First, an NFT creator would need an Ethereum wallet that supports ERC-721, Ethereum’s NFT token standard. Some wallets that qualify include Coinbase Wallet, MetaMask, Trust Wallet, Enjin, and D’Cent.

An NFT creator will also need to fund their wallet with a specific amount of Ether (ETH) tokens that eventually cover transaction fees. Those using the Coinbase wallet can buy ETH from Coinbase with U.S. dollars or another fiat currency. Other users will have to purchase ETH from a crypto exchange and send it to their digital wallet.

4. Find a Marketplace to Sell Your Art on

Before you create and sell your NFT art, you’ll need to choose the marketplace to list your NFT. There are now many NFT marketplaces from which to choose. Depending on your art and interests, you may choose a curated marketplace that specializes in specific kinds of art or a general open marketplace.

Also, you’ll want to keep in mind that marketplaces may charge users minting fees, and there may also be Ethereum gas fees and other costs for listing and transacting on the platform.

5. Minting an NFT

You’re now finally ready to mint your NFT. Most NFT marketplaces offer a step-by-step guide for uploading your digital file to their platform. That process will enable you to turn your digital art into a marketable NFT, known as minting an NFT.

Recommended: What Does Minting an NFT Mean?

6. Sell Your NFT

Once you’ve minted your NFT, you can choose to sell it. There are generally three options to sell your NFT art:

• Fixed price: This allows you to set a price for the NFT and sell it instantly if a buyer is willing to buy the NFT at that price.

• Timed auction: A timed auction will give those interested in your NFT a time limit to submit bids.

• Unlimited auction: There is no set time limit with an unlimited auction. Instead, the seller can choose to end the auction whenever they want.

You also need to set a minimum price and determine the royalties you’ll be paid if the NFT is resold. NFT creators may earn royalties for their artwork when someone sells their tokens to a new person. Creators earn royalties automatically through smart contracts.

How to Buy NFTs

In some ways, buying and selling NFTs is similar to trading different types of crypto. But before learning how to buy NFT tokens, there are a few things worth considering, such as:

• What marketplace do you intend to use?

• Which cryptocurrency will be needed to fund your crypto wallet and make the purchase?

• Are the NFTs you’d like to buy only available at a certain time?

Some NFTs are only available on certain platforms or marketplaces. For example, someone who wants to buy an NBA Top Shot pack of virtual trading cards must open an account with NBA Top Shot and create a Dapper wallet. Other NFT marketplaces include OpenSea, Rarible, Foundation, and Nifty Gateway.

The buyer will then fund their cryptocurrency wallet with either cryptocurrency or fiat currency options. You’ll then have to connect your wallet to the NFT marketplace. After that, you can start browsing the marketplace’s offerings and make a purchase.

For NBA Top Shot, a buyer must wait for a card pack to drop and buy a pack before they sell out.

NFT drops have become a popular method of selling NFTs to eager buyers. Drops like these often require users to sign up and have their accounts funded before the drop so they don’t miss their chance to buy once the NFTs drop.

Drops can sell out in seconds, so being ready ahead of time can be crucial. Of course, other NFTs and NFT platforms don’t utilize drops.

How to Sell NFTs

If you own an NFT, you’ll need to decide whether you want to HODL it or sell it. To sell an NFT, you must list the token on a marketplace. To do this, click on the NFT in your collection that you’d like to sell and locate the “sell” button. Clicking on “sell” will bring up a pricing page, allowing you to set the terms of the sale. As noted above, you can choose either a fixed price or an auction sale.

NFTs typically sell for ETH or ERC-20 tokens. However, some platforms only let you sell for the native token of their blockchain.

NFT Sale Fees

NFT sale fees are the charges associated with selling an NFT. These fees can vary depending on the platform used to sell the NFT. Anyone interested in making, buying, or selling an NFT need to consider the various costs associated with the market because they could eat into any potential profits.

Some fees associated with NFTs include gas, transaction, royalty, and minting fees.

Popular NFT Marketplaces

OpenSea

OpenSea is one of the most used NFT marketplaces. OpenSea offers all kinds of digital assets, from art to music to collectibles, which are free to browse. It also gives artists and creators an easy-to-use process to mint their NFTs.

Rarible

The Rarible platform allows all kinds of art, videos, collectibles, and music to be bought, sold, or created. Rarible has its own token (RARI), which you’ll need to use to buy and sell on the Rarible marketplace.

Foundation

Since Foundation’s launch in early 2021, more than $100 million of NFTs have been sold on the platform. To join the Foundation marketplace, users must get an invitation from a current artist on the platform.

Nifty Gateaway

Nifty Gateway has been the marketplace for the sale of some of the most popular digital artists, such as Beeple, Grimes, and Pak. It’s an art curation platform powered by the crypto exchange Gemini.

SuperRare

As its name suggests, the SuperRare marketplace is a highly selective platform focusing on art rather than meme and celebrity NFTs.

Pros and Cons of NFTs as an Investment

Pros and Cons of NFTs
Pros	Cons
Ownership of NFT is secured by blockchain technology	NFTs are relatively new and are subject to greater volatility and risk
NFTs can be bought, sold, or created at any time, giving investors the ability to cash out their investment 24/7	NFTs generate no revenue, unlike dividend-paying stocks, bonds, and real estate
Investors can use NFTs to diversify a financial portfolio	NFTs are not regulated, which could pose a risk to investors

Crypto Investing

Learning how to buy NFTs or create and sell them is not challenging. Developers have created graphic user interfaces that make the process as painless as possible. Of course, having previous experience using cryptocurrency wallets will be a big help.

FAQ

Can anyone make NFTs?

Yes, there is no centralized authority that controls the creation of NFTs. Anyone with an internet connection and the necessary technical skills can create an NFT.

Can NFTs be made completely for free?

You can create NFTs for free, but it depends on what blockchain and marketplace you use to mint your NFT. Usually, NFT creators will need to pay costs related to gas fees.

What are some places where you can buy NFTs?

You can buy and sell NFTs on various marketplaces, including OpenSea, Rarible, NBA Top Shot, SuperRare, and Foundation.

Photo credit: iStock/asbe

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Sep

2022

Understanding Cash in Lieu of Fractional Shares

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

It’s not uncommon for publicly-traded companies to restructure based on changing market conditions or their stock price. When companies merge, acquire competitors, or split their stock, it can raise the question of how to consolidate or restructure the company’s outstanding shares.

If such a corporate action generates fractional shares for investors, the company’s leadership has a few options for how to proceed: They could distribute the fractional shares to shareholders, round up to the nearest whole share, or pay cash in lieu of fractional shares. Investors need to be aware of cash in lieu because it can affect a portfolio and taxes.

What Is Cash in Lieu?

Cash in lieu is a type of payment where the recipient receives money instead of goods, services, or an asset.

In investing, cash in lieu refers to funds received by investors following structural company changes that unevenly disrupt existing stock prices and quantities. Instead of receiving fractional shares after a stock split or a merger, investors receive cash.

Following corporate actions like a stock split or a merger, the newly-adjusted stock supply can be uneven and often results in fractional shares. Rather than holding or converting fractional shares to whole shares, some companies opt to aggregate and sell all of the partial shares in the open market. After the sale of these shares, the company will pay cash to the investors who did not get fractional shares.

The company’s board ultimately determines how the company will maintain or return value to investors. Opting to distribute cash in lieu is a company’s method of disposing of fractional shares and returning the cash balance to investors that’s proportionate to prior holdings.

💡 Recommended: What Are Fractional Shares and How Do They Work?

Why Investors Receive Cash in Lieu

Investors can receive cash in lieu for various reasons involving company restructuring that affects the number of outstanding shares, stock price, or both.

The following events can lead to investors receiving cash in lieu of fractional shares.

Stock Split

A stock split occurs when a company’s board of directors determines that the company’s high share price may be too high for new investors. The company will then execute a stock split to lower the stock’s price by issuing more shares at a fixed ratio while maintaining the company’s unchanged value. Companies will often approve a stock split so its share price looks more attractive to more investors and gains more liquidity and marketability.

Depending on the predetermined ratio, a stock split could generate fractional shares. For example, a 3-to-2 stock split would create three shares for every two shares each investor holds. If you own five shares of the stock, you would have 7.5 shares after the split. Thus, a stock split would cause any investor with an odd number of shares to receive a fractional share.

However, suppose the company’s board isn’t keen to hold or deal with fractional shares. In that case, they will distribute investors’ whole shares and liquidate the uneven remainders, thus paying investors cash in lieu of fractional shares.

Conversely, a company may execute a reverse stock split because its stock price is too low, and they want to raise it. If stock prices get too low, investors may become fearful of buying the stock, and it may risk being delisted from exchanges.

When a stock undergoes a reverse stock split, investors usually receive one share for a specific number of shares they own, depending on the reverse split ratio. For example, a stock valued at $3.50 may undergo a reverse 1-for-10 stock split. Every ten shares are converted into one new share valued at $35.00. Investors who own 33 shares, or any number not divisible by ten, would receive fractional shares unless the company decides to issue cash in lieu of fractional shares.

Companies may notify their shareholders of an impending stock split or reverse split on Forms 8-K, 10-Q, or 10-K, as well as any settlement details if necessary.

Merger or Acquisition

Company mergers and acquisitions (M&As) can also create fractional shares. When publicly-traded companies combine or are bought, investors will often receive stock as part of the deal using a predetermined ratio. These stock purchase deals often result in fractional shares for investors in all involved companies.

In these cases, it’s rare for the ratio of new shares received to be a whole number. Companies may opt to return full shares to investors, sell fractional shares, and disburse cash in lieu to investors.

💡 Recommended: What Happens to a Stock During a Merger?

Spinoff

Suppose an investor owns shares of a company that spins off part of the business as a new entity with a separately-traded stock. In that case, shareholders of the original company may receive a fixed amount of shares of the new company for every share of the existing company held. Depending on the structure of the spinoff, investors may receive cash in lieu of fractional shares of the new company.

How Is Cash in Lieu of Fractional Shares Taxed?

Like many other forms of investment profits, cash in lieu of fractional shares is taxable, even though the payment occurred without the investor’s endorsement or action. Investors will pay a capital gains tax on the payment.

However, if you have a tax-advantaged account, like a 401(k) or individual retirement account (IRA), you do not have to worry about reporting or paying taxes on the gains of cash in lieu payment.

Some investors may simply report the payment on the IRS Form 1040’s Schedule D as sales proceeds with zero cost and pay capital gains tax on the entire cash settlement. However, the more accurate and tax-advantageous method would apply the adjusted cost basis to the fractional shares and pay capital gains tax only on the net gain.

💡 Recommended: A Guide to Tax-Efficient Investing

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How to Report Cash in Lieu of Fractional Shares

As noted above, if you receive cash in lieu of fractional shares, you’ll have to pay capital gains taxes on the windfall. To ensure you’re paying the right amount of tax, you’ll have to take a few extra steps to determine your cost basis and accurately report the cash in lieu payment.

Gather Your Documents

Investors may receive the cash through their investment broker and an IRS Form 1099-B at year-end with a “cash in lieu” or “CIL” notation. To accurately report your cash in lieu payment, you’ll need the Form 1099-B, your original cost basis, the date you purchased the stock, the date of the stock split or other corporate action, and the reason why you received the cash in lieu of fractional shares.

Calculate Your Cost Basis

Calculating the cost basis for cash in lieu of fractional shares is a little tricky due to the share price and quantity change. The new stock issued is not taxable, nor does the cost basis change, but the per-share basis does.

Consider the following example:

• An investor owns 15 shares of Company X worth $10.00 per share ($150 value)

• The investor’s 15 shares have a $7.00 per share cost basis ($105 total cost basis)

• Company X declares a 1.5-to-1 stock split

After the stock split, the investor is entitled to 22.5 shares (1.5 x 15 shares = 22.5 shares) valued at $6.67 each ($150 value / 22.5 shares = $6.67 per share), but the company states they will only issue whole shares. Therefore, the investor receives 22 shares plus a $3.34 cash in lieu payment for the half share ($6.67 x 0.5 = $3.34 per half share).

The investor’s total cost basis remains the same, less the cash in lieu of the fractional shares. However, the adjusted cost basis now factors in 22 shares instead of 15, equaling a $4.77 per share cost basis ($105 total cost basis / 22 shares = $4.77 cost basis) and a $2.39 fractional share cost basis.

Finally, the taxable “net gain” for the cash payment received in lieu of fractional shares equates to:

$3.34 cash in lieu payment – $2.39 fractional share cost basis = $0.95 net gain.

So, rather than paying capital gains taxes on the $3.34 payment, you pay taxes on the $0.95 gain. You report this figure on the IRS Form 1040’s Schedule D.

The Takeaway

It’s not always possible to anticipate a company’s actions, like a merger or stock split, and how it will affect shareholders’ stock. If the company doesn’t wish to deal with fractional shares, shareholders need to understand the alternative payments, such as cash in lieu of fractional shares, and how it affects them. While cash in lieu can be burdensome, knowing the nuances of the payment and how it is taxed may benefit your portfolio.

Though you may receive cash in lieu of fractional shares, investors may still consider fractional shares to add to their investment portfolio. For individuals looking to invest in fractional shares with the help of a simple account setup, opening an online brokerage account with SoFi Invest® can help. With the SoFi app, you can trade stocks, exchange-traded funds (ETFs), and fractional shares with no commissions for as little as $5.

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FAQ

Is cash in lieu of fractional shares taxable?

If you receive cash in lieu of fractional shares, the cash is taxable. The payment can be taxed as a short-term or long-term capital gain, depending on how long you’ve held the stock.

Is cash in lieu a dividend?

Investors can receive cash in lieu of fractional shares for a dividend payment. However, cash in lieu is not a dividend and is not taxed like a dividend.

Is cash in lieu a capital gain?

Cash in lieu is treated as a capital gain because the IRS considers it a stock sale. When you receive cash in lieu of fractional shares, you may have to pay capital gains taxes on the payment.

What is a cash in lieu settlement?

A cash in lieu settlement is an agreement between two parties in which one party agrees to pay the other party an agreed-upon amount of cash instead of some other form of payment or consideration.

Sep

2022

Understanding the Different Stock Exchanges

By Austin Kilham | Growing Wealth, Investing, Terminology | Comments Off

What to know about how the New York Stock Exchange and Nasdaq work.

Sep

2022

Crypto Wallets vs Crypto Exchanges: How They Compare

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

Crypto wallets and exchanges are two different things. Crypto exchanges are like online marketplaces where people can buy, sell, and trade crypto.

A crypto wallet is a piece of software or hardware that can be used for storing, receiving, and sending crypto. Many exchanges provide custodial wallets for their users, so people can also hold crypto on an exchange if they choose.

Here we’ll explore the similarities and differences between holding crypto in a crypto wallet vs. an exchange. Different users might prefer one option over the other for different reasons.

What Is a Crypto Wallet?

A crypto wallet is a piece of software or hardware that allows users to interact with different blockchains, and thus buy, sell, and store various types of crypto.

There are two main parts to a crypto wallet: a private key and a public key. The private key is like the key to a safe deposit box. Anyone with access to the private key can take control of all the crypto assets held in a given wallet. Do not share your private key with anyone under any circumstances.

The public key is derived from the private key and allows users to receive funds. This key is safe to share. When someone wants to receive crypto, they use their wallet to generate a public key and share it with the person who will be sending them coins.

A single wallet can generate many public keys, also known as addresses. A wallet address can come in the form of a QR code or a long string of randomly generated alphanumeric characters.

How Do Crypto Wallets Work?

Technically, a crypto wallet doesn’t contain actual coins. It provides a way to engage with a blockchain network and prove that you have ownership of specific digital assets. Using the private key, a wallet holder can initiate or “sign” a transaction, proving that the coins are theirs to send. This is an important fact to know when it comes to the discussion of different types of wallets.

While wallets are generally used for storing, receiving, and sending crypto, some have additional functionality as well. Wallets can also provide the ability to swap different tokens, buy and sell crypto, or interact with different decentralized applications (dApps).

Wallets are built so that a user doesn’t have to do much more than enter the correct information and click a few buttons. The details are handled on the backend, so users don’t have to know everything about how cryptocurrency works.

Different types of wallets work somewhat differently as far as the user experience is concerned. The best type will depend on a user’s wants and needs.

Setting up crypto wallets requires some general knowledge of using computer programs. It’s not all that complicated, but this can vary according to the type of wallet.

Types of Wallets

Now that you know what crypto wallets are, let’s discuss the different types of wallets.

Crypto wallets generally fall into one of two categories: software wallets and hardware wallets. Software wallets can be further subdivided into additional categories like web wallets, desktop wallets, and mobile wallets. Wallets can also be custodial, meaning a third-party holds the private keys, or non-custodial, meaning the user holds their own private keys.

Let’s explore some key characteristics of these different types of wallets, including hot vs. cold wallets.

Software wallets

A software wallet is a computer program that has no physical counterpart. There are different types of software wallets, depending on where the program runs. Wallets like these can exist in a web browser, mobile device, or desktop computer. Software wallets are hot wallets by default because they exist on an internet-connected device.

Web wallets

Web-based wallets work in a web browser and allow for easy integration into apps like NFT marketplaces or decentralized finance (DeFi) markets. These wallets are among the least secure and aren’t suitable for long-term crypto storage.

Mobile Wallets

Mobile wallets exist on a mobile device like a smartphone or tablet. These wallets can be convenient for sending or receiving small amounts of crypto. If someone wants to buy Bitcoin at a Bitcoin ATM or use Bitcoin to pay for something, a mobile wallet might be a good option.

Desktop Wallets

Desktop wallets run on a desktop or laptop computer. They can be useful for those who want to use crypto without having to go through an exchange. While desktop wallets allow users to hold their own private keys, they are still considered to be less than secure because those keys are held on an internet-connected device.

Hardware Wallets

Hardware wallets are small devices that hold a user’s private keys and allow for the sending and receiving of transactions. These wallets usually interact with a user’s computer via apps or web-based interfaces.

When not in use, a hardware wallet stores keys offline or in “cold storage.” Coupled with the fact that the signing of a transaction happens on a separate device that is seldom connected to the internet, this makes hardware wallets much more secure than other wallet options.

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What Is a Crypto Exchange?

A crypto exchange is a marketplace for cryptocurrencies. It’s a website where people can buy, sell, and trade crypto. Exchanges also provide their users with wallets for different cryptocurrencies. An exchange could also be thought of as a digital bank where people can store their crypto and access certain financial services.

Some crypto exchanges provide users with the option to take out a loan against their crypto, for example. Others allow for advanced trading options like using leverage and derivatives such as options or futures contracts.

Money held in a bank doesn’t technically belong to the depositors — those funds become property of the bank. In a similar way, funds held in a custodial wallet on an exchange aren’t in direct possession by the exchange’s users. A non-custodial crypto wallet, by contrast, allows users to take personal control of their funds.

How Do Crypto Exchanges Work?

There are two types of crypto exchanges: centralized exchanges and decentralized exchanges (DEX). Most of the largest exchanges are centralized. Some of the biggest exchanges include Binance, Kraken, Coinbase, KuCoin, Crypto.com. A centralized exchange has a single entity that makes a market for buyers and sellers and maintains an order book containing the bids (buy orders) and asks (sell orders) of users.

Many exchanges allow users to place a “market” order that will execute a buy or sell at the current market price. The market price is determined by the point at which buyers and sellers meet at any given time.

Alternatively, traders can place a buy or sell order at a price above or below the current market price. The order will then be filled when the price falls or rises to the price set by the trader.

By contrast, DEXs have no central entity controlling the order books. Many don’t even have order books at all. One of the most common methods used by decentralized exchanges is what’s called an automated market maker (AMM). Using real-time price data from oracles, AMMs match buyers with sellers automatically.

Decentralized exchanges often don’t require a user to verify their identity, unlike centralized exchanges, which must comply with regulations like anti-money laundering (AML) and know-your-customer (KYC) laws.

DEX users can therefore remain more anonymous. They can also potentially access other decentralized finance (DeFi) services such as borrowing and lending without having to undergo a credit check.

Crypto Wallets vs Exchanges

The idea of a crypto wallet vs. exchange can be confusing for beginners because exchanges provide users with custodial wallets for different types of crypto. While users can use wallets like these to transact with or hold crypto, the wallet itself is owned and controlled by the exchange.

For the purpose of our discussion here, the term “crypto wallet” refers to non-custodial wallets held by users, and the term “crypto exchange” refers to the marketplace where people buy and sell crypto, as well as any associated custodial wallets and financial services.

Let’s look at some of the similarities and differences between a crypto wallet vs. exchange.

Similarities

A wallet and an exchange are two very different things. Yet they still have some characteristics in common.

Crypto wallets vs. exchanges are similar in that they both:

• Allow for the storage, receiving, and sending of crypto

• Provide an easy way for people to interact with the crypto ecosystem

• Are designed to be as simple as possible

Differences

Despite performing some of the same functions, wallets and exchanges differ in some important aspects.

Crypto wallets vs. exchanges are different in the following ways:

• Wallets allow people to hold their own private keys, exchanges do not

• You can’t buy crypto with a wallet alone, although some have connected exchanges

• Most exchanges require users to verify their identity, whereas wallets can be used pseudonymously.

Crypto wallets vs exchanges
Similarities	Differences
Allow for the storage, receiving, and sending of crypto	Wallets allow people to hold their own private keys, exchanges do not
Provide an easy way for people to interact with the crypto ecosystem	You can’t buy crypto with a wallet alone, although some have connected exchanges
Are designed to be as simple as possible	Most exchanges require users to verify their identity, whereas wallets can be used pseudonymously

Investing in Crypto Today

Crypto wallets and exchanges are different entities. Crypto wallets can be software or hardware based. And while you don’t technically hold actual crypto in a cryptocurrency wallet, these wallets are specially constructed so you can send and receive crypto via different blockchain platforms using private and public keys.

Crypto exchanges are like online marketplaces where people can buy, sell, and trade crypto. You can use a centralized exchanges, which operates similar to a regular securities exchange, or a DEX — a decentralized exchange, which relies on automated market makers rather than order books.

FAQ

Is it safer to keep your crypto in a wallet or an exchange?

Keeping crypto in a non-custodial wallet, where you control the private keys to your crypto assets, is widely considered to be a safer option than keeping crypto on an exchange. When you store crypto on an exchange, a third-party holds the keys, and therefore has control over those assets. If an exchange gets hacked or its employees steal from the exchange’s wallets, users could be left with nothing.

What happens if you move crypto from an exchange to a wallet?

Moving crypto from an exchange to a wallet means that a user will obtain ownership of their private keys. This brings with it a new level of security and sovereignty, but also an additional layer of responsibility. When holding one’s own private keys, a user effectively becomes their own bank, making them responsible for anything that could happen, including total loss of funds.

Which type of crypto wallet is considered the safest?

Hardware wallets are widely considered to be the most secure type of crypto wallet. This is because when using a hardware wallet, the “signing” of a transaction happens on a separate device, keeping the private keys safer. The keys can also be held in offline cold storage when not in use, where they are safe from hackers.

Photo credit: iStock/AndreyPopov

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.

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

SOIN0322031

Sep

2022

How Does a Crypto Exchange Work?

By SoFi | invest, Investing | No Comments

What Is a Crypto Exchange?

A cryptocurrency exchange is simply where buyers and sellers can trade crypto. If you want to trade crypto, you need to do it via a crypto exchange because, at least for now, very few traditional investment firms offer crypto.

Generally speaking there are three main types of crypto exchanges — centralized, decentralized, and hybrid. But there are other ways to buy and sell crypto, including investing apps and P2P or peer-to-peer platforms where you can buy and sell crypto 1:1.

Learn more about the different types of exchanges, how a crypto exchange works with your crypto wallet, and how to decide which type of exchange is best for you.

How a Crypto Exchange Works

When you set up an account with a crypto exchange, it enables you to buy and sell cryptocurrencies like bitcoin (BTC), ether (ETH), litecoin (LTC), polkadot (DOT), dogecoin (DOGE), and so on. Depending on the exchange, you can purchase crypto using a fiat currency like the U.S. dollar, or trade one form of crypto for another.

The bigger and more established a service is, the more likely it is to offer a range of cryptocurrencies. Still, you may want to check that your desired crypto is available before setting up an account.

On a crypto exchange, you can use ordinary fiat currency to buy crypto, or you may be able to trade one crypto for another. You may be able to convert your crypto back into regular currency, leave it in your account for future trades, or withdraw it as cash. Available services can vary, depending on the exchange or app you use. For example, some services don’t allow you to move your crypto off platform to your own crypto wallet.

Unlike traditional exchanges that have set trading hours, cryptocurrency exchanges are active 24 hours a day, 7 days a week.

How to trade on a crypto exchange

To begin trading, you need to fund your exchange account — sometimes called a wallet. Note that a wallet provided by a platform or app is typically held on that platform. It’s generally recommended that you also set up your own crypto wallet for greater security (more on crypto wallets below).

You can then view the trading prices of different crypto. Note that the exchange doesn’t set the prices; they’re determined by the market, and most exchanges reflect up-to-the-minute pricing, although there can be slight differences among exchanges owing to the fact that cryptocurrencies are decentralized.

You can then place a buy order to purchase bitcoin, ether, etc., and your order is added to the order book along with other buy and sell orders. Depending on which type of platform you’re on (an exchange, investing app, or cash app), the view of Exchanges and online brokers generally charge fees for their services. Unlike traditional markets, where many fees have declined in recent years, crypto trading typically costs more. It’s not uncommon to see fees as high as 5% per trade or more, for example, although many can be much lower: 0.5% or less per trade.

Pros and Cons of Crypto Exchanges

Most people’s experience with crypto begins on an exchange, as this is the easiest place to buy crypto. Most wallets are only useful for sending, storing, and receiving crypto, which is a key difference between a crypto exchange and wallet.

Some of the pros of using a crypto exchange include:

• Easy and convenient for new users

• Allows for the purchasing and selling of crypto in a somewhat regulated environment

• Some exchanges provide users with tax forms, making it easier to calculate crypto taxes

Some of the cons of using a crypto exchange include:

• Vulnerable to hacking, fraud, or theft

• If the exchange goes down, users can’t access their funds or place trades

• Individuals who use the custodial exchange wallet do not hold their private keys

Pros and Cons of Crypto Exchanges
Pros	Cons
Easy and convenient for new users.	Vulnerable to hacking, fraud, or theft.
Allows for the purchasing and selling of crypto in a somewhat regulated environment.	If the exchange goes down, users can’t access their funds or place trades.
Some exchanges provide users with tax forms, making it easier to calculate crypto taxes.	In some cases, individuals do not hold their private keys.

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

What Are the Different Crypto Exchanges?

There are three kinds of digital currency exchanges: centralized exchanges, decentralized exchanges, and hybrids. Here’s how they shake out:

Centralized Exchanges

These exchanges have a third party that helps conduct transactions to make sure they go through as intended — similar to a brokerage.

This might seem counterintuitive since one of the founding tenets of cryptocurrencies is that they are decentralized — meaning they aren’t issued or regulated by a government or other central authority. But a centralized cryptocurrency exchange can make it easier to buy your intended crypto with regular currency.

The potential risk inherent in some centralized exchanges is that these exchanges, being held by a single entity, are more vulnerable to an attack.

Decentralized Exchanges

A decentralized cryptocurrency exchange, or DEX, operates without the third party commonly used centralized exchanges. You could say decentralized exchanges are closer to the spirit of the cryptocurrency world because they are open source and depend on users to trade peer to peer.

In theory, a decentralized cryptocurrency exchange could be more secure than a centralized exchange. Because there’s no central entity or server to hack, it might make it harder to steal cryptocurrency. Fees might be lower and your transactions might also process faster in a DEX.

A DEX might have some drawbacks compared to their centralized counterparts. You might have to be a little more skilled with tech because a DEX may not offer the easy transfers from bank accounts or debit cards to buy crypto.

Some DEX don’t offer fiat currency changes at all and your only option might be to trade one cryptocurrency for another. Your funds aren’t insured and there’s nobody to call if you run into a customer service issue, as there’s no central authority.

Hybrid Cryptocurrency Exchanges

Hybrid cryptocurrency exchanges are an attempt to blend the best of both worlds from centralized and decentralized into one exchange. Their aim is to give end users the convenience of a centralized exchange while also giving them the security and freedom of a decentralized exchange.

Hybrid exchanges have yet to see the adoption that centralized exchanges have realized, but they may be laying a roadmap for a middle ground that might keep consumers and crypto enthusiasts happy in the future.

Other Ways to Trade Crypto

Trading on an exchange isn’t for everyone. The technical know-how required can set a high bar. And some exchanges might follow the KYC (Know Your Client) protocol, which requires users to share personal information and identification, similar to traditional exchanges. Luckily, there are other options.

• Investing apps. Many online investment brokers offer apps that also enable users to buy and sell cryptocurrency.

• Cash and payment apps. Apps like PayPal, Venmo, and Cash App also allow users to buy crypto.

The challenge with some of these options is that you may not be able to move your crypto assets off platform.

Users concerned with privacy and anonymity can consider using P2P services that allow you to trade crypto directly with others.

Choosing a Crypto Exchange: 5 Things to Know

In order to pick a crypto exchange that meets your needs and aligns with your crypto plan or strategy, consider these five factors.

1. Where does the exchange do business?

Before you choose an exchange to trade on, make sure it covers your jurisdiction. Some exchanges are limited to specific locales. An exchange’s jurisdiction reflects not only their target market, but also where they’re allowed to do business due to certain cryptocurrency regulations. Some exchanges have website addresses specific to each country.

2. How much liquidity does it have?

Exchanges that have a higher volume of trades and more money changing hands tend to work in an investor’s favor. In order to access that higher liquidity, look for an exchange with many users, or users who hold large amounts of assets on the exchange and trade frequently. Of course, some cryptocurrencies tend to be more liquid than others.

If there are only a small number of orders, there might not be enough people willing to buy or sell the coins an investor wants to acquire or liquidate. Lower trade volume could drive prices up for buyers — or drive prices down for sellers.

Liquidity is typically important during times of high volatility (which is common to the crypto markets). Less liquidity can exacerbate volatility to the point where prices rise or fall even more dramatically than they would otherwise.

3. Which types of crypto can you trade?

In general, the higher-market-cap coins are more likely to be traded on most exchanges. Investors looking for more exotic, lesser-traded coins might have to search out smaller exchanges. It’s easy to find out what coins are available, so just check the list to find your desired crypto.

4. What are the fees?

As noted above, crypto exchanges and trading apps vary widely in terms of the fees they charge — but they all charge something. Be sure to understand the terms and choose an exchange that makes sense for the types of trades you’ll be making.

In some cases, an exchange might have a native token that enables traders to pay lower fees. Users pay fees in the form of the exchange’s native token, rather than from the currency pair they are trading.

5. How secure is it?

While no exchange is 100% secure, you might consider those that have been around for the longest time, have the most customers, or have had the least amount of problems. You can usually find information about an exchange’s security practices on their websites.

Some exchanges insure some or all of user funds. An exchange that offers insurance could shield investors from losses should anything catastrophic happen, but such policies are not common and they’re typically not extensive. Be sure to do your research.

How Is a Crypto Exchange Different Than a Crypto Wallet?

Think of a crypto exchange as the place where you trade crypto, and a wallet as the place where you “store” crypto — although how a crypto wallet functions is a bit more complex.

Crypto wallets and exchanges are generally used in tandem by investors and traders, as they’re both used to trade crypto. But it’s important to keep in mind that their main purposes differ: A crypto wallet is built and designed to hold crypto assets, while an exchange is built to, well, exchange them.

Some crypto exchanges have their own wallets that users can adopt, but users should be aware that the assets they keep in these custodial wallets are not always safe. There’s a phrase: “not your keys, not your coins,” that investors should be familiar with, too.

It essentially means that if you’re keeping your assets on a crypto exchange’s native or custodial wallet, that exchange effectively controls those assets. The only way to make sure they’re truly safe and in your possession is to transfer them to a hot or cold wallet that you control.

Here’s a quick rundown of some of the key differences between crypto exchanges and wallets:

Crypto Exchanges	Crypto Wallets
Supports crypto trades.	Allows you to send, receive, and hold crypto using private keys.
May or may not support certain types of crypto.	Typically any crypto can be held in a crypto wallet.
May include a custodial wallet for faster trades, but these come with restrictions.	Can exist on exchanges, or offline as hot or cold wallets.
Can trade fiat currency for crypto.	Only holds crypto, not fiat currency (you can hold fiat in a fiat wallet).

The Takeaway

A crypto exchange sounds simple — it’s a platform where you can buy and sell different types of crypto — but like most things in the cryptoverse, exchanges can be complicated and may require a little more scrutiny from users than traditional stock and bond exchanges do.

The main thing to remember is that this industry — the coins, the platforms, the blockchains, the exchanges, the wallets — is largely unregulated. That means the consistency you may be accustomed to in the ordinary financial world, in terms of how investments are structured and how investment firms work, is less common in the world of cryptocurrency. Thus it’s important to invest some extra time to understand basics — like whether a certain exchange can do business in your state or country, what fees they charge, etc. — as well as more complex topics like choosing the right wallet.

Photo credit: iStock/svetikd

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.

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

SOIN19144