Investing Archives | Page 181 of 222

Q: Why Has the US Not Issued a CBDC?

It will, if it needs one. The United States has embraced the cryptocurrency sector and is trying to integrate it into its existing financial system. The U.S. continues to be at the forefront of creating regulations for crypto so that it may be more resilient and sustainable as an investment option.

May

2022

What Is a Central Bank Digital Currency (CBDC)?

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

A central bank digital currency (CBDC) is virtual money issued as legal tender by the central bank of a country. No major bank has issued a CBDC yet. However, it would be similar to blockchain-based cryptocurrencies like Bitcoin that have increased in popularity, only backed in a sovereign nation’s fiat currency: paper and coin currencies like the U.S. dollar and British pound. In other words, a CBDC would be a government-issued virtual store of value.

Fertile Ground For CBDCs

The year 2021 posted strong growth in digital assets in general and stablecoins in particular. According to the Bank of International Settlements’ (BIS) May 2022 publication — Gaining momentum: Results of the 2021 BIS survey on central bank digital currencies — crypto’s market capitalization grew by 3.5 times, swelling to $2.6 trillion in market cap. The BIS survey also found that, in 2021, nine out of ten central banks were exploring the pros and cons of digital currencies. And that approximately two-thirds of the world’s population could see their country issue a CBDC in the next three years. Further, BIS reported that developing economies are more apt than major economies to issue digital money.

Could CBDCs and Stablecoins Hurt Fiat?

The push toward digital currencies comes amid the greater possibility that private virtual currencies like Bitcoin could see even wider adoption in the near term. Some central banks and regulators view this possibility as threatening. They’re concerned that, if and when crypto gains traction as a common form of payment, it might erode the stability of legacy financial services. How could this happen?

If, for example, a director of a crypto project does not understand cryptocurrencies well enough to manage them — along with the high risk profile that most cryptocurrencies carry — then a financial disaster could ensue. Moreover, for an individual to be a leader in the crypto sector, it might behoove them to be a master strategist on the trading floor, too. The ability to execute complex trading strategies quickly and wisely can be critical for navigating the crypto market.

In 2020 and 2021, the Covid-19 pandemic further expedited a shift away from physical cash and coins. But that had been happening well before the pandemic with the advent of payment platforms like PayPal and Venmo. If the pace of adopting digital currencies continues, then that alone could pose a potential threat to fiat currency.

How Could CBDCs Work?

The details of exactly how CBDCs would function remain unclear. However, some outcomes of using CBDCs are already apparent.

As mode of Payment/ Store of Value/ Easier Digital Pay

As with physical cash, CBDCs could be stored or used for payment. They will also likely carry a unique serial number, similar to how paper notes and coins in a fiat-currency system do. Many CBDCs won’t be designed to replace cash anytime soon; instead, they’ll be used to complement physical money.

Could Expedite New Central Bank Monetary Policy

Currently, central banks already issue a form of digital money but only to other banks, which then lend that money to consumers and businesses. When people currently make payments or move money between multiple bank accounts, it usually goes through a patchwork of systems, often incurring fees for the parties involved and taking a couple of days for transfers to be completed.

Possible Democratizing Effect on Central Bank Money

Central bank digital currencies could potentially cut out the middlemen, lowering or eliminating fees and making transfers faster. For instance, a Bitcoin transaction typically takes less than 10 minutes. Instead of purchasing their CBDCs from an exchange, for example, consumers could hold accounts directly with the central bank, which would make these transactions faster. Having the option to purchase CBDCs also could democratize central-bank money by making it more accessible to all.

Potential to Minimize Role of US Commercial Banks

That means CBDCs could become a tool for monetary policy, giving central banks more control over currency supply and allowing them to better track the movement of money within the economy. Central banks also could possibly bypass financial markets and change interest rates directly on consumer accounts.

Exploring the Risks of CBDCs

Of course, CBDCs would be a disappointment to those who buy cryptocurrencies with the hope that a private decentralized form of digital cash, like Bitcoin, Ethereum or Litecoin, will one day displace traditional fiat. Some argue that CBDCs would mean an expansion of governmental oversight; that the anonymity that the most private cryptocurrencies (in particular) offer will continue to fuel their appeal.

Potential to Destabilize Existing Financial System

The emergence of CBDCs could also be a destabilizing force for the existing financial system. If consumers can hold direct accounts with a central bank, commercial banks could become drained of retail deposits. One potential solution to this problem has been to put a cap on how much you can hold in CBDCs, or not have central banks pay interest on retail deposits.

Possible War Against the Dollar

Another potential repercussion could be the start of a new kind of currency war. The U.S. dollar has been the world’s reserve currency since the 1920s. The rise of multiple sovereign digital currencies could challenge the current dollar-dominant system, making it less important for international trade and foreign-exchange transactions to be pegged to the dollar.

Central Bank Digital Currencies Worldwide

A CBDC-based financial system likely would pose unique advantages and challenges for each country that issues a digital currency.

But despite the challenges, most of the world has rushed to adopt central bank digital currencies. In its most recent survey, the BIS reported that the majority of the 81 record countries that responded to its 2021 survey either had developed a CBDC, are in some stage of piloting a central bank digital coin; and more than two-thirds of these countries likely would issue a CBDC in the near term. These countries cited the Covid-19 pandemic and escalating use of cryptocurrencies as among their reasons for embracing a CBDC.

Not every country has issued central bank digital currencies, including the United States. However, the U.S. does have numerous stablecoins that are pegged one-to-one to the U.S. dollar.

Why Has the US Not Issued a CBDC?

It will, if it needs one. Some in the United States have embraced the cryptocurrency sector and are trying to integrate it into its existing financial system. One key step in that direction would be for the U.S. to step up regulations for crypto to make it safer for investors and for cryptocurrency platforms to operate.

How About a US e-Dollar? Or, a Fedcoin?

At this time, the U.S. is actively researching the viability of incorporating a CBCD into its financial structure. But its approach is thorough and methodical. Along with being supportive of digital currencies in general, the U.S. is trying to ascertain its own need for a digital dollar. The U.S. Federal Reserve System (the Fed) — which is the central bank of the U.S. — has said it’s looking into different options involving digital currencies.

Key issues that the Fed needs to understand include protection from cyberattacks, counterfeiting and fraud; how a CBDC would affect monetary policy and financial stability; and how it could prevent illicit activity.

Fed Urges Prudence Amid Tenuous Financial Stability

In May 2022, the Fed released its annual Financial Stability Report . The Fed’s last such report was in November 2021, and since that time the United States’ economic uncertainty has risen. A number of factors are responsible for this unease, including the Russian invasion of Ukraine, human and economic hardship, the pandemic’s improving though unclear trajectory, and persistent higher levels of inflation.

The Fed specifically cited concerns about stablecoins in the 2022 report. U.S. traders are using stablecoins a tool in leveraged transactions of other cryptocurrencies, which according to the Fed “may amplify volatility in demand for stablecoins and heighten redemption risks.” Therefore, the Fed is not ready to turn to central bank digital currencies, and had has continued to focus on regulating stablecoins. Also at issue is whether a country really needs both types of digital assets — stablecoins and CBDCs.

Snapshots of Other Countries’ CBDCs

In the rest of the world, adoption of central bank digital currencies seems to be thriving. The Atlantic Council is a nonprofit, which in 2021 launched its database, CBDC Tracker , which first only the Fed, now everyone can use to get the latest news about digital currencies globally.

As of May 2022, nine countries have issued CBDCs, and approximately 100 countries are at some stage of exploring them, be it researching, developing, testing, or launching. (Note: We chose the countries below randomly and cited them in alphabetical order.)

The Bahamas

In October 2020, the Central Bank of the Bahamas issued the world’s first CBDC, called the Sand Dollar. The Bahamas was the first country to issue a central bank digital currency that covered an entire country.

China

China first began exploring a digital yuan in 2014. In 2022, China launched a pilot of its current CBDC, called e-CNY, during the Beijing Winter Olympic Games. China’s approach is to run tests of e-CNY in smaller sections of the country before initiating it for the entire country. China’s program is designed to replace cash in circulation, not money held in long-term bank accounts.

But e-CNY won’t use blockchain technology for the central database. Instead, both commercial bank distributors and the central bank will keep their own databases that track the flows of digital yuan from user to user.

India

India’s government, Nirmala Sitharaman announced that India will introduce a digital rupee during its fiscal year 2022–2023, beginning April 1, 2022. The Reserve Bank of India will back this CBDC, which is now in development.

According to the Sitharaman, the CBDC would strengthen India’s economy, increase efficiency and lower expenses for the country’s currency-management system, and provide a stable, regulated digital currency that would compete with private cryptocurrencies.

Sweden

Sweden is another country at the forefront of moving toward digital currency. Unlike in China however, distributed ledger technology or blockchain was always the inspiration for the country’s electronic krona (e-krona), so it will be the e-krona’s foundation. Sweden’s central bank, Riksbank, is focused on securing new solutions that are scalable, and which would offer the same level of convenience and security that banks offer today.

The BIS estimated in 2018 that Sweden is the world’s most cashless society — and that was before the global pandemic. While many countries have witnessed a downturn in cash use, Sweden’s cash usage in the last decade has been more striking than most.

Even more remarkable is the year-over-year percentage change in Sweden’s cash usage during the Covid-19 pandemic. In 2020, according to Riksbank, cash comprised 40% of the country’s point-of-sale payments; in 2021, that amount dropped to less than 10% — affirming BIS’ estimation.

The Takeaway

As of May 2022, nine countries have issued central bank digital currencies, and approximately 100 more countries are researching and exploring CBDCs.

Proponents of the CBDC argue that blockchain-based fiat currency could solve inefficiencies in the existing central bank infrastructure. Those more cautious warn that CBDCs could be vulnerable to hacks or outages. Meanwhile, enthusiasts of decentralized finance (DeFi) argue for a financial system that moves away from centralized authority, rather than one that expands its influence.

It’s yet to be seen whether CBDCs will usher in a new era of stable digital currency usage. So far, cryptocurrencies have been popular for trading in markets, rather than as a mode of payment.

May

2022

Target Date Funds: What Are They and How to Choose One

By AJ Smith | invest, Investing, Preparing for Retirement | No Comments

A target date fund is a type of mutual fund designed to be an all-inclusive portfolio for long-term goals like retirement. While target date funds could be used for shorter-term purposes, the specified date of each fund — e.g. 2040, 2050, 2065, etc. — is typically years in the future, and indicates the approximate point at which the investor would begin withdrawing funds for their retirement needs (or another goal, like saving for college).

Unlike a regular mutual fund, which might include a relatively static mix of stocks and bonds, the underlying portfolio of a target date fund shifts its allocation over time, following what is known as a glide path. The glide path is basically a formula or algorithm that adjusts the fund’s asset allocation to become more conservative as the target date approaches, thus protecting investors’ money from potential volatility as they age.

If you’re wondering whether a target date fund might be the right choice for you, here are some things to consider.

What Is a Target Date Fund?

A target date fund (TDF) is a type of mutual fund where the underlying portfolio of the fund adjusts over time to become gradually more conservative until the fund reaches the “target date.” By starting out with a more aggressive allocation and slowly dialing back as years pass, the fund’s underlying portfolio may be able to deliver growth while minimizing risk.

This ready-made type of fund can be appealing to those who have a big goal (like retirement or saving for college), and who don’t want the uncertainty or potential risk of managing their money on their own.

While many college savings plans offer a target date option, target date funds are primarily used for retirement planning. The date of most target funds is typically specified by year, e.g. 2035, 2040, and so on. This enables investors to choose a fund that more or less matches their own target retirement date. For example, a 30-year-old today might plan to retire in 38 years at age 68, or in 2060. In that case, they might select a 2060 target date fund.

Investors typically choose target date funds for retirement because these funds are structured as long-term investment portfolios that include a ready-made asset allocation, or mix of stocks, bonds, and/or other securities. In a traditional portfolio, the investor chooses the securities — not so with a target fund. The investments within the fund, as well as the asset allocation, and the glide path (which adjusts the allocation over time), are predetermined by the fund provider.

Sometimes target date funds are invested directly in securities, but more commonly TDFs are considered “funds of funds,” and are invested in other mutual funds.

Target date funds don’t provide guaranteed income, like pensions, and they can gain or lose money, like any other investment.

Whereas an investor might have to rebalance their own portfolio over time to maintain their desired asset allocation, adjusting the mix of equities vs. fixed income to their changing needs or risk tolerance, target date funds do the rebalancing for the investor. This is what’s known as the glide path.

How Do Target Date Funds Work?

Now that we know what a target date fund is, we can move on to a detailed consideration of how these funds work. To understand the value of target date funds and why they’ve become so popular, it helps to know a bit about the history of retirement planning.

Brief Overview of Retirement Funding

In the last century or so, with technological and medical advances prolonging life, it has become important to help people save additional money for their later years. To that end, the United States introduced Social Security in 1935 as a type of public pension that would provide additional income for people as they aged. Social Security was meant to supplement people’s personal savings, family resources, and/or the pension supplied by their employer (if they had one).

💡 Recommended: When Will Social Security Run Out?

By the late 1970s, though, the notion of steady income from an employer-provided pension was on the wane. So in 1978 a new retirement vehicle was introduced to help workers save and invest: the 401(k) plan.

While 401k accounts were provided by employers, they were and are chiefly funded by employee savings (and sometimes supplemental employer matching funds as well). But after these accounts were introduced, it quickly became clear that while some people were able to save a portion of their income, most didn’t know how to invest or manage these accounts.

The Need for Target Date Funds

To address this hurdle and help investors plan for the future, the notion of lifecycle or target date funds emerged. The idea was to provide people with a pre-set portfolio that included a mix of assets that would rebalance over time to protect investors from risk.

In theory, by the time the investor was approaching retirement, the fund’s asset allocation would be more conservative, thus potentially protecting them from losses. (Note: There has been some criticism of TDFs about their equity allocation after the target date has been reached. More on that below.)

Target date funds became increasingly popular after the Pension Protection Act of 2006 sanctioned the use of auto-enrollment features in 401k plans. Automatically enrolling employees into an organization’s retirement plan seemed smart — but raised the question of where to put employees’ money. This spurred the need for safe-harbor investments like target date funds, which are considered Qualified Default Investment Alternatives (QDIA) — and many 401k plans adopted the use of target date funds as their default investment.

Today nearly all employer-sponsored plans offer at least one target date fund option; some use target funds as their default investment choice (for those who don’t choose their own investments). Approximately $1.8 trillion dollars are invested in target funds, according to Morningstar.

What a Target Date Fund Is and Is Not

Target date funds have been subject to some misconceptions over time. Here are some key points to know about TDFs:

• As noted above, target date funds don’t provide guaranteed income; i.e. they are not pensions. The amount you withdraw for income depends on how much is in the fund, and an array of other factors, e.g. your Social Security benefit and other investments.

• Target date funds don’t “stop” at the retirement date. This misconception can be especially problematic for investors who believe, incorrectly, that they must withdraw their money at the target date, or who believe the fund’s allocation becomes static at this point. To clarify:

◦ The withdrawal of funds from a target date fund is determined by the type of account it’s in. Withdrawals from a TDF held in a 401k plan or IRA, for example, would be subject to taxes and required minimum distribution (RMD) rules.

◦ The TDF’s asset allocation may continue to shift, even after the target date — a factor that has also come under criticism.

• Generally speaking, most investors don’t need more than one target date fund. Nothing is stopping you from owning one or two or several TDFs, but there is typically no need for multiple TDFs, as the holdings in one could overlap with the holdings in another — especially if they all have the same target date.

Example of a Target Date Fund

Most investment companies offer target date funds, from Black Rock to Vanguard to Charles Schwab, Fidelity, Wells Fargo, and so on. And though each company may have a different name for these funds (a lifecycle fund vs. a retirement fund, etc.), most include the target date. So a Retirement Fund 2050 would be similar to a Lifecycle Fund 2050.

How do you tell target date funds apart? Is one fund better than another? One way to decide which fund might suit you is to look at the glide path of the target date funds you’re considering. Basically, the glide path shows you what the asset allocation of the fund will be at different points in time. Since, again, you can’t change the allocation of the target fund — that’s governed by the managers or the algorithm that runs the fund — it’s important to feel comfortable with the fund’s asset allocation strategy.

How a Glide Path Might Work

Consider a target date fund for the year 2060. Someone who is about 30 today might purchase a 2060 target fund, as they will be 68 at the target date.

Hypothetically speaking, the portfolio allocation of a 2060 fund today — 38 years from the target date — might be 80% equities and 20% fixed income or cash/cash equivalents. This provides investors with potential for growth. And while there is also some risk exposure with an 80% investment in stocks, there is still time for the portfolio to recover from any losses, before money is withdrawn for retirement.

When five or 10 years have passed, the fund’s allocation might adjust to 70% equities and 30% fixed income securities. After another 10 years, say, the allocation might be closer to 50-50. The allocation at the target date, in the actual year 2060, might then be 30% equities, and 70% fixed income. (These percentages are hypothetical.)

As noted above, the glide path might continue to adjust the fund’s allocation for a few years after the target date, so it’s important to examine the final stages of the glide path. You may want to move your assets from the target fund at the point where the predetermined allocation no longer suits your goals or preferences.

Pros and Cons of Target Date Funds

Like any other type of investment, target date funds have their advantages and disadvantages.

Pros

• Simplicity. Target funds are designed to be the “one-stop-shopping” option in the investment world. That’s not to say these funds are perfect, but like a good prix fixe menu, they are designed to include the basic staples you want in a retirement portfolio.

• Diversification. Related to the above, most target funds offer a well-diversified mix of securities.

• Low maintenance. Since the glide path adjusts the investment mix in these funds automatically, there’s no need to rebalance, buy, sell, or do anything except sit back and keep an eye on things. But they are not “set it and forget it” funds, as some might say. It’s important for investors to decide whether the investment mix and/or related fees remain a good fit over time.

• Affordability. Generally speaking, target date funds may be less expensive than the combined expenses of a DIY portfolio (although that depends; see below).

Cons

• Lack of control. Similar to an ordinary mutual fund or exchange-traded fund (ETF), investors cannot choose different securities than the ones available in the fund, and they cannot adjust the mix of securities in a TDF or the asset allocation. This could be frustrating or limiting to investors who would like more control over their portfolio.

• Costs can vary. Some target date funds are invested in index funds, which are passively managed and typically very low cost. Others may be invested in actively managed funds, which typically charge higher expense ratios. Be sure to check, as investment costs add up over time and can significantly impact returns.

What Are Target Date Funds Good For?

If you’re looking for an uncomplicated long-term investment option, a low-cost target date fund could be a great choice for you. But they may not be right for every investor.

Good For…

Target date funds tend to be a good fit for those who want a hands-off, low-maintenance retirement or long-term investment option.

A target date fund might also be good for someone who has a fairly simple long-term strategy, and just needs a stable portfolio option to fit into their plan.

In a similar vein, target funds can be right for investors who are less experienced in managing their own investment portfolios and prefer a ready-made product.

Not Good For…

Target date funds are likely not a good fit for experienced investors who enjoy being hands on, and who are confident in their ability to manage their investments for the long term.

Target date funds are also not right for investors who are skilled at making short-term trades, and who are interested in sophisticated investment options like day-trading, derivatives, and more.

Investors who like having control over their portfolios and having the ability to make choices based on market opportunities might find target funds too limited.

The Takeaway

Target date funds can be an excellent option for investors who aren’t geared toward day-to-day portfolio management, but who need a solid long-term investment portfolio for retirement — or another long-term goal like saving for college. Target funds offer a predetermined mix of investments, and this portfolio doesn’t require rebalancing because that’s done automatically by the glide path function of the fund itself.

The glide path is basically an asset allocation and rebalancing feature that can be algorithmic, or can be monitored by an investment team — either way it frees up investors who don’t want to make those decisions. Instead, the fund chugs along over the years, maintaining a diversified portfolio of assets until the investor retires and is ready to withdraw the funds.

Target funds are offered by most investment companies, and although they often go by different names, you can generally tell a target date fund because it includes the target date, e.g. 2040, 2050, 2065, etc.

If you’re ready to start investing for your future, you might consider opening a brokerage account with SoFi Invest® in order to set up your own portfolio and learn the basics of buying and selling stocks, bonds, exchange-traded funds (ETFs), and more. Note that SoFi members have access to complimentary financial advice from professionals.

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.

SOIN0322062

May

2022

What Is a Stablecoin? Examples, Purpose, and Types

What Are Stablecoins? Their Purpose and Different Types

By Brian Nibley | Financial Independence, invest, Investing | Comments Off

Stablecoins are digital currencies that maintain a fixed value. They are designed to function like fiat currencies that exist on the blockchain. This brings with it several benefits in terms of usability, speed, and regulatory compliance. There are multiple types of stablecoins, each defined by the mechanism used to maintain the 1-to-1 peg to their respective fiat currencies.

Table of Contents

What Are Stablecoins?
What Is the Point of a Stablecoin?
Different Types of Stablecoins
Are Stablecoins a Good Investment?
The Most Popular Stablecoins
What’s the Most Stable Cryptocurrency?

What Are Stablecoins?

Stablecoins are digital coins that maintain a stable value. Most stablecoins are pegged to popular fiat currencies like the U.S. Dollar, Chinese Yuan, or the Euro. Some are pegged to commodities like gold, too. In theory, a stablecoin could have its value linked to anything. However, coins pegged to a fiat currency are the most commonly used type. When someone uses the term “stablecoin,” they are most likely referring to fiat currency coins.

The most stable cryptocurrency will by definition be a stablecoin. Some of these coins see their values fluctuate by small amounts during times of intense cryptocurrency trading volume, but they tend to correct back to their normal value in short order.

If there is any volatility in a stablecoin, it’s certainly much less than that seen in other types of cryptocurrencies.

What Is the Point of a Stablecoin?

Stablecoins have a variety of benefits and uses. The main idea is to have a cryptocurrency that is not subject to the volatility of other cryptos like Bitcoin and the many hundreds of altcoins.

Beyond that, there are other benefits that make using a stablecoin preferable to using regular fiat currency in some situations. Some of the most commonly cited reasons for creating and using stablecoins are:

• Regulatory compliance for crypto exchanges

• Utility in decentralized finance (DeFi)

• Ease of use for traders

• The ability to make fast cross-border payments with low fees

Let’s look at each of these in detail.

Stablecoins Make Things Easier for Crypto Exchanges

With stablecoins, cryptocurrency exchanges get to sidestep the complex financial regulations involved with institutions that deal with fiat currencies. (Crypto regulations are very different; and still evolving.) This gives their users the convenience of having stablecoin trading pairs while keeping everything within the cryptocurrency ecosystem.

Stablecoins Are Essential to Decentralized Finance (DeFi)

Stablecoins are becoming a necessary component of the decentralized finance (DeFi) space. Investors can make transactions like peer-to-peer lending — where people make direct loans to each other via blockchain — with stablecoins.

Some users might prefer this option to other cryptocurrencies, which could hurt their rate of return if the price goes down. A stablecoin adds an element of predictability to financial arrangements.

Stablecoins Make Trading Easier

One group of people who often use stablecoins to their advantage are cryptocurrency traders.

When moving money between multiple volatile cryptocurrencies, holding onto profits can be difficult. While traders can always put their gains into Bitcoin (BTC), the largest cryptocurrency by market cap, bitcoin itself has bouts of volatility.

Stablecoins can provide an easy solution to this problem. Traders can simply move into a stablecoin like USD Coin (USDC) or Tether (USDT) to immediately lock in gains. Or, they can take advantage of arbitrage opportunities when the same cryptocurrency has a different price on two different exchanges.

Crypto exchanges have begun offering more stablecoin/altcoin pairs to make things easier for traders.

Stablecoins Enable Fast, Cheap Cross-border Payments

Traditional bank transfers typically take anywhere from three-to-five business days and can cost anywhere from a few dollars to dozens of dollars. International transfers tend to be the most expensive.

Stablecoin transactions can be confirmed within minutes, or less, and at very little cost. Two people with stablecoin wallets can transact with each other from anywhere in the world at any time without the need for a bank or other third-party intermediary.

Different Types of Stablecoins

There are four basic types of stablecoins:

1. Centralized Coins Backed by Fiat Currency

The most popular stablecoins today use a centralized model and back new token issues with fiat currency at a one-to-one ratio. U.S. Dollar Coin (USDC) and Tether (USDT) are examples of this type of coin. In terms of real daily trading volume, USDT and USDC were the number-one and number-six most-traded cryptocurrencies, respectively, at the time of writing, according to data from Messari.

2. Decentralized Coins Backed by Cryptocurrency

Some other stablecoins that use a decentralized model, like DAI, have grown in popularity in the crypto community. Rather than maintaining their stable value through fiat reserves, users can lock up cryptocurrency as collateral for borrowing DAI on the Maker DAO platform. There are also a growing number of decentralized lending platforms that allow users to deposit DAI or other stablecoins and earn interest. Network consensus, rather than a centralized team, governs DAI (similar to how Bitcoin works), which maintains a value equal to one U.S. dollar.

3. Decentralized Algorithmic Coins

Decentralized algorithmic coins are a newer technology and differ from the other types of stablecoins in that they don’t involve any type of collateral backing. Instead, they rely on smart contracts to maintain their price.

4. Stablecoins Backed by Non-Currency Assets

Some stablecoins are backed by other assets, like gold. The overall functions remain the same, but the value is tied to the current price of gold, with physical gold used as collateral.

Are Stablecoins a Good Investment?

Because a stablecoin retains the same value as another asset, most often a fiat currency, asking if stablecoins are good investments is like asking if cash is a good investment.

Stablecoins might be best thought of as tools to use in an emerging DeFi system instead of other types of assets. These coins let traders and users of DeFi apps interact with a form of fiat currency directly on the blockchain. Stablecoins are an integral part of how DeFi works.

Benefits of Stablecoins

Stablecoin holders can use their stablecoins without needing to use a bank account, which increases access to financial services for some people. These coins also benefit from the security of blockchain technology.

One way stablecoins could be used as an investment is to earn interest on them. Some crypto exchanges and lending platforms offer higher interest rates on stablecoin deposits than most banks do on cash deposits.

Drawbacks of Stablecoins

Stablecoins also don’t have the same consumer protections in place that traditional banks do. Users will need to hold their stablecoin balance via any number of crypto storage methods and the cryptocurrency wallet of their choice.

Critics have cited a potential lack of transparency regarding their reserves of stablecoins. In other words, it can be difficult to know whether the company behind the coin actually holds one dollar for each dollar-backed stablecoin.

The Most Popular Stablecoins

A handful of stablecoins make up the lion’s share of market cap for this particular type of digital asset. Here’s a short list of stablecoins that are popular as of this writing.

1. DAI

DAI is a decentralized stablecoin governed by the Maker Protocol and its smart contracts, which in turn is governed by a community of MKR token holders. More than 400 apps and services have currently integrated DAI.

2. Tether

Tether (USDT) is the most popular stablecoin in terms of daily trading volume and the third largest cryptocurrency by market cap at the time of writing according to Coinmarketcap.com. Launched in 2014, USDT is one of the oldest stablecoins in the crypto market.

Tether is a fiat-collateralized stablecoin that trades on most cryptocurrency exchanges. Tether is also the fourth most valuable crypto by market capitalization and one of the most stable cryptocurrencies.

3. Binance

Binance USD (BUSD) is also pegged to the U.S. dollar. Binance is among the largest crypto exchanges in the world. And BUSD is the native coin of the Binance exchange. The company developed BUSD to enhance the speed of effecting crypto transactions on its own platform, as well as globally.

BUSD is approved by the New York State Department of Financial Services (NYDFS).

4. USD Coins

USD Coins (USDC) is backed by real dollars stored at financial institutions. USD Coins performs audits to ensure that each dollar backing each coin is accounted for on record. This helps to maintain the one-to-one relationship between USDC and the U.S. dollar.

USD Coin says it holds in reserve a mix of cash and cash equivalents, including U.S. Treasurys, to back every USDC in circulation. Like many other stablecoins, USDC runs on the Ethereum blockchain.

5. Paxos

Paxos Pax Dollar (USDP) is a financial technology (fintech) stablecoin. It’s distinguished as the first regulated blockchain infrastructure platform for financial services. Paxos’ products are helping to build the foundation for a decentralized financial system that can operate faster and more efficiently than the current legacy systems. Along with Binance and other cryptos, PAX is also approved by NYDFS.

Gaining New York state’s stamp of approval went a long way toward helping Paxos enter the crypto space. Its partnerships with payments giant, PayPal and behemoth, Bank of America, have brought digital assets to millions of people almost instantly.

What’s the Most Stable Cryptocurrency?

Theoretically, any stablecoin should be stable; most of them see their values fluctuate by no more than 1% or 2% daily. The decentralized and algorithmic stablecoins have experienced somewhat more volatility than the centralized coins, historically.

Stablecoins Wrap-Up

Stablecoins are cryptocurrencies that keep their value stable in relation to another asset — most commonly, an existing fiat currency, such as the U.S. dollar.

Issuing these coins on a permissionless blockchain removes the barriers to entry associated with banks and the legacy financial system at large; it provides greater access to financial services for those who may not otherwise have the opportunity to participate in the world of finance.

Everyone from the unbanked to day traders, and those braving the rough new world of decentralized finance, may have a potential use case for stablecoins.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

Photo credit: iStock/tomap49
SOIN0422037

May

2022

Beginner’s Guide to Crypto Trading Bots

By Carla Tardi | Growing Wealth, invest, Investing | Comments Off

What Are Crypto Trading Bots?

Crypto trading bots are just what they sound like: programmable, virtual robots (bots) that make automatic trades. A human trader can program a trading bot to follow certain rules and execute particular trading strategies. A bot can either send signals to its user or execute trades automatically as market conditions change.

This type of trading is also sometimes referred to as “high-frequency trading” or “algo trading” because it allows for many trades to be placed quickly and relies on computer algorithms to follow pre-set rules. In the United States, the share of high-frequency trading in equity markets is estimated to be 50%. While similar data hasn’t yet been collected on crypto markets, a significant portion of the trading activity on most cryptocurrency exchanges may also happen at the hands of bots.

Understanding Crypto Trading Bots

Trading cryptocurrency, or any asset for that matter, can be a lucrative but difficult task. So investors looking to build a well-balanced crypto portfolio might choose to use all available tools, including bots, to gain every advantage when trading crypto.

Timing the market is not easy to do. The vast majority of actively managed investment funds in the world of traditional finance (TradFi) never outperform the major benchmark indexes. It’s not unreasonable to assume that the same might be true for crypto markets when it comes to hedge funds or retail traders.

One of the many reasons that individual investors and institutional investors can fail to beat the market in the near term might have something to do with a preference for trading bots’ hard-to-beat alacrity. Bots can make decisions, and act on them, in milliseconds!

A crypto bot can accomplish this either by

• Sending trade signals to the user, or

• Executing buy or sell orders automatically.

In the first instance, users would be notified the moment certain market conditions are met, at which time they could execute a trade manually. This might be a simpler version of a crypto trading bot.

What most traders want from a trading bot is the second option: They’re seeking a bot that can do more than send real-time signals to a human trader — one that can track things like price movement, trading volume, demand, buying or selling pressure, and other technical indicators. Bots can execute many trades in a fraction of time it would take a human to place a single buy or sell order.

Crypto trading bots are designed to be used by traders to act on market changes the moment they happen, instead of after the fact. Human traders often must wait for a trigger to occur in the market before they trade, or they use simple stop-loss or stop-limit orders to try to hedge tier risk. Bots, on the other hand, can be programmed to wait for specific signals, then trade accordingly. Bots can trade more strategically and rapidly than a human — with human input.

How Do Crypto Trading Bots Work?

A crypto trading bot can execute trades automatically by interacting directly with a cryptocurrency exchange; placing buy or sell orders when certain predetermined conditions are met. Essentially, bots use technical indicators — which are based on mathematics relative to price movements — to make decisions.

In terms of the user interface, trading bots operate in various ways: Some come with an internet browser plug-in that allows the trader to interact with the bot. Others have standard operating-system clients that come as downloadable apps. And some are in the form of software designed for cryptocurrency exchanges.

Trading strategies involve multiple methods:

• One common method relies primarily on exponential moving averages (EMA). A bot might be programmed to place particular trades when this indicator moves beyond a certain point.

• Some bots use variants of the approach, such as double or triple EMAs. A moving average is derived from the average of price movements over a set time — such as a nine or fifty days, for example.

• As a tool for making investment decisions, a double EMA combines data from two moving averages; a triple EMA uses data from three moving averages, and so on.

• There are crypto trading bots that use other automatic indicators, such as the relative-strength index, and certain regression-analysis techniques.

Other Types of Bots

The bots we’ve discussed so far work on a single crypto exchange. Yet, bots can employ other technical trading techniques, such as charting and “inter-exchange arbitrage.”

Bots For Arbitrage

Crypto arbitrage involves taking advantage of the price differences of a single asset across different trading platforms. If bitcoin or another cryptocurrency is trading at $10,000 on one exchange and at $9,950 on another, an arbitrage bot could buy the asset on the exchange where it’s cheaper and sell it on the one where the price is higher.

Bots For Technical Charting

Some traders use technical charting to map out their trading strategies. Charting can take a long time, even for the most experienced trader. A bot, on the other hand, can be programmed to look at the charts’ metrics and act almost instantaneously.

Are Trading Bots Legal?

Automated trading is a well-known and legal activity across most financial markets. Half of stock market trades in America are automated, and the process is 100% legal.

Likewise, in most countries and on most cryptocurrency exchanges, there are no laws that prohibit using crypto trading bots. That said, cryptocurrency rules and regulations are in flux, so it can be helpful for investors to familiarize themselves with current crypto trading rules before diving into automated trading.

Is Automated Trading Profitable?

A crypto trading bot may be profitable when used carefully and under the right circumstances. When placing large volumes of orders over a short time span, it is possible to rack up profits by squeezing out small gains on each trade. Of course, losses could mount quickly as well.

Crypto Bots Need To Be Managed

Using a crypto trading bot doesn’t work in a “set it and forget it” fashion. First, it’s important to develop a trading strategy. And once you’ve outlined a strategy, it’s critical to monitor the results you’re getting; you may want to adjust your strategy. Moreover, markets do not trade on technical analysis alone. In fact, it’s equally essential to apply fundamental analysis when trading any asset. Fundamentals are generally easier to understand and apply for many investors.

Emotions Can Color Trading Decisions

Perhaps one of the greatest benefits of a crypto trading bot is that it takes the emotion out of trading. Greed and fear can harm a portfolio and even the economy. When the market is going up, investors can become greedy. If a trader’s avarice makes them trade fast and furiously, they could miss changes in market conditions until it’s too late to take a profit.

When financial markets go down, investors tend to get fearful. A trader could make a bad decision while in a state of panic, like selling at the bottom of a downtrend.

Finally, bots are capable of recognizing fundamental market forces like big news headlines, events, or rumors — such as when PayPal (PYPL) announced it would allow users to buy and sell crypto on its platform. Nor can they sense macroeconomic trends like a rise in the price of lumber for housing starts, or how an oil spill might affect petroleum exports.

How to Choose a Crypto Trading Bot

Here are some factors that investors would want to consider carefully when choosing a crypto trading bot:

• How complex is the bot? It’s important to ensure that you can understand and utilize the bot’s technology successfully.

• What strategies does the bot use? For investors with a specific preference — such as arbitrage, for example — this matters.

• If you’re just starting out trading crypto, or are new to trading with bots, it might make sense to use a bot that comes programmed with existing strategies.

• Look for fees to be stated clearly and up front, with no hidden costs.

• Do your due diligence on the team that develops a particular bot? Do they display their contact information, offer a support team, and provide a profile on their website?

• Word of mouth counts. What do others have to say about the platform?

The Takeaway

Trading bots are one way to begin investing in cryptocurrency. A bot can send signals to its user or execute trades automatically, and lightning fast. And a crypto trading bot can take the emotion out of trading in cryptocurrencies — which usually have a higher degree of risk than traditional investments.

The SoFi Invest® investment platform provides all the tools needed for novice and experienced investors alike.

Get started investing in crypto with just $10.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

Photo credit: iStock/CasPhotography
SOIN20204

May

2022

Vega Options, Explained

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

What Is Vega in Options Trading?

Vega is one of the Greeks — along with delta, theta, and gamma. And the Greeks, itself, is a set of indicators that quantitative analysts and traders use to measure the effect of various factors on prices of options contracts. Traders can use the Greeks to hedge against risks involved in trading options. Each indicator in the Greeks helps analysts to understand the level of risk, volatility, price direction, value over time, and interest rate of a particular options contract.

As a unit of measure, vega tries to assess, theoretically, the amount that a security’s price will change with every percentage point that its price fluctuates. So vega reflects how sensitive a contract is to changes in the price of its underlying security. When an underlying asset of an options contract has significant and frequent price changes, then it has high volatility, which also makes the contract more expensive.

How Vega Works

Vega changes over time as the price of the underlying asset changes and the contract moves closer to its expiration date. Because vega is always changing, investors tend to track it on an ongoing basis while they are invested in an options contract.

When options still have time before they expire, the vega is said to be positive. But when an options contract nears its expiration date, then vega decreases and becomes negative. This is because premiums are higher for future options than they are for options that are close to expiring. When an option’s vega is higher than the amount of the bid-ask spread, the option has what is known as a competitive spread. If vega is lower than the bid-ask spread, then the spread is not competitive.

Vega is a derivative of implied volatility.

Implied Volatility

The term, implied volatility is simply an estimate of where the price of an underlying security may be now, was in the past, or will be going forward. In pricing options, implied volatility is mostly used to predict future price fluctuations. Traders sometimes use a sigma symbol (𝞂) to represent implied volatility.

Traders use options pricing models to calculate implied volatility. These models try to estimate the speed and amount that an underlying security’s price changes — its volatility. As the volatility of the underlying asset shifts, the vega also changes. Pricing models can estimate volatility for present, past, and future market conditions. But, as the calculation is just a theoretical prediction, so the actual future volatility of the security may differ.

Characteristics of Vega

• Vega relates to the extrinsic value of an option, not its intrinsic value.

• Vega is always positive when an investor purchases calls or puts.

• It Is negative when writing options.

• Vega is higher when there is more time until the option expires.

• It’s lower when the option is close to expiring.

• When the option is at the money, vega is highest.

• When the option is in- or out-of-the-money, vega decreases. In other words, vega is lower when the market price of the underlying security is farther from the option strike price.

• When implied volatility increases, the option premium increases.

• When implied volatility decreases, the option premium decreases.

• The effect vega has on options trading is based on various factors that affect the option’s price.

• When gamma is high, vega is generally also high.

• Vega shows an investor the amount that an option should theoretically change for every percentage its underlying security’s volatility changes.

• Vega can also be calculated for an entire portfolio of options to understand how it is influenced by implied volatility.

What Does Vega Show?

Vega shows the theoretical amount that an option’s price could change with every 1% change in implied volatility of the underlying asset. It can also be used to show the amount that an option’s price might change based on the volatility of the underlying security — that is, how often and how much the security’s price could change.

Traders generally omit the percentage symbol when referring to vega, or volatility. And some analysts, too, display it without a percentage symbol or decimal point. In that case, a volatility of 16% would be displayed as “vol at 16.”

Vega Options Example

Let’s say stock XYZ has a market price of $50 per share in February. There is a call option with a March expiration date with a price of $52.50. The option has a bid price of $1.50 and an ask price of $1.55.

The option’s vega is 0.25, and it has an implied volatility of 30%. Because vega is higher than the bid-ask spread, this is known as a competitive spread. A competitive spread does not mean the trade will be profitable or that it is automatically a good trade to enter into, but it is a positive sign.

The implied volatility of the underlying security increases to 31%. This changes the option’s bid price to $1.75 and changes the ask price to $1.80. This is calculated as

(1 x $0.25) + bid-ask spread

Conversely, if the implied volatility goes down 5%, the bid price would decrease to $0.25 and the ask price decreases to $0.30.

How Can Traders Use Vega in Real-Life?

Vega tends to be less popular with investors than the other Greeks (Delta, Theta, and Gamma) mostly because it can be difficult to understand. But vega has a significant effect on options prices, so it is a very useful analytic tool.

Benefits of Vega

If investors take the time to understand implied volatility and its effect on options prices, they’ll find that vega can be a useful tool for making predictions about future options price movements. It also helps with understanding the risks of trading different types of options contracts. Looking at the implied volatility of options can even guide investors as they choose which options to buy and sell. Some traders even utilize changes in volatility as part of their investing plan — with strategies like the long straddle and short straddle. Vega plays a key role in using these options trading strategies.

Vega Neutral: Another Strategy

For traders who want to limit their risk in options trading, the vega neutral strategy helps them hedge against the implied volatility in the market of the underlying security. Traders use the vega neutral strategy by taking both long and short option positions on a number of options. By doing this, they create a balanced portfolio that has an average vega of around zero. The zero value means that their options portfolio will not be affected by changes in the implied volatility of the underlying security, thereby reducing the portfolio’s level of risk.

Start Trading Stocks With SoFi Invest

Vega, one of the Greeks, along with the concept of implied volatility relate to advanced trading techniques. Trading options is usually appropriate for experienced traders.

Options are popular with investors who want exposure to assets with lower overhead capital requirements. If you’re looking to begin trading options, an options trading platform like SoFi’s can help. Its intuitive design makes it user-friendly. Investors can trade options from the mobile app or web platform and access educational resources about options if needed.

Trade options with low fees through SoFi.

Photo credit: iStock/gorodenkoff

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN1021465