Investing Archives | Page 192 of 222

Jan

2022

How to Set Up a Cryptocurrency Wallet

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

Setting up a cryptocurrency wallet can take anywhere from a few minutes to a few hours depending on the wallet type. Hardware wallets and exchange-hosted wallets will take some extra time, thanks to the additional steps involved for each.

The type of crypto wallet a user might choose will depend on what they want to do with their crypto and what level of security they’re looking for.

Understanding Crypto Wallets

A crypto wallet is used to send, store, and receive cryptocurrency. Some wallets have additional functionality, including the ability to:

• Buy and spend crypto

• Swap between different tokens

• Stake tokens for a fixed return

• Interact with different decentralized applications (dApps)

A wallet has two important parts: a private key and a public key. The private key is used to sign transactions, proving their authenticity. Anyone with the private key to a wallet can take control of the funds held there.

A public key is derived from the private key. One wallet can be used to create many public keys, so users can receive crypto to the same wallet from different addresses. Public keys are also referred to as wallet addresses.

Setting Up Different Crypto Wallets

The process for setting up a cryptocurrency wallet differs depending on the type of wallet.

Crypto wallets fall into one of two broad categories: hot wallets and cold wallets. Hot wallets are those that are connected to the internet, making them less secure. Cold wallets can hold private keys offline in cold storage, making them more secure.

Hardware Wallets

Hardware wallets are small devices that are separate from a user’s computer. This allows for the “signing” of transactions to happen on the wallet device, so a user’s private key is never exposed in the same way as it is when using a software wallet. For this reason, hardware wallets are considered a form of cold storage.

Hardware wallets are generally recommended for long-term storage of large amounts of crypto due to the added security. These wallets can also be used to send and receive transactions, but the additional investment and responsibility involved might not be worth it for those only holding a small amount of crypto.

Steps to Setting Up a Hardware Wallet

The process of setting up a hardware wallet differs somewhat depending on the exact wallet someone chooses. For many popular hardware wallets, users must do the following before their wallet will be ready to send and receive transactions:

1. Order the physical device. The average hardware wallet costs around 100 USD. Users should do their own research before deciding which manufacturer is right for them.

2. Install the appropriate software that will provide an interface to the wallet. Ledger wallets, for example, require the Ledger Live app. In some cases, this won’t be necessary — some wallets use a web-based interface, meaning users simply have to visit a website to access their wallet’s dashboard. KeepKey wallets, for example, utilize the ShapeShift web platform.

3. Plug the wallet into your computer and follow the instructions provided. This usually begins with showing the user their backup seed phrase.

4. Write down your backup seed phrase on paper. This phrase represents the wallet’s private key. Storing it in any online location can be dangerous, as it could be accessible to hackers. Anyone with this phrase can access all of the funds held in the wallet.

5. Set up a PIN. This will be used to access the wallet.

6. Buy or deposit crypto. At this point, it’s possible to put crypto into the new wallet. Some wallet platforms even have built-in exchanges where users can buy and trade crypto.

Paper wallets are also a form of cold storage, but they aren’t typically recommended due to their lack of durability and the high likelihood of user error.

Hosted wallets

In hosted wallets, a third party holds the private keys on a user’s behalf. This is similar to a bank holding someone’s fiat currency. The process of how to open a crypto wallet on an exchange is the same as signing up for an account.

Hosted wallets might be the easiest of all to create. Users simply have to sign up for an account on a crypto exchange and buy or deposit crypto into the wallet of their choice. The process could take some time, however, as exchanges have to verify a user’s identity. This could involve waiting for several days or longer.

For sending and receiving crypto transactions, many people turn to wallets hosted on exchanges.

Non-custodial wallets

Also known as self-custody wallets, these are software wallets that aren’t controlled by a third-party service like an exchange.

Non-custodial wallets allow users to hold their own private keys. This removes the counterparty risk associated with letting another party hold the keys to an individual’s crypto. However, it also makes the person 100% responsible for their funds.

There are many types of non-custodial wallets. Desktop wallets like Electrum work as simple software programs with user-friendly interfaces. If a crypto investor wants to take custody of their own keys, they might use desktop wallets like Electrum or similar non-custodial wallets on mobile devices.

Web wallets like MetaMask allow users to store, send, and receive Ethereum (ETH) right from their web browser.

Steps to Setting Up a Non-custodial Wallet Using MetaMask

Wallets like MetaMask are often used for Ethereum-based applications like decentralized finance (DeFi) and non-fungible token (NFT) platforms. Since MetaMask is one of the most popular non-custodial ETH wallets, let’s look at the step-by-step process of how to set up a cryptocurrency wallet of this kind.

1. Download MetaMask. First, you’ll need to install the MetaMask browser extension. Visit Metamask.io and click on “Install MetaMask.” The extension is available for the following browsers: Chrome, Brave, Edge, Firefox.

2. Create an account. After opening MetaMask for the first time, select the “create a wallet” button. Then accept the terms of use and create a password. After that, you’ll be asked to “click here to reveal secret words”. Doing so will reveal your 12-word backup seed phrase.

3. Store your seed phrase. Write your seed phrase down on paper. Keep it somewhere safe and don’t share it with anyone. Don’t take a screenshot of the phrase or store it anywhere online.

4. Fund your wallet. The final step in setting up a cryptocurrency wallet is to fund it. MetaMask supports in-app crypto purchases, but you can also deposit some from another location. To do this, simply send a transaction to your wallet address. When logged in to MetaMask, click the icon of two squares laid on top of each other in the top-center part of the screen. This will copy your wallet’s address to your clipboard. Send the right kind of crypto to this address to put funds into the wallet.

The Takeaway

The process of learning how to set up a cryptocurrency wallet is usually quick and simple. Developers have worked hard to make things as user-friendly as possible.

“Not your keys, not your crypto” is a popular saying among crypto enthusiasts. Some users like to hold their own keys while others may opt for hosted wallets for the sake of simplicity.

Note that software wallets are unique to a specific cryptocurrency. Hardware wallets often have the ability to hold multiple types of crypto. In any case, it’s very important to send the right kind of crypto to the appropriate wallet, otherwise those funds could be lost forever. Sending Bitcoin Cash (BCH) to a Bitcoin (BTC) wallet address, for example, could result in the sent funds being unretrievable.

Photo credit: iStock/Poike

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Jan

2022

What Is USD Coin (USDC)? A Guide to the Stablecoin

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

U.S. Dollar Coin (USDC) is one of the most popular stablecoins — a type of cryptocurrency that keeps its price pegged to the same price as another asset, in this case, the U.S. dollar.

Stablecoins have a variety of use cases and continue to grow in terms of trading volume and market cap. In 2021, the stablecoin market was worth about $130 billion, making USDC the second-largest stablecoin in circulation.

How Does USDC Work?

USD Coin runs on Ethereum, which is a programmable blockchain. The coin was created to be a form of digital money that wouldn’t be subject to wild price swings.

USDC is an ERC-20 token, which means it conforms to a certain set of programmatic standards that developers must follow to have their token issued on Ethereum. ERC-20 is the standard for utility tokens, which serve a specific function. In a sense, a stablecoin like USDC can be thought of as a type of utility token, in that it acts as a substitute for dollars within the digital asset space.

Dollar-denominated assets back the issuance of USDC tokens at a 1:1 ratio. For each coin in circulation, there is an equivalent amount of assets.

Who Created USDC?

USDC was created through a collaboration between Coinbase, the largest U.S.-based cryptocurrency exchange, and Circle, a financial services firm that is backed by some large financial institutions such as Goldman Sachs.

Based in Boston, Circle started in 2013 as a way to quickly and easily send money. The company quickly found its way into crypto and announced that they had acquired crypto exchange Poloniex in April 2020.

Price of USDC

The price of USDC remains pegged at $1. However, because the price of anything is determined by buyers and sellers, it can fluctuate slightly from time to time.

Sometimes investors try to eke out small gains by selling USDC on crypto exchanges for a few fractions of a penny higher than $1. Some traders might be willing to buy USDC at the slightly higher price if they want to exchange a different currency for one pegged to the dollar immediately.

Why Does USDC Have Value?

USDC is thought to have value because of the assets backing it. Circle backs each coin with cash and cash equivalents. For every new U.S. Dollar Coin created, there is supposed to be an equal amount of dollar assets held at Circle.

With the growing popularity of decentralized finance (DeFi) and centralized lending platforms, demand for USDC continues to rise, as the coin makes it easy for people to conduct financial transactions without leaving the crypto ecosystem.

People who don’t have access to the traditional finance system — who are sometimes referred to as the “unbanked” — may also benefit from USDC. Rather than needing a bank account, which can be difficult to get, USDC users only need an internet-connected device and a wallet that supports ERC-20 tokens.

Why Use USDC

There are several reasons someone might choose to use a cryptocurrency with a stable value:

• As a means of payment. If an individual wants to make a payment using crypto, they can rely on USDC to have a consistent value across time, without the sometimes-extreme price fluctuations that are common among cryptocurrencies.

• As a way to take profits. Traders like stablecoins because they can lock in gains while remaining within the crypto ecosystem. This may also potentially delay some of the taxable events associated with selling cryptocurrency for fiat currency (note: this is not tax advice).

• As a way to earn interest. Some platforms offer users interest payments in exchange for USDC deposits. Celsius and Vauld are among those that reward users for offering their USDC as collateral to be lent out to other users. It’s worth noting that there is risk involved with this activity.

• Making transparent donations to charity. People can use USDC to make charitable contributions that can be seen by everyone.

Advantages and Disadvantages of USDC

There are advantages and disadvantages to using USDC stablecoin. This chart outlines the biggest pros and cons.

Pros	Cons
Price stability	No potential for price appreciation
Lots of liquidity	Depending on the current state of the Ethereum network, transaction fees can be high
Good reputation and is backed by Circle’s assets	Fees for withdrawing USDC from exchanges can also be high

How Can I Buy USDC?

Investors can buy USDC on any crypto exchange that offers trading for the token. You will need some U.S. dollars or cryptocurrency that trades against USDC to get started.

To buy USDC, do the following:

1. Find an exchange that trades USDC. Many exchanges have trading pairs that include USDC against Bitcoin and other cryptocurrencies.

2. Create an account on the exchange.

3. Fund your account. Tip: depositing cryptos can be faster than depositing fiat currency like U.S. dollars.

4. Exchange the currency you used to fund your account for USDC.

The exact mechanics will look slightly different depending on the specific exchange, but these steps outline the general process.

How to Sell USDC

Selling USDC involves the same steps as buying. Once an exchange account has been set up, it’s simply a matter of placing a sell order instead of a buy order. USDC can often be sold for other cryptocurrencies or regular U.S. dollars. Note that depositing or withdrawing U.S. dollars typically requires additional user verification and linking a bank account.

Can You Stake USDC?

USDC is not a proof-of-stake token, so it can’t be staked. However, there are crypto lending services that allow investors to deposit their USDC and get paid interest in return. Like a bank, the platforms lend out the USDC at interest and pass on some of the profits to the depositor.

Unlike traditional savings accounts, some crypto lending platforms offer interest rates of anywhere from 8% to 12% or more. As with any investment, there are risks involved, and investors would be wise to do their own research first.

The Takeaway

USD Coin (USDC) can provide an easy way to transfer crypto into dollars without the friction typically associated with using real U.S. dollars. The coin can serve as a bridge between the traditional financial system and the blockchain-powered open financial system.

USDC can be exchanged back into crypto if desired. Some lending platforms also offer attractive interest rates on USDC deposits. One drawback, however, is that because USDC exists as an ERC-20 token on the Ethereum network, the token can be subject to high gas fees at times.

Photo credit: iStock/Prostock-Studio

Jan

2022

A Guide to Sharding in Crypto

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

Sharding is a method of making a database more manageable for computers. This technique has been used in many modern applications but its use in blockchain is still relatively new.

Sharding is important when it comes to crypto because many networks have difficulty scaling. Some of the largest blockchain networks, like Ethereum, are considering sharding as a potential way to manage their rapidly growing number of users and transactions.

In this guide to crypto sharding, we’ll explore the basic concept of sharding and how it could be applied to blockchain technology.

What Is Sharding?

Sharding is one potential solution to the problem of scaling a blockchain network. Sharding involves splitting a blockchain into multiple pieces, or shards, and storing them in different places. By storing the data across different computers, the computational burden on each can be reduced. This allows the network to process a larger volume of transactions.

A typical peer-to-peer (P2P) network such as a blockchain involves multiple full nodes (computers) that each record copies of the entire chain’s history. Using sharding, it’s possible for nodes to function without having to maintain all of that data at once.

How Does Sharding Work?

Sharding involves splitting a large database of the same type into multiple databases. Because this makes for an algorithm that can be more easily generalized, it’s possible to implement sharding at either the application level or the database level.

Sharding has another name — horizontal partitioning. The term horizontal in this case refers to the traditional layout of a database. A database can be split horizontally, with rows of the same database being distributed across multiple nodes, or vertically, with different information in a separate database.

Vertical partitioning involves drawing a logical split within an application’s data. This is often done at the application level, with a piece of code routing commands to a designated database.

Distributed Ledger Technology and Sharding

A distributed ledger is a database that stores information on multiple servers that are distributed throughout different locations. Blockchain technology involves using a type of distributed ledger that aims to be decentralized.

Sharding can be implemented on databases like the ones maintained by distributed ledger technology (DLT). In this case, the database is typically a record of transactions, along with quite a lot of pertinent data, including:

• The time each transaction was sent

• Its transaction hash (a unique number identifying the transaction)

• Which block the transaction was confirmed in

• The amount of currency sent

• The public address of the sender and receiver

With millions of users sending millions of transactions, as time goes on, full nodes have to manage a larger and larger database.

Scalability and Sharding

One of the biggest problems faced by blockchains is scaling. Scaling refers to being able to grow the number of users and transactions on a network.

When a new project becomes popular quickly, its network often gets congested, resulting in high transaction fees as people compete to have their transaction processed in the next block (users can adjust the fee they pay to miners in exchange for processing a transaction. When everyone wants to send a transaction, they might be willing to pay more and more, bidding up prices).

Sharding is one of many proposed solutions to this problem. A network that utilizes sharding can reduce the burden placed upon its nodes, allowing them to function more efficiently without an increase in computing power.

How Sharding Is Done

The details of how sharding is implemented get very technical. Those who understand distributed ledgers, coding, and databases might already have an idea of how it works. Others will have a lot of research to do if they want to learn more.

Sharding is typically done on proof-of-stake (PoS) networks, as opposed to proof-of-work (POW) networks. In the PoS consensus mechanism, nodes validate transactions based on the amount of tokens they have staked. Sharding would involve stakers dealing with different shards of the same blockchain.

Implementing sharding on proof-of-work (PoW) networks is very difficult. Nodes would have difficulty validating transactions with only the information from a single shard.

Blockchain Nodes and Sharding

The computers that facilitate transactions in a peer-to-peer (P2P) network like a blockchain are referred to as nodes. The most common type of node is an archival full node. Full nodes archive a copy of the blockchain’s entire history. For larger networks like Bitcoin and Ethereum, this requires quite a lot of memory and computing power.

The tasks of a node include:

• Processing transactions

• Recording transactions

• Broadcasting transactions

These require computing power, storage, and network bandwidth, respectively.

With sharding, full nodes no longer have to store or process the entirety of the network’s activities. Instead, each node only has to maintain data related to its shard.

Shard Sharing

The information of a shard can still be shared with other nodes. This maintains the security and decentralization of the network because all participants can still see all the ledger entries. They just aren’t required to store and process every bit of information.

Is Sharding Necessary?

Sharding is not always necessary. Only networks that are having difficulty scaling are likely to consider sharding. Where other solutions will suffice, developers may opt to forgo sharding due to the additional complexities it can add to an application.

Another method of scaling that has been growing in popularity lately is the use of layer-2s. A layer-2 is a solution that involves processing transactions off-chain, separate from the base layer of the ledger. This can decrease transaction times and decrease fees dramatically.

Bitcoin’s Lightning network is one example of a layer-2 solution. Lightning allows for instant transactions that cost a fraction of a penny.

Pros and Cons of Sharding

There are advantages and disadvantages to using sharding in cryptocurrency. It can be a great way for some networks to scale, but there are still some unknowns, and most developers believe it might not work for every blockchain.

Pros of Sharding	Cons of Sharding
Allows for greater scalability	Difficult for proof-of-work protocols to implement
Reduces the processing and memory burden placed on full nodes	Makes the database and its applications more complex
Works well for proof-of-stake networks	Mostly untested for blockchain technology, meaning there are some unknowns surrounding security

The Takeaway

Sharding was being discussed a lot several years ago as a potential scaling solution. Recently, layer-2s are increasingly being looked at as an alternative.

Bitcoin’s Lightning and Ethereum’s layer-2 solutions — have both seen increasing adoption lately. It’s worth noting, however, that if Ethereum upgrades to Ethereum 2.0 and adopts proof-of-stake, sharding will become the main method used for scaling.

FAQ

Does ETH 2.0 have sharding?

After a series of delays, ETH 2.0 still hasn’t been launched as of December 2021. If ETH 2.0 does launch at some point in the future, then the network would likely adopt a proof-of-stake consensus mechanism and look to use sharding as its main scaling solution.

Is sharding in crypto always needed?

No, sharding is not always necessary. Because sharding can make things more complicated, developers sometimes opt for other solutions to the problem of scaling. This could simply involve getting a more expensive and powerful computer. Adding additional caches or database replicas can also work as a solution for applications that are bound by read performance. A database can also be vertically partitioned according to functionality.

Photo credit: iStock/Poike

Jan

2022

What Is Fibonacci Retracement in Crypto Trading?

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

A retracement level is the price at which a stock or cryptocurrency tends to see a reversal in its trend. Fibonacci retracement is a popular tool in technical analysis that helps determine support and resistance levels on a price chart.

What Are Fibonacci Retracement Levels?

Fibonacci numbers are a series where each number equals the sum of the two previous numbers. The most basic series is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 etc.

When it comes to technical analysis, investors use Fibonacci Replacement Levels, expressed as percentages, to analyze how much of a previous move a price has retraced. The most important Fibonacci Retracement levels are: 23.6% 38.2%, 50% and 61.8%.

Some analysts refer to 61.8% as “the golden ratio,” since it equals the division of one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The other Retracement levels reflect other calculations: Dividing one number by the number three places to its right equals 23.6%. For example: 8/34 = 0.2352. Bitcoin traders often use 78.6%, which is the square root of 0.618,

Some prefer the 0.618 and 0.382 levels because these are the retracement levels analysts believe are most likely to generate a trend reversal. These levels are considered inflection points where fear and greed can alter price action. When an asset is trending upward but loses momentum, it’s possible that a pullback to the 0.618 price level could result in a bounce upward, for example.

How Does Fibonacci Retracement Work and What Does it Do?

There are several theories as to why the fibonacci retracement works. Some of these include:

• Fibonacci price levels reflect the effects of extreme fear and greed in the market. To use this to their advantage, traders might buy when people are panicking and sell when others are getting greedy.

• Fibonacci patterns are often observed in nature as well as in mathematics. For example: fruits and vegetables. If one would look at the center of a sunflower, spiral patterns could appear to curve left and right. Counting these spirals, the total often is a Fibonacci number. If one could divide the spirals into those pointed left and right, then two consecutive Fibonacci numbers could be obtained. Therefore, it’s thought that these patterns may be important in financial markets as well.

• The law of numbers: If a greater percentage of people practice Fibonacci crypto trading, then the likelihood of its accuracy increases.

At its core, a Fibonacci retracement is a mathematical measurement of a particular pattern. When it comes to Fibonacci in crypto, traders try to apply these patterns to price action to predict future price movements.

Who Created Fibonacci Retracements?

While traders commonly use Fibonacci in crypto today, the number sequences pre-date the invention of cryptocurrency by many centuries. Fibonacci numbers are based on the key numbers studied by mathematician Leonardo Fibonacci (or Leonardo of Pisa) in the 13th century, although Indian mathematicians had identified them previously. He was a medieval Italian mathematician famous for his “Book of the Abacus”, the first European work on Indian and Arabian mathematics, which introduced Hindu-Arabic numerals to Europe.

Formula

In an uptrend or bullish market, the formulas for calculating Fibonacci retracement and extension levels are:

UR = High price – ((High price – Low price) * percentage) in an uptrend market; where UR is uptrend retracement.

UE = High price + ((High price – Low price) * percentage) in an uptrend market; where UE is an uptrend extension.

For example: A stock price range of $10 – $20, could depict a swing low to swing high.

Uptrend Retracement (UR) = $20 – (($20 – $10) * 0.618)) = $13.82 (utilizing 0.618 retracement)

Uptrend Extension (UE) = $20 + (($20 – $10) * 0.618)) = $26.18 (utilizing 0.618 retracement)

If a stock pulls back $13.82 could be a level that the stock bounces back to reach higher levels than its swing high price, e.g. $20. In an uptrend, the general idea is to take profits on a long trade at a Fibonacci price extension Level ~ $26.18.

What Does a Fibonacci Retracement do?

Markets don’t go straight up or down. There are pauses and corrections along the way. To buy stocks in an uptrend, one would look to get the best price possible.

Some traders use Fibonacci Retracement to determine how much a stock could pull back before continuing higher. Traders can use these retracement levels to find optimal prices at which to enter a trade.

A swing high happens when a security’s price reaches a peak before a decline. A swing high forms when the highest price reached is greater than a given number of highs around it.

Swing low is the opposite of swing high. It refers to the lowest price within a timeframe, usually fewer than 20 trading periods. A swing low occurs when a lowest price is lower than any other surrounding prices in a given period of time.

Support and Resistance

Support is the price level that acts as a floor, preventing the price from being pushed lower, while resistance is the high level that the price reaches over time. Analysts often illustrate these as horizontal lines on a graph.

A support or resistance level can also represent a pivot point, or point from which prices have a tendency to reverse if they bounce (in the case of support) or retreat (in the case of resistance) from that level.

Learn more: Support and Resistance: What Is It? How To Use It for Trading

Limitations of Fibonacci Retracement

Fibonacci retracements in crypto or other markets may be slightly predictive. But over relying on them can be counterproductive for reasons such as:

• Fibonacci retracements, like any other indicators, could be used effectively only if investors understand it completely. It could end up being risky if not used properly.

• There are no guarantees that prices will end up at that point, and retrace as the theory indicates.

• Fibonacci retracement sequences are often close to each other, therefore it may be tough to accurately predict future price movements.

• Using technical analysis tools like Fibonacci retracements can give investors tunnel vision, where they only see price action through this one indicator. Assuming that any single indicator is always correct can be problematic.

A Fibonacci retracement in crypto trading could wind up being even less predictive than in other financial markets due to the extreme volatility that cryptocurrencies often experience.

Fibonacci Retracements and Bitcoin

Fibonacci retracements can also be used for trading cryptos such as Bitcoin (BTC), similarly to how they’re used in stocks. In this case, one would use the levels 23.6%, 38.2%, 50%, 61.8% and 78.6% to determine where the cryptocurrency price might reverse.

Crypto prices are very volatile, and leverage trading is common. Leverage is the use of borrowed funds to increase the trading position, beyond what would be available from the cash balance alone. Therefore, it can be important to have some reference as to when the price could reverse, to not incur major losses.

Using the Fibonacci Retracement Tool to Trade Cryptocurrencies

In order to get started with a Fibonacci Retracement Tool, a trader could find a completed trend for a crypto, say, Bitcoin, which could either be an uptrend or downtrend.

Below are some steps on how to use Fibonacci retracement tool:

1. Determine the direction of the market. Is it an uptrend or downtrend?

2. For an uptrend, determine the two most extreme points (bottom and top) on a crypto price chart. Attach the Fibonacci retracement tool on the bottom and drag it to the right, all the way to the top.

3. For a downtrend, the extreme points are top and bottom and the retracement tool could be dragged from the top to the bottom.

4. For an uptrend or downtrend, one could monitor the potential support levels: 0.236, 0.382, 0.5 and 0.618.

Fibonacci Retracement Example for Bitcoin

In December 2017, Bitcoin fell from $13,112 to around $10,800, within a short timeframe. After that, it rallied up to $12k twice, but did not break above that level until 2021. That indicates a bearish pattern, as it couldn’t break above its previous high. In technical analysis it is called a double top.

On the Fibonacci tool, the $12k resistance point coincided with the 50% level of retracement. When the price could not reach this level, it started to fall again. In this scenario, traders using Fibonacci Retracement might consider this a good time to exit a long position or establish a short position. A short trade is based on the speculation that the price of Bitcoin is going to fall.

By February, 2018, the trade materialized as Bitcoin continued its downtrend falling all the way to $9,270. The short trade would have worked and traders could have realized a profit from using the crypto Fibonacci Retracement tool, although those who managed to HODL for years after that would have made even more.

The Takeaway

The Fibonacci Retracement tool can help identify hidden levels of support and resistance so that analysts can better time their trades. Analysts believe this tool is more effective when utilized with types of cryptocurrency that have higher market-capitalization, like Bitcoin and Ethereum, because they have more established trends over extended time frames.They consider it less effective on cryptocurrencies with a smaller market capitalization.

FAQ

Does Fibonacci retracement work with crypto?

While the Fibonacci retracement tool is traditionally used for analyzing stocks or trading currencies in the forex market, some analysts believe it is also helpful in determining a crypto trading strategy.

How accurate is fibonacci retracement?

In crypto, Fibonacci retracement levels are often fairly accurate, although no indicator is perfect and they are best used in combination with other research. The accuracy levels increase with longer timeframes. For example, a 50% retracement on a weekly chart is a more important technical level than a 50% retracement on a five-minute chart.

What are the advantages of using fibonacci retracement?

Here are some benefits of using Fibonacci Retracement.

• Trend prediction. With the correct setting and levels, it can often predict the price reversals of bitcoin at early levels, with a high probability.

• Flexibility. Fibonacci Retracement works for assets of any market and any timeframe. One must note that longer time frames could result in a more accurate signal.

• Fair assessment of market psychology. Fibonacci levels are built on both a mathematical algorithm and the psychology of the majority, which is a fair assessment of market sentiment.

Photo credit: iStock/HAKINMHAN

Jan

2022

What is Delta in Options Trading?

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

In options trading, Delta is an important assessment tool used to measure risk sensitivity. Delta is a risk metric that compares changes in a derivative’s underlying asset price to the change in the price of the derivative itself.

Essentially it measures the sensitivity of a derivative’s price to a change in the underlying asset. Using Delta as part of an options assessment can help investors make better trades.

Delta is one of “the Greeks,” a set of options trading tools denoted by Greek letters. Some traders might refer to the Greeks as risk sensitivities, risk measures,or hedge parameters. The Delta metric is the most commonly used Greek.

Recommended: A Beginner’s Guide to Options Trading

Option Delta Formula

Analysts calculate Delta using the following formula with theoretical pricing models:

Δ = ∂V / ∂S

Where:

• ∂ = the first derivative

• V = the option’s price (theoretical value)

• S = the underlying asset’s price

Some analysts may calculate Delta with the much more complex Black-Sholes model that incorporates additional factors. But traders generally don’t calculate the formula themselves, as trading software and exchanges do it automatically. Traders analyze these calculations to look for investment opportunities.

Option Delta Example

For each $1 that an underlying stock moves, an the equity derivative’s price changes by the Delta amount. Investors express the Delta sensitivity metric in basis points. For example, let’s say there is a long call option with a delta of 0.40. Investors would refer to this as “40 delta.” If the option’s underlying asset increased in price by $1.00, the option price would increase by $0.40.

However, the Delta amount is always changing, so the option price won’t always move by the same amount in relation to the underlying asset price. Various factors impact Delta, including asset volatility, asset price, and time until expiration.

If the price of the underlying asset increases, the Delta gets closer to 1.0 and a call option increases in value. Conversely, a put option becomes more valuable if the asset price goes lower than the strike price, and in this case Delta is negative.

How to Interpret Delta

Delta is a ratio that compares changes in the price of derivatives and their underlying assets. It uses theoretical price movements to track what will happen with changes in asset and option price. The direction of price movements will determine whether the ratio is positive or negative.

Bullish options strategies have a positive Delta, and bearish strategies have a negative Delta. It’s important to remember that unlike stocks, options buying and selling options does not indicate a bullish or bearish strategy. Sometimes buying a put option is a bearish strategy, and vice versa.

Recommended: Differences Between Options and Stocks

Traders use the Delta to gain an understanding of whether an option will expire in the money or not. The more an option is in the money, the further the Delta value will deviate from 0, towards either 1 or -1.

The more an option goes out of the money, the closer the Delta value gets to 0. Higher Delta means higher sensitivity. An option with a 0.9 Delta, for example, will change more if the underlying asset price changes than an option with a 0.10 Delta. If an option is at the money, the underlying asset price is the same as the strike price, so there is a 50% chance that the option will expire in the money or out of the money.

Call Options

For call options, delta is positive if the derivative’s underlying asset increases in price. Delta’s value in points ranges from 0 to 1. When a call option is at the money the Delta is near 0.50, meaning it has an equal likelihood of increasing or decreasing before the expiration date.

Put Options

For put options, if the underlying asset increases in price then delta is negative. Delta’s value in points ranges from 0 to -1. When a put option is at the money the Delta is near -0.50.

How Traders Use Delta

In addition to assessing option sensitivity, traders look to Delta as a probability that an option will end up in or out of the money. The more likely an option is to generate a profit, the less risky it is as an investment.

Every investor has their own risk tolerance, so some might be more willing to take on a risky investment if it has a greater potential reward. When considering Delta, traders recognize that the closer it is to 1 or -1 to greater exposure they have to the underlying asset.

If a long call has a Delta of 0.40, it essentially has a 40% chance of expiring in the money. So if a long call option has a strike price of $30, the owner has the right to buy the stock for $30 before the expiration date. There is a 40% chance that the stock’s price will increase to at least $30 before the option contract expires.

Traders also use Delta to put together options spread strategies.

Delta Neutral

Traders also use Delta to hedge against risk. One common options trading strategy, known as neutral Delta, is to hold several options with a collective Delta near 0.

The strategy reduces the risk of the overall portfolio of options. If the underlying asset price moves, it will have a smaller impact on the total portfolio of options than if a trader only held one or two options.

One example of this is a calendar spread strategy, in which traders use options with various expiration dates in order to get to Delta neutral.

Delta Spread

With a Delta spread strategy, traders buy and sell various options to create a portfolio that offsets so the overall Delta is near zero. With this strategy the trader hopes to make a small profit off of some of the options in the portfolio.

Using Delta Along With the other Greeks

Delta measures an option’s directional exposure. It is just one of the Greek measurement tools that traders use to assess options. There are five Greeks that work together to give traders a comprehensive understanding of an option. The Greeks are:

• Delta (Δ): Measures the sensitivity between an option price and the price of the underlying security.

• Gamma (Γ): Measures the rate at which Delta is changing.

• Theta (θ): Measures the time decay of an option. Options become less valuable as the expiration date gets closer.

• Vega (υ): Measures how much implied volatility affects an option’s value. The more volatility there is the higher an option premium becomes.

• Rho (ρ): Measures an option’s sensitivity to changing interest rates.

The Takeaway

Delta is a useful metric for traders evaluating options and can help investors determine their options strategy. Traders often combine it with other tools and ratios during technical analysis. However, you don’t need to trade options in order to get started investing.

If you’re looking to begin options trading, a great way to start is with a user-friendly platform like SoFi’s. Thanks to its intuitive and approachable design, SoFi’s platform allows you to trade options through the mobile app or the web platform. Plus, you’ll have access to educational resources about options so you can learn more.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/PeopleImages

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