What Are Over-the-Counter (OTC) Stocks?

What Are Over-the-Counter (OTC) Stocks?

Over-the-counter stocks are not traded on a public exchange like the New York Stock Exchange (NYSE) or Nasdaq. Instead, these stocks are traded through a broker-dealer network.

In addition to stocks, the over-the-counter (OTC) market can also include other types of securities. The Financial Industry Regulatory Authority regulates broker-dealers that engage in OTC trading.

What is an OTC stock, exactly? There are different reasons why a stock or other security may trade over the counter rather than being listed on a public exchange. Trading OTC stocks can be rewarding, but also potentially risky for investors.

Before dipping into the OTC market, it’s important to understand the meaning of OTC stocks, and where these securities might fit into your portfolio.

What is OTC Stock?

In order to grasp OTC stock trading and how it works, it helps to have a clear understanding of public stock exchanges.

A stock exchange — like NYSE or Nasdaq — is a regulated environment in which buyers and sellers can trade shares of publicly listed companies. Before a stock can be listed on an exchange for public trading, it first has to meet the guidelines established by that exchange (for example, a company that wants to be listed on the Nasdaq must meet the Nasdaq listing requirements).

Companies may opt to trade shares in the over-the-counter market (meaning, they trade through a broker-dealer) if they’re unable to meet the listing requirements of a public exchange. OTC trading may also appeal to companies that were previously traded on an exchange but have since been delisted.

Recommended: What Are Stock Delistings and Why Do They Occur?

Also, stocks that are traded on an exchange are called listed stocks; those that trade OTC are often called unlisted stocks.

What Kind of Securities Trade on the Over-the-Counter Market?

OTC trading tends to focus on equities, i.e. stocks. In fact, it’s even common to see penny stocks being traded over the counter. The Securities and Exchange Commission (SEC) generally defines penny stocks as stocks that trade for less than $5 per share. Penny stocks can also be referred to as micro-cap stocks. A micro-cap stock has a market capitalization of less than $250 million or $300 million, versus $10 billion or more for large-cap stocks. (Market capitalization is a measure of valuation, based on the number of shares outstanding multiplied by the share price.)

But stocks don’t make up the entirety of OTC trading activity. Other types of investments that can be traded OTC include:

Derivatives

• Corporate bonds

• Government securities

Foreign currency (forex)

• Commodities

Cryptocurrency can also be traded over the counter. Over-the-counter crypto trading has gained popularity because it offers traders liquidity as well as anonymity.

Recommended: What is Cryptocurrency? The Fundamentals of Crypto

Altogether, there are an estimated 10,000-plus securities that trade on the over-the-counter market. These can include small and micro-cap companies, large-cap American Depositary Receipts (ADRs), and foreign ordinaries (international stocks that are not available on US exchanges). Companies that trade over the counter may report to the SEC, though not all of them do.

So Where Are OTC Securities Traded, Exactly?

In the US, the majority of over-the-counter trading takes place on networks operated by OTC Markets Group. This company runs the largest OTC trading marketplace and quote system in the country (the other is the OTC Bulletin Board or OTCBB). While companies that trade their stocks on major exchanges must formally apply and meet listing standards, companies quoted on the OTCBB or OTC Markets do not have to apply for listing or meet any minimum financial standards.

OTC Markets Group organizes OTC stocks and securities into three distinct markets:

• OTCQX

• OTCQB

• Pink Sheets

OTCQX

OTCQX is the first and highest tier and is reserved for companies that provide the most detail to OTC Markets Group for listing. Companies listed here must be up-to-date with regard to regulatory disclosure requirements and maintain accurate financial records. Penny stocks, shell corporations, and companies that are engaged in a bankruptcy filing are excluded from this grouping. It’s common to find stocks from foreign companies (e.g. foreign ordinaries) listed here.

OTCQB

The middle tier is designed for companies that are still in the early to middle stages of growth and development. These companies must have audited financials and meet a minimum bid price of $0.01. They must also be up-to-date on current regulatory reporting requirements and not be in bankruptcy.

Pink Sheets

The Pink Sheets or Pink Open Market has no minimum financial standard that companies are required to meet, nor do they have reporting or SEC registration requirements. These are only required if the company is listed on a Qualified Foreign Exchange. Be forewarned: OTC Markets Group specifies that the Pink Market is designed for professional and sophisticated investors who have a high risk tolerance for trading companies about which little information is available.

Pros and Cons of OTC Trading

Investing can be risky in general, but the risks may be heightened with trading OTC stocks. But trading higher risk stocks could result in bigger rewards if they’re able to produce above-average returns.

When considering OTC stocks, it’s important to understand how the positives and potential negatives may balance out. It’s also helpful to consider your personal risk tolerance and investment goals to determine whether it makes sense to join the over-the-counter market.

OTC Stock Trading Pros OTC Stock Trading Cons
Over-the-counter trading may be suitable for investors who are interested in early stage companies that have yet to go public via an IPO. Micro-cap stocks and nano-cap stocks that trade over the counter may lack a demonstrated track record of positive performance.
Investing in penny stocks can allow you to take larger positions in companies. Taking a larger position in a penny stock could amplify losses if its price declines.
May appeal to active traders who are more interested in current pricing trends than fundamentals. Limited information can make it difficult to assess a company’s financials and accurately estimate its value.
Trading cryptocurrency on an OTC exchange could help minimize hacking or security risks. OTC securities are subject to less regulation than stocks listed on a public exchange, which may increase the possibility of fraudulent activity.
OTC trading makes it possible to invest in foreign companies or companies that may be excluded from being listed on a public exchange. OTC stocks may be more illiquid than stocks traded on a public exchange, making it more difficult to change your position.

The Takeaway

Why would you want to trade stocks over the counter? Since OTC stocks trade outside of traditional exchanges like the NYSE or Nasdaq, the OTC market gives you access to different types of securities, including penny stocks, international stocks, derivatives, corporate bonds, and even cryptocurrency. If you’re interested in OTC trading, the first step is to consider how much risk you’re willing to take on and how much money you’re willing to invest. Having a baseline for both can help you to manage risk and minimize your potential for losses.

Either way, you can still get started by investing online. With SoFi Invest, for example, you can trade stocks, ETFs, and cryptocurrency. SoFi members also have access to IPO trading, if you’d like to invest in up-and-coming companies as they go public. It’s easy to get started with SoFi Invest and trade with minimal fees.

Photo credit: iStock/JohnnyGreig


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
SOIN0721289

Read more
401(k) Vesting: What Does Vested Balance Mean?

401(k) Vesting: What Does Vested Balance Mean?

Your 401k vested balance refers to how much of your contributions you own and would if you left your company. Contributions that employees make to their 401(k) accounts are always 100% vested; they own them outright.

However, this is not always true of the money employers put into their employees’ accounts, including matching funds. Those contributions may only belong to an employee after they’ve worked for the company for a certain amount of time, the company’s vesting period.

If you were to leave your job before reaching that milestone, you could forfeit some or all of the employer-contributed money in your account. The amount that you get to keep is the “vested balance.” Other qualified defined contribution plans, such as 401(a) or 403(b) plans may also be subject to vesting schedules.

Here’s a deeper look at what being vested means and the effect it can have on your retirement savings.

401(k) Contributions Basics

Before you can understand vesting, it’s important to know how 401(k) contributions work. A 401(k) is an employer-sponsored retirement plan that allows employees to make elective deferrals of part of their salary on a pre-tax basis (they can choose how much of their salary to contribute from each pay period).

As of 2021, employees can contribute up to $19,500 annually in their 401(k) accounts, with an extra $6,500 in catch-up contributions allowed for those who are age 50 or older. Employees can then invest their contributions, often choosing from a menu of funds or other investments offered by their employer.

The IRS also allows employers to contribute to their employees’ plans. Often these contributions come in the form of a 401(k) match. For example, an employer might offer matching contributions of 3% or 6% if an employee chooses to defer 6% of their salary.

In 2021, the total contributions that an employee and employer can make to a 401(k) cannot exceed 100% of the employee’s salary or $57,000, ($63,500 including catch-up contributions,) whichever is less.

Employer contributions are a way for businesses to encourage their employees to save for retirement. They’re also an important benefit that job seekers look for when searching for new jobs.

Recommended: What Exactly is a 401(k)?

What Is Vested Balance?

The vested balance is the amount of money that belongs to you and cannot be taken back by an employer when you leave your job—even if you are fired.

Contributions that you make to your 401(k) are automatically 100% vested. Vesting of employer contributions typically occurs according to a set timeframe known as a vesting schedule. When employer contributions to a 401(k) become vested, it means that money is now fully yours.

Being fully vested means that when you leave the company, those employer contributions will remain in your account. It also means that you can decide to roll over your balance to a new account, start making withdrawals, or take out a loan against the account, if your plan allows it. However, keeping a vested 401k invested and letting it grow over time may be one of the best ways to save for retirement.

You’ll owe taxes on withdrawals made before age 59 ½, and they may be subject to early withdrawal penalties, plus you’ll miss out on future growth of those earnings.

Whether a company contribution is vested will depend on what type of contribution it is. Contributions known as safe harbor matches are immediately 100% vested. Employers may make these matching contributions only for employees who themselves make elective deferrals to their account. Or they can make contributions on behalf of all employees whether or not those employees make contributions themselves.

Matching contributions that do not fall under the safe harbor provision and profit sharing contributions may both be subject to a vesting schedule. While contributions to traditional and Roth 401(k)s may be subject to vesting rules, that is not the case with SIMPLE 401(K)s. All contributions to these accounts are fully vested when they are made.

Recommended: How Much Should I Put Towards My 401(k)?

How Do I Know if I Am Fully Vested in my 401(k)?

If you’re not sure whether or when you will be fully vested, you can check their plan’s vesting schedule, usually via your online benefits portal.

Immediate Vesting

Immediate vesting is the simplest form of vesting schedule. Employees own 100% of contributions right away.

Cliff Vesting

Under a cliff vesting schedule, employer contributions are typically fully vested after three years of service. Federal law requires that 401(k) plans using a cliff vesting schedule wait no longer than three years for funds to be fully vested. A year of service is usually defined as 1,000 hours of work over a 12-month period.

Graded Vesting

Graded vesting is a bit more complicated. A percentage of contributions vest over the course of a set period of time, and employees gain gradual ownership of their funds. Eventually they will own 100% of the money in their account.
For example, a hypothetical six-year graded vesting schedule might look like this:

Years of Service

Percent Vested

1 0%
2 20%
3 40%
4 60%
5 80%
6 100%

All employees must be fully vested by the time they reach retirement age under the plan or if the company decides to terminate the plan.

Why Do Employers Use Vesting?

Offering 401(k) matching contributions is a benefit that employers may use to attract talented employees. More than three-quarters of companies who have a retirement plan offer some sort of employer match on contributions.

After hiring employees, the vesting schedule may help companies retain their best workers, encouraging them to stay with the company over the long term. Hiring and training new employees is a costly process for businesses. Withholding employer retirement contributions is a way to incentivize employees to stay at least as long as it takes for them to be fully vested.

You may want to take vesting schedules into account before getting a new job. If you’re only one year away from being 100% vested, you may decide it’s worth waiting the extra time before leaving the company for another opportunity. But the decision is a personal one: For example, if a potential new position offers a much higher salary, you might do your own math and decide that the gains from the higher salary overshadow the losses from leaving a percentage of unvested funds on the table.

What Happens If I Leave My Job Before I’m Fully Vested?

If you leave your job before being fully vested, you forfeit any unvested portion of their 401(k). The amount of money you’d lose depends on your vesting schedule, the amount of the contributions, and their performance. For example, if your employer uses cliff vesting after three years and you leave the company before then, you won’t receive any of the money your employer has contributed to their plan.

If, on the other hand, your employer uses a graded vesting schedule, you will receive any portion of the employer’s contributions that have vested by the time they leave. For example, if you are 20% vested each year over the course of six years, and you leave the company shortly after year three, they’ll keep 40% of the employer’s contributions.

Other Common Types of Vesting

Aside from 401(k)s, employers may offer other forms of compensation that also follow vesting schedules, such as pensions and stock options. These tend to work a little bit differently than vested contributions, but both pensions and stock options may vest immediately or by following a cliff or graded vesting schedule.

Stock Option Vesting

Stock options give employees the right to buy company stock at a set price and at a later date, regardless of the stock’s current value. The idea is that between the time an employee is hired and their stock options vest, the stock price will have risen. The employee can then buy the stock and sell it to make a profit.

Pension Vesting

With pensions, vesting schedules determine when an employee is eligible to receive their full benefit.

How Do I Find Out More About Vesting?

There are a few ways to find out more about vesting and your own 401(k) vested balance. This information typically appears in the 401(k) summary plan description and/or the annual benefits statement.

Generally, the plan administrator or human resources department of a company can also explain the company’s vesting schedule in detail, and even pinpoint exactly you are in your vesting schedule. Understanding this information can help you understand the actual value of your account.

The Takeaway

While any employee contributions to 401(k) plans are immediately fully vested, the same is not always true of employer contributions. The employee may gain access to employer contributions slowly over time, or all at once after they’ve been employed by the company for a number of years.

Understanding vesting and your 401(k)’s vesting schedule is one more piece of information that can help you plan for your financial future. A 401(k) and other retirement accounts can be important components of a retirement savings plan. Knowing when you are fully vested in a 401(k) can help you understand how much money might be available to you when you retire.

There are many ways to save for retirement, including opening a traditional or Roth IRA. To get started with those, you can open an online retirement account on the SoFi Invest® platform. With SoFi, members can build a diversified portfolio and get advice from financial planners at no additional cost.

Find out more about investing with SoFi today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.

SOIN20184

Read more
Lidar Stocks: What Are They & How Do You Pick the Best Ones?

Lidar Stocks: What Are They & How Do You Pick the Best Ones?

Many people associate Lidar with the sensors that enable self-driving cars — but there are a growing number of applications for this technology that can offer attractive new opportunities for investors.

New developments in self-driving cars and other smart products are driving demand for Lidar technology, which is in turn helping to spur the growth of Lidar companies innovating in this space, including some that have gone public through a SPAC merger.

What is Lidar? How is it Used?

The word is short for “light detection and ranging,” and Lidar works by using short bursts of light from lasers to create a 3-D rendering of an object or environment. Devices equipped with Lidar detect nearby objects, and process massive amounts of data to determine information such as their size, direction and speed of movement — which is why Lidar has become a core technology in the sensors that may one day allow self-driving cars to operate safely.

What many people don’t know is that Lidar is also at work in the newest smartphones and other automated devices like robot vacuum cleaners, which use Lidar to scan the environment and maneuver through a room.

Lidar is also widely used for measurement and imaging in an array of scientific disciplines, including oceanography, archaeology, forestry, seismology, robotics and atmospheric physics. It’s no wonder that Lidar technology stocks are attracting investor interest.

Recommended: Tips for Investing in Tech Stocks

The Advantages of Lidar

Lidar offers several advantages over similar technologies, such as radar, because light has a shorter wavelength than radio waves. By sending out repeated laser bursts, Lidar can offer a clearer picture of a given target.

For example, the Lidar sensors on some smartphones can give users almost instantaneous estimates of the size, shape and distance of an object, a capability that has enabled better experiences of augmented reality.

Also, as the Internet of Things (IoT) moves toward increasingly autonomous and interconnected machines, those devices will likely need sophisticated sensors to operate safely and effectively, which is another reason why Lidar companies and Lidar stocks are catching the eye of investors large and small.

Some Lidar Drawbacks

That said, investors considering Lidar technology stocks should be aware of some of the drawbacks as these may present some investment risks. Although Lidar technology can be highly sophisticated, critics note that some Lidar systems can lag in a more dynamic environment (e.g. driving in traffic), where a swift analysis of driving conditions is critical to safety.

Another drawback is that some Lidar sensors may weigh all data points equally in a given environment, and fail to take into account a more present danger like a certain obstacle or bad weather. For example: Lidar functionality has also been compromised by rainy or cloudy conditions, or very bright sun — as any of these can interfere with the light reflection and refraction that’s fundamental to the technology.

Lidar Stocks to Watch

A number of new Lidar companies have entered the market in recent years. Two Lidar technology stocks in particular attracted investor attention last year when it was announced that some models of self-driving cars scheduled to roll out in 2024 might include innovations to assist drivers. One is Luminar (LAZR) and the other is Velodyne (VLDR). Here’s a look at the technology these two Lidar companies currently offer, and some of their biggest competitors.

Luminar

As the largest single Lidar company, Luminar has indicated an interest in being more than Lidar vendor, and becoming a full-stack technology provider for autonomous vehicles. For example, the Sentinel system it helped develop with a Volvo subsidiary integrates Luminar’s Lidar sensors and software with autonomous driving software. Luminar is also exploring opportunities in international markets, including China.

Velodyne

Silicon Valley-based Velodyne went public in September 2020, not through a traditional IPO but a special purpose acquisition company (SPAC) IPO. Despite changes in company leadership this year, Velodyne signed a multi-year agreement with a Russian company, AGM Systems, that is focused on mobile and air applications for Lidar technology. Velodyne is also set to supply Lidar sensors to Knightscope, for the development of autonomous security robots.

Innoviz

Israeli technology company Innoviz (INVZ) is a smaller player looking for ways to deliver competitive Lidar technology to automakers at a lower cost. Some of those cost efficiencies may come from fine-tuning existing technology by optimizing features like the wavelength of laser and the sensitivity of the light detectors.

Aeva Technologies

Another Lidar leader, Aeva Technologies (AEVA) was founded by two former Apple engineers. The company is second only to Luminar as a pure-play Lidar company, evoking a mix of confidence from some analysts and caution from others.

AEye

Taking an innovative approach to Lidar, AEye (AEYE) has leaned into biomimicry to refine the use of lasers and make Lidar sensor data collection highly efficient and adaptable. AEye created its patented iDAR technology — a robotic solution using artificial perception that fuses Lidar, computer vision, and artificial intelligence — to create safer, smarter autonomous vehicles.

Evaluating Potential Investment Risks With Lidar Stocks

Lidar has been finding its ways into the products people use on a daily basis, and it holds great promise as an enabler for many technologies in many different fields. As such, investors may find investment opportunities through one or several public Lidar companies.

But investing in Lidar stocks comes with some risks. One risk factor investors should consider: a single version of Lidar technology might emerge as a frontrunner, elevating one patent-holding company to prominence and relegating others to the status of also-rans.

On the flip side, there is also the risk that one company’s technology might be adopted, but not widely.

And while Lidar is seen by many as an essential technology in self-driving cars, there is some debate on this point, with reports indicating that some automakers are exploring other types of sensors and networks to create safe, viable autonomous vehicles.

Recommended: What Every New Investor Should Know About Risk

The Takeaways

Lidar technology and sensors are well-entrenched in the autonomous car market, and now a growing number of companies are finding innovative ways to use this laser-driven technology to make advancements in other industries — like oceanography, seismology, robotics and more. While the expanding array of players in the Lidar space may be contributing to a sense of excitement about what the future of Lidar may hold, competing companies and technologies also indicate that this is a sector that’s still in flux, and there is much for investors to weigh when it comes to choosing the best Lidar stocks.

You could get started investing today by opening an investment account with SoFi Invest®. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs without paying SoFi commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a SoFi management fee.

Photo credit: iStock/Drazen_


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN0721299

Read more
How to Start a Cryptocurrency: Can Anyone Create a New Coin?

How to Start a Cryptocurrency: Can Anyone Create a New Coin?

In theory, anyone could start a cryptocurrency, but not everyone has the knowledge or resources necessary to take on the task.

Even after an individual manages to make a new cryptocurrency, there is typically work to do in terms of promotion, listing on exchanges, and ongoing maintenance and upgrades. Still want to know what it takes? Read on:

Understanding Coins vs Tokens

Before getting started, however, it’s important to know the difference between a token and a coin. Both fall under the blanket term of “cryptocurrency,” but while a coin like Bitcoin or Litecoin exists on its own blockchain, a token like Basic Attention Token, functions on top of an established blockchain technology infrastructure like Ethereum. Tokens also do not have uses or value outside of a specific community or organization.

Cryptocurrencies function like fiat currencies, without the centralized bank. Users typically hope to use their coins to store, build, or transfer wealth.

Meanwhile, tokens usually represent some kind of contract or have specific utility value for a blockchain application. Basic Attention Token for example, rewards content creators through the Brave browser. Tokens can also serve as a contract for or digital version of something, such as event tickets or loyalty points. Non-fungible tokens (NFTs) represent a unique piece of digital property, like artwork. And DeFi tokens serve many different purposes in that space.

Recommended: What is Cryptocurrency? A Guide to Understanding Crypto

Ways to Create a Cryptocurrency

There are three primary ways to create a cryptocurrency, none of which is fast and easy. Here’s how each of them works:

Create a New Blockchain

Creating a new blockchain from scratch takes substantial coding skills and is, by far, the most difficult way to create a cryptocurrency. There are online courses that help walk you through the process, but they assume a certain level of pre-existing knowledge. Even then, you might not walk away with everything you need to go and create a new blockchain.

Fork an Existing Blockchain

Forking an existing blockchain might be a lot quicker and less complicated than creating one from scratch. This would involve taking the open source code found on GitHub, altering it, then launching a new coin with a different name. The developers of Litecoin, for example, created it by forking from Bitcoin. Developers have since forked several coins from Litecoin, including Garlicoin and Litecoin Cash. This process still requires the creator to understand how to modify the existing code.

Use an Existing Platform

The third and easiest option for those unfamiliar with coding is making a new cryptocurrency or token on an existing platform like Ethereum. Many new projects create tokens on the Ethereum network using the ERC-20 standard, for example.

If you’re not familiar with writing code, you might consider a creation service that does the technical work and then hands you a finished product.

How to Make a Cryptocurrency in Seven Steps

After considering everything above, you can start taking the steps to build the cryptocurrency. Some of these steps will be less relevant when paying a third-party to create the new coin. Even then, anyone undertaking the task should be familiar with these aspects of how to create a cryptocurrency.

Step 1. Decide on a Consensus Mechanism

A consensus mechanism is the protocol that determines whether or not the network will consider a particular transaction. All the nodes have to confirm a transaction for it to go through. This is also known as “achieving consensus.” You will need a mechanism to determine how the nodes will go about doing this.

The first consensus mechanism was Bitcoin’s proof-of-work. Proof-of-Stake is another popular consensus mechanism. There are many others as well.

Step 2. Choose a Blockchain

This goes back to the three methods mentioned earlier. A coin or token needs a place to live, and deciding in which blockchain environment the coin will exist is a crucial step. The choice will depend on your level of technical skill, your comfort level, and your project goals.

Step 3. Create the Nodes

Nodes are the backbone of any distributed ledger technology (DLT), including blockchains. As a cryptocurrency creator, you must determine how your nodes will function. Do they want the blockchain to be permissioned or permission less? What would the hardware details look like? How will hosting work?

Step 4. Build the Blockchain Architecture

Before launching the coin, developers should be 100% certain about all the functionality of the blockchain and the design of its nodes. Once the mainnet has launched, there’s no going back, and many things cannot be changed. That’s why it’s common practice to test things out on a testnet beforehand. This could include simple things like the cryptocurrency’s address format as well as more complex things like integrating the inter-blockchain communication (IBC) protocol to allow the blockchain to communicate with other blockchains.

Step 5. Integrate APIs

Not all platforms provide application programming interfaces (APIs). Making sure that a newly created cryptocurrency has APIs could help make it stand out and increase adoption. There are also some third-party blockchain API providers who can help with this step.

Step 6. Design the Interface

There’s little point in creating a cryptocurrency if people find it too difficult to use. The web servers and file transfer protocol (FTP) servers should be up-to-date and the programming on both the front and backends should be done with future developer updates in mind.

Step 7. Make the Cryptocurrency Legal

Failing to consider this last step led to trouble for many who initiated or promoted ICOs back in 2017 and 2018. At that time, cryptocurrency was in a kind of legal grey area, and they may not have realized that creating or promoting new coins could result in fines or criminal charges depending on the circumstances. Before launching a new coin, it might be a good idea to research the laws and regulations surrounding securities offerings and related topics. Given the complexity of the issues and their regular updates, you might consider hiring a lawyer with expertise in the area to help guide you through this step.

The Takeaway

This is only the beginning of what someone needs to know about how to create a cryptocurrency. In addition to the technical aspects, creators of a new coin or token will have to figure out how their cryptocurrency can provide value to others, how to persuade them to buy in, and how the network will be maintained. Doing so often involves many costs like hiring a development team, a marketing team, and other people who will help keep things going and perform needed upgrades.

Creating a cryptocurrency can take a lot of time and money, and there’s a high risk that it will not succeed. There are more than 5,000 different types of cryptocurrencies listed on public exchanges according to data from Coinmarketcap, and thousands more that have failed over the years.

Simply investing in cryptocurrency might be a better route for those who don’t have the time, money, or interest in creating their own. A great way to do that is by opening an account on the SoFi Invest brokerage platform, which makes it easy to trade crypto, stocks, and exchange-traded funds.

Photo credit: iStock/MF3d


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
SOIN0621253

Read more
How to Invest and Profit During Inflation

How to Invest During Inflation

The inflation rate, or the rate at which prices are increasing, is going up in 2021, with the core US inflation rate up to 5.4% in mid-2021. That’s a fairly big number, given the US inflation rate stood at 1.4% only last January.

That has an impact on both consumers and investors. When inflation rises, consumer prices rise with it. Common goods like lumber, gasoline, semiconductors, and grocery items like bacon and bananas have seen prices soar this year as a result of rising inflation, meaning that consumers’ paychecks might not go as far. If wages are rising at the same time as inflation, the impact on consumers is much less severe.

Rising inflation can also affect the stock market. Traditionally, rising inflation has tempered stock market growth, as consumers have less money to spend and the Federal Reserve may step in to check rising inflation by making loans and credit more expensive with higher interest rates.

What’s an investor do when inflation is on the upswing? Often, it means adjusting investment portfolios to protect assets against rising prices and an uncertain economy.

Inflation Basics, Explained

Inflation is largely defined as a continuing rise in prices. Some inflation is okay – historically, economic booms have come with an inflation rate at about 1.0%-to-2.0%, a range that reflects solid consumer sentiment amidst a growing economy. An inflation rate of 5% or more can be a different story, with higher rate levels associated with an overheated economy.

Inflation rates often correlate to economic growth, which is not always bad for consumers. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash is flowing through the economy, demand for goods and services grows and that leads food and services producers to raise prices. That triggers a rise in inflation, with the inflation rate growing even more as demand for goods and services outpaces supply.

Recommended: Is Inflation a Good or Bad Thing for Consumers?

Conversely, when demand slides and supply is in abundance, prices fall and the inflation rate tumbles as economic growth wanes. In 2021, however, the US economy is heating up after muted growth in 2020, and the inflation rate is on a significant upward trajectory.

In the United States, the main barometer of inflation is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, healthcare, transportation, food and beverage, and education, among other economic sectors. The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE) in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

What Causes Inflation?

Historically there are two types of inflation: cost-push inflation and demand-pull inflation.

Cost-push inflation

This type of inflation is an economic condition when goods and services are limited in supply, and where demand “pushes up” prices on those same goods and services. Take the cost of lumber in the first half of 2021, which was up substantially. Any increased price of lumber for building and construction leads to a lower lumber supply. With demand for lumber both sustained and intense, the price of lumber rises – or is “pushed” higher. Cost-push inflation also often occurs following a natural disaster (i.e., like when a hurricane closes oil refineries, leading to a lower supply of oil and gas, which leads to higher prices for both commodities.)

Demand-Pull Inflation

This type of inflation occurs when prices rise in the consumer economy. When jobs are plentiful and consumer sentiment is high, or the government has pumped a large fiscal stimulus into the economy. People tend to spend more money on goods and services. Yet if the goods consumers are limited (such as smartphones or used cars), competition for those goods rises, and so do the prices for those goods.

Demand-driven inflation is often referred to as “too many dollars chasing too few goods”, meaning the competition among consumers for specific goods and services drives prices significantly higher.

Recommended: A Closer Look at 7 Factors That Cause Inflation

Inflation’s Impact on Stock and Bond Investments

Inflation impacts both stock and bond markets, but in different ways.

Inflation and the Stock Market

Inflation has an indirect impact on stocks, primarily reflecting consumer purchasing power. When inflation rises, that puts pressure on stock market returns to keep up with the inflation rate. Consider a stock portfolio that earns 5% before inflation. Add the 5.4% inflation rate US investors have seen (on average) over the past year, and the portfolio actually loses 0.4% on an inflation-adjusted basis. Plus, as prices rise, retail investors may have less money to put into the stock market, reducing market growth.

Conversely, some inflation stocks can perform well in periods of high inflation. When inflation hits the consumer economy, companies boost the prices of their goods and services to keep profits rolling, as their cost of doing business rises at the same time. Consequently, rising prices contribute to higher revenues, which helps boost the price of a company’s stock price. Investors, after all, want to be in business with companies that have strong revenues.

Overall, however, rising inflation raises the investment risk of an economic slowdown. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth, thus reducing company earnings which leads to sliding equity prices.

Inflation and the Bond Market

Inflation can crimp bond market performance, as well. Most bonds like US Treasury, corporate, or municipal bonds offer a fixed rate of return, paid in the form of interest or coupon payments. As fixed-income securities offer stable, but fixed, investment returns, rising inflation can eat it those returns, further reducing the purchasing power of bond market investors

What to Invest in During Inflation

Investors can take several action steps to protect and potentially outperform with their portfolios during periods of high inflation. You don’t have to worry about choosing the best investments during hyperinflation, because it’s highly unlikely that runaway inflation will occur in the United States.

Choosing inflation investments is like selecting investments at any other time–you’ll need to evaluate the security itself, and how it fits into your overall portfolio strategy both now and in the future.

Retail Stocks

For instance, investors might consider stocks where the underlying company can boost prices in times of rising inflation. Consider a big box store with a global brand and a massive customer base. In that scenario, the retailer could raise prices and not only cover the cost of rising inflation, but also continue to earn profits in a high inflation period.

Consumer Goods Manufacturers

Think of a consumer goods manufacturer that already has a healthy portion of the toothpaste or shampoo market, and doesn’t need excess capital as it’s already well-invested in its own business. Companies with low capital needs tend to do better in inflationary periods, as they don’t have to invest more cash into the business just to keep up with competitors – they already have a solid market position and already have the means to produce and market their products.

TIPS – Treasury Inflation-Protected Securities

Treasury Inflation-Protected Securities can be a good hedge against inflation. By design, TIPS are like most bonds that pay investors a fixed rate twice annually. They’re also protected against inflation as the principal amount of the securities is adjusted for inflation, based on Consumer Price Index levels.

Commodities

Precious metals, oil and gas, and orange juice can all be good inflation hedges, as well. Most commodities are tied to the rate of inflation and can capitalize in high inflationary periods. Take the price of gasoline, which rises as inflation heats up. Businesses and consumers are highly reliant on oil and gas, and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices to do so. That makes oil – and other commodities – a good portfolio component when inflation is on the move.

Recommended: A Guide to Investing in Precious Metals

Shorter-Duration Fixed-Income

By investing in short-term bonds and bonds funds, you’re not locked into today’s low rates for the long term. When interest rates rise, you can purchase new investments that reflect more favorable rates.

The Takeaway

Investors should proceed with caution when inflation rises. While low inflation can indicate a healthy economy, high inflation can be a precursor to a recession. Massive changes to a well-planned portfolio may do more harm than good, and you shouldn’t toss out a long-term investment plan shouldn’t be deep-sixed just because inflation is moving upward.

If you’re ready to build a portfolio, a great place to start is via the SoFi Invest brokerage platform. You can use it to purchase stocks and exchange-traded funds that you either select yourself or let the platform’s algorithm choose on your behalf.

Photo credit: iStock/pondsaksit


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
SOIN0721298

Read more
TLS 1.2 Encrypted
Equal Housing Lender