Jul
09
2021
Bitcoin Soft Fork vs Hard Fork: Key Differences

Bitcoin Soft Fork vs Hard Fork: Key Differences

By | Growing Wealth, invest, Investing | Comments Off on Bitcoin Soft Fork vs Hard Fork: Key Differences

Cryptocurrencies evolve over time, adopting new network rules voted on by miners. This is known as forking. Since its invention in 2009, Bitcoin has forked many times—sometimes with a soft fork and sometimes with a hard fork.

Here’s a look at how each works, how they differ, and what they mean for investors.

Why Does Bitcoin Fork?

Developers, investors and miners will often call for a bitcoin fork because of disagreements on how best to manage the growth of Bitcoin. And while this has fueled innovation, none of the forks have come near to exceeding the usage and value of the original bitcoin blockchain, also called Bitcoin Core.

Recommended: What is Bitcoin and How Exactly Does it Work?

What Is A Hard Fork?

Hard forks happen when miners vote for a significant change to the Bitcoin blockchain protocol. A hard fork creates a new blockchain. And after a hard fork, both the old and new versions of the blockchains persist, separate and side by side.

What Is A Soft Fork?

Soft forks are more subtle software alterations of the blockchain. After a soft fork, the original blockchain remains valid, and users simply adopt the update.

Other Bitcoin Alterations

There are also other kinds of software alterations that create clone or copycat “altcoins.” In the history of Bitcoin, some of these created entirely new forms of crypto, such as Litecoin or Vertcoin.

The main difference is that while these “altcoins” used Bitcoin code as a jumping-off point, they didn’t add on to the existing Bitcoin blockchain. Instead, they created their own trading networks. These coins employ different mining algorithms, which means the computers that mine the coins operate on different software.

Main Differences Between Soft Forks and Hard Forks

Soft Fork

 Hard Fork
Backward Compatible? Yes No
Block Size Smaller Larger
Speed Slower Faster
Security Lower Higher

Backward Compatibility

One major difference between hard forks and soft forks comes down to something called “backward compatibility.” The term refers to the ability of a software system to use interfaces and data from earlier versions of the system.

The change of software protocol in a soft fork offers backward compatibility. While the new software may speak a new dialect, it still understands data in the old dialect. A hard fork is more like changing the language that the software speaks. It no longer understands what’s being said in the old language.

This is why a hard fork splits the network into two parts—the one before the fork and the one after. Because there is no backward compatibility, once forked the two parts of the network can never interact again. Transaction blocks that are valid in one network are no longer considered valid in the other one.

Block Size

One reason for a fork on a cryptocurrency like Bitcoin is to adjust the size of the blocks used in their blockchain. Those blocks hold transaction data, and the more data in each block, the faster the transaction.

Block size was one of the major reasons behind the first hard fork for Bitcoin, when a hard fork created Bitcoin Cash (BCH) in 2017. Because of its larger block size, one block in the BCH blockchain can record a larger number of transactions than a block in the original Bitcoin blockchain. That allows the currency to process more money faster.

Some forms of crypto may want to limit the size of the blocks to increase the payout to miners. This is where a soft fork can work, by adding a new set of rules to the existing blockchain to reduce block size from, say, 1MB to 500KB. With a soft fork, the 1MB block will still be considered valid by existing nodes, but as more nodes update to the soft fork, they may reject any blocks larger than 500KB.

A soft fork can only restrict the size of the blocks. It can only add new rules—it can’t change existing rules.

Speed and Security

Another famous use of a hard fork was done for the sake of blockchain security after a major hack. The Ethereum blockchain voted unanimously to hard fork as part of a strategy to reverse a hack that stole tens of millions of dollars’ worth of its coins. As a result, the original blockchain is now referred to as Ethereum Classic, and the fork became known as Ethereum.

That’s an extreme scenario. And there are many situations involving speed or volume or security that arise on a crypto network where a soft fork would get the job done.

But when a network needs to solve a problem quickly, hard forks have a major advantage. With both hard and soft forks, there’s a period when the old and new versions of the cryptocurrency’s code both live on the network. But with a hard fork, the old and new versions are divided clearly and forever on two separate networks.

With a soft fork, however, both versions will remain in place for however long it takes for all the users on the network to update the software. And there’s always the risk that the legacy version could win out. That’s why, when a hack or another major security issue is at play, the predominance of users and developers tend to prefer a hard fork.

Notable Bitcoin Forks in the Past

Bitcoin has forked on more than one occasion. In addition to Bitcoin Cash, these are some of the other notable forks:

•  Litecoin: Litecoin (LTC) was created to enable faster transactions, using the Scrypt algorithm rather than Bitcoin’s SHA-256 algorithm. LTC transactions are thought to confirm faster and have lower fees than BTC in general.

•  Vertcoin: Vertcoin (VTC) uses a different consensus algorithm for mining. The goal of VTC was to be ASIC-resistant, meaning that the market for mining couldn’t be taken over by people with access to resources for purchasing large and expensive ASIC (application-specific integrated circuit) computer hardware.

•  BSV: BSV is a hard fork from the Bitcoin Cash network, initiated by Craig Wright, who claims that he is in fact Satoshi Nakamoto, the creator of Bitcoin. (That remains unproven; Satoshi Nakamoto may in fact be a pseudonym for a group of people.)

•  Bitcoin Gold: This fork utilizes an ASIC-resistant proof-of-work mining algorithm, to create a coin that anyone can mine at home without the need for expensive specialized computer hardware.

Many of these cryptocurrencies forked from Bitcoin have undergone forks of their own. For instance Litecoin has had its own hard fork, which gave birth to Litecoin Cash.

But for all the improvements those forks have offered, Bitcoin is still the predominant cryptocurrency in the world today, with a market capitalization of $734,951,021,330 as of June 16, 2021, according to Coinmarketcap.com. Not that some of the forks are doing so badly. Bitcoin Cash and Litecoin boast market caps of $$11,339,133,478 and $11,303,929,705, respectively.

The Takeaway

As the original crypto, Bitcoin was the first to fork, and has forked a few times since—with both hard forks and soft forks. The hard forks, like Bitcoin Cash and Bitcoin Gold, created entirely new blockchains. Soft forks, on the other hand, are backwards compatible, meaning they work with the existing blockchain.

Some Bitcoin forks created entirely new altcoins, and thus additional investing opportunities for investors interested in crypto.

Photo credit: iStock/I am 3D animator artist

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.

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0421183

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Jun
28
2021
What Are Currency Hedged ETFs?

What Are Currency Hedged ETFs?

By | Financial Independence, Growing Wealth, invest, Investing | Comments Off on What Are Currency Hedged ETFs?

Currency-hedged ETFs are exchange-traded funds created to minimize the risks of fluctuating exchange rates in ETFs that have foreign holdings.

Many investment companies offer two versions of the same ETF with one version including a currency hedge. The latter ETF has the same holdings as the former, but it also includes derivatives purchased to protect–or hedge–against currency risk. The protections come at a cost, however, and hedged ETFs may have higher fees than non-hedged ETFs.

Recommended: ETF Trading 101: How Exchange Traded Funds Work

Why Do Investors Use Currency-Hedged ETFs?

Since currency values fluctuate, exchange rates can affect the total return on an asset. While ETFs provide investors with a significant diversification, they don’t offer any protection against the investment risk created by foreign exchange rates. So purchasing an ETF focused on overseas markets creates an additional layer of volatility within the investment.

Currency shifts can boost or diminish returns on international investments — but they almost always make them more uncertain. If the local currency loses value against the ETF’s currency (in this case the dollar), that can offset returns for the dollar-based investor, even if the assets that make up the security’s returns go up in their own currency.

Since many ETF investors are not interested in forex trading, they can minimize their currency risk by purchasing a currency-hedged ETF, which can smooth out volatility related to foreign exchange rates.

Currency-hedged ETFs may have a slightly higher expense ratio than non-hedged ETFs, due to the cost of the futures contracts as well as potential expenses associated with the tools and people who develop the hedged currency strategy.

Recommended: How to Invest in International Stocks

How Do Exchange Rates Impact Investment Returns?

While a strong dollar may be good when you’re buying assets in a foreign currency, it can hurt returns on assets denominated in a foreign currency. Over the past decade, the strong dollar has meant that hedged portfolios tend to outperform those that weren’t hedged.

Here’s an example: If the dollar-to-foreign-currency conversion rate is 1 to 2, as in one dollar buys you two units of the foreign currency, and you buy 100 shares of a stock at 5 foreign currency units per share, it will cost you $250, or 500 foreign currency units. Now, let’s say those shares double, so that 100 shares are worth 1,000 foreign currency units instead of 500 and your investment is now worth $500, compared to the $250 you spent initially.

But if the dollar strengthened so that the conversion rate went from 2 foreign currency units per dollar to 4 foreign currency units per dollar, those 100 shares are still worth 1,000 foreign currency units but for a US investor, their $250 investment would have shown no gain. While this is an extreme currency fluctuation, it illustrates the reason that some investors might purchase currency-hedged ETFs.

How Does Currency Hedging Work?

Investors use two methods to hedge against currency risk: static hedging and dynamic hedging.

Static Hedging

Static hedging is the most basic kind of hedging. An ETF that uses static hedging has one strategy that it executes, regardless of market conditions. An ETF using this strategy would buy contracts in the future market that lock in a currency’s value relative to the dollar or set parameters around it.

The contract is an agreement to buy a currency at a future price, which has the same effect of cancelling out currency gains or losses if they move from the currency’s current value against the dollar.

Dynamic Hedging

Dynamic hedging may incorporate multiple strategies or change strategies as market conditions change. Dynamic hedging is not always in effect, instead the hedge is “put on” based on the judgment of the ETF manager. Sometimes this judgment reflects an algorithm or series of rules that looks at market conditions for determining when to buy and sell financial instruments that hedge currency exposure.

For example, an ETF might have a rules-based system that looks at the trend of a currency’s value against the dollar, the interest rates in both countries, and the overall value of that currency (namely if it’s more expensive than the dollar). Those data points and, specifically, how they change over time, would determine whether and how much to hedge the ETF at any given time

The Takeaway

Currency-hedged ETFs are one way to get exposure to foreign markets and protection against the currency risks that come with that type of investment, but they may cost more than non-hedged ETFs. It’s important for investors to understand how they work, as they start to build their own investment strategy and learn how to pick ETFs to include (if any) in their portfolio.

If you’re ready to start putting that strategy into action, a great place to start is the SoFi Invest investing platform, which offers personalized investment advice, a range of ETFs, and automated investing.

Start investing today.

Photo credit: iStock/Delmaine Donson

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

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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Jun
25
2021
Bitcoin Mining Software: How to Choose the Right One

Bitcoin Mining Software: How to Choose the Right One

By | Growing Wealth, invest, Investing | Comments Off on Bitcoin Mining Software: How to Choose the Right One

To mine Bitcoin, a number of things are required. Miners need:

•  Mining hardware: Application Specific Integrated Circuits (ASICs) or Graphic Processing Units (GPUs)

•  Bitcoin mining software

•  A bitcoin mining pool

•  Electricity: Bitcoin mining typically consumes a large amount of energy

•  A place to set up a mining rig

•  In some cases, a way to cool down ASICs/GPUs (the machines tend to generate a lot of heat)

Of all these needed elements, crypto mining software is one of the most vital. Mining rigs can’t mine without the proper software. This program will tell the machines which currency to mine, what pool to participate in, and how fast to run the fans.

Selecting the best software to mine Bitcoin may be confusing to newcomers, but it doesn’t have to be complicated. Perhaps even better, it also doesn’t have to be expensive. While mining Bitcoin can be costly in terms of hardware and electricity, the software to mine Bitcoin usually isn’t. Most Bitcoin mining software is free and open-source, so anyone can download it and see what went into creating it.

Factors to Consider When Choosing Bitcoin Mining Software

Before settling on a specific mining software program, it’s worth considering some key variables.

1. What operating system will you be running the software in?

Make sure the OS is compatible with the software whether it’s Windows, Linux, or Mac OSX. In addition, some software only works with ASIC miners, while others might only work with GPU miners.

2. Are the software and hardware Bitcoin-compatible?

Bitcoin requires ASICs that can run the SHA-256 algorithm. Some altcoins, like Dogecoin and Litecoin, run on the Scrypt algorithm, and need special ASICs designed for that specific purpose.

3. Which wallet and exchange will you be using?

First, you need your own Bitcoin wallet to deposit mined coins into. A desktop hot wallet like Amory, Breadwallet, or Electrum may be a good option since it allows users to hold their own private keys. From there, you will need to move the coins to a crypto exchange to trade the mined coins for fiat currency or a stablecoin. Users who want to hold all of their profits in Bitcoin can skip this last step and instead put their coins into a more secure long-term storage method like cold storage.

Once the above factors have been taken care of, users can move forward with finding the best Bitcoin mining software for their needs.

Top Bitcoin Mining Software in 2021

Here are a few of the top crypto mining software programs on the market in 2021. Depending on a user’s experience with crypto specifically and with tech in general, some software might be more appealing than others.

CGMiner

CGMiner has been one of the most popular mining programs for many years. For those who already know a thing or two about how Bitcoin mining works, this might be their preferred program.

Pros:

•  This software comes with features like fan speed control, the ability to access the program remotely, and use with multiple miners.

•  It can even be used for CPU mining (although this is not feasible for most coins today, as mentioned earlier).

•  The software works with most operating systems.

Cons:

•  The user interface is very basic: grey text on a black background.

•  The program is run using a command line, meaning users type in commands to tell it what to do. This may not be appealing to new users.

EasyMiner

EasyMiner provides a graphic user interface (GUI) for the CGMiner software. While CGMiner shows little more than lines of text, EasyMiner provides graphs displaying mining activity along with other visual features.

Pros:

•  It’s good for new users who prefer a user-friendly GUI.

Cons:

•  It’s not compatible with Mac OS X.

BitMinter

This software is also more user-friendly than some of its competitors. BitMinter supports all major operating systems, is easy to use, and automatically points to its own mining pool (also called BitMinter).

Pros:

•  It’s easy to set up, including its own mining pool.

•  It’s compatible with Windows, Mac OS X, and Linux operating systems.

Cons:

•  It has to be used with the BitMinter mining pool, which charges a 1% fee.

MultiMiner

This software simplifies a lot of the set up involved with Bitcoin software and comes with a GUI. Things are displayed and explained in a simple-to-understand way for beginners. Users are even instructed on how to link their miners to the mining pool of their choice. This software is designed for Windows, although additional software add-ons can be used to make things work on other operating systems.

Pros:

•  It’s good for beginners.

Cons:

•  It needs additional software to be able to run on Mac OS X or Linux.

Bitcoin Mining Software: Commonly Asked Questions

Wondering what to know before investing in crypto through the mining process? These are some of the most frequently asked questions when it comes to crypto mining software.

Can I Mine Bitcoin On My PC?

No, you can’t mine Bitcoin using your PC’s CPU or GPU power. There was a time when that was possible, but today, mining Bitcoin requires more powerful machines known as ASICs. You can, however, use a PC to run the mining software that controls your ASICs and points them toward a specific mining pool.

Can I Mine Bitcoin With My Phone?

Smartphones do not have the processing power necessary to mine Bitcoin. There have been reports of some types of sophisticated mining malware that harvest processing power from many smartphones and combine it to mine an altcoin with lower difficulty. But other than that, phones simply cannot mine crypto.

Recommended: What Is Pi Cryptocurrency? – A unique take on smartphone crypto mining.

Can You Mine Bitcoin for Free?

No. This is like asking if you can mine gold for free. There will always be costs associated with Bitcoin mining, including the hardware and electricity required to do so. This is one reason people believe Bitcoin has value—it can’t be created out of thin air.

How much does it cost to mine 1 Bitcoin?

This varies depending on the rate miners pay for electricity, the power of their machines, and the current mining difficulty (which adjusts upward or downward every two weeks or so).

How Do I Start Mining Bitcoins?

The best place to start is by doing research to determine whether or not mining Bitcoin is right for you. An individual who decides to try their hand at Bitcoin mining would then have to go about securing the necessary hardware, software, and electricity before finally selecting a mining pool to point their rig towards.

What is the Best Way to Mine Bitcoin?

From an energy perspective, the best way to mine Bitcoin might be using some kind of renewable energy source like solar, wind, hydro, or geothermal. There’s a growing trend in the industry toward these types of energy sources because they both increase miner revenues and reduce the carbon footprint of Bitcoin.

The Takeaway

Overall, Bitcoin mining requires a lot of research, knowledge, effort, and investment. Bitcoin mining software is a crucial piece of the prep, since miners can’t run their machines without the right software. Choosing the right software depends on both an array of technical factors for the mining machines, the chosen coin to mine, and the operating system of the computer running the software in question, as well as factors regarding the user experience itself. Once the technical details have been determined, users can make a decision based on what they think might work best for them.

Photo credit: iStock/Eva-Katalin

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.

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0421172

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Jun
25
2021
How is Bitcoin Valued?

How is Bitcoin Valued?

By | Growing Wealth, invest, Investing | Comments Off on How is Bitcoin Valued?

As a decentralized digital currency, Bitcoin is valued primarily on supply and demand on the exchanges where it’s bought and sold. But there are other variables that come into play, driving up the value of Bitcoin to new heights, and then driving it down at times, too.

What is the Value of 1 Bitcoin?

The price of Bitcoin has risen dramatically since the technology was created in 2009. While at first one bitcoin had essentially zero value, it gradually rose to a fraction of a penny and then underwent several boom and bust cycles (or “bubbles”) over the years before arriving at today’s valuation of around $37,000.

In March of 2020, the price of one bitcoin fell as low as $4,000 or less on some exchanges. The price then rose 10x to over $40,000 in less than a year as massive government stimulus programs coincided with growing adoption by corporations and large institutional investors.

In April of 2021, Bitcoin notched yet another record high in US dollars at over $63,500, according to Coindesk data—and by mid-May, it was down to $37,739.

What Affects the Price of Bitcoin?

There’s no easy answer to the question “how is the price of Bitcoin determined?” Because Bitcoin is decentralized, there isn’t even one single price like there is for commodities like oil or gold. Being a decentralized digital commodity of sorts has allowed Bitcoin to find a price determined mostly by the sum total of buy orders and sell orders across multiple exchanges.

Bitcoin trades constantly on many different exchanges. The price is discovered through buyers and sellers agreeing on prices at which to settle trades. It can be said that “the market” determines the price of Bitcoin. Indexing services, like those provided by Coindesk, Coinmarketcap, Messari and others, aggregate data from many sources and approximate an average to come up with a single value.

Of course, many external factors may influence the price at which people are willing to pay for Bitcoin. These variables can shed light on the question, “how is Bitcoin valued?”

1. Sentiment

With any asset, general market sentiment can influence present and future price action. This tends to occur in cycles.

It often happens that as more and more people grow increasingly bullish on something, the price keeps rising until everyone thinks it will never go down again. Then at some point, things change, and sentiment starts shifting the other way. Once most people think the price will never go up again, that usually indicates that prices have come close to bottoming.

This is why CNN has something called the “Fear and Greed Index” . The index measures sentiment across financial markets at large using seven broad indicators. These indicators measure things like stock volatility, call-to-put ratios, and the amount of stocks making new highs vs the amount of stocks making new lows.

With Bitcoin, news of increasing adoption or additional capital coming into the asset class tends to drive prices upward. Here are a few examples of headlines that have contributed to Bitcoin’s price performance in 2020 and 2021. Note that positive Bitcoin news doesn’t always have to do with Bitcoin itself, but with the cryptocurrency sector in general:

•  “Visa Supports Transaction Settlement With USDC Stablecoin”

•  “Paul Tudor Jones reportedly buys bitcoin as an inflation hedge, compares crypto to 70s gold trade”

•  “MicroStrategy buys more than $1 billion worth of bitcoin, adding to massive holdings”

•  “Tesla Buys 1.5bn in Bitcoin, Pushing Price to New High”

The fact that big names like these (and others) have decided to start investing in bitcoin in just the past 12 months has helped to boost the price. Furthermore, these entities are buying up huge sums of bitcoin with the intent to hold for the long-term, further reducing the overall supply and putting a floor underneath prices.

Recommended: How to Use the Fear and Greed Index To Your Advantage

2. Mining

Bitcoin mining also impacts the price of Bitcoin. Miners are powerful computers that process transactions for the network, and they’re the source of newly minted bitcoins.

Because miners create and accumulate new coins, what they tend to do as a whole can make a big difference in market prices. Miners have to sell some of their Bitcoin to cover electricity and maintenance costs. But what they choose to do with their remaining coin can impact prices.

For example, when miners anticipate the future price of Bitcoin to be higher than it is right now, they could choose to hold most of their coins, reducing overall supply on exchanges. This would create support for prices.

On the other hand, if miners think the price of Bitcoin will fall, or they need cash today for some reason, they could sell their coins, increasing the supply and potentially driving prices lower.

3. Money Supply

Some may argue that the number one factor affecting the price of Bitcoin is the growth in money supply. When central banks print more money, the price of Bitcoin tends to rise in almost direct proportion to the amount of new currency created.

This is part of the supply-and-demand element in Bitcoin’s price. More and more dollars (or Euros, Yen, Pesos, etc.) wind up chasing an ever-dwindling supply of bitcoin. The new supply of fiat currency keeps growing while the new supply of bitcoin gets cut in half every 4 years (a process known as Bitcoin halving).

4. The Network Effect

Some say Bitcoin’s true value lies in the Bitcoin network. In other words, how many people are using Bitcoin.

A rough analogy would be social media networks. We tend to measure the value of a social network by its number of users and how active they are on the platform. Facebook and Instagram both have over a billion users each, with at least half of them logging in everyday in the case of Instagram. This is the main reason people think these networks have value.

With Bitcoin, the more people who create cryptocurrency wallets, convert fiat currency to Bitcoin, and spend or store those coins, the more valuable Bitcoin could become. And as the price of Bitcoin rises, more people tend to join in the network, potentially creating a positive feedback loop.

The Takeaway

There’s no single variable that can be pinned down as the main driver of the Bitcoin price. While some factors, like news and sentiment, are universal in the financial world, others like mining and the network effect are more unique to cryptocurrency. When it comes to what to know before investing in crypto, doing more in-depth research on some of the concepts mentioned above could be a good place to start.

For investors ready to start trading crypto, SoFi Invest® makes it simple to get started. Members can trade a range of crypto, from Bitcoin and Ethereum to Litecoin and more—and manage their account right from the SoFi app.

Find out how to get started trading crypto with SoFi Invest.

Photo credit: iStock/akinbostanci

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.

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Jun
16
2021
What is a Token? Crypto Tokens vs Coins

What Is a Token?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Token?

Both cryptocurrency and tokens are blockchain-based digital assets—but they are not the same thing. Yet as the public becomes increasingly aware of blockchain technology and more people invest in cryptocurrency, confusion swirls around the difference between the two assets.

What Are Crypto Tokens?

Cryptographic tokens are programmable assets that can be developed and recorded on existing blockchains, as a special-access smart contract.

Tokens operate within a pre-existing blockchain to allow for the creation and execution of unique smart contracts that often deliver ownership of assets outside of the blockchain network. Tokens can represent units of value—including real-world items like electricity, money, points, coins, digital assets, and more—and can be sent and received.

ERC-20 tokens exist on the Ethereum network, NEP-5 tokens are on the NEO cryptocurrency network. The tokens live on the blockchain of those currencies, but are not the same as the coins those currencies use as their denomination.

Those tokens, written into the smart contract of the underlying blockchain of the cryptocurrency, are only accessible by the person with the private key for the token. They allow people to create new assets, whose ownership and scarcity can be verified using blockchain technology.

Crypto Tokens vs. Coins: What is the Difference?

Coins—for example, Bitcoin and Litecoin—are built on their own blockchain and are a store of value, intended as a form of currency. Generally, any blockchain-based cryptocurrency that is not Bitcoin is referred to as an altcoin.

Tokens are built on an existing blockchain and while they aren’t currency they can represent other fungible and non-fungible items of value, like points, coins, or even a piece of artwork. One example of a token is the Basic Attention Token, or BAT.

Because crypto coins are more straightforward—they’re a form of currency—they’re often easier to understand than crypto tokens. Below, we’ll go over what crypto tokens are and how they work.

How Do Crypto Tokens Work?

Blockchain uses a decentralized, or distributed, ledger, which resides on a vast array of independent computers to track transactions. Each node organizes new data into blocks, and chains them together in an “append only” mode. That append-only structure means no one on any node can alter or delete the data from earlier blocks. They can only add to the chain, which is one of the core security features of blockchain.

Cryptocurrency tokens offer the append-only secure record of cryptocurrency, connected with a special-access contract, which can connect to all manner of assets. The special-access contract with the tokens can give users the rights to assets such as cash, crypto coins, rewards points, or even digital media such as music, art, a video clip, or a movie. The tokens create the possibility of owning a blockchain-verified private smart contract connected to that asset.

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Different Types of Crypto Tokens

Currently, there are four main categories of tokens: payment tokens, utility tokens, security tokens, and non-fungible tokens. Below we’ll dive deeper into each one.

Payment Tokens

Most of the best known and most widely used forms of cryptocurrency are payment tokens. These crypto tokens are used to buy and sell, just like the U.S. Dollar or the Euro—except they’re not backed by a specific government.

Payment tokens exist within the blockchain of crypto networks like Bitcoin, Monero, and Ethereum, and represent units of value that can be exchanged for other currencies. There are also third-party custodians or exchanges that convert payment tokens into legal tender currencies such as the dollar.

Increasingly though, people have begun using these tokens to buy goods and services, though the overall number of merchants who accept them is still relatively small.

Utility Tokens

Utility tokens give their owners access to a product or service that either exists or is in development. They’re most commonly used as a fundraising vehicle for ICOs (Initial Coin Offerings), as a placeholder for the crypto coins the purchasers will receive when the new coins eventually go live on the blockchain.

The name for these tokens comes from the fact that they can be used to obtain either a good or service offered by the issuer. Their existence on an existing blockchain means that the owners can be verified, and also that they can be easily exchanged. During the 2017 cryptocurrency boom, when hundreds of crypto firms were planning new ICOs, they issued ERC-20 utility tokens on the Ethereum blockchain as a placeholder for prospective investors in their soon-to-launch coins.

Security Tokens

Security tokens offer rights and obligations to securities like stocks and bonds. Most often, a security token represents a share in the company that issued it. They can represent legal ownership of an asset, or a portion of an asset, like real estate, stocks, ETFs, and so on.

As such, they’re more heavily regulated than other tokens. Companies might issue security tokens instead of traditional shares of stock to raise money cheaply, or because the tokens offer instant settlement and easier cross-border trading.

Non-fungible Tokens

Also known as NFTs, these tokens have made the news lately because of the eye-popping sales prices of single NFTs connected with works of art, individual tweets, and sports memorabilia. They exist on pre-existing crypto networks, with ETH being one of the most popular.

These tokens have private contracts that can be clearly distinguished from any other token in existence. Because of that feature, they are used by athletes, artists, musicians and other creators as a way to connect with collectors, who see them as digital one-of-a-kind assets.

NFTs have opened up new markets for digital art and memorabilia, because while the purchaser can still duplicate the underlying media, they can’t copy, sell or pirate it. Some people have also issued NFTs that confer ownership of unique non-digital assets, such as real estate.

The Takeaway

Blockchain offers a unique way to buy and sell just about everything, as well as new ways to verify ownership of assets. Crypto coins function as the currency on these platforms, and crypto tokens serve a variety of uses—representing a wide range of units of value, with the ability to be securely sent and received.

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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