5 Strategies for Day Trading Cryptocurrency

5 Strategies for Day Trading Cryptocurrency

The term “day trader” comes from the stock market, where trades generally only happen during regular business hours on weekdays. One notable difference when day-trading cryptocurrency is that crypto markets stay open 24 hours a day, 7 days a week.

For would-be day traders, it helps to know some day-trading basics along with a few things to know before investing in crypto in this manner.

First, What is Day Trading?

Day trading is a short-term trading style involving trades that are bought and sold during the same trading day. This is also sometimes called “intraday trading.” Day traders attempt to use intraday trading strategies to profit from the price moves of a particular asset or financial instrument.

Recommended: What Is Day Trading?

Things to Know About Crypto Day Trading

There are two market conditions that must be present for day trading to be profitable:

•  Liquidity: Traders need to be able to enter or exit trades quickly without moving prices too much. In a market with low liquidity, slippage—when a large position can’t be liquidated at the price a trader desires—could eat into a trader’s profits. With slippage, the position must be sold in increments, with each order having a lower price than the previous one, leading to smaller gains overall by the time the whole position has been sold.

•  Volatility: A lack of volatility means prices aren’t moving, and there’s no chance of buying low and selling high. Because day traders try to buy and sell during the same day, markets have to be going up and down on a short-term basis for this strategy to be viable.

Bitcoin mining could also play a role in markets at times. If miners are selling most of their coins as they mine them, this could increase downward pressure on prices for a time. Anyone learning how to day trade Bitcoin could benefit from learning how the technology itself works, too.

5 Day Trading Crypto Strategies

On a multi-year timespan, simply holding bitcoin or some other cryptocurrencies has been a profitable strategy. The gains have largely outpaced that of other asset classes.

So when considering how to invest in Bitcoin, one strategy might be to just buy and hold. This can be especially true during crypto bull markets, when corrections tend to be short-lived. However, it’s also important for investors to remember that Bitcoin and other cryptocurrencies are highly speculative investments. Just because an investment has risen in the past, that doesn’t mean it will continue to do so.

For investors specifically interested in day trading, there are numerous strategies to try. Technical analysis might be among the most popular strategies, as entire communities of traders have sprung up around this school of thought.

One thing’s for sure: having a rule-based trading strategy of some kind is a must for short-term traders. Here are five strategies for day trading cryptocurrency.

1. Technical Analysis

Technical analysis (TA) involves using mathematical indicators and chart patterns to try and predict which way prices will move next. Some technical indicators are simply generated with a computer program like TradingView (RSI, for example), while others must be identified by humans looking at charts (the cup-and-handle pattern, for example).

One popular technical indicator is the relative strength index (RSI). This appears as a single line beneath a chart with a value between 0 and 100. The closer the RSI gets to 100, the more overbought conditions are thought to be, meaning prices could fall. The closer the RSI gets to 0, the more oversold conditions are thought to be, meaning prices could rise. This is one example of how someone day-trading cryptocurrency might use TA.

2. News and Sentiment Analysis

While it’s less popular among short-term traders, looking at headlines and overall market sentiment can also be used in Bitcoin day-trading. Sometimes, big news items can move crypto markets quickly.

For example, on the day this article was written in mid-April 2021, the nation of Turkey announced that it would ban Bitcoin and other cryptocurrencies as payment options within its borders. This sparked a global crypto market selloff, with Bitcoin falling about 3.2% initially and more than 10% later.

Additionally, there are websites that attempt to track the sentiment of the most popular cryptocurrencies by analyzing Twitter chatter. More positive tweets about a crypto equals more bullish sentiment, while more negative tweets equals more bearish sentiment—or so the theory goes.

3. Range Trading

Range trading assumes that prices tend to move within a certain range. Using this strategy involves looking at candlestick charts and support and resistance levels.

Traders might buy when prices reach a support level and sell when prices reach a resistance level. Or they might go short when prices hit resistance and close out the short when prices fall to support.

Pivot points are an example of range-bound trading. Calculating pivot points gives investors an idea as to what price levels are likely to see reversals in momentum.

4. Scalping

This strategy involves trying to profit from very small price moves over short periods. Often these are market inefficiencies like gaps in the bid-ask spread or gaps in liquidity.

Because they are aiming to take advantage of tiny price movements, “scalpers” often trade using leverage like margin or futures contracts to amplify their gains. This also amplifies potential losses, however, so managing risk is especially important with this strategy.

Scalpers might utilize strategies like volume heatmaps, order book analysis, or a range of technical indicators to determine entry and exit positions for their trades.

Due to the fast-paced and high-risk nature of scalping, it’s better suited for experienced traders.

Recommended: What Is Scalp Trading and How Does It Work?

5. Bot Trading

Bot trading, or high-frequency trading (HFT), involves the use of algorithms and trading bots that can be programmed to execute a large number of trades very quickly. Using this method requires knowledge of advanced trading strategies and programming.

While crypto trading bots conduct the trading itself, high-frequency traders don’t simply sit back and let a computer program do all of the work. Trading bots involve coming up with a specific strategy, developing the appropriate program to execute that strategy, and then constant monitoring, backtesting, and updating of the algorithms to keep up with changing market conditions.

There are some pre-made trading bots available for purchase from certain dealers. One thing to keep in mind when considering such a bot is this: if the bot is profitable and easy to use, why isn’t everyone using it, and why are its creators selling it rather than using it themselves?

Which Cryptocurrency is Best for Day Trading?

It depends on what’s currently happening in the crypto markets. As mentioned, liquidity and volatility are key for any day trading strategy, so any cryptocurrency with sufficient liquidity that is showing high volatility could be a good option.

One coin that has enjoyed increased liquidity and a surge of volatility as of early 2021 is Dogecoin (DOGE). Originally created as a joke, this meme-based cryptocurrency skyrocketed from a fraction of a penny to over $0.25 in a matter of months. The market cap exploded by billions of dollars.

Dogecoin still has high volatility because it’s easy to mine and there might be a lot of people holding large amounts of DOGE who sell them whenever the opportunity arises. This also creates opportunities for day traders.

This is only one potential example—and this specific coin could be completely irrelevant by the time you read this article. Such is the volatile nature of cryptocurrency.

Crypto Day Trading: Taxes and Regulations

It’s important for traders to educate themselves about the rules and taxes associated with day trading in their area. For example, two important things for day traders to be familiar with are short-term capital gains taxes and the wash sale rule.

Short-term capital gains taxes apply to the sale of any asset that was held for less than a year. This means any earnings are taxed as regular income or at the “marginal rate,” so based on an investor’s tax bracket. The IRS changes these numbers every year in order to adjust for inflation. For the 2021 to 2022 tax rate, the rates ranged from 0% to 37%.

The wash sale rule is also a must-know for day traders. This rule prevents investors from taking a loss on their taxable income when they sell a security then buy the same security within the next 30 days.

There are many more nuances regarding taxes and day trading. Traders should consult with a certified tax professional to understand all the necessary details for their own situation.

What Are the Downsides of Day Trading Crypto?

The majority of people who engage in day trading lose money. An estimated 85% of professional money managers underperform their market benchmarks. Timing the markets can be difficult, and human traders now compete with sophisticated computer bots.

Another issue is trading fees. Every trade involves a small fee, and these fees can quickly add up when making large numbers of trades. Some crypto exchanges, such as Binnace, have their own exchange tokens that provide users a discount when paying trading fees in the form of that token. Even then, day traders still have to subtract fees from their profits.

The Takeaway

Day trading is a strategy that involves buying and selling stocks throughout the course of the trading day to try and turn a profit. With crypto, the trading “day” is even longer, as crypto markets are open 24/7. That said, day trading can be an especially risky pursuit, with no guarantee of profits.

Interested in trading crypto? With the SoFi Invest® crypto trading platform, members can buy and sell Bitcoin, Ethereum, Cardano, and more coins, all on a secure platform that ensures your holdings are protected against fraud and theft.

Find out how to invest in crypto with SoFi Invest.

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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.

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Why Would a Company Stop Paying Dividends?

Why Would a Company Stop Paying Dividends?

When companies reduce the dividends they pay investors, or stop paying them altogether, it can mean different things.

Sometimes it’s a result of lower earnings or a shortage of available cash. Other times, a company is uncertain about the future, and wants to keep cash on hand to protect it against unforeseen risks or seize unexpected opportunities. And sometimes, it’s because the company’s leadership thinks they can offer shareholders more value by investing the cash currently earmarked for dividends back into the business itself.

A Look At How Dividends Work

The reason that a company will offer a dividend in the first place is to reward shareholders. In some cases, companies pay dividends only to preferred stock shareholders, or pay a higher rate to certain classes of shareholders than others.

Most companies offer the regular cash payouts because management believes that paying a dividend is a better use of that capital than any strategic growth opportunities the company would otherwise invest in.

Companies that offer dividends are usually established businesses in mature industries, such as healthcare or utilities. They typically pay out their dividends on a regular schedule, annually, semi-annually, or even monthly.

Investors often rely on dividends, either as part of their investing strategy, or as a source of income. Dividend-paying stocks are especially popular among retirees, who use the income to help cover living expenses. Companies suspending dividends run the risk of alienating a sizable portion of their shareholders.

It’s important for investors to understand why a company in their portfolio has cut its dividend, and to use that information to determine whether that stock still makes sense for their broader investing strategy or whether it might be time to sell the stock. Sometimes when a company cuts its dividend, its stock price will also fall.

Recommended: How Do Dividends Work? A Complete Overview

Examples of Dividend Cuts

Recent history has provided many examples of companies that reduced, suspended or eliminated their dividends.

Meredith Corp. – Dividend Suspension

In April of 2020, roughly a month into the Covid-19 lockdowns, Meredith Corp, the publisher of magazines like People, Real Simple, and Better Homes & Gardens, suspended its dividend payments. The move came just over two months after it had announced a dividend hike.

The company eliminated its dividend amid widespread reductions in expenditures, including salary cuts after it had seen significant advertising cancellations and delays as Covid-19 lockdowns took effect. In the three months leading up to the dividend cut, its stock had dropped by 40.3%.

While the stock has staged a rally since hitting a low of $11 in October of 2020, it has not yet reinstated its dividend, as it focuses on paying down its debts.

Antero Midstream – Dividend Reduction

In February of 2021, Antero Midstream reduced its dividend by 27%. The company, which builds and operates pipelines, storage facilities and other infrastructure for natural gas, and water handling and treatment, cut the dividend in order to grow.

By cutting its annual dividend from $1.23 a share to just 90 cents, Antero Midstream was able to free up an estimated $65 million to invest in new infrastructure. Unlike some other companies who eliminate or trim their dividend because of business reversals, Antero made the move in response to promising signals about growth opportunities. Even with the cut, the company maintained a 10.3% dividend.

Estee Lauder – Dividend Suspension and Reinstatement

Roughly a month after the Covid-19 lockdowns began, Estee Lauder announced it would suspend its dividend payments. At the time, the cosmetics giant paid an annual dividend of $1.92. The company projected that as fewer people went out socially during the pandemic, they’d spend less on makeup – a projection proven correct. At the time, the company also announced other spending cuts, suspending stock buybacks and cutting executive pay by as much as 30%.

But as shops, restaurants, and bars began reopening in the first quarter of 2021, makeup sales also rose. As Estee Lauder benefited from higher sales it responded by reinstating its quarterly dividend. In May of 2021, it announced a quarterly dividend of 53 cents per share.

Healthpeak Properties – Dividend Reduction

Healthpeak Properties, a real estate investment trust (REIT) focused on properties related to life sciences, medical offices and senior housing, cut its quarterly dividend payment in February of 2021 from 37 cents per share to 30 cents per share.

At the time, Healthpeak had $1.6 billion in free cash flow. But it had concerns about the future, given the potential of recent Covid-19 related mortalities to drive down demand for senior housing. Its net income in 2020, at $413.6 million, was already much lower than the $787 million it had made in dividend payouts in 2020. The dividend reduction freed up an estimated $150 million in cash flow for Healthpeak, which the company intended to use to transition its holdings away from senior housing.

National CineMedia – Dividend Reduction

During the pandemic, people stopped going to the movies. That had a major impact on theater chains, but also on companies like National CineMedia, which sells pre-screening advertising at theaters across the United States.

That’s why the company cut its quarterly dividend from seven cents to five cents per quarter in early March of 2021. At the time of the cut, the company was in solid financial shape, with enough cash to cover its expenses. But even with ample cash, and with Covid-19 restrictions lifting around the country, the company trimmed its dividend amid concerns about how long it will take for theaters to return to normal.

National CineMedia’s stock price has been on a roller coaster ride since March, but as of July, it was trading roughly in the same range as it had been in early March.

The Walt Disney Company – Dividend Suspension

In May of 2020, with the pandemic lockdowns entering their second month, The Walt Disney Company announced it would suspend its dividend payments due to the impact of the coronavirus on its theme parks.

The dividend suspension occurred as the company’s earnings had plummeted due to the virus. By eliminating its semi-annual dividend, which it had kept at 88 cents a share since 2018, the company saved $1.6 billion of much-needed cash to preserve liquidity.

While Disney has not announced plans to reinstate its dividend, the company’s entry into the video-streaming business with its Disney+ service has many investors looking at the stock as less of an income investment, and more as a long-term growth play.

The Takeaway

Companies cut their dividends for many reasons, using the move as a way to preserve cash for future investments or during uncertain times. While investing in dividend stocks can be a smart way to generate income or increase returns on a portfolio, it’s important for investors to understand that dividends are not guaranteed in perpetuity and to consider changes in a company’s dividend payout as one factor in analyzing the value of that stock.

Whether you’re looking to invest in dividend stocks or in other types of investments, a great way to get started is by opening an account with the SoFi Invest® brokerage platform. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs. It also offers an automated investing solution that invests your money for you based on your goals and risk.

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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.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
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What Is a Backdoor Listing? Definition and How It Works

What Is a Backdoor Listing? Definition and How It Works

A backdoor listing can allow a private company to become publicly traded, without having to pursue an Initial Public Offering (IPO). This strategy can be less time- and cost-intensive for companies that are interested in being listed on a public stock exchange.

There are different ways backdoor listings can occur. A key question for investors is whether it makes sense to invest in stocks associated with a backdoor company.

What Is a Backdoor Listing?

In most cases, a company that wants to make its shares available for trade on a stock exchange would go through an initial public offering. This process, regulated by the Securities and Exchange Commission (SEC), ensures that companies meet certain requirements before they can be listed on the Nasdaq or the New York Stock Exchange (NYSE).

A backdoor listing allows companies to list shares of stock on a public exchange while circumventing the traditional IPO process. These companies effectively go through the “back door” to get their shares listed. Some investors also call this process a reverse listing, reverse IPO, a reverse takeover or a backdoor to the trade.

How Do Backdoor Listings Work?

Generally speaking, a backdoor list transaction allows companies to go public without the usual IPO requirements. There are typically three strategies private companies use to pursue a backdoor listing.

•  Reverse merger/takeover. In a reverse merger or reverse takeover, a private company purchases a majority shareholder interest in a publicly-traded company in exchange for shares in the public company. The two companies then merge, operating under the name of the publicly-traded company going forward.

•  Shell company. In some cases, the backdoor company may wish to continue doing business independently, even after completing a reverse merger or takeover. To do this, they create a shell company, that allows both the formerly private company and the publicly-traded company it acquired or merged with to continue operations.

•  SPAC. This strategy essentially combines the other two. A SPAC is a “special purpose acquisition corporation,” a shell company created specifically to purchase a private company. The SPAC goes public and then uses the proceeds from its IPO to purchase a private company.

Recommended: 5 Things to Know Before Investing in SPACs

Each approach offers a shortcut to trading on a public exchange for private companies. In the case of a reverse merger, the private company would gain control of the public company’s board of directors. Depending on the terms of a backdoor listing, this can result in a restructuring or reorganization of the public company it acquired.

IPO Investing at Your Fingertips
Get In On the Ground Floor


Backdoor Listing Example

It can be helpful to have a real-world example of a backdoor listing to better understand how they work. One high-profile instance of a backdoor listing over the last decade involved the reverse merger of T-Mobile USA with MetroPCS in 2013.

In that deal, MetroPCS declared a 1-for-2 reverse split of its stock, while paying out $1.5 billion in cash to its shareholders. T-Mobile USA assumed a 74% ownership stake in the company, a deal approved by MetroPCS shareholders. Following the reverse takeover, MetroPCS stock began trading under the symbol TMUS.

Using a more general example, Company A may wish to go public but not meet the SEC’s IPO requirements for size or valuation. Instead, it chooses to buy a majority ownership stake in its competitor, Company B, which trades on the NYSE. Following the reverse merger, Company A assumes Company B’s name and is now a publicly-traded stock.

Advantages of Backdoor Listings

Private companies may prefer a backdoor listing for several reasons, including:

•  Capital preservation. Filing an IPO involves numerous costs, including underwriting fees and SEC registration fees. Between 2015 and 2020, the average IPO cost for deals valued at $100 million to $249 million ranged from $8.2 million to $25 million, according to PricewaterhouseCoopers. Choosing a backdoor IPO could yield substantial cost savings for private companies.

•  Speed. The traditional IPO timeline can take anywhere from six months to a year to complete, owing to the various steps in the process that must be completed. On the other hand, companies can complete a reverse takeover, in as little as a few weeks, allowing private companies to go public at a much faster pace.

•  Avoiding IPO valuation rules. The SEC has some strict guidelines with regard to things like how IPO valuations are set. By going through the backdoor to the trade, companies can sidestep these requirements altogether.

•  Skipping the lockup period. Early investors and employees typically can’t trade their stocks during a certain period before and after a traditional IPO. Companies that use a backdoor IPO typically don’t impose such restrictions on shareholders.

•  IPO failure. Companies may also turn to a backdoor listing if they had an unsuccessful IPO.

There can also be advantages for the original shareholders of a backdoor company. If a reverse IPO boosts the share value of the newly merged company, that can increase the value of shareholders’ equity.

Disadvantages of Backdoor Listings

Backdoor listings also pose some potential problems for the private company executing it and the publicly-traded company it acquires. Some of the key issues that may result from a backdoor listing include:

•  Share dilution. Share dilution occurs when a public company issues new shares to the market, which can sometimes happen in a reverse takeover. This may decrease the value of equity for shareholders who already own stock in the company.

•  Incompatibility. It’s also possible that a backdoor listing fails to yield sufficient benefits for both companies involved.In that case, rather than driving profits up, a reverse IPO could result in financial losses.

What Do Backdoor Listings Mean for IPO Investors?

Buying IPO stocks may appeal to investors who want to get in on the ground floor of a company that’s going public. If an IPO takes off, early investors could reap significant rewards later if they’re able to sell their shares at a profit down the line.

Backdoor listings can mean fewer opportunities to invest in IPOs. They’re not, however, shut out from trading stocks upon completion of the merger. Say, for example, there’s a private company you’ve been hoping will go public. Instead of launching an IPO, the company chooses to execute a reverse takeover instead.

You may be able to capitalize on that by purchasing shares of the public company it plans to merge with ahead of a reverse IPO. Or you may wait until the dust settles on a backdoor listing to invest in the newly merged company. In either case, the opportunity to invest in the private company you had your eye on isn’t lost. It simply takes on a new form.

Recommended: SPAC IPO vs. Traditional IPO: Pros and Cons of Investing in Each

The Takeaway

IPO investing and backdoor listings can help to diversify your portfolio into different types of investments, beyond stocks, mutual funds or bonds. Even if you can’t invest in the IPO of a company that has used a backdoor listing, you can still invest in the company’s stock.

A great way to start is by opening a Sofi Invest® brokerage account. You can use it to purchase stocks, exchange-traded funds, IPOs, and cryptocurrencies.

Photo credit: iStock/NeoLeo


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.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
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Blockchain in Finance: What Does it Mean for Fintech?

Blockchain in Finance: What Does it Mean for Fintech?

While investors and asset managers have mixed opinions on the future of cryptocurrencies, many agree that blockchain–the technology that enables crypto trading–holds the potential to transform many different industries.

Blockchain technology is the infrastructure that makes trading Bitcoin and thousands of other cryptocurrencies possible. Invented in 2009 by a person or group known as Satoshi Nakamoto, a blockchain is one example of what’s known as distributed ledger technology (DLT).

Distributed ledgers keep records of transactions spread across different servers in multiple locations. Blockchains are special types of distributed ledgers that are immutable (they can’t be changed) and decentralized (they’re outside the control of a single entity).

Understanding Blockchain Basics

Blockchain technology processes transactions into groups referred to as “blocks.” Each new block gets attached to the block that came before it, creating an ever-growing chain of blocks. This is where the term “blockchain” comes from. Altering the data inside any single block would require changing the entire chain, something which requires massive amounts of computing power and is almost impossible in most cases.

However, the data held in blocks can take many forms, not just financial transactions. The ability to create an immutable, transparent, decentralized ledger of data creates many new possibilities. In addition to altcoins, several other industries outside of cryptocurrency are looking at different blockchain applications, including Fintech.

Blockchain Applications in Fintech

There are myriad ways that financial services can make use of blockchain technology. Most of them currently exist in a proof-of-concept or pilot phase, meaning their real-world applications have yet to be consistently utilized or widely adopted.

Payments

Payment systems represent the most tried-and-true use case for blockchain in finance, since that’s essentially how crypto trading works. Sending money across national borders using the traditional financial system takes a long time, and can get costly as each intermediary that facilitates the transaction receives a fee. Blockchain has the potential to make this process faster and more affordable by enabling things like:

•  Fast and secure cross border payments

•  Multiple forms of payment – cryptocurrency, stablecoin cryptocurrency, etc.

•  Reduced fraud risk through digital Know Your Customer (KYC) and Anti-Money Laundering (AML) data

•  Smart contracts, digital agreements between two parties that get stored within the blockchain.

Insurance

Blockchain could allow insurers to more efficiently handle claims. IBM reports that it is already using blockchain technology to help clients automate underwriting, settle claims, and reduce fraud.

Asset Management

When it comes to asset management, blockchain financial services can help real estate funds, private equity firms, venture capital firms, and similar institutions. These groups often find themselves to remain compliant with changing regulations and improve risk management. Blockchain security could also offer an additional layer of protection for their assets.

Blockchain improve efficiency in asset management through:

•  Tokenization of securities, leading to greater liquidity and market access

•  Customizable privacy settings for confidential transactions

•  Reduced human errors in shareholder voting

•  Improved governance with greater transparency for investors

•  Automation of other tasks

Regulatory Compliance

Keeping up with the pace of regulatory change can be challenging for some financial institutions. That’s especially true when an organization conducts business across national borders and exposes itself to regulatory frameworks in multiple jurisdictions. Blockchain can help in ways such as:

•  Programming digital assets with specific governance attributes

•  Eliminating human errors that occur in manual processes

•  Improving network governance

Potential Drawbacks of Blockchain in Finance

As you can see, there are a variety of ways that fintech and blockchain could improve many cumbersome tasks that people and organizations deal with today. The main benefits have to do with increases in speed, automation of complex processes, and “trustless” processes, meaning a central entity doesn’t have to be trusted with information or transactions.

There are also a few potential drawbacks, though. They mostly have to do with the impracticality of creating and maintaining an independent, decentralized blockchain.

Maintaining Decentralization

Decentralization democratizes blockchain by making it resistant to central authority and makes things more secure by eliminating any single point of failure. But when a single organization creates its own blockchain for specific purposes, they might be the only ones with an ongoing incentive to maintain it. This could lead to the nodes becoming centralized, somewhat defeating the purpose of having a blockchain in the first place.

Recommended: 51% Attack: A Threat to Decentralized Blockchain

Trust Issues

With the Bitcoin blockchain, users trust the transaction data because Bitcoins are “born” on that blockchain. From the moment Bitcoin is mined into existence, everyone can see where coins go and what wallets they’re in. However, most of the potential use cases for blockchain finance involve assets that were not born on-chain (insurance claims, securities, loans, titles, etc.). For this reason, it’s possible that the data being put onto a blockchain in this manner could contain mistakes or inaccuracies.

Environmental Concerns

The blockchain requires massive computing power, which makes it an inefficient industry from an energy standpoint.

Recommended: How Much Energy Does Mining a Bitcoin Consume?

The Takeaway

Creating a blockchain in finance, while appealing in principle, might be hard to do in practice while still preserving the unique features that make a genuine blockchain desirable. Still, the technology holds significant promise for improving the way that many financial transactions occur.

Regardless of your thoughts on the blockchain, a great way to get started building a portfolio including cryptocurrency is by opening an account on the SoFi Invest brokerage platform. Using the platform, investors can buy cryptocurrency online, including Bitcoin, Litecoin, Ethereum and others, right from their SoFi app.

Photo credit: iStock/Eoneren


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.
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Should I Pay Off Student Loans, Save, or Invest?

You’re a successful college graduate. You made it through all of your classes and secured a job in your chosen field. You’re on your way to building a successful career and establishing your life as an adult.

Now that you’re in full-on adult mode, you’ll have to start making some pretty big decisions. What are your short-term goals? What are your long-term goals? How are your finances stacking up to help you get there?

One of the questions many young adults face is whether it’s better to pay off student loans (or other debt), save, or invest. With rising levels of student debt across the nation, this is a common question. College students who graduated in 2019 with student loans owe an average of nearly $29,000.

Is It Better to Pay Off Student Loans, Save, or Invest?

As you move through life, retirement will be just one of your many financial goals. You may also want to work toward buying a house, saving for a child’s education, or taking an extravagant vacation. No matter what your financial goals are, investing could help you meet them.

The key to understanding whether it is better to invest or pay off student loans is opportunity cost. Federal student loans often have relatively low-interest rates, and if you’ve refinanced your loans, you may have secured an even lower rate.

For example, say your student loan interest rate is 4%, while the stock market has (hypothetically) yielded average returns of 7% over the last five years. Generally speaking, earning 7% interest makes more financial sense than paying down debt at 4% interest.

Investing comes with risk, but investing can be a great way to grow your money in the long run. On the other hand, paying down debt can free up additional cash flow and improve your credit score, giving you more financial flexibility in the short term.

You know that paying down debt is good for financial security, but saving and investing are important, too. The best course for many is not to think of it as choosing between one goal and another. With some strategic thinking and careful planning for your financial future, you can do all three.

Assess the Situation by Making a Budget

A good first step to any financial conundrum is to fully evaluate the situation. Start by gathering all of your financial documents including tax statements, bank statements, credit card statements, and statements on student loans or other debts. Then, list out all of your monthly expenses—fixed expenses, like rent, and variable ones, like dining out.

Now, tally up all sources of income and list out your savings. After you’ve done this, you should have a pretty clear idea of how much money you’re spending, what you’re spending it on, and how that compares with the money you are bringing in every month.

Now that you have a big picture view of your spending habits, look for areas where you might be able to make changes. Take a look at any of your current subscription services with monthly payments, for example. If you’re not actively using them, maybe it’s time to cancel.

If you’re willing to call your internet or cable provider, you could try to negotiate a lower rate. After you’ve made any changes to your spending, make a new budget—one that details how much money you’re going to put toward your student loans, your savings, and your investments.

Making Payments on Your Loans

Regardless of your financial goals, it’s important to prioritize your debt payments. Failing to make payments and allowing your loan to become delinquent or go into default can have serious consequences for your finances and credit score.

By paying at least the monthly minimum payments, you can make sure you stay in good standing with your loan servicer while still making progress toward your loan repayment.

Paying off High-Interest Debt

When it comes to debt, the interest rates on student loans are relatively low. While you are making monthly payments on your student loans, it could be smart to tackle any high-interest debt you may have.

Credit card annual percentage rates (APRs) average more than 16% in July 2021, which means debt can rack up quickly. If you are carrying credit card debt, you might try either the debt snowball or debt avalanche method to pay it down.

The Debt Snowball Method

With the debt snowball method, you’ll pay the minimums on all accounts first and direct any additional funds to the smallest debt first, regardless of the interest rate. The idea is that by paying off your smallest debt first, you’ll stay motivated to continue making payments on your debt. After you pay off your smallest debt, you take all of the money you were putting toward that balance and put it toward the next smallest debt (so the amount you pay gets bigger like a snowball), and so on, until all of your debt is paid off. The accomplishment of repaying your debts provides motivation to continue paying off the money you owe.

The Debt Avalanche Method

With the debt avalanche method you’ll focus on the debt with the highest interest rate first. Make a list of all your debts by order of descending interest rate. While making your minimum monthly payments on all the debts, you would “attack” the loan with the highest interest rate with as many extra payments as you can.

This method can require more discipline, but keeping track of how much you are saving in interest can be a great motivator.

Consolidating Loans

Another option for getting your credit card debt under control is to consolidate it with a personal loan. Personal loans often have lower interest rates than high-interest credit cards and, as a result, you could save money on interest.

Another benefit of consolidating your credit card debt: Streamlined payments. You’ll only be responsible for making one monthly payment to one lender instead of multiple payments to a variety of credit card companies and lenders.

No matter which debt repayment method you use, a common tactic is to keep credit card balances low after paying them off, since running them back up has the potential to make your credit profile less attractive to lenders due to the increased total debt.

Lowering Your Student Loan Payments

If you are having difficulty making monthly payments on your federal student loan due to temporary financial issues, you could consider putting your federal student loans into deferment or forbearance. Just know that while many student loans are in forbearance interest will continue to accrue, making it more expensive to pay off later.

Depending on the type of loan you have, you may be responsible for accrued interest during deferment as well. If your issues with repayment will last more than a couple of months, consider adjusting your student loan repayment plan.

If you have federal student loans, you can change your repayment plan at any time, at no cost to you. The standard repayment plan for federal student loans is a fixed monthly payment over a 10-year term. If this is too much for your current financial situation, you might consider other repayment plans.

The Extended Repayment and Graduated Repayment plans offer repayment terms over 15 or 20 years, which could make your payments more manageable on a monthly basis.

There are also four Income-Driven Repayment plans which allow you to pay a portion of your discretionary income—usually 10%, 15%, or 20%—over 20 or 25 years. These options would lower your monthly payments, meaning you would have more money to save for a rainy day or to invest. But, it’s important to note that by extending your repayment term, you will be paying more in interest over the life of the loan.

Refinancing

Another alternative to consider is refinancing your student loans. Refinancing may allow you to lower your interest rate, adjust your monthly payments, or customize your repayment term. When you refinance, you take out a new loan with a private lender. However, this means you forfeit federal loan benefits, such as access to income-driven repayment plans, deferment, or federal loan forgiveness programs. So, if you’re taking advantage of a federal loan program, refinancing might not be for you.

Whether you’ve freed up some of your monthly budget with an income-driven repayment plan or by refinancing, or simply by better budgeting, you may be able to redirect some of those funds into other financial goals like saving and investing.

Building Your Emergency Fund

Now that you have a handle on your debts, it’s time to turn to your savings. The first order of business you might consider is building an emergency fund. A good goal is to have six months’ worth of expenses in a liquid account, such as a high-yield savings account. You can use this fund to cover any unexpected expenses that might occur due to a medical emergency, sudden layoff, car repairs, etc. Even starting with a small amount can help when emergency expenses pop up.

Saving for Your Retirement

When it comes to investing for your future, one of your biggest assets is time, but it’s important to start saving as soon as possible for retirement. Even a small amount of savings can add up over time, but you may want to aim to save at least 10% to 15% of your income for retirement. To see how your retirement goals stack up, take a look at SoFi’s retirement calculator.

The best place for most investors to start saving for retirement is in a tax-favored investment account, such as a 401(k) or IRA. If you are eligible for an employer-sponsored 401(k) plan, that’s a great place to start. Some employers offer a matching contribution up to a certain percentage when you contribute to a 401(k). Take a look at your employer policy and see if you’re able to contribute enough to get the full employer match.

Another option for retirement savings is setting up an IRA, or Individual Retirement Account. There are two types of IRAs: traditional or Roth IRA.

Roth IRA

First, you can only contribute to a Roth IRA if your income falls below a certain limit. You won’t get an immediate tax benefit for money you put into a Roth, but the money grows tax-free, and you won’t owe taxes on it when you make withdrawals in retirement.

Traditional IRA

Depending on your income and whether you have a 401(k) at work, you may be able to deduct some or all of the money that you put into a Traditional IRA. That money grows tax-free, and you’ll also typically owe taxes on your withdrawals when you retire.

The Takeaway

Whether it makes sense to direct any extra cash toward debt repayment, savings or investing (or some combination of the three) will depend on your current financial situation, your short- and long-term goals, and your risk tolerance.
If investing is part of your plan, a great way to get started is with SoFi Invest® automated investing platform. You’ll gain access to a team of financial advisors and cutting-edge automated investing technology, and we’ll work with you to determine your financial goals and risk tolerance.

Then, we’ll set up your account to meet those preferences and we’ll auto-balance your investments to keep them in line with your goals as the market changes. And anyone can invest—you can get started with as little as $5.

When you’re ready to take control of your financial future, SoFi Invest is here to help.


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.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

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