What is The Synthetix Network?

What is The Synthetix Network?

According to the Synthetix white paper, Synthetix is a decentralized synthetic asset issuance protocol built on Ethereum. What this means is that the Synthetix network allows people to create synthetic assets, or “synths”.

Synthetic assets are the decentralized finance (DeFi) equivalent of derivatives in traditional finance. Synths take the form of ERC-20 smart contracts that track the returns of a real asset without requiring investors to own that asset. In effect, it can be said that an investor can gain “synthetic” exposure to regular assets in this fashion.

How Do Synths Work?

A synth is a virtual representation of another asset in the form of an ERC-20 smart contract. The smart contract serves to tie the price of the synth to the asset.

Synths can be traded on Kwenta, Synthetix’s decentralized exchange (DEX), and can represent cryptocurrencies, indexes, gold, and more.

Synths utilize decentralized “oracles”, which are price discovery protocols based on smart contracts. These oracles automatically track the price of the asset that a synth represents, allowing investors to hold a synth as if it were actually the underlying asset.

In this way, synths can give crypto investors exposure to assets they wouldn’t normally be able to access through the cryptocurrency ecosystem, such as gold and silver.

Synths are issued on Ethereum, which means users can deposit them on other decentralized finance platforms and earn interest. Some participants in this newly emerging financial system believe that synthetic assets and derivatives are important for the space to mature and become legitimized, as synths and derivatives can help hedge against volatility and facilitate price discovery.

Recommended: What is Ethereum and How Does it Work?

Synths vs Tokenized Commodities

Synths differ from tokenized commodities like Pax Gold (PAXG), created by Paxos, a cryptocurrency backed by physical gold bars. Holding PAXG is intended to give investors a piece of an actual gold bar—someone who holds PAXG has a claim on physical gold that Paxos is holding.

Synths, by contrast, only provide exposure to the price of the underlying asset. For example, a synth for gold would give investors a token they could hold that would mimic the price of gold.

How Does Synthetix Exchange Work?

Users can trade synths on Kwenta, the decentralized exchange (DEX) for Synthetix, as well as across a variety of different DeFi protocols. Unlike other exchanges, Kwenta has no order book that contains buy and sell orders. Instead, Kwenta uses peer-to-contract trading, meaning all trades get executed via smart contracts.

Proponents of Synthetix claim this type of exchange has a few key advantages.

Infinite liquidity: Traders don’t have to worry about “slippage,” or driving prices down when they place large sell orders, reducing their overall profits.
Censorship resistance: Since the system is decentralized and governed by smart contracts, it is free and open to everyone (and resistant to censorship). In fact, users don’t even have to create an account to start using Kwenta.

Oracles from another DeFi protocol called Chainlink (LINK) provide the price feeds that set exchange rates for each synthetic asset. This differs from traditional exchanges, where prices are determined by the point at which buyers and sellers are willing to meet. Trades come with fees of between 0.3% and 1%, and the proceeds get sent to a pool where SNX stakers claim them as rewards for staking tokens.

Is Synthetix a Good Investment?

As with all altcoins, trading SNX can be highly volatile and is widely considered to be a speculative investment.

There are thousands of altcoins, and over the years many of them have seen their values fall to zero or very close to it. These coins tend to make a few people large profits during the speculative mania phase, and then bring large losses to everyone else afterward.

Some investors might believe that certain cryptocurrency projects like Synthetix have the potential to grow into something large and significant in the future (although altcoins in general have failed to do so yet). It’s possible that DeFi protocols like Synthetix could wind up becoming part of a new financial system, in which case the SNX token might perform well.

It’s also possible that decentralized finance as a whole could fail for a variety of potential reasons, in which case SNX and other tokens like it would all go to zero.

Recommended: 2021 Guide to Crypto Trading

How Do You Make Money on Synthetix?

There are a few ways to potentially profit from Synthetix.

Buy SNX, the Synthetix network token, on an exchange. If the price rises, then a profit will be realized.

Trade synthetic assets on Kwenta. If a trader holds synthetic gold or Bitcoin, for example, and the price of those assets rise, then the price of the synths should also rise.

Users can stake their SNX tokens and earn passive income rewards on a regular basis.

How Do You Trade On Synthetix?

There are two ways to start trading synths.

A user can purchase ETH on an exchange before exchanging that ETH for sUSD on Kwenta. The sUSD can then be exchanged for other synths.

A user can obtain SNX tokens on an exchange, then stake their SNX on a decentralized application created by Synthetix called Mintr. At this point, users can create synths and start trading them on Kwenta.

As of March 2021, Kwenta users have the option to trade 13 different cryptocurrencies and their inverse counterparts (inverse cryptocurrencies inversely track the price of cryptocurrencies, providing a way to short them), synthetic gold and silver, and several synthetic government-issued fiat currencies. The Synthetix website lists five categories of synths, including commodities, fiat currencies, cryptocurrencies, inverse cryptocurrencies, and cryptocurrency indexes.

There are also two synthetic cryptocurrency indexes offered by Synthetix: sDEFI, an index that tracks a basket of DeFi assets, and sCEX, which tracks a basket of exchange tokens (e.g., Binance coin).

The Takeaway

Synthetix enables cryptocurrency users to invest in certain assets via proxy mechanisms called synthetics or “synths” for short. Powered by the Synthetix network token (SNX), users can create their own synths and trade them on a decentralized exchange. To create synths, users must stake a certain amount of SNX to collateralize the new synthetic assets.

For some crypto investors, Synthetix might be a step too deep into cryptocurrency waters. Looking for a more straightforward way to invest in crypto? With SoFi Invest® crypto trading, members can buy coins like Bitcoin, Ethereum, and Litecoin, starting with just $10, right from the SoFi app.

Find out how to buy and sell cryptocurrency 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.
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.
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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What Is an IPO?

An IPO, or initial public offering, refers to the process of privately-owned companies selling shares of the business to the general public for the first time.

“Going public” has benefits: it can boost a company’s profile, bring prestige to the management team, and raise cash that can be used for expanding the business.

But there are downsides to going public as well. The IPO process can be costly and time-consuming and subject the business to a high level of scrutiny.

Meanwhile, for folks who are considering investing in a company’s IPO, there are pros and cons. Here’s a deep dive into IPOs.

How IPOs Work

An initial public offering (IPO) refers to the first time a company offers shares of stock to the general public. A company is not legally allowed to sell stock to the public until the transaction has been registered with the Securities and Exchange Commission (SEC).

Prior to an IPO, a company is “private,” which means that shares of stock are not available for sale to the general public. Also, a private company is not generally required to disclose financial information to the public.

To have an IPO, a company must file a prospectus with the SEC. The company will use the prospectus to solicit investors, and it includes key information like the terms of the securities offered and the business’s overall financial condition.

Behind the scenes, companies typically hire investment bankers and lawyers to help them with the IPO process. The investment bankers act as underwriters, or buyers of the shares from the company before transferring them to the public market. The underwriters at the investment bank help the company determine the offering price, the number of shares that will be offered, and other relevant details.

The company will also apply to list their stock on one of the different stock exchanges, like the New York Stock Exchange or Nasdaq Stock Exchange.

History of IPOs

While there are some indications that shares of businesses were traded during the Roman Republic, the first modern IPO is widely considered to have been offered by the Dutch East India Company in the early 1600s. In general, the Dutch are credited with inventing the stock exchange, with shares of the Dutch East India Company being the sole company trading in Amsterdam for many years.

In the U.S., Bank of North America conducted the first American IPO, which likely took place in 1783. A report claims investors hiding cash in carriages evaded British soldiers to buy shares of the first American IPO.

Henry Goldman led investment bank Goldman Sachs’ first IPO–United Cigar Manufacturers Co.– in 1906, pioneering a new way of valuing companies. A challenge for retail companies at the time was that they lacked hard assets, as other big businesses like railroads had at the time. Goldman pushed to value companies based on their income or earnings, which remains a key part of IPO valuations today.

Recommended: A Brief History of the Stock Market

IPO Investing at Your Fingertips
Get In On the Ground Floor


Why Does A Company IPO?

Answering the question, “what’s an IPO?” doesn’t explain why a company “goes public”—an important detail in the process. Because an IPO requires a significant amount of time and resources, a business probably has good reason to go through the trouble.

Raising Money

A common reason is to raise capital (money) for possible expansion. Prior to an IPO, a private company may procure funding through angel investors, venture capitalists, private investors, and so on.

A company may reach a size where it is no longer able to procure enough capital from these sources to fund further expansion. Offering sales of stock to the public may allow a company to access this rapid influx of investment capital.

Exit Opportunity

An IPO may be a way for early stakeholders, such as angel investors and venture-capital firms, to cash out of their holdings. Venture-capital firms in particular have their own investors that need to provide returns for. IPOs are a way for them to transfer their share of a private company by selling their equity to public investors.

More Liquidity

Venture-capital firms and angel investors aren’t the only ones who may be seeking more liquidity for stakes in companies. Liquidity refers to the ease with which an investor can sell an asset. Stocks tend to be much more liquid assets than private-company stakes.

Hence, employees with equity options can also use IPOs as a way to gain more liquidity for their holdings, although they are usually subject to lock-up periods.

Publicity

From the roadshow that investment banks hold to inform potential investors about the company to when executives may ring the opening bell at a stock exchange, an IPO can bring out greater publicity for a company.

Being listed as a public company also exposes a business to a wider variety of investors, allowing the business to obtain more name recognition.

Pros and Cons of an IPO

As with any business decision, there are downsides and risks to going public that should be considered in conjunction with the potential benefits. Here’s a look at a few:

Pros

1. A company’s public offering may provide an opportunity to raise capital on a scale that might not be possible with other forms of capital generation. This is capital that can be used for business expansion, infrastructure buildout, intensive research, or other activities that require a large amount of upfront cash.

2. An IPO may expand opportunities for future access to capital. They can issue more stock and may also be able to attract business partners, potential investors, or other opportunities.

3. An IPO may increase liquidity for a company’s stock, which could allow owners and employees to exercise options and sell shares more easily.

4. Having publicly-traded stocks can be useful in mergers and acquisitions. A company may be able to acquire other businesses by using their stock as payment.

5. An IPO can create publicity and brand awareness for a company. Also, there’s no denying that an IPO provides some prestige for a business.

Cons

1. Going public is expensive and time-consuming. Every company should consider conducting an extensive cost-benefit analysis prior to pursuing an IPO.

2. A public company’s initial disclosure obligations may begin with the registration statement they file with the SEC, but that is far from the only filing requirement. Public companies must continue to keep their shareholders informed on a regular basis by filing periodic reports and other materials.

A public company takes on significant new obligations, such as filing quarterly and annual financial reports with the SEC, keeping shareholders and the market informed, and running extensive internal controls tests required by the Sarbanes-Oxley Act of 2002.

3. A company and its management may be liable if legal obligations (such as filing quarterly and annual financial statements) are not satisfied.

4. A private company will generally report to a smaller group of investors and has more control over who those investors are. Management at a publicly-owned company, who may have to consider the opinions of shareholders, may lose some managerial flexibility.

5. When a company is public, they are required to share important information about the business, such as financial statements and disclosures, contracts, and customers and suppliers. This exposes a company to a considerable amount of scrutiny. This information is also available to a business’s competitors.

IPO Alternatives

Since the heady days of the dot-com bubble, when many new companies were going public, startups have become more disgruntled with the traditional IPO process. Some of these businesses often complain that the IPO model can be time-consuming and expensive.

Particularly in Silicon Valley, the U.S. startup capital, many companies are taking longer to go public. Hence, the emergence of so many unicorn companies–businesses with valuations of $1 billion or greater.

In recent years, alternatives to the traditional IPO process have also emerged. Here’s a closer look at some of them.

Recommended: Guide to Tech IPOs

Direct Listings

In direct listings, private companies skip the process of hiring an investment bank as an underwriter. A bank may still offer advice to the company, but their role tends to be smaller. Instead, the private company relies on an auction system by the stock exchange to set their IPO price.

Companies with bigger name brands that don’t need the roadshows tend to pick the direct-listing route.

SPACs

Special purpose acquisition companies or SPACs have become another common way to go public. With SPACs, a blank-check company is listed on the public stock market.

These businesses typically have no operations, but instead a “sponsor” pledges to seek a private company to buy. Once a private-company target is found, it merges with the SPAC, going public in the process.

SPACs are often a speedier way to go public. They became wildly popular in 2020 and 2021 as many famous sponsors launched SPACs.

Recommended: Why Are SPACs Suddenly So Hot

Crowdfunding

Crowdfunding is collecting small amounts of money from a bigger group of individuals. The advent of social media and digital platforms have expanded the possibilities for crowdfunding.

One 2020 report found that $17.2 billion is generated in North America annually through crowdfunding. The average crowdfunding campaign has raised $824, with the average pledge by a backer by $88.

Is an IPO a Good Investment?

An IPO, by definition, gives the investing public an opportunity to own the stock of a newly public company. However, the SEC warns that IPOs can be risky and speculative investments.

IPO Market Price

To understand why investing in an IPO can be risky, it is helpful to know that the business valuation and offering price have not been determined not by the market forces of supply and demand, as is the case for stocks trading openly in a market exchange.

Instead, the offering price is usually determined by the company and the underwriters who negotiate a price based on an often-competing set of interests of involved parties.

Post-IPO Trading

Purchasing shares in the market immediately following an IPO can also be risky. Underwriters may do what they can to buoy the trading price initially, keeping it from falling too far below the offering price.

Meanwhile, IPO lock-up periods may stop early investors and company executives from cashing out immediately after the offering. The concern to investors is what happens to the price once this support ends.

Data from Dealogic shows that since 2010, a quarter of U.S. IPOs have seen losses after their first day.

Getting into IPOs Early

Even if an investor were to feel comfortable with the risk, they may not have access to the stock being offered in an IPO. IPO investing is sometimes limited to those with access to the investment bank that acts as the IPO’s underwriter.

If an investor is a client of an underwriter involved in the IPO, they may have the opportunity to directly participate in the IPO by purchasing the shares. Usually, though, underwriters will distribute IPO shares to their “institutional and high net-worth clients, such as mutual funds, hedge funds, pension funds, insurance companies, and high net-worth individuals.”

Therefore, the average investor may not have the chance to “get in on the ground floor.” Instead, investors may try accessing shares in the “secondary market,” which is another name for the stock exchange, in the days following an IPO. An investor could try to buy shares of a recently-public company through their brokerage bank or online investing platform as they become available.

Recommended: How to Invest in IPOs

IPO Due Diligence

Investors with the option to invest in an IPO should do so only after having conducted their due diligence. The SEC states that “being well informed is critical in deciding whether to invest. Therefore, it is important to review the prospectus and ask questions when researching an IPO.”

Investors should receive a copy of the prospectus before their broker confirms the sale. To read the prospectus before then, check with the company’s most recent registration statement on EDGAR , the SEC’s public filing system.

The Takeaway

Initial public offerings or IPOs are a key part of U.S. capital markets, allowing private businesses to enter the world’s biggest public market. Conducting an IPO is a multi-step, expensive process for private companies but allows them to significantly expand their reach when it comes to fundraising, liquidity and brand recognition.

For investors, buying an IPO stock can be tempting because of the potential of getting in on a company’s growth early and benefiting from its expansion. However, it’s important to know that many IPO stocks also tend to be untested, meaning their businesses are newer and less stable and that the stock price hasn’t been fully vetted by scrutinizing public investors yet.

SoFi Invest® now offers a new IPO investing feature that allows members to access IPO shares before they get listed on the public stock market. That means eligible individual investors who have an Active Investing account with SoFi can buy shares at the IPO price before they’re trading on exchanges. This opportunity has traditionally only been available to institutional investors.

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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.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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What Are Collateralized Debt Obligations (CDO)?

What Are Collateralized Debt Obligations (CDO)?

Collateralized debt obligations are complex financial products that bundle multiple bonds and loans into single securities. These packaged securities are then sold in the market, typically to institutional investors. CDOs became more widely known to the general public due to their role in magnifying the 2008 financial crisis.

Individual investors cannot easily buy CDOs. However, the 2008 financial crisis and subsequent recession revealed the interconnected nature of markets, as well as how losses on Wall Street could have widespread ripple effects on the broader economy.

Therefore, it can be important for everyday individuals to grasp the role that complex financial instruments like collateralized debt obligations have in markets. Here’s a closer look at the CDO market.

How Do CDOs Work?

“Collateral” in finance is the security that lenders accept in return for borrowed money. In collateralized debt obligations, the collateral is the payments from the underlying loans and bonds.

CDOs are considered derivatives since their prices are derived from the performance of the underlying bonds and loans. The institutional investors who tend to hold CDOs may collect the repayments from the original borrowers in the securities.

The returns of CDOs depend on the performance of the underlying debt. CDOs are popular because they allow lenders, usually banks, to turn a relatively illiquid security–like a bond or loan–into a more liquid asset.

Tranches in CDOs

CDOs are typically sliced into so-called tranches that hold varying degrees of risk and then these slices are sold to investors.

The most senior tranche is the highest rated by credit rating firms like S&P and Moody’s. The highest credit rating possible is AAA. Holders of the most senior or highest-rated tranche generally receive the lowest yield but are the last group to absorb losses in cases of default.

The most junior tranche in CDOs is sometimes unrated. Investors of this layer earn the highest yields but are the first to absorb credit losses. The middle tranche is usually rated between BB to AA.

What Are Synthetic CDOs?

Regular, plain-vanilla CDOs invest in bonds, mortgages and loans. In contrast, synthetic collateralized debt obligations invest in derivatives.

So instead of bundling corporate bonds or home mortgages, synthetic CDOs bundle derivatives like credit default swaps, options or other types of contracts. Keep in mind, these derivatives are themselves tied to another asset, such as loans or bonds.

Investors of regular CDOs get returns from the payments made on corporate debt or mortgage loans. Holders of synthetic CDOs get returns from the premiums associated with the derivatives.

CDOs vs. CLOs

Collateralized loan obligations are a subset of CDOs. Instead of bundling up an array of different types of debt, CLOs more specifically gather together debt from hundreds of different companies.

CLOs are considered by some market observers to be safer than CDOs, but both are risky debt products. CLOs do however tend to be more diversified across firms and sectors, while CDOs run the risk of being concentrated in a single debt type, such as mortgage loans during the 2008 financial crisis.

According to S&P, no U.S. AAA-rated CLO has ever defaulted. Also, CDOs can have a higher percentage of lower-rated debt. According to the ratings firm Moody’s, CDOs are allowed to hold up to 17.5% of their portfolio in Caa-rated assets and below. That compares to the 7.5% in CLOs.

Collateralized Debt Obligations and the 2008 Housing Crisis

CDOs of mortgage-backed securities became notorious during the subprime housing crisis of 2008 and 2009. A selloff in the CDO market was said to amplify broader economic weakness in the economy.

Banks had been weakening lending standards when it came to home mortgages, allowing individuals to buy home that may have been too expensive for them.

Meanwhile, Wall Street banks were packaging home loans–some risky and subprime–into CDOs in the years leading up to the financial crisis. Ratings firms labeled these mortgage-backed CDOs as safe on the premise that homeowners were a group of creditors less likely to default.

A mortgage-backed CDO holds many individual mortgage bonds. The mortgage bonds, in turn, packaged thousands of individual mortgages. These mortgage CDOs were considered to be of limited risk because of how they were diversified across many mortgage bonds.

But homeowners started to become unable to make their monthly payments, and defaults and foreclosures started piling up, leading to a domino effect of losses spread across the financial system.

Recommended: How to Really Know If You’re Ready to Buy a Home

CDO Comeback

Around 2020, CDOs had a resurgence, with primarily corporate loans rather than home loans being packaged into securities.

A world of ultralow yields in the bond market pushed investors to seek higher-yielding markets. The average yield stands at just 2%, while trillions of dollars in debt trades at negative rates. In contrast, CDOs can yield up to 10%.

This time around hedge funds and private-equity firms, rather than banks, became the big players in the CDO market. Hedge funds are the new buyers–accounting for 70% of volume in the market. Banks were responsible for 10% of volumes in 2019, compared with 50% in the past.

The Takeaway

Collateralized debt obligations or CDOs are a financial structure that gathers different risky credits and transforms them into more liquid securities. For investors, they’re another way to wager on the creditworthiness of America.

Investing can seem complicated and overwhelming. With a SoFi Invest online brokerage account, individuals can’t trade CDOs but have a variety of other options to help them meet their financial goals. The Active Investing platform allows investors to make no-commission trades on other debt or bond products through exchange-traded funds (ETFs).

Get started with SoFi Invest today.

Photo credit: iStock/akinbostanci


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.
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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How to Use the Fear and Greed Index To Your Advantage

How to Use the Fear and Greed Index to Your Advantage

CNN’s Fear and Greed Index tries to track which emotion is driving the stock market. The index is based on the premise that fear and greed influence investment behavior, with investors selling shares when they’re scared and buying them when they desire greater profits.

Here’s a closer look at how the Fear and Greed Index (FGI) gets calculated, as well as how investors can use the gauge to inform their investment decisions.

Understanding the Fear and Greed Index

The Fear and Greed Index uses a scale of 0 to 100. The higher the reading, the greedier investors are, with 50 signaling that investors are neutral. To give some historical context, on Sept. 17, 2008, during the height of the financial crisis, the Fear and Greed Index logged a low of 12.

Seven different indicators are used to calculate the Fear and Greed Index.

CNN tracks how much each indicator has veered from its average versus how much it normally veers. Then each indicator is given equal weighting when it comes to the final reading. Here are the seven inputs.

  1. Stock Price Momentum: The S&P 500 versus its 125-day moving average. Looking at the benchmark equity gauge relative to its own history can measure how the index’s 500 companies are getting valued.

  2. Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange. Share prices of public companies can signal whether they’re getting overvalued or undervalued.

  3. Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining. Market breadth can be used to gauge how widespread bullish or bearish sentiment is.

  4. Put and Call Options: The ratio of bullish call options trades versus bearish put options trades. Options give the right not the obligation to buy or sell an asset. Therefore, more trades of calls over puts could indicate investors are feeling optimistic about snapping up shares in the future.

  5. Junk Bond Demand: The spread between yields on investment-grade bonds and junk or high-yield bonds. Bond prices move in the opposite direction of yields. So when yields of higher-quality investment-grade bonds are climbing relative to yields on junkier debt, investors are seeking riskier assets.

  6. Market Volatility: The Cboe Volatility Index, also known as VIX, is designed to track investor expectations for volatility 30 days out. Rising expectations for stock market turbulence could be an indicator of fear.

  7. Safe Haven Demand: The difference in returns from stocks versus Treasures. How much investors are favoring riskier markets like equities versus safer assets like U.S. government bonds can indicate sentiment.

On its website for the Fear and Greed Index, CNN gives a breakdown for how each indicator is faring. For instance, whether each measure is showing Extreme Fear, Fear, Neutral, Greed, or Extreme Greed among investors.
“Stock Price Strength” might be showing Extreme Greed even as “Safe Haven Demand” is signaling Extreme Fear.

Dos and Don’ts of Using the Fear and Greed Index

Why is the Fear and Greed Index useful? For the same reason why it can be helpful to check the temperature of any setting.

Gauging how hot or cold can help determine which move you want to make next as an investor. Are you being too greedy? Too fearful? Is now the time to think about herd mentality?

Also generally, some investors often try to be contrarian, so when markets appear frothy and the rest of the herd appears to be overvaluing assets, investors try to sell, and vice versa.

Recommended: Should I Pull My Money Out of the Stock Market?

Do’s

Use the index to realize that investing can be emotional but it shouldn’t be.

Use it to determine when to enter the market. Let’s say for instance you’ve been monitoring a stock that becomes further undervalued as investor fear rises, that could be a good time to buy the stock.

Recommended: Timing the Stock Market

Don’ts

Don’t only rely on the Fear and Greed Index or other investor sentiment measures as the sole factor in making
investment decisions. Fundamentals–like how much the economy is growing or how quickly companies in your portfolio are growing revenue and earnings–are important.

For instance, the FGI may be signaling extreme greed at some point, with all seven metrics also flashing greed. However, this extreme bullishness may be warranted if the economy is firing on all cylinders, allowing companies to hire and consumers to buy up goods.

Recommended: Using Fundamental Analysis on Stocks

The Takeaway

The Fear and Greed Index is one of many gauges that tracks investor sentiment. Investors generally use it to take a contrarian view of the markets, so when the rest of the herd appears fearful, they buy, or if they’re greedy, they sell. While it can be a useful tool to decide timing on certain investments, it shouldn’t be used as the only determinant in investment decisions.

Ready to buy and sell stocks, ETFs, fractional shares, or cryptocurrencies on your own? Online trading with SoFi Invest offers an Active Investing platform, where investors can make their own decisions on how they want to build their portfolios. If choosing your own investments is not for you, the Automated Investing services takes into account your preferences and manages a diversified portfolio for you.

Start trading on SoFi Invest today.

Photo credit: iStock/guvendemir


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.
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.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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What Are NFTs (Non-fungible Tokens)?

Non-fungible tokens (NFT) are cryptographic digital assets that each have uniquely identifiable metadata and codes. Their data is stored on the blockchain, ensuring they can’t be replicated or forged.

The tokens act as a representation, like an IOU, for either digital or tangible items. For instance, one could create NFTs that stand for digital artwork, virtual real estate in a game, collectible Pokemon cards, or even someone’s personal identification information.

Currently the majority of the NFT market is focused on collectibles like sports cards and digital art. But there are other highly priced NFTs on the market as well, such as a tokenized version of the first-ever tweet, created by Twitter CEO Jack Dorsey.

Let’s dive into the details about how NFTs work, what they’re important, and what makes them valuable.

What are NFTs Used For?

The concept of digital representations of material items is not new. But the addition of blockchain technology makes NFTs important. As part of a blockchain, NFTs are easily verifiable and unique, each one able to be traced back to the original issuer.

NFTs are revolutionizing gaming, art, and the collectibles market. They also have the potential to transform real estate, travel, and identity management. Millions of dollars have been spent on NFTs over the past few years, and their popularity is increasing amongst both collectors and crypto traders.

NFTs and Gaming

For the first time, immutable ownership and efficient sale of collectible and in-game items is possible. This opens up many opportunities for online gaming and world creation. For instance, within virtual worlds like Decentraland and The Sandbox, players can create pretty much any business one might create offline—design and sell hats, create avatars, or sell theme park tickets. Players can even create in-game currencies to sell to other users.

NFTs and Art

NFTs are revolutionizing the art world. Using an NFT exchange, artists can sell digital art directly to buyers, removing the need for a gallery or auction house. Typically, middle men can take a large percentage of sale profits, which means artists may be able to increase their profits using NFTs. It’s even possible for artists to earn royalties each time their artwork or music is sold. The most expensive digital art sold so far was a group of NFTs created by Beeple which sold for over $69 million.

NFTs and Identity Management

There are also use cases for NFTs in identity management. Currently people around the world travel with physical passports, which can easily be lost or stolen, and even replicated or forged. Storing identity information on the blockchain has the potential to eliminate these risks and may one day make travel processing more efficient.

NFTs and Real Estate

Another use case for NFTs is in real estate. Dividing up a property is difficult, but dividing digital real estate is easy. Multiple people can invest in and exchange property if it has been digitized. This principle can also be applied to other material assets.

NFTs and Supply Chain

NFTs can also help improve and validate supply chains. For instance, a coffee company could prove that their beans are fair trade. A wine company could create an NFT for each bottle of wine to keep track of every step of its production.

NFT Standards

Most NFT tokens are currently created using one of two Ethereum token protocols, ERC-721 or ERC-1155. These are essentially blueprints for tokens that were created by the Ethereum team. The blueprint creates a template for certain information that must be included for any new NFT, such as security and ownership information. By standardizing the way this information is created, NFTs are easily distributed and exchanged.

Starting with a blueprint, software developers can create NFTs that are compatible with large public exchanges and NFT wallets such as MyEtherWallet and MetaMask. This ensures that people can buy and sell the NFT and hold it in their own personal wallet.

Other blockchain networks such as Tron, Neo, and Eos are also building out NFT token standards. Each one has different token functionality, so software developers can choose which platform is best for the token they are creating.

What Makes NFTs Valuable?

As with any type of asset, supply and demand drives the price of NFTs. Since there are only so many of each collection of NFTs or individual NFTs, this can make the demand for them very high.

One might wonder what the value would be in owning a representation of a limited edition item as opposed to the real thing. NFTs are both easily verifiable and completely unique. This makes them easily tradable online. Their code is also useful because each NFT can be traced, including past transactions of that token. This provides security, transparency, and prevents fraudulent items from being sold.

Gamers, investors, and collectors have been flocking to the NFT market because they see the potential for market growth and significant profits.

Within certain online games, for example, real estate is a prized possession. If one owns a plot of land on a main road in a virtual world where they could open up a casino, that has the potential to make a lot of money. So that plot of land is very valuable.

Are NFTs Cryptocurrencies?

Cryptocurrencies, like physical money, are fungible assets, which can be exchanged and used for financial transactions because they are identical to one another. For example, one USD is always equal in value to another USD. Although NFTs are built on blockchain technology, they aren’t the same as cryptocurrencies, in that they can’t be exchanged with one another. Think of an NFT like a passport or a ticket to an event. Each one is unique.

An NFT that represents a baseball card can’t be directly exchanged for one that represents a piece of digital art. And even an NFT that represents one baseball card can’t be exchanged for one that represents a different baseball card. The reason for this is that each NFT is unique and contains specific identification information.

However, NFTs are similar to cryptocurrencies in that they have attributes and metadata that makes them easily transferable and identifiable.

Key Characteristics of NFTs

There are several characteristics of NFTs that make them different from other types of assets and that appeal to investors. They are:

•   Indivisible: Unlike Bitcoin or other forms of cryptocurrency, NFTs can only be bought and sold in their entirety. They can’t be divided into smaller portions.
•   Non-interoperable: Just as NFTs can’t be exchanged for one another, one type of NFT can’t be used in another NFT system or collection. NFTs used in online games, for instance, are like a playing card or game piece. Just as a Monopoly piece can’t be used in the game of Life, the owner of a CryptoKitties NFT can’t use that NFT in the Gods Unchained game.
•   Indestructible: Token information is securely stored on the blockchain using smart contracts. This means NFTs can’t be erased or copied.
•   Immutable: One important characteristic of NFTs is that the person who buys one actually has possession of it. They can sell it or hold it. It’s not held by a company the way iTunes holds music and licenses it out for users to listen to.
•   Verifiable: The creation, transaction, and identification information for NFTs can be traced and verified without a third party. This allows anyone interested in buying an NFT to make sure it’s legitimate and do their own vetting before purchase. It prevents the creation and sale of fraudulent tokens.
•   Extensible: Two NFTs can be combined to create a new, unique NFT.
•   Capable of storing metadata: NFT creators and owners can add metadata to NFTs. For instance, an artist could sign their digital artwork.

The Takeaway

The NFT market is still new and full of potential for creators and investors. However, before investing in cryptocurrencies, NFTs, or any other digital asset, it’s important to research and understand the market.

One way to get started investing in digital assets is with SoFi Invest®. Members can trade cryptocurrencies like Bitcoin, Ethereum, and Litecoin, right from the convenient mobile app.

Find out how to invest in crypto with SoFi Invest.



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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