Jan
04
2022
What Is a Bull Put Credit Spread? Definition and Example

What Is a Bull Put Credit Spread? Definition and Example

By | Growing Wealth, invest, Investing | Comments Off on What Is a Bull Put Credit Spread? Definition and Example

The bull put credit spread, also referred to as bull put spread or put credit spread, is an options trading strategy. In a bull put credit spread, an investor buys one put option and sells another. Each set of options has the same underlying security and the same expiration date, but a different strike (exercise) price. The strategy has limited upside and downside potential.

Investors employing a bull put credit spread receive a net credit from the difference in option premiums. The strategy seeks to profit from a modest increase in price of the underlying asset before the expiration date. The trade will also benefit from time decay or a decline in implied volatility.

Recommended: 10 Important Options Trading Strategies

How a Bull Put Credit Spread Works

In a bull put credit spread, the investor uses put options, which give the investor the right – but not the obligation – to sell a security at a given price during a set period of time. For that reason, they’re typically used by investors who want to bet that a stock will go down.

To construct a bull put credit spread, a trader first sells a put option at a given strike price and expiration date, receiving the premium (a credit) for the sale. This option is known as the short leg.

At the same time, the trader buys a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg, since the lower strike put is further out-of-the money. Thus, the trader receives a net credit for setting up the trade.

The difference between the strike prices of the two sets of options is known as the “spread,” giving the strategy its name. The “credit” in the name comes from the fact that the trader receives a net premium upfront.

Recommended: What Is a Protective Put? Definition and Example

Profiting from a Bull Put Credit Spread

In a properly executed bull put credit spread strategy, as long as the value of the underlying security remains above a certain level, the strategy produces a profit as the difference in value between the two sets of options diminish. This reduction in the “spread” between the two put options reflects time decay, a dynamic by which the value of an options contract declines as that contract grows closer to its expiration date.

As the “bull” in the name indicates, the strategy’s users believe that the value of the underlying security will go up before the options used in the strategy expire. For bull put credit spread investors, the more the value of the underlying security goes up during the life of the strategy, the better their returns, although there’s a cap on the total profit an investor can receive.

If the underlying security drops under the long-put strike price, then the options trader can lose money on the strategy.

Recommended: How to Trade Options

Maximum Gain, Loss, and Break-Even of a Bull Put Credit Spread

Investors in a bull put credit spread strategy make money when the value of the underlying security of the options goes up, but the trade comes with limited loss and gain potential. The short put gives the investor a credit, but caps the potential upside of the trade. And the purpose of the long put position – which the investor purchases – protects against loss.

The maximum gain on a bull put credit spread will be obtained when the price of the underlying security is at or above the strike price of the short put. In this case, both put options are out-of-the-money, and expire worthless, so the trader keeps the full net premium received when the trade was initiated.

The maximum loss will be reached when the price of the underlying security falls below the strike price of the long put (lower strike). Both put options would be in-the-money, and the loss (at expiration) will be equal to the spread (the difference in the two strike prices) less the net premium received.

The breakeven is equal to the strike price of short put (higher strike) minus net premium received.

Example of a Bull Put Credit Spread

Here’s an example of how trading a bull put credit spread can work:

Bob, a qualified investor, thinks that the price of XYZ stock may increase modestly or hold at its current price of $50 over the next 30 days. He chooses to initiate a bull put credit spread.

Bob sells a put option with a strike price of $50 for a premium of $3, and buys a put option with a strike price of $45 for a premium of $1, both expiring in 30 days. He earns a net credit of $2, the difference in premiums. And because one options contract controls 100 shares of the underlying asset, the total credit received is $200.

Scenario 1: Maximum Profit

The best case scenario for Bob is that the price of XYZ is at or above $50 on expiration day. Both put options expire worthless, and the maximum profit is reached. His total gain is $200, equal to $3 – $1 = $2 x 100 shares, less any commissions. Once the price of XYZ is above $50, the higher strike price, the trade ceases to gain additional profit.

Scenario 2: Maximum Loss

The worst case scenario for Bob is that the price of XYZ is below $45 on expiration day. The maximum loss would be reached, which is equal to $300, plus any commissions. That’s because $500 ($50 – $45 x 100) minus the $200 net credit received is $300. Once the price of XYZ is below $45, the trade ceases to lose any more money.

Scenario 3: Breakeven

Suppose that on expiration day, XYZ trades at $48. The long put, with a strike of $45, is out-of-the-money, and expires worthless, but the short put is in-the-money by $2. The loss on this option is equal to $200 ($2 x 100 shares), which is offset by the $200 credit received. Bob breaks even, as the profit and loss net out to $0.

Related Strategies: Bear Put Debit Spread

The opposite of the bull put credit spread is the bear put debit spread, also known as a put debit spread or bear put spread. In a bear put spread, the investor buys a put option at one strike price and sells a put option at a lower strike price – essentially swapping the order of the bull put credit spread. While this sounds similar to the bull put spread, the construction of the bear put spread results in two key differences.

First, the bear put spread, as its name implies, represents a “bearish” bet on the underlying security. The trade will tend to profit if the price of the underlying declines.

Second, the bear put spread is a “debit” transaction – the trader will pay a net premium to enter it, since the premium for the long leg (the higher strike price option) will be more than the premium on the short leg (the lower strike price option).

Bull Put Credit Spread Pros and Cons

There are benefits and drawbacks to using bull put credit spreads when investing.

Pros

Here are the advantages to using a bull put credit spread:

•   The inevitable time decay of options improves the probability that the trade will be profitable.

•   Bull put credit spread traders can still make a profit if the underlying stock price drops by a relatively small amount.

•   The timing and strategy for exiting the position are built into the initial trades.

Cons

In addition to the benefits, there are also some disadvantages when considering a bull put strategy.

•   The profit potential in a put credit spread is limited, and may be lower than the return if the investor had simply purchased the security outright.

•   On average, the maximum loss in the strategy is larger than the maximum gain.

•   Options strategies are more complicated than some other forms of investing, making it difficult for beginner investors to engage.

The Takeaway

Bull put credit spreads are bullish options trading strategies, where the investor sells one put option and buys another with a lower strike price. That investor can make money when the value of the underlying security of the options goes up, but the trade comes with limited loss and gain potential.

If you’re ready to start trading options, check out SoFi’s options trading platform. It’s user-friendly, thanks to the platform’s intuitive design, and it offers a library of educational resources about options. Investors can continue to read up on options through the available library of educational resources.

Trade options with low fees through SoFi.

Photo credit: iStock/Ridofranz

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Dec
29
2021
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What Are Actively Managed ETFs?

By | Going to College, invest, Investing, Terminology | Comments Off on What Are Actively Managed ETFs?

Exchange-traded funds or ETFs generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager.

The goal of an active manager is to outperform a certain market index, which they use as a benchmark for their portfolio. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.

There are two types of actively managed ETFs: transparent and non-transparent. Active non-transparent ETFs are a new option that was introduced in 2019; these funds are sometimes called ANTs.

Keep reading to learn more about the distinction among different ETFs, the pros and cons, and whether investing in actively managed ETFs makes sense for you.

How Actively Managed ETFs Work

Actively managed ETFs employ a portfolio manager and typically a team of analysts who do market research and make decisions to buy, hold, or sell the assets held within the fund. Most ETFs are designed to reflect a certain market sector or niche. They typically measure their success by using a known index as their benchmark.

For example, a technology ETF would be invested in tech companies and potentially use the Nasdaq composite index as a benchmark to measure its performance.

Despite the fact that passive (or index) ETFs strategies predominate in the industry — index ETFs represent roughly 98% of the ETF market — active strategies are gaining ground. That said, it has been historically quite difficult for active fund managers to beat their benchmarks.

Actively managed transparent and non-transparent ETFs are similar to traditional (i.e. index) ETFs. You can trade them on stock exchanges throughout the day, and investors can buy and sell in amounts as small as a single share. Broad availability and low investment minimums are an advantage that ANTs (and ETFs more generally) boast over many mutual funds.

Actively managed transparent ETFs

When exchange-traded funds first appeared some 20 years ago, only passive ETFs were allowed by the Securities and Exchange Commission (SEC). In 2008, though, the SEC introduced a streamlined approval process that allowed for a type of actively managed ETF called transparent ETFs. These funds were required to disclose their holdings on a daily basis, similar to passive ETFs. Investors would then know exactly which securities were being traded within the fund.

Many active fund managers, however, didn’t want to reveal their trading strategies on a daily basis — which is one reason why there have been fewer actively managed ETFs vs. index ETFs to date.

Non-transparent or semi-transparent ETFs

In 2019, another rule change from the SEC permitted an active ETF structure that would be partially instead of fully transparent. Under this new rule, an active ETF manager would be allowed to either reveal the constituents of their portfolio less often (e.g. quarterly, like actively managed mutual funds), or communicate their holdings more obliquely, by using various accounting methods like proxy securities or weightings.

The SEC ruling opened up a new channel for active managers, and since then the number of actively managed ETFs has grown. According to Barron’s, in just the past two years the number of actively managed ETFs has more than doubled. Nearly 60% of the ETFs launched in 2020 and 2021 were actively managed — more than all the actively managed ETFs established in the past decade.

From an investor’s perspective, the most noticeable difference between these two kinds of actively managed ETFs — transparent vs. non-transparent — would be the frequency with which these funds disclose their holdings. Both types of ETFs trade on exchanges at prices that change constantly during trading days; both rely on a team of managers to select and trade securities.

Index ETFs vs Active ETFs

So what is the difference between index ETFs and actively managed ETFs? It’s essentially the same difference that exists between index mutual funds and actively managed mutual funds.

How do index ETFs work?

Index ETFs, also called passive ETFs, track a specific market index. A market index is a compilation of securities that represent a certain sector of the market; indexes (or indices) are frequently used to gauge the health of certain industries, or as broader economic indicators. There are thousands of indexes that represent the equity markets alone, and Well-known indexes include the S&P 500®, an index of 500 of the biggest U.S. companies by market capitalization, as well as the Russell 2000, an index of small- to mid-cap companies, and many more.

Because index ETFs simply track a market sector via its index, there is no need for an active, hands-on manager. As a result the cost of these funds is typically lower than actively managed ETFs, and many active and passive mutual funds as well.

How do actively managed ETFs work?

Actively managed ETFs, often called active ETFs, rely on a portfolio manager and a team of analysts to invest in companies that also reflect a certain market sector. But these funds are not tied to the securities in any given index. The ETF manager invests in their own selection of securities, but often uses an index as a benchmark to gauge the success of their strategies.

Transparent actively managed ETFs must reveal their holdings each day.

Actively managed non-transparent ETFs, or ANTs, aren’t required to disclose their holdings on a daily basis. This protects asset managers’ strategies from potential “front-runners” — traders or portfolio managers that try to anticipate their trades. By and large, the cost of these funds is lower than transparent ETFs, and also lower than actively managed mutual funds.

Mutual Funds vs Actively Managed ETFs

All mutual funds and exchange-traded funds are examples of pooled investment strategies, where the fund bundles together a portfolio of securities to offer investors greater diversification than they could achieve on their own. In addition to the potential benefits of diversification, which may mitigate some risk factors, the pooled fund concept also creates economies of scale which helps fund managers keep transaction costs low.

That said, the structure or wrapper of mutual funds vs. passive and active ETFs, is quite different.

Fund structure

Although a mutual fund invests directly in securities, ETFs do not. With both active and passive ETFs, the fund creates and redeems shares on an in-kind basis. So when investors buy and sell ETF shares, the portfolio manager gives or receives a basket of securities from an authorized participant, or third party, which generates the ETF shares.

By comparison, mutual fund shares are fixed. You can’t create more of them based on demand. But you can with an ETF, thanks to the “in-kind” creation and redemption of shares. This means that ETF fund flows don’t create the same trading costs that might impact long-term investors in a mutual fund. And fund outflows don’t require the portfolio manager to sell appreciated positions, and thus minimize capital gains distributions to shareholders.

Pricing

The price of mutual fund shares is calculated once a day, at the end of the day, and is based on a fund’s net asset value (NAV). Investors who place a trade must wait until the NAV is calculated because most standard open-end mutual funds can only be bought and sold at their NAV.

ETFs, by contrast, are traded like stocks throughout the day. And because of the way ETF shares are created and redeemed, the NAV can vary, creating a wider or tighter bid-ask spread, depending on volume.

Fees

The expense ratio of mutual funds includes management fees, operational expenses, and 12b-1 fees. These 12b-1 fees are a type of marketing and distribution fee that don’t apply to ETFs, which trade on stock exchanges.

Thus the expense ratio for most ETFs, including actively managed ETFs, can be lower than mutual funds.

Pros and Cons of Actively Managed ETFs

As with any investment vehicle, these funds have their pros and cons.

Pros

Potentially for higher returns

One advantage of an actively managed ETF is the potential for gains that could exceed market returns. While very few investment management teams beat the market, those who do tend to produce outsize gains over a short period.

Greater flexibility and liquidity

Active ETFs could also provide greater flexibility amid market turbulence. When world events rattle financial markets, passive investors can’t do much other than go along for the ride.

A fund with active managers might be able to adjust to changing market conditions, however. Portfolio managers could be able to rebalance investments according to current trends, reducing losses, or even profiting from panics and selloffs.

Like passive ETFs, active funds also trade throughout the day (as opposed to some mutual funds who only have their price adjusted once daily), allowing investors the opportunity to do things like short shares of the fund or buy them on margin.

Cons

Higher expense ratios

One disadvantage of investing in an actively managed ETF is the potentially higher expense ratio. Active funds, whether ETFs or mutual funds, tend to have higher expense ratios. The costs associated with paying a professional or entire team of professionals combined with the fees that result from additional buying/selling of investments typically adds up to higher costs over time.

Each purchase or sale might come with a brokerage fee, especially if the securities are foreign-based. These costs exceed those of passive funds, resulting in higher expense ratios.

Performance factors

While active ETFs aim to provide higher returns, most of them don’t. It’s a widely known fact in the investment world that the majority of actively managed funds (as well as most individual investors) do not outperform the market over the long term.

So, while an active ETF may have the potential for greater returns, the risk of lower returns, or even losses, can also be greater. The chances of choosing an active fund that fails to outperform its benchmark are greater than the odds of choosing one that succeeds.

Bid-ask spread

The bid-ask spread of ETFs can vary, and while it’s more beneficial to invest in an ETF with a tighter bid-ask spread, that depends on market factors and the liquidity and trading volume of the fund. To minimize costs, it’s wise for investors to be aware of the bid-ask spread.

Investing in Actively Managed ETFs

Once an investor opens an account at their chosen brokerage, they can begin buying shares or fractional shares of actively managed ETFs.

Historically, brokerages have required investors to buy a minimum of one share of any security, so the minimum investment will most often be the current price of one share of the ETF plus any commissions and fees (many brokerages eliminated fees for buying or selling shares of domestic stocks and ETFs in 2019).

Some brokerages like SoFi Invest® now offer fractional shares, which allow for investors to purchase quantities of stock smaller than one share. This option may appeal to those looking to get started investing with a small amount of money.

It’s important to note that many ETFs pay dividends, which are payouts from the stocks held in the fund. Investors can choose to have their dividends deposited directly into their accounts as cash or automatically reinvested through a dividend reinvestment program (DRIP).

Investors with a long-term plan in mind might do well to take advantage of a DRIP, as it allows for gains to grow exponentially. For those only looking for income, DRIP might defeat the purpose of holding securities that yield dividends, however.

The Takeaway

Like mutual funds, exchange-traded funds or ETFs are considered pooled investments and generally fall into two categories: actively managed and passively managed. Actively managed ETFs, a growing category in the ETF market, are overseen by a portfolio manager. By contrast, passive ETFs simply mirror the performance of a particular market index; they don’t aim to outperform it.

Although actively managed ETFs make up only about 2% of the ETF universe, owing to regulatory changes in recent years this category has been growing. In fact there are now two types of actively managed ETFs: transparent and non-transparent. These funds offer investors the potential upside of active management, with the lower cost, tax-efficiency, and accessibility associated with ETFs. If you’re curious about actively managed ETFs, you can explore these products by opening an account with SoFi Invest®.

Learn more about investing with SoFi.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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

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Dec
28
2021
What Are Flash Loans & How Do They Work?

What Are Flash Loans & How Do They Work?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Flash Loans & How Do They Work?

Flash loans are a type of loan that crypto traders may use to facilitate the buying and selling of different types of cryptocurrency on an exchange. They make use of smart contracts to issue the loans – and the trades they enable – instantly.

What Is a Flash Loan?

Flash loans are a form of uncollateralized (or, unsecured) lending some decentralized finance (DeFi) networks and protocols make available to investors.

Flash loans are loans — they involve a lender loaning money to a borrower, with the expectation that they’ll get paid back. But there are some important distinctions. Namely, flash loans utilize smart contracts, or digital agreements cemented into place on a blockchain network.

Also, flash loans encapsulate the entire transaction — from borrowing to paying back — in one single, instant transaction at any time when you’re trading crypto.

While they’re available on multiple platforms, flash loans began as through Aave , a lending platform built on and enabled by Ethereum. As of December 2021, Aave had issued more than $5 billion in flash loans, including some for hundreds of millions of dollars, too.

Recommended: Crypto Lending: Everything You Need to Know

How Do Flash Loans Work?

If you’re not a developer or have a limited technical background, here’s what you should know: Smart contracts lay out the terms of the loans, and then actually perform the trades with the borrowed funds for traders. It all happens in a flash.

From a technical perspective, a flash loan builds a contract on the blockchain that acts as a request to borrow funds. That requires some advanced knowledge — you may only be able to do it by tapping your developer knowledge and writing some code. There are also tools that can allow people to use flash loans without coding.

Essentially, flash loans are meant to be an easy, low-risk way to borrow money to try and make profitable trades in the crypto markets. If a trade is profitable, the trader pays a 0.09% fee on the gains. If it is unprofitable (or the conditions in a smart contract otherwise aren’t met), the funds go back to the lender.

Recommended: Blockchain in Finance: What Does it Mean for Fintech?

Why Do People Use Flash Loans?

When getting a traditional loan, there are a lot of hoops to jump through: You usually need collateral of some type, for one, and there’s a review of your creditworthiness and approval process. Flash loans require fewer time or resources.

By removing those obstacles and making money available cheaply and instantaneously, borrowers can take a more nimble approach to trading and investing in crypto.

Perhaps the most popular use of flash loans is to try and scalp a profit to take advantage of small arbitrage discrepancies in different types of crypto across various exchanges. Again, within the traditional lending model, there likely wouldn’t be time to take advantage of those discrepancies. But flash loans make it possible.

Recommended: How to Get a Bitcoin Loan

Are Flash Loans Still Available?

Even though flash loans aren’t yet very accessible, they already have a few interesting uses. Some of them involve “regular” IOUs that are collateralized in some way. You can pay debts with existing collateral or even swap assets if you need to.

Pros and Cons of Flash Loans

While there are benefits to using flash loans as a crypto trader, there are also some drawbacks to this relatively new technology that it’s important to consider.

Flash Loans: Pros and Cons
Pros Cons
Instantaneous Still a developing product
Don’t require collateral Subject to exploitation
Designed to avoid defaults Not widely used outside crypto

Defaulting on a Flash Loan

Because of the lending mechanics, it’s almost impossible to actually default on the loan. Thanks to the magic of smart contracts, the answer, in a nutshell, is that everything essentially “resets.”

Because a smart contract will consider the transaction complete when the borrower has repaid the lender, a borrower defaulting on a flash loan means that the smart contract cancels the transaction. In effect, the transaction reverses itself, and the money would go back to the lender.

What is a Flash Loan Attack?

Flash loans are a lending mechanism, and they have their weaknesses. One such weakness is that bad actors can engage in a “flash loan attack,” which is more or less what it sounds like — an attempt to exploit the lending mechanism, potentially for profit.

Flash loan attacks can take many forms. Since a flash loan requires the loan to be repaid before the completion of the contract, a flash loan attack may find a way to change the value of the cryptos they’re trading, essentially tricking a smart contract into thinking the loan has been repaid, when it has not.

Again, this is just one relatively simple example of a flash loan attack, but in the recent past, it’s been an effective one.

The Takeaway

Flash loans may or may not be a part of your crypto investing strategy. You may be at a point where you’re still asking “what is cryptocurrency, exactly?” — rather than figuring out ways to borrow quick money to make money through arbitrage.

FAQ

Here are answers to some other flash loan-related questions:

What does “flash loan” mean?

To recap, flash loans get their name because they’re executed instantaneously. They’re done “in a flash.”

Are flash loans risk-free?

No, flash loans are not risk-free. While the lending mechanism that powers a flash loan ensures that they’re difficult, if not impossible to default on, there are security issues at play (flash loan attacks.) That risk, however, mostly falls on lenders, who are the ones doling out potentially millions of dollars in unsecured loans.

What is a flash loan exploit?

A flash loan exploit is an action taken to capitalize on a loophole or shortcoming in the flash loan lending mechanism. A flash loan exploit aims to circumvent lending protocols and safety measures, and allow a bad actor to potentially trick the network into thinking they had repaid a flash loan that they, in fact, had not.

Are flash loans legal?

Yes. But things could change in the future as it’s likely that the crypto space will become more regulated.

Photo credit: iStock/masterzphotois

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

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.

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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Dec
23
2021
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What is Ripple XRP? Everything to Know for 2022

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What is Ripple XRP? Everything to Know for 2022

Cryptocurrency is a fast-moving space with new technologies and names arising on a daily basis. One of the largest and more polarizing subjects in the space is Ripple XRP, a private-company-founded platform and cryptocurrency launched in 2012. It has gained notoriety for its unique founding, structure, and operations.

Ardent supporters back its real-world adoption and growth potential. Dissenters contend that because of many of these same factors, it’s philosophically misaligned with cryptocurrency ideals and fundamentals.

Despite these contentions, Ripple XRP has grown to become a household name in cryptocurrency. Here’s everything you need to know about this cryptocurrency, and how to invest in it.

What Is Ripple?

Ripple is both a currency-exchange system designed to allow fast and low-cost transactions, and a cryptocurrency in its own right. Ripple’s primary goal is to connect financial institutions, payment providers, and digital asset exchanges to provide faster and cheaper global payments.

Created in 2012 by Jed McCaleb and Chris Larsen, Ripple is perhaps better known for its open-source, peer-to-peer decentralized platform, RippleNet, which enables money to be transferred globally in any fiat or cryptocurrency denomination between financial institutions.

Ripple makes some improvements on common shortfalls associated with traditional banks. Transactions on the Ripple Network are settled in seconds even under the regular stress of millions of transactions. Compare this to banks’ wire transfers which typically can take days to weeks to complete and can cost anywhere from $15 to $30 or more if sending or receiving internationally. Fees on Ripple vary based on the transaction size but overall are minimal, with the minimum cost for a standard transaction at 0.00001 XRP.

Whereas top cryptocurrencies like Bitcoin, Ethereum, and Litecoin are designed to be used primarily by individuals, Ripple’s system is designed to be adopted by banks, funds, and institutions.

What Is XRP?

XRP is the currency issued and managed by Ripple (though users can also create their own currency on the platform). Ripple began selling XRP in 2012 to fund company operations, allowing its users to buy cryptocurrency, though it has taken a backseat to the company’s primary objective of developing RippleNet.

Throughout Ripple’s lifespan, leadership has reframed how XRP fits into the company’s business model, originally proclaiming it as the fuel on which its borderless payments technology runs, and later as a more efficient medium of exchange than Bitcoin.

XRP tokens represent the transfer of value across the Ripple network and can be traded on the open cryptocurrency market by anyone. Unlike Bitcoin’s popular store-of-value narrative use-case, XRP is primarily used for payments and borderless currency exchange. While Ripple’s centralized infrastructure concerns some in the cryptocurrency space, its fast transaction speeds, low transaction costs, and low energy usage provide superior performance as a medium of exchange compared to many blockchain-based cryptocurrencies.

(Need a crash course on crypto before you can read any further? Check out our guide to cryptocurrency.)

What is the XRP Price?

At the time of reporting, the XRP price is $0.474494. It’s all-time high was $3.8419 in January 2018. It went as low as $.0041 in November 2015.

How Does Ripple Work?

There are two main technologies to be aware of when it comes to Ripple and XRP. Specifically, the XRP ledger (XRPL) and the Ripple Protocol Consensus Algorithm (RPCA). Here’s how they work.

XRP Ledger (XRPL)

RippleNet is built on top of its own blockchain-like distributed ledger database, XRP Ledger (XRPL), which stores accounting information of network participants and matches exchanges among multiple currency pairs. The transaction ledger is maintained by a committee of validators who act like miners and full-node operators to reach consensus in three to five seconds—versus Bitcoin’s 10 minutes. Because there are no miners competing to confirm transactions for block rewards, validators verify transactions for no monetary reward.

Anyone can become an XRP validator, but in order to gain trust and be used by others on the network, validators must make Ripple’s unique node list (UNL), deeming them a trusted Ripple validator. These centralized validators are critical to prevent double-spending and censorship of transactions. There are only 35 active XRP validators; six are run by Ripple.

Ripple Protocol Consensus Algorithm (RPCA)

XRP’s design is predicated on speed and cost, as opposed to decentralization. Unlike different types of cryptocurrency like Bitcoin and Ethereum, which are built on the blockchain and validated by miners through the Proof of Work consensus mechanism, Ripple confirms transactions through its own consensus mechanism, the Ripple Protocol Consensus Algorithm (RPCA).

By avoiding Proof of Work’s energy-intensive mining, Ripple transactions require less energy than Bitcoin or Ethereum, are confirmed faster, and cost less. However, this speed is ultimately achieved because of XRP’s centralized infrastructure, which some argue makes the network less secure, censorship-resistant, and permissionless than open-source blockchain networks.

Ripple Cryptocurrency Token Supply

Unlike many other cryptocurrencies, XRP is not mined. The token’s entire supply was created when the network first launched in 2012 and Ripple executives intermittently tap into an escrow to release segments of the supply to sell on the open market.

In other words, unlike Bitcoin’s decentralized economy, XRP’s supply and issuance is centralized and governed by a few authorities. Because the total supply already exists, no more will be created into existence, thus making XRP fixed in quantity and not inflationary.

As of January 2021, only 45 billion XRP tokens are in circulation, out of the maximum total 100 billion. Due to the vast circulating supply, XRP has had one of the largest market caps of any cryptocurrency, even briefly eclipsing that of Ethereum’s second-largest cap late in the 2017-2018 bull market.

Ripple Crypto and Regulatory Trouble

In late 2020, Ripple became the target of an SEC investigation . The regulatory body determined that Ripple Labs Inc. and two of its executives, Co-Founder Chris Larsen and CEO Bradley Garlinghouse, had raised over $1.3 billion through an “unregistered, ongoing digital asset securities offering” to finance the company’s operations. Consistent with recent cryptocurrency rules set by the SEC, Ripple’s leaders were charged with unlawful issuance of securities in the form of sales of its XRP token, raising questions about compliance with cryptocurrency taxes.

The XRP price crashed amid the fallout, from over $0.60 to under $0.30, as prominent crypto exchanges began delisting the token and Ripple executives, including Founder Jed McCaleb, sold off personal XRP holdings worth millions.

Is Ripple a Good Investment?

Though XRP has been impacted by Ripple’s legal blow, XRP is an independent token that can and does function somewhat outside of Ripple’s business model. The crash in price and soured fundamental outlook may not paint a bright picture of XRP as an investment to some. Whether XRP recovers and continues to evolve with the rest of the crypto herd remains to be seen, but as investors look for value in undervalued assets, it doesn’t hurt to do further research and form an educated conclusion.

Pros and Cons of Ripple XRP

Because Ripple is different in some ways from other cryptocurrencies, it makes sense to review its perceived pros and cons before making any investing decisions.

Pros of Ripple XRP

•  Fast speeds
•  Low fees
•  Interest/tentative adoption by financial institutions

Cons of Ripple XRP

•  Centralized infrastructure, governance, issuance
•  Corruptible validators
•  Unsupported by many exchanges

How to Invest in XRP

To start investing in Ripple, you first need to join a crypto exchange. Signing up for an account could include different verification processes, depending on the exchange. Once you’re signed up, you’re ready to trade or buy Ripple XRP. You can trade any current crypto you own, or you can buy a major cryptocurrency like Bitcoin or Ethereum and then use that to buy Ripple XRP.

The Takeaway

Ripple XRP is a global digital payments system that sacrifices decentralization for performance. The network and technology is owned and at least partly run by Ripple, the private company, which controls the underlying infrastructure, supply, and some of the limited network validators. While Ripple strays from the conventional decentralization model adopted by leading cryptos Bitcoin and Ethereum, it conforms to some degree through its own specially — designed infrastructure.

Although Ripple’s primary goal is providing a borderless payments and currency exchange gateway for financial institutions, its native cryptocurrency XRP has taken on a life of its own and is actively traded and analyzed by investors. With high-ranking metrics such as fast and inexpensive transactions, some investors argue XRP is a strong competitor to large cryptocurrency blockchains such as Bitcoin and Ethereum. Conversely, Ripple XRP’s centralization has been a major philosophical and security concern for others — including US regulatory bodies.

Cryptocurrency is an exciting new technology that’s disrupting money as we know it. With SoFi Invest®, members can trade some of the most popular cryptocurrencies, like Bitcoin, Ethereum, Cardano, Dogecoin, and Litecoin.

Find out how to invest in cryptocurrencies with SoFi Invest.

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

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

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

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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22
2021
What Is Tokenization? An Overview on Payment

What Is Tokenization? An Overview on Payment

By | Growing Wealth, invest, Investing | Comments Off on What Is Tokenization? An Overview on Payment

Tokenization refers to the process of encrypting sensitive information by replacing the details with random strings of characters. These random character strings are generated by algorithms and are referred to as tokens.

Tokens can be used as a more secure method of data transfer, such as a customer’s credit card or bank account information. Rather than the raw data being exposed, the same information in tokenized format can be passed through a payment gateway instead.

Keep in mind we’re not talking about a crypto token or cryptocurrency here.

What is tokenization and what purpose does it serve? Some security methods, like the computer chips in credit cards, are designed to stop hackers from replicating banking details onto another card. The main goal of safeguarding data through tokenization, however, is to prevent online data breaches.

How Does Tokenization Work?

With regard to payment processing, tokenization requires a credit card or account number to be substituted with a token. The token itself isn’t connected to any person or account.

The 16-digit primary account number (PAN) of a customer gets replaced with a custom-made string of random numbers, letters, and special characters. This process eliminates any connection between customer data and a transaction.

Payment tokenization safely stores bank account numbers or credit card numbers in a virtual vault. This allows for the safe transmission of data through wireless networks. Organizations need a payment gateway to effectively make use of tokenization.

Payment gateways are services offered by e-commerce applications that double as tokenization service providers. They allow for direct payments or the processing of credit card payments. This kind of gateway can store credit card numbers in a safe manner and generate the random tokens needed for payment tokenization.

Tokenization vs Encryption

How is tokenization different from encryption? Both methods involve protecting information from prying eyes, but how they go about doing this is quite different.

While encryption uses a “key” to protect data, tokenization uses a “token.” One method makes data opaque, with the intention of revealing it later through use of a special decryption key. The other method uses random data to represent real data.

Encryption

Encryption can be reversed. Data that has been encrypted is intended to be decrypted at some point and restored to its initial state. How strong the encryption will be depends on the complexity of the algorithm used to encrypt the data.

All encryption can theoretically be broken. The stronger the encryption algorithm, the more difficult it will be to break. But given sufficient computing power, an attacker can overcome just about anything. Encryption serves to obfuscate data but doesn’t protect it completely. When something is encrypted, it becomes more difficult to access — but not impossible.

Tokenization

Tokenized data can’t be reversed. Tokenization involves substituting sensitive data with random data, so there’s nothing to decrypt. A token simply holds the place of other data and has no real value.

The real data can remain in a different location such as an offsite platform. The original data doesn’t have to be kept inside an online computer network at all. If the tokens are compromised, an attacker has gained nothing. Tokens are useless to criminals.

Benefits

 Tokenization

 Encryption
Reversible X
Refunds, chargebacks, subscriptions X
Low-cost per transaction X
Centrally controlled X
Established security X
PAN data displayed X

What Are Some Examples of Tokenization?

When a credit card transaction is processed, the primary account number (PAN) gets substituted with a token. For example, 1234-2323-3434-5454 might be replaced with 6^fjk8Nm$zqGa.

A merchant can then use this token ID to retain customer records, like connecting the 6^fjk8Nm$zqGa token to Bob Smith. The token then gets sent to the payment processor who de-tokenizes the identification and confirms the transaction. 6^fjk8Nm$zqGa turns into 1234-2323-3434-5454 again.

Only the payment processor can read the token, making it useless for outside parties. The token can only be used with one merchant.

Here are some more specific examples of using tokenization payment.

Apple and Android Pay

With payment apps like Apple Pay or Android Pay, you first take a picture of your credit card and upload it to your phone. Then the payment processor (either Apple for Apple Pay or Google for Android Pay) sends the details to the bank who issued the credit card, which then tokenizes the card’s details. The token is then sent to Apple or Google before being programmed into the phone. This way, the number stored in the payment app can’t be of any use to attackers.

Tokenization Within Apps

Some apps allow for direct in-app purchases on a mobile device. If the phone has a token, such apps won’t have access to any raw credit card information. Not only does this kind of tokenization of payment prevent data from being useful to criminals, but it also makes payments easier. A tokenized account can be linked to your stored payment and shipping information, making the process quicker the next time around.

Tokenization in eCommerce

Tokenization helps protect consumers when they shop online, too. For example, when someone buys a product from a retail website, the retailer tokenizes the card information and keeps it on file. The data is safe even if it were to be hacked. If an attacker gains access to the system, all they will be able to see is random strings of characters.

Tokenization ensures these types of transactions can happen in a way that most benefits customers in terms of both safety and speed.

Benefits of Tokenization

Merchants and their customers benefit from tokenization in many ways, notably additional security, reduced costs, and a better user experience.

Additional Security

Today, cybersecurity often functions from a perspective of assuming that breaches are likely to occur. Because of how tokenization works, even if hackers access tokenized data, they probably still won’t be able to use it. The data would have to be decrypted first to be of any use. In this way, tokenization minimizes the risk of a data breach being harmful to a merchant or its customers.

Reduced Costs

Merchants can save on some of the costs that come with payment card industry (PCI) regulatory compliance by working with the right tokenized service providers. Protecting a company’s reputation by securing customer data can also prevent losses down the road, should something go wrong.

Better User Experience

Tokenization allows customers to store their credit cards in mobile wallets or at checkout for online payments. Cards can then be charged again without having to expose the original information. Merchants can provide a smoother customer experience this way because tokens can be used as payment for recurring subscriptions and one-click payments.

The Takeaway

Tokenization works by replacing real information with random characters called tokens. The tokens can then be used to process payments. There are a number of advantages to tokenization, especially over encryption — notably, while encryptions are made to be deciphered, tokenization is not.

There’s a lot to know when it comes to securing your transactions, finances, and investments. With a SoFi Invest® brokerage account, you can build your portfolio by securely trading your choice of stocks, exchange-traded funds (ETFs), and Initial Public Offerings (IPOs).

Find out how to get started with SoFi Invest.

Photo credit: iStock/paulaphoto

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

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.

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.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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