What Are Flash Loans & How Do They Work?

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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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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What Is the Put/Call Ratio?

What Is the Put/Call Ratio?

The put to call ratio (PCR) is a mathematical indicator that investors use to determine market sentiment. The ratio reflects the volume of put options and call options placed on a particular market index. Analysts interpret this information into either a bullish (positive) or bearish (negative) near-term market outlook.

The idea is simple: the ratio of how many people are betting against the market versus how many people are betting in favor of the market, should provide a gauge of the general mood investors are in.

A high put-call ratio is thought to be bearish (because more investors are taking short positions) while a low put-call ratio is thought to be bullish (because more investors are taking long positions). Investor Martin Zweig invented the put-call ratio and used it to forecast the 1987 stock market crash.

What are Puts and Calls?

Puts and calls are the most basic types of options contracts. Options contracts give holders the right, but not the obligation, to buy or sell a specific number of shares of a given security by a certain date (the expiration date) at an agreed upon price (the strike price). For both puts and calls, one options contract is usually for 100 shares of the underlying security.

The seller of an option is also sometimes called the writer. Options writers receive a fee, called a premium, in exchange for the risk of having to buy or sell shares when the holder of the option chooses to exercise their contract.

There are many factors that influence an option’s premium, and many ways to calculate the value and the risk of options, including the Black-Sholes, trinomial, and Monte Carlo simulations.

Those interested in trading calls and puts and other options strategies may want to research the details further with our options trading guide.

For now, we’re concerned with the basics of call vs. put options so we can better understand the put-call ratio and what it means.

Puts

A put option (or “put”) gives its owner the right to sell a certain number of shares at a predetermined price by a certain date. Investors may also refer to puts as “short positions” because they represent bearish bets on a security’s future.

An investor who buys a put has the option to sell the stock at some point leading up to the expiration date of the contract. Investors may use puts in a variety of ways within the portfolio. For example, a protective put allows an investor who already owns the underlying asset to benefit even if the price of that stock asset goes down.

Calls

A call gives its owner the right to buy a certain number of shares at a predetermined price by a certain date. Calls are also referred to as long positions because they represent bullish bets on a security’s future.

An investor who buys a call has the option to buy the stock at some point leading up to the expiration date.

Recommended: Popular Options Trading Terminology to Know

What Is Put Call Ratio?

The put-call ratio is a measurement of the number of puts versus the number of calls traded on a given security over a certain timeframe. The ratio is expressed as a simple numerical value.

The higher the number, the more puts there are on a security, which shows that investors are betting in favor of future price declines. The lower the number, the more calls there are on a security, indicating that investors are betting in favor of future price increases.

Analysts most often apply this metric to broad market indexes to get a feel for overall market sentiment in conjunction with other data point. For example, the Chicago Board Options Exchange put-to-call ratio is one of seven factors used to calculate the Fear & Greed Index by CNN Business.

The put-call ratio can also be applied to individual stocks by looking at the volume of puts and calls on a stock over a certain period.

Recommended: Buying Options vs Stocks: Trading Differences to Know

How to Calculate the Put-Call Ratio

The put-call ratio equals the total volume of puts for a given time period on a certain market index or security divided by the total volume of calls for the same time period on that same index or security. The CBOE put call ratio is this calculation for all options traded on that exchange.

There can also be variations of this. For example, total put open interest could be divided by total call open interest. This would provide a ratio for the number of outstanding puts versus the number of outstanding calls. Another variation is a weighted put-call ratio, which calculates the dollar value of puts versus calls, rather than the number.

Looking at a put call ratio chart can show you how that ratio has changed over time.

Put-Call Ratio Example

Suppose an investor is trying to assess the overall sentiment for a stock. The stock showed the following volume of puts and calls on a recent trading day:

Number of puts = 1,400

Number of calls = 1,800

The put call ratio for this stock would be 1,400 / 1,800 = 0.77.

How to Interpret the Put-Call Ratio

A specific PCR value can broadly be defined as follows:

•   A PCR of less than 1 implies that investors are expecting upward price movement, as they’re buying more call options than put options.

•   A PCR of more than 1 implies that investors are expecting downward price movement, as they’re buying more put options than call options.

•   A PCR equal to 1 indicates investors expect a neutral trend, as purchases of both types of options are at the same level.

However, while PCR has a specific, mathematical root, it is still open to interpretation, depending on your options trading strategy. Different investors might take the same value to have different meanings.

Contrarian investors, for example, typically believe that the majority is wrong. The best move is to act contrary to what others are doing, in this view. If everyone else is buying something, contrarians believe it might be a good time to sell, or vice-versa. A contrarian investor might therefore perceive a high put/call ratio to be bullish because it suggests that most people believe prices will be heading downward soon.

Momentum investors believe in trying to capitalize on prevailing market trends. “The trend is your friend,” they might say. If the price of something is going up, it could be best to capitalize on that momentum by buying, in this view. A momentum investor could believe the opposite, and that a high PCR should be seen as bearish because prices could be trending downward soon.

To take things a step further, a momentum investor might short a security with a high put-call ratio, hoping that since most investors appear to already be short, this will be the right move. On the other hand, a contrarian investor could do the opposite and establish a long position, based on the idea that what most people expect to happen is the opposite of what’s actually coming.

The Takeaway

The put-call ratio is a simple metric used to gauge market sentiment. While often used on broad market indexes, investors may also apply the PCR to specific securities. Calculating it only involves dividing the volume of puts by the volume of calls on the market for a security.

The put-call ratio is one factor you might consider as you start trading options. A platform like SoFi’s allows you to get started with options trading, thanks to its intuitive and user-friendly design. Investors can also reference a library of educational resources about options.

Trade options with low fees through SoFi.


Photo credit: iStock/PeopleImages

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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What Is Volume in Cryptocurrency? A Guide

What Is Volume in Cryptocurrency?

Trading volume is a metric that investors use to see how often an asset is trading hands, indicating how popular it is to buy or sell that asset at any given time. Investors examine trading volume for a variety of securities, including stocks, bonds, and international currencies.

In cryptocurrency, in particular, trading volume is an important factor that traders use to determine the potential trajectory of a coin.

Recommended: Crypto 101: Crypto for Beginners

Crypto Trading Volume Meaning

Crypto trading volume measures how many times a coin changes hands over a given time frame. Investors analyze crypto volume baked on either trades taking place on a given crypto exchange or on all exchanges combined.

The most common timeframe for measuring volume is 24 hours, and the most common format used to show this metric is a bar chart. Typically when high volume cryptocurrency trading can mean an increase in prices and low volume cryptocurrency could indicate prices falling.

Calculating Cryptocurrency Volume

Calculating crypto trading volume requires determining the total value of a type of cryptocurrency that has changed hands in a given period. For example, if the total amount of bitcoin (BTC) traded on Binance in the last 24 hours added up to $10 billion, then the 24-hour trading volume of BTC on Binance was $10 billion.

Why Is Volume Important in Cryptocurrency?

Tracking cryptocurrency is particularly important when trading coins with low crypto liquidity on smaller exchanges, the importance of volume becomes apparent. Say a trader wants to sell one million SHIB coins, for example. But the hypothetical exchange she is using doesn’t have a lot of SHIB volume. To sell 1 M SHIB could require going through dozens of buy orders, each one being at a slightly lower price than the one before it.

This results in the trader receiving a lower price for her coins than she might have if the exchange had higher volumes (a phenomenon referred to as “slippage”). In extreme cases, there might not be any buy orders at all, and a trader would have to make new sell orders, hoping they get filled at some point.

Likewise, if someone wants to buy a coin with low volume, they could end up spending more money than they would have if trading volumes were higher. Having to buy up existing sell orders bids prices higher.

Higher volume tends to translate to higher price stability and less volatility. Of course, times of extreme fear or greed might bring surges in volume and large price movements. But, in general, coins or assets that consistently have higher volume tend to have less volatility.

What Does Cryptocurrency Volume Indicate?

Crypto trading volume indicates interest in a cryptocurrency. The more people are buying and selling something, the higher the volume, which can drive even more interest in that cryptocurrency.

Surges in trading volumes suggest either strongly bullish or strongly bearish sentiment. Meme coins like Dogecoin (DOGE) and Shiba Inu (SHIB) have enjoyed plenty of volume during their big market run-ups. Over time, interest in such coins tends to wane, and volume tapers off along with the price.

A high-volume cryptocurrency can become a low-volume cryptocurrency and vice versa.

Low trading volume means investors aren’t very interested in buying or selling a particular asset. There could be any number of reasons for this. When prices and trading volumes diverge, this can mean that prices aren’t telling the whole story.

Can Volume Be Faked in Crypto?

Yes, it’s possible to exchange volumes through a practice known as “wash trading.” This practice involves placing buy and sell orders at nearly the same time. The orders can cancel each other out and not result in any material movement of markets. This gives the appearance of an active market but is really just noise.

According to crypto research firm Messari , “it is well known that many exchanges conduct wash trading practices in order to inflate trading volume.”

The exchanges may believe that higher volume will entice traders into using their platform, and the more traders that use their platform the more money they make.

Wash trading can take place in several different ways, including:

•   A trader colluding with an exchange

•   A trader colluding with another trader

•   The use of high-frequency trading algorithms

In cryptocurrency markets, high-frequency trading (HFT) algorithms may account for much of the fake volume. These are basically computer bots that can make large numbers of trades very fast.

Concerns about fake volume on exchanges may be one reason that some traders prefer decentralized exchanges, on which it’s harder to fake volume.

Crypto by Volume

Coinmarketcap is a commonly cited source for crypto prices and trading volumes. But the site makes no distinction between exchanges that may have high amounts of wash trading and those that do not. Messari provides “real” volume data, gleaned from exchanges that they believe with a high degree of confidence do not engage in wash trading.

This distinction is important to make because when looking at volumes for different coins or exchanges, the results can be very different depending on the source.

On December 9, the top 5 crypto assets by 24hr trading volume according to Coinmarketcap were:

1.    Tether (USDT)

2.    Bitcoin (BTC)

3.    Ethereum (ETH)

4.    Binance USD (BUSD)

5.    XRP (XRP)

However, according to Messari, the top crypto assets by 24hr “real” trading volume were:

•   Bitcoin (BTC)

•   Ethereum (ETH)

•   USD Coin (USDC)

•   Tether (USDT)

These rankings show that the popular stablecoins USDC and USDT are among the top 5 coins by volume with or without alleged fake trading transactions.

Binance’s exchange token, BUSD, is fourth when including wash trades, but didn’t make the top five for real volume.

Bitcoin (BTC), the oldest and largest cryptocurrency, had volume of more than twice the next-highest volume coin.

Is Volume a Necessary Metric for Valuing Coins?

Many crypto traders see volume as the most important metric for valuing a cryptocurrency.

In 2018, nearly 40% of 39% of respondents to a Coindesk survey chose volume as the indicator they couldn’t live without. The main reason they gave was that other technical indicators rely on an individual’s ability to interpret charts, while volume is more objective.

When price and volume fall together, traders may believe that the market is exhausted and will reverse course soon. On the other hand, when price rises and volume falls, investors often see that as a bearish sign that means prices will pull back soon.

The Coindesk survey quoted one trader as saying that trading volume “speaks to the sincerity of price action.” In other words, the movement of prices alone can be deceiving. When factoring in volume, it can be easier to get a more comprehensive view of how the market is behaving.

The Takeaway

Cryptocurrency volume trading is a measure of how many cryptocurrency transactions are taking place. Much of what’s been covered here also applies to volume in stocks, although there are more regulations around wash trading in equities.

Photo credit: iStock/hsyncoban


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.

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Popular Terms Every Crypto Beginner Needs to Know

Cryptocurrency is an exciting new technology that has strongly impacted the financial sector in its short existence. Bitcoin, the first cryptocurrency, was launched in 2009.

Like any new technology, cryptocurrency has introduced a host of new terminology and phrases with subtle or clever meanings perhaps unbeknownst to the average person. For a crypto beginner, learning these nuanced phrases and acronyms might help to buy the dip and HODL through a wave of FUD. (By the end of this article, you’ll know exactly what that means.)

Recommended: Crypto 101: A Beginner’s Guide

16 Crypto Slang Terms to Know

1. FOMO

FOMO stands for “fear of missing out.” FOMO happens across all parts of life. In this context, it’s a common investor psychological state in which an investor feels a combination of panic and envy for not having an active position in a powerful market move from which others are benefiting.

In crypto, this typically refers to when a sharp bullish breakout occurs and anxious investors debate whether or not to buy into an already high-priced market in hopes they will be along for the remainder of the move. FOMO can apply to any financial market but is commonly heard in crypto markets which are largely composed of amateur retail investors trying to navigate extremely volatile price action as they attempt to build a well-balanced crypto portfolio.

Used in a sentence: “I bought at an all time high yesterday and now it’s down 25% today. The FOMO got to me!”

Recommended: What is FOMO Trading and How to Avoid It

2. HODL

HODL stands for “hold on for dear life.” HODL is a popular crypto meme and misspelling of the word “hold” (which some people then misinterpreted as standing for “hold on for dear life”).

The term originated on a Bitcoin forum during a period of market turbulence in late 2013 in which an unsettled investor ranted about how investors are ill-suited to trade highs and lows, but rather simply buy and hold in their own crypto wallet.

Since then, HODL has exploded in popularity and is widely exclaimed during price rallies in which investors will instruct other investors to HODL through steep price volatility.

Used in a sentence: “The price of Bitcoin is dropping, but I plan to HODL through it!”

3. FUD

FUD stands for “fear, uncertainty, and doubt.” FUD, as it’s commonly exclaimed in crypto circles, is a psychological method of inspiring negative sentiment about a particular asset to prevent further buying or even instigate selling or short-selling.

The objective is to suppress an asset’s price so the FUDer can accumulate at a lower price, or can inflict financial pain onto others that are holding the token for what may be a competing crypto project.

There are many ways to spread fear, uncertainty, and doubt, including proclaiming poor fundamentals, questionable project leadership, stagnant or bearish price movement, unclear roadmaps, lack of adoption, low network usage, and inability to be transacted in certain countries.

Used in a sentence: “He panic sold all his coins because he listened to the FUD.”

4. Shill

Shilling is the act of using propaganda, or false or exaggerated narratives to promote a service or investment, particularly of low quality, for a financial incentive.

Shilling has a negative connotation and is widely used in pump-and-dump schemes but can be used in other contexts as well. For example, an influencer might be paid to promote a cryptocurrency or service, a cryptocurrency project developer might shill their project to help it gain users and see it succeed, or a casual investor might shill an underperforming cryptocurrency in their portfolio to sell it for a profit at a higher price.

Used in a sentence: “It’s often frowned upon when people shill coins on social media for their own personal gain.”

5. Rekt

Rekt, an intentional misspelling of “wrecked,” is a slang term used in crypto to describe an investor’s portfolio or investment getting handily defeated. It’s used sensationally on social media to alert overleveraged positions being liquidated causing massive financial losses.

Used in a sentence: “After the price of XRP fell, my position was rekt.”

6. Sats

Satoshis, commonly abbreviated as “sats,” are the smallest unit of Bitcoin — 0.00000001 BTC, to be precise. Named after the credited creator of Bitcoin, a developer named Satoshi Nakamoto (which may actually be a pseudonym for a group of people), one satoshi is equivalent to 100 millionth of a Bitcoin.

Because Bitcoin is easily divisible and constantly transacted in fractional amounts, being able to denominate arbitrary fractions of a Bitcoin is essential. This is especially important since the Bitcoin price has risen precipitously over its decade-old existence, making it much more expensive for new investors to buy one whole Bitcoin.

A similar popular term, “stacking sats,” refers to an investing strategy in which an investor accumulates satoshis, fractions of a Bitcoin, to increase a Bitcoin position.

Used in a sentence: “I transfered three sats to my wallet.”

7. Whale

In crypto, a whale is an entity that has a massive position in regard to a specific cryptocurrency. For instance, a Bitcoin whale may be a company that owns 50,000 bitcoins, allowing it to move the markets with a single trade.

Used in a sentence: “A whale sold a big position this morning, and as a result, the price of Bitcoin is dropping.”

8. Pump and Dump

“Pump and dump” doesn’t merely apply to cryptocurrency; it’s seen in stocks, too. It is considered market manipulation and is illegal in regulated securities. Essentially, a pump-and-dump scenario unfolds when investors hype or inflate the price of an asset, like a cryptocurrency, and subsequently sell their holdings before the price falls again. They pump it up — and then dump it before it falls.

Used in a sentence: “I was caught up in a pump-and-dump scheme involving a new crypto, and now my position is underwater.”

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9. Bagholder

You never want to get caught holding the bag, but that’s what a “bagholder” is in the crypto world. A bagholder is someone who bought into a position at an elevated price, and subsequently saw the value of their holdings fall.

Used in a sentence: “Sell your position now before the price drops, otherwise you’ll be the bagholder.”

10. When Lambo?

At some point, Lamborghinis — yes, the expensive sports cars — became associated with crypto culture. Mostly because people making a lot of money from crypto were able to buy them. As such, the term “when Lambo?” became synonymous with a crypto’s success. It’s essentially asking when the asset in question will gain enough value that its holder can buy a Lambo.

Used in a sentence: “I just bought into Coin X…. When Lambo?”

11. Flippening

“Flippening” refers to the hypothetical — and some say inevitable — moment in which the value of Ethereum overtakes the value of Bitcoin.

Used in a sentence: “I’m loading up on ETH in anticipation of the Flippening.”

12. No Coiner

A “no-coiner” is someone who’s pessimistic about crypto and doesn’t believe that there is a use case for it. As such, they have no holdings, no crypto tokens, and no coins. They’re a “no-coiner.”

Used in a sentence: “I just got an earful from some no-coiner about how Bitcoin is going down the tubes.”

13. Vaporware

“Vaporware” refers to a sexy, cool idea or concept that will, in all likelihood, never exist or come to fruition. It can also refer to prospective cryptocurrencies that have no apparent use.

Used in a sentence: “The idea sounds great, but it’s all vaporware — it’ll never get off the ground.”

14. BTD/BTFD

BTD stands for “buy the dip” and is a common term in financial markets meaning to enter a long position during a suspected brief decrease in an asset’s price. It is more commonly used in bull markets to support the bullish sentiment and rising prices but also used in crypto bear markets to buy at good historical value for a longer-term investment horizon.

BTFD, short for “Buy the [Expletive] Dip” is an exuberant exclamation of BTD, typically used during manic bullish rallies.

Used in a sentence: “When the market pulls back, some suggest to BTD.”

15. Cryptosis

“Cryptosis” is when someone is bitten by the crypto bug, and simply can’t shut up about it. The afflicted reads, writes, discusses, and otherwise consumes information about crypto all day, nonstop.

Used in a sentence: “I introduced my brother to Bitcoin, and now he has a serious case of Cryptosis.”

16. KYC

KYC, or “know your customer“, is a form of identity verification required by many crypto exchanges since being imposed by regulatory agencies in 2017.

The Security Exchange Commission (SEC)’s Rule 17a-3(17) requires that broker-dealers (exchanges) make a good-faith effort to obtain personal information and create a record for each account with each individual customer. KYC ensures that customers are relatively suited for their trades or investments, customers are who they say they are, and customers’ transaction histories are recorded for tax purposes. KYC is commonly hyphenated KYC-AML (Anti-Money Laundering) as the two guidelines closely complement each other.

KYC is a long-standing regulatory standard in traditional finance but has been met with some animosity in crypto. Some Bitcoin-maximalists and crypto enthusiasts emphatically oppose KYC as they claim it defeats the point of crypto’s decentralized philosophy .

Here are some other cryptocurrency rules and regulations to know.

The Takeaway

Crypto is a new space for a lot of investors but is quickly changing the way people think about and transact money. Crypto has some similarities to traditional finance as it’s both a standalone network and considered by some as a store of value.

As these crossovers enable opportunities for technical integrations and mainstream adoption, a new wave of specific terminology has sprouted up. It can be helpful to learn these terms and phrases unique to crypto before investing in this dynamic new asset class.


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.

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.

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.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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