What Is a dApp? A Guide to Decentralized Applications

What Is a dApp? A Guide to Decentralized Applications

The invention of cryptocurrency, blockchain, and smart contracts has opened up a new world of technological possibilities.

Bitcoin, the first cryptocurrency, provided a way for people to transfer value independently of any third-party payment processor thanks to blockchain technology. This same concept has also been applied to more complex transactions, like those involving software applications.

Software applications that run independently of a central authority are known as dApps, or decentralized apps.

What is a dApp?

An application that has no central authority governing it, isn’t hosted on one centralized server, and runs on a distributed, decentralized peer-to-peer network is known as a decentralized application (dApp).

A dApp is, for the most part, similar to any other software application — for instance, it could function on a desktop or mobile device, and will have a graphical user interface (GUI) just like any other app.

What makes dApps different is how they function behind the scenes, with the app being powered by transactions taking place on a decentralized network. Most or all of the backend programming happens on a decentralized network like Ethereum.

How dApps Work with Ethereum

Most dApps run atop Ethereum. Other protocols exist that perform similar functions, such as Cardano and the Ouroboros consensus protocol, Tron, or EOS, but Ethereum is the dominant market player in this space.

The Ethereum protocol gives users the ability to deploy and run smart contracts. A smart contract is a virtual agreement contained in code that can run specific operations and interact with other smart contracts.

The use of smart contracts eliminates the need for a third party to handle transactions and contract execution between two parties. Replacing the middle man with a program can speed up processes, reduce the potential for fraudulent transactions, and reduce costs.

Where do smart contracts exist? On thousands of servers called “nodes” distributed around the world. The nodes continually work to make sure they all agree on the current state of the network and which transactions are valid.

What Makes dApps Different?

There are a few key characteristics that differentiate dApps from other programs:

•   dApps run on a blockchain

•   Their code is open-source and operates independently of any person or group

•   Many dApps generate tokens in an effort to bring value to their nodes

•   Users often must contribute tokens to gain access

•   Miners receive new tokens as a reward for contributing to the ecosystem

Not all dApps have a native token. The Crypto Kitties game, for example, was one of the first and most popular dApps of its time, beginning in 2018. Playing the game required ETH gas fees and the value exchanged between players were pictures of digital cats.

Any dApp running atop Ethereum will require gas fees, paid in ETH (the native token of the Ethereum network), to facilitate smart contract transactions. The same holds true of other smart contract protocols. Some dApp protocols may have their own native tokens as well.

Recommended: What is a Crypto Token? Tokens vs Coins

What Can dApps Be Used For?

DApps can be used for just about anything that requires two or more parties to agree on something. When the appropriate conditions are met, the contract will execute automatically.

4 Different Types of dApps

1. Money management applications

These allow users to make peer-to-peer transactions on a blockchain network. Dapps of this kind often have their own independent blockchains, and are commonly called cryptocurrencies.

One of the most popular use cases for decentralized applications in recent years has been decentralized finance (DeFi). Decentralized exchanges (DEXs), for example, allow for peer-to-peer trading of digital assets without the need for a single entity maintaining order books, user accounts, and security. Financial services like borrowing and lending can also take place thanks to dApps. This can provide access to loans for people with poor credit (as no credit check is required) and give investors a chance to earn yield on their idle investments.

Recommended: A Guide to Decentralized Finance (DeFi)

2. Applications that align real-world events with digital assets.

An example could be oracles that feed real-time price data to decentralized exchanges or other interested parties. Or a logistics company could use a location-tracking chip to verify that a cargo shipment has reached its destination, at which time payment for the shipment could be released. Such a transaction could be accomplished with crypto, with no action taken on part of the humans involved aside from both the buyer and seller entering into a smart contract agreement beforehand.

Such agreements wouldn’t require notarization by a formal authority, as there would be no way for participants to avoid their contractual obligations (assuming the smart contract code was written correctly).

3. Decentralized Autonomous Organizations (DAOs).

These are decentralized blockchain-based organizations with no leader. Such organizations run according to rules defined by code from day one. These programmatic rules can define who can be a member, how voting works, what activities members can engage in, and how funds or value can be exchanged. After deployment, a DAO operates autonomously.

Recommended: What Is a DAO and How Do They Work?

4. Oracles.

These are an interesting kind of dApp that can be used to compliment other dApps. Oracles like Chainlink are protocols that provide real-time data about something happening in the real world. Synthetic assets, for example, allow people in the DeFi world to trade crypto tokens that are designed to have the same price as a real, physical asset like gold or oil. Oracles provide the price data that allows this kind of trading to happen.

The Takeaway

A decentralized application, or dApp, is a software app that can run atop a blockchain protocol independently and autonomously, without the need for constant human intervention.

DApps have many potential use cases, some of which are still being developed. Decentralized finance (DeFi) and non-fungible tokens (NFTs) are a few of the latest examples, but they likely won’t be the last.

Interested in getting involved in crypto trading? With SoFi Invest®, you can trade crypto including Ethereum, Bitcoin, Litecoin, Cardano, Dogecoin, Solana, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Poike


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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What Is Margin Debt & How Does It Affect the Stock Market?

What Is Margin Debt?

Margin debt is the amount that traders borrow from stock brokers when they want to trade on margin, or buy securities such as stocks or exchange-traded funds (ETFs) using leverage. It is not available on a cash-only account, in which a trader simply buys the stock they want and they cover the full amount using the cash in their account.

Leverage means that a trader buys more shares than the cash value of their account, and they borrow the remainder of the money from their broker using a margin account. The amount that they borrow from the broker is known as margin debt, and the amount that they pay in cash is known as the equity.

Debt margin trading gives the investor the opportunity to earn significant profits, beyond what they could earn if they only bought securities with cash they have on hand. But it also opens up the trader to larger risks of losses, because if the stock decreases in value they will be in margin debt and on the hook to pay for the difference between the cash they deposited and the amount the stock went down. Traders also have to pay additional fees and interest on any money they borrow from a broker for a margin trade.

Recommended: What is Margin Trading?

Margin Debt Definition

When engaging in margin trading, an investor could potentially borrow up to 100% of the cash they have in their account, allowing them to buy twice as much stock. This would mean they are 200% invested, or fully margined. Government regulations and brokerage rules, however, may limit the amount of margin to which a specific investor has access.

How Margin Debt Works

Traders can use margin debt for both long and short selling stocks. The Federal Reserve Board’s Regulation T places limitations on the amount that a trader can borrow for margin trades. Currently the limit is 50% of the initial investment the trader makes. This is known as the initial margin. In addition to federal regulations, brokerages also have their own rules and limitations on margin trades, which tend to be stricter than federal regulations. Brokers and governments place restrictions on margin trades because they are very risky but also because they can result in significant gains.

Example of Margin Debt

A trader wants to purchase 2,000 shares of Company ABC for $100 per share. They only want to put down a portion of the $200,000 that this trade would cost. Due to federal regulations, the trader would only be allowed to borrow up to 50% of the initial investment, so $100,000. In addition to this regulation, the broker might have additional rules. So the trader would need to deposit at least $100,000 into their account in order to enter the trade, and they would be taking on $100,000 in debt. The $100,000 in their account would act as collateral for the loan.

The broker may also require that the trader keeps a certain amount of cash in their account at all times for the duration of the trade. In the case that the value of the stock goes down, the trader will owe the broker money, and they will either have to deposit cash or sell some of their holdings.

An investor can keep margin debt and just pay off the margin interest until the stock in which they invested increases to be able to pay off the debt amount. The brokerage typically takes the interest out of the trader’s account automatically. In order for the investor to earn a profit or break even, the interest rate has to be less than the growth rate of the stock.

Recommended: Should I Still Invest If I Have Debt?

Advantages and Disadvantages of Margin Debt

There are several benefits and drawbacks of margin debt to purchase securities such as stocks or exchange-traded funds.

Advantages

•   Margin trading allows a trader to purchase more securities than they have the cash for, which can lead to significant profits. The trader can use the cash they have to enter more trades and create more opportunities to profit.

•   Traders can also use margin debt to short sell a stock. They can borrow the stock and sell it, and then buy it back later at a lower price.

•   Traders using margin can more easily spread out their available cash into multiple investments.

•   Rather than selling stocks, which can trigger taxable events or impact their investing strategy, traders can remain invested and borrow funds for other investments.

Disadvantages

•   Margin trading is risky and can lead to significant losses, making it less suitable for beginner investors.

•   The investor has to pay interest on the loan.

•   If a trader’s account falls below the required maintenance margin, such as because the stock drops in value, that might trigger a margin call. In this case the trader will have to deposit more money into their account or sell off some of their holdings. If a stock is very volatile, this can increase a trader’s debt and result in a margin call.

•   Brokers have a right to sell off a trader’s holdings without notifying the trader in order to maintain a certain balance in the trader’s account.

Is High Margin Debt a Market Indicator?

Stock market margin debt recently reached an all-time high, which leaves some traders wondering whether what that means for the markets or their investing strategies.

Some traders view margin debt as one measure of investor confidence in the markets. So, high margin debt can be an indicator that the market is near the top, but this is not always the case. It can be helpful for investors to look at whether total margin debt has been increasing year over year, rather than focusing on current margin debt levels. The Financial Industry Regulatory Authority (FINRA) publishes total margin debt levels.

There have been several instances in the past 50 years where year-over-year changes in total margin debt followed significant market runs and marked near the top of the market.

•   May 5, 1972: Margin debt up 55.8% year over year.

•   Dec. 3, 1999: Margin debt up 58.9%.

•   June 1, 2007: Margin debt up 67.5%

However, there have also been circumstances in which large increases in total margin debt did not indicate the peak of the market. So jumps in margin debt do not always indicate a coming market drop, while they may be an indication to keep an eye out for additional signs of market shifts.

Recommended: 5 Bullish Indicators for Stocks

The Takeaway

Margin trading can be a useful tool for trading, but it isn’t recommended for beginning traders due to its high risk level. It also may not be the best strategy for investors with a low appetite for risk, who should likely look for safer investment strategies.

If you want to get started trading stocks, one great way is with SoFi Invest® brokerage platform. It allows you to research, track, buy and sell stocks, ETFs, cryptocurrencies, and other assets all right from your phone.

Photo credit: iStock/PeopleImages


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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What Is a Dogecoin Faucet? Where Can I Access One?

What Is a Dogecoin Faucet? Where Can I Access One?

A Dogecoin faucet is an app or website that gives out DOGE (pronounced DOHJE) in exchange for completing simple tasks.

So how do faucets work? How do you find them? And are there any risks associated with using faucets? We will answer questions like these in this article.

What is a Dogecoin Faucet?

The name “faucet” reflects the fact that the rewards are very small, as if they were drops of water dripping from a faucet.

Free Dogecoin faucets send a few DOGE, usually one or two Dogecoins, to a user’s crypto wallet. To claim these rewards, users often have to perform a task like:

•   Watch product videos

•   View advertisements

•   Complete a captcha

•   Solve a puzzle

In exchange for these tasks, users could be rewarded with Dogecoins.

Why Were Dogecoin Faucets Created?

Crypto faucets have their roots in the very early days of cryptocurrency.

When Bitcoin was only a few years old, 1 BTC was worth less than a penny. Some early adopters took it upon themselves to create new, fun ways to spread the word about crypto.

Among them, developer Gavin Andresen believed in the future of Bitcoin and came up with a way for more people to learn about cryptocurrency. His idea was to give away free Bitcoins in exchange for completing Captchas.

The first Bitcoin faucet ever created paid out 5 BTC in exchange for the simple task of clicking images. Again, this was at a time when one Bitcoin was worth less than a penny. Today, 5 BTC would be worth about $250,000.

Over time, faucets for popular altcoins sprang up as well. When software engineers Billy Marcus and Jackson Palmer launched DOGE in 2014, DOGE faucets quickly sprang up for what was originally a joke currency. DOGE is a good fit for a faucet considering it has very low fees and was worth a tiny fraction of a penny when it was first created. Since it’s an uncapped currency, it’s also unlikely that the price will go up dramatically in the future.

How to Use a Dogecoin Faucet

The only things required are a computer with internet access and a Dogecoin wallet. Many popular crypto exchanges and their mobile apps support DOGE, providing users with a DOGE wallet.

A Dogecoin faucet, also known in the DOGE community as a “water bowl,” will ask users to enter their wallet address (also known as a public key). This is a necessary step so that the faucet knows where to send coins. If a user enters the wrong address, they won’t receive any rewards.

After entering the wallet address, a user must complete whatever task the faucet requires. Some faucets only require users to click a button to receive one or two free DOGE.

Note that there will be a time limit placed on how often someone can use the faucet. For example, the same person might only be able to use the faucet once a day or once every several hours. This prevents individuals from spamming the faucet and draining it of all its coins.

Keep in mind that faucet rewards are very small, and as the price of a coin rises, the rewards get even smaller in crypto terms. Using faucets is not a very efficient way to start building a crypto portfolio.

Are There Any Risks With a Dogecoin Faucet?

A Dogecoin faucet can come with some potential risks, as anything related to investing in cryptocurrency generally does.

Phishing scams have utilized crypto faucets in the past, seeking user information that they later use to target individuals for exploitation like identity theft or other crimes.

That’s why before using a faucet, you should first check to make sure it has a legitimate reputation. If there have been complaints from users in the past, it might be wise to consider looking for a different faucet.

It can be helpful to look at the website that hosts the faucet. A true faucet only has a single webpage with one function: to distribute coins. This only requires a place for people to enter their wallet address and a button to click, usually with a Captcha underneath it.

This feature should be the main attraction of the site. There might be some images of dogs or a variation of the Doge meme, and maybe some FAQs or other commentary. But if a “faucet” site has more than that, the odds of it being some sort of scam go up dramatically.

There’s also the risk that Dogecoin faucet users will be bombarded with advertisements and ad-tracking cookies in their browsers. Because most faucets are free, they tend to commoditize user’s time and traffic.

Finally, the high volatility of DOGE makes it a risky investment, no matter whether you’re getting it via a faucet or some other route. Some detractors have even compared DOGE to a pump-and-dump scheme.

Can I Mine Dogecoin?

Most cryptocurrencies can be mined by almost anyone.

Without getting into all the details, mining Dogecoin involves running powerful computers known as miners that process network transactions. In exchange for this work, miners receive block rewards of fresh Dogecoins. A new block of transactions is mined about once every minute on the Dogecoin network. The reward for each block is 10,000 DOGE, or about $2,500 currently.

Mining DOGE can be done alone or in a pool. For most people, it’s easier and more profitable to mine as part of a pool.

Recommended: What is a Dogecoin Mining Pool?

Anyone who wants to start mining Dogecoin will have to answer several questions, especially the following:

•   Will you mine solo or join a mining pool?

•   What mining hardware will you use?

•   What mining software will you use?

The Takeaway

You can find Dogecoin faucets through a simple search online or using a directory like this one . Be careful though, as some sites could use the allure of a Dogecoin faucet to trick people into giving up sensitive information. You should only need to enter your Doge wallet.

However, there are easier and more effective ways to start trading crypto. One of them is by opening an online brokerage account on SoFi Invest®. SoFi Invest allows you to trade Bitcoin, Dogecoin, Bitcoin, Ethereum, Cardano, and other types of cryptocurrency from your phone.

Photo credit:iStock/Ksenia Raykova


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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Implied Volatility: What It Is & What It's Used For

Implied Volatility: What It Is & What It’s Used for

Implied volatility (IV) is a metric that describes the market’s expectation of future movement in the price of a security. Implied volatility, also known by the symbol σ (sigma), employs a set of predictive factors to forecast the future changes of a security’s price.

Investors sometimes use implied volatility as a way to understand the level of market risk they face. They calculate the implied volatility of a security using either the Black-Scholes model or the Binomial model.

What Is Volatility?

Volatility, as it relates to investments, is the pace at which the market price of a security moves up or down during a given period. During times of high volatility, prices experience frequent, large swings.

What Is Implied Volatility?

Implied volatility is, in essence, a prediction, based on probability. While it shapes the price of an option, it does not guarantee that the price activity of the underlying security will indeed be as volatile, or as stable, as the expectation embedded in its implied volatility. While implied volatility isn’t a window onto the future, it does often correlate with the broader opinion that the market holds regarding a given security.

To express implied volatility, investors typically use a percentage that shows the rate of standard deviation over a particular time period. As a measure of market risk, investors typically see the highest implied volatility during downward-trending or bearish markets, when they expect equity prices to go down.

During bull markets on the other hand, investors implied volatility tends to go down as more investors believe equity prices will rise. That said, as a metric, implied volatility doesn’t predict the direction of the price swings, only that the prices are likely to swing.

How Implied Volatility Affects Options

So how does implied volatility affect options? When determining the value of an options contract, implied volatility is a major factor. Options implied volatility can also help options traders decide whether and when to exercise their option.

Recommended: 10 Important Options Trading Strategies

An investor buying options contracts has the right, but not the obligation, to buy or sell a particular asset at an agreed-upon price during a specified time period. Because IV options forecast the size of the price change investors expect a security to experience in a specific time span, it directly affects the price an investor pays for an option. It would not help them determine whether they want a call or a put option.

It can also help investors determine whether they want to charge or pay an options premium for a security. Options on underlying securities that have high implied volatility come with higher premiums, while options on securities with lower implied volatility command lower premiums.

Recommended: Popular Options Trading Terminology to Know

Implied Volatility and Other Financial Products

Implied volatility impacts the prices of financial instruments other than options. One such instrument is the interest rate cap, a product aimed at limiting the increases in interest charged by variable-rate credit products.

For example, homeowners might purchase an interest rate cap to limit the risks associated with their variable-rate mortgages and adjustable-rate mortgage (ARM) loans. Implied volatility is a major factor in the prices that people pay for those caps.

How Is Implied Volatility Calculated?

There are two implied volatility formulas that investors typically use.

Black-Scholes Model

One of the most widely used methods of calculating implied volatility is the Black-Scholes Model.

Sometimes known as the Black-Scholes-Merton model, the Black-Scholes model is named for three economists who developed the model in 1973.

It is a complex mathematical equation investors use as a way of projecting the price changes over time for financial instruments, including stocks, futures contracts, and options contracts.

Investors use the Black-Scholes Model to forecast different securities and financial derivatives. When used to price options, it uses the following factors:

•   Current stock price

•   Options contract strike price

•   Amount of time remaining until the option expires

•   Risk-free interest rates

The Black-Scholes formula takes those known factors and effectively back-solves for the value of volatility.

The Black-Scholes Model offers a quick way to calculate European-style options, which can only be exercised at their expiration date, but the formula is less useful to accurately calculating American options, since it only considers the price at an option’s expiration date. With American options, the owner may exercise at any time up to and including the expiration day.

Recommended: The Black-Scholes Model, Explained

Binomial Model

Many investors consider the binomial option pricing model more intuitive than the Black-Scholes model. It also represents a more effective way of calculating the implied volatility of U.S. options, which can be exercised at any point before their expiration date.

Invented in 1979, the binomial model uses the very simple assumption that at any moment, the price of a security will either go up or down.

As a method for calculating the implied volatility of an options contract, the binomial pricing model uses the same basic data inputs as Black-Scholes, along with the ability to update the equation as new information arises. In comparison with other models, the binomial option pricing model is very simple at first, but becomes extremely complex as it accounts for multiple time periods.

By using the binomial model with multiple periods of time, a trader can use an implied volatility chart to visualize the changes in implied volatility of the underlying asset over time, and evaluate the option at each point in time. It also allows the trader to update those multi-period equations based on each day’s price movements, and new market news emerges.

The calculations involved in the binomial model can take a long time to complete, which makes it difficult for short-term traders to utilize.

What Affects Implied Volatility?

The markets fluctuate, and so does the implied volatility of any security. As the price of a security rises, that can change its implied volatility, which translates to changes in the premium it costs to buy an option.

Another factor that changes the implied volatility priced into an option is the time left until the option expires. An option with a relatively near expiration date will have lower implied volatility than one with a longer duration. And as an options contract grows closer to its expiration, the implied volatility of that option tends to fall.

Implied Volatility Pros and Cons

There are both benefits and drawbacks to be aware of when using implied volatility to evaluate a security.

Pros

•   Implied volatility can help an investor quantify the market sentiment around a given security.

•   Implied volatility can estimate the size of the price movement that a particular asset may experience.

•   During periods of high volatility, implied volatility can help investors choose safer sectors or products.

Cons

•   Implied volatility cannot predict the future.

•   Implied volatility does not indicate the direction of the price movement a security is likely to experience.

•   Implied volatility does not factor in or reflect the fundamentals of the underlying security, but is based entirely on the security’s price.

•   Implied volatility does not account for unexpected adverse events that can affect the security, its price and its implied volatility in the future.

The Takeaway

Investors use implied volatility to predict the changes in security prices that increase the odds of success. It is a useful indicator but it has limitations, so investors may want to use it in connection with other types of analysis.

While investing in options and analyzing them using implied volatility is one method of investing, you can also get started with a more straightforward approach investing in stocks and exchange-traded funds. You can start that today, by opening an account on the SoFi Invest® brokerage platform. SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs without paying SoFi management fees and commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk.

Photo credit: iStock/nortonrsx


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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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12 Factors that Make the Price of Bitcoin Go Up

11 Factors that Make the Price of Bitcoin Go Up

In 2009, the Bitcoin network went live and the world changed forever. The first cryptocurrency started out with a value of $0, and it took years before bitcoins gained value in terms of any national fiat currency. But at the time of writing in late September 2021, the value of Bitcoin had risen to over $47,000, after beginning at $0 just twelve years earlier.

There are a number of factors that drive Bitcoin’s prices — including its soaring highs and lows. Here are 11 factors.

1. Supply and Demand

Part of what determines Bitcoin price is supply and demand. The Bitcoin protocol is designed to limit the supply of new coins. A new block of transactions is mined about every 10 minutes, and miners receive a set reward of new bitcoins for finding each block.

This reward amount is steadily reduced overtime and there are only 21 million bitcoins that can ever be mined. As of June 2021, about 18.74 million bitcoins had been mined, leaving 2.26 million bitcoins remaining. It’s estimated that the final bitcoin will be mined sometime around the year 2140.

On the other hand, the fiat currencies that prices are measured in have no supply cap and are always being created in ever-increasing amounts. This can result in more fiat currencies chasing fewer bitcoins, which can lead to higher Bitcoin prices.

2. Bitcoin Halving

Halving is part of the Bitcoin protocol that contributes to the supply and demand dynamics. Rather than new bitcoins being created at a steady or ever-increasing rate, the reward that miners receive for mining new blocks gets cut by 50% every 4 years or so.

In 2009, the block reward was 50 bitcoins. Over the next 11 years, the reward was “halved” three times, or reduced as follows:

•   2012: 25 bitcoins

•   2016: 12.5 bitcoins

•   2020: 6.25 bitcoins

In this way, Bitcoin remains a deflationary currency thanks to the process of Bitcoin mining. Fiat currencies, being inflationary, work in the opposite manner. Their supply increases each year with no limit on how many currency units can be created.

3. Monetary Policy

Because Bitcoin has a fixed supply limit, the price tends to correlate with the supply of new fiat currency being created. An increase in the money supply can be part of what drives up Bitcoin’s price. However, this isn’t a hard and fast rule — and past performance doesn’t always indicate future results.

It is worth noting that throughout 2020 and early 2021, the money supply in the U.S. saw massive increases to the tune of trillions and trillions of new dollars being created. During this same period, the price of Bitcoin rose from under $4,000 in March 2020 to over $60,000 in April 2021. When it comes to questions of what affects the Bitcoin price, monetary policy is thought to be a key factor.

4. Regulatory Factors

Regulatory news can also affect Bitcoin price. Some people believe that national governments will one day create such strict crypto regulations around Bitcoin and companies that use it that the technology will not survive. Because of this fear, sometimes it only takes a simple statement from a regulatory agency to cause prices to tank.

At the same time, some regulation can also be seen as a positive sign. It signals that the technology is seeing increased adoption and becoming more and more accepted. So, when regulatory agencies respond favorably to Bitcoin or announce new regulations that seem benevolent, this can be part of what makes Bitcoin go up.

5. Memes and Social Media

While technical matters and serious issues can contribute to what drives the Bitcoin price, more light-hearted factors can also influence what makes Bitcoin go up or down. Memes circulating on social media can sway sentiment toward crypto markets and possibly impact prices.

This could create a feedback loop where positive meme sharing leads to a bump in prices, which leads to more memes, leading to prices rising more, and the cycle continues. Some of the most popular Bitcoin memes involve phrases like “going to the moon” and references to sports cars like Lamborghinis.

Recommended: How to Use Social Media for Investing Tips: The Smart Way

6. Mainstream Media

In addition to social media, the regular news cycle can also influence Bitcoin price. Almost every time Bitcoin suffers a price correction, numerous mainstream media outlets begin publishing negative news.

Some of these can be so pessimistic that they fall into the category of what’s become known as “Bitcoin obituaries,” where a media outlet proclaims that Bitcoin has died. Sometimes influential politicians, bankers, or bureaucrats make negative statements about Bitcoin too, leading to similar effects on price.

On the other hand, when overall media coverage is positive, this can make the price of Bitcoin go up. In 2020 and 2021, news about famous influential investors making bullish bets on Bitcoin and large corporations adding Bitcoin to their balance sheets were seen as significant factors with regard to what makes Bitcoin go up.

7. Miners

In Bitcoin mining, powerful computers process transactions for the network, keeping Bitcoin running in a decentralized way. Mining operations continue running, at least in part, with funding from the bitcoins that they mine.

But miners have to be very careful about what they do with their new bitcoins. If miners believe the price of Bitcoin will go up in the future, they are likely to hold their coins for some time. If miners believe prices will go down soon, they might sell their coins immediately.

Miners refusing to sell new coins can be part of what makes Bitcoin go up, as new supply never makes it to crypto exchanges where it could drive prices down.

Recommended: What are Bitcoin Mining Pools? Should You Join One?

8. Hash Rate

The Bitcoin hash rate is one of the most important metrics in Bitcoin. The hash rate indicates how hard miners are working to solve the mathematical problems needed to process transactions. The more miners that are contributing computing power, the higher the hash rate.

While there’s disagreement about whether or not hash rate is part of what affects the price of Bitcoin, there does appear to at least be some correlation. If nothing else, a higher hash rate makes the network more secure and signals confidence in the near-term.

Recommended: What is a Good Hash Rate?

9. Network Adoption

Bitcoin is the world’s first decentralized monetary network. The more people using the network, the more valuable it tends to become. (This same principle holds true for things like social media networks, too.)

When it comes to the Bitcoin network, one of the main metrics used to measure adoption is the number of new crypto wallets being created. New wallets indicate that more people are using Bitcoin, some of them presumably for the first time. Sometimes when a lot of new wallets are coming online, this can be a sign of confidence in the technology and be part of what makes Bitcoin go up.

10. Risk Appetite

General sentiment in financial markets can be part of what makes Bitcoin go up. When investors feel comfortable taking on more risk than usual, they could be more likely to put money into Bitcoin.

On the other hand, some Bitcoin proponents believe Bitcoin to be more of a safe haven asset (the opposite of a risk asset). Bitcoin has a limited supply.

11. Technical Analysis

Crypto technical analysis can influence the price action of almost any tradeable asset. TA involves patterns identified by computer-generated data and from human eyes identifying patterns on charts. When a certain pattern emerges, it’s thought that prices could be about to move upward or downward, depending on the type of technical setup.

The Takeaway

When it comes to what makes Bitcoin go up, there are at least a dozen potential factors. Many of them are related to market sentiment, the status of the Bitcoin network, and supply-and-demand dynamics.

For individuals who want to invest in Bitcoin, SoFi Invest® may be a good place to start. With SoFi, you can trade cryptocurrency like Bitcoin, Solana, Enjin Coin, Cardano, Litecoin, and more.

Find out how to get started with SoFi Invest.

Photo credit: iStock/cokada


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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