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Aug

2021

8 Ways to Make Money With Cryptocurrency

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

With the rise of Bitcoin over the past decade, and new alternatives like Ethereum and Litecoin springing up in recent years, cryptocurrency, as a whole, has become an investment category that more are considering. If you’re new to the asset class, however, you may be wondering just how to make money with Bitcoin or other cryptocurrencies.

There are numerous ways to potentially make money with cryptocurrency. Read on for some suggestions on how to make money with cryptocurrency, blockchain, and Bitcoin.

Ways to Make Money in Crypto

1. Investing in Cryptocurrency

Investing is, perhaps, the most obvious and common way that some people are making money with cryptocurrency.

The idea here is simple, though: Investors buy cryptocurrencies like Bitcoin, Ethereum, etc. with a traditional account or a Bitcoin IRA. Then, they let it accrue value over time, with the goal of selling it for more than they purchased it. That is, this really only works under the assumption that cryptocurrencies will continue to see their values increase.

However, cryptocurrencies are a risky and volatile investment, so it’s important for investors to consider that before undertaking this strategy. In general, crypto investors may want to make sure that their crypto holdings are just one part of a diversified portfolio that includes other types of investments.

2. Day Trading Cryptocurrency

One could make the argument that trading and investing are the same thing. But they’re often differentiated, to a degree, by time horizons—traders are looking to make a relatively quick profit, while investors may only make a handful of changes to their portfolios per year.

Nonetheless, day trading can be another way to make money with cryptocurrency, just like it is with stocks or other securities. Day traders buy and sell assets within the same day, in order to try and score a quick profit. This is a risky strategy, since it’s hard to know how cryptocurrency values could change in any given day or over time. It should be noted that day trading is an extremely risky activity, and most day traders tend lose money. As with any investing strategy, it is smart to consult with an advisor, and only ever trade with extra money you don’t need to cover your lifestyle costs.

3. Stake Your Crypto

The process of crypto staking is similar to locking your assets up in the bank and earning interest—similar to a certificate of deposit (CD). You “lock up” your crypto holdings in exchange for rewards or interest from the platform on which you’ve staked the assets.

4. Mining

Crypto miners use any available processing power to solve complex equations, producing the next block in a blockchain, and earning new coins or tokens as a reward. If you don’t have the computing power to become a Bitcoin miner on your own, you may be able to join a Bitcoin mining pool—in which numerous miners “pool” their resources—to mine Bitcoin.

Recommended: How Bitcoin Mining Works

5. Earn Crypto Dividends

Another way to make money with your crypto assets is to earn dividends. If you’re at all familiar with trading stocks or bonds, you’re probably at least somewhat familiar with dividends. In short, dividends are small cash payouts to shareholders. If a company turns a profit during a quarter (or year, it depends on the individual company), it’ll chop those profits up and return them to the company’s ownership (shareholders!).

While it’s unlikely you’ll see a huge proverbial tidal wave of dividends hit your crypto account without a huge balance, it can be a way to make money with cryptocurrency that you already have. That said, you’ll need to do some research to see which cryptos indeed pay dividends, and if the dividends they do pay are enough to make it worth it to you.

Some cryptocurrencies that do shell out dividends in the form of more coins (or tokens) include VeChain, NEO, Reddcoin, NAVCoin, Decred, and Komodo—and their annual dividends vary wildly. So, crypto dividends differ from stock dividends in that they’re not paying out cash, but rather, additional tokens.

6. Earn Dividends on Crypto-focused Funds

There is another way to earn crypto dividends, however, and it involves investing in mutual funds or exchange-traded funds (ETFs) that invest in the technology or platforms powering cryptocurrency. (To date, the Securities and Exchange Commission has not approved any ETFs that invest directly in cryptocurrency.)

While investing in crypto-related funds is not technically making money with cryptocurrency directly, it does allow you to generate passive income from the crypto and blockchain markets.

7. Crypto Lending

A final way to make some additional coin from your crypto investing activities is to get into cryptocurrency lending. Crypto lending basically involves a borrower and a lender, and an agreement between the two. There are several platforms that facilitate crypto lending, including Nexo, SALT lending, Oasis, and Celsius.

More specifically, cryptocurrency loans involve a borrower who offers their own crypto holdings as collateral, a lender who accepts the terms and offers either cash or another cryptocurrency, and an agreement that the borrower will pay the lender interest.

Generally, the lender and the borrower in a crypto lending agreement are both individuals, not institutions like banks. The key point is that a cryptocurrency is the focal point of the loan, either being used as collateral, or as the primary source of value that’s being borrowed.

So, for lenders, it’s possible to lend out crypto assets or holdings, and in turn, generate returns via interest payments in the form of additional crypto assets. This isn’t without its risks, of course, and it may take some time to research platforms that connect potential borrowers and lenders together. But again, if you’re looking for ways to put your cryptocurrency to work and earn you some additional money, lending it out is one possible avenue worthy of exploration.

8. Work for a Cryptocurrency Company

As crypto has expanded into the mainstream consciousness, so has the opportunity to work in the crypto industry. You could work for any of the hundreds of cryptocurrencies themselves, or for other companies or industries looking to take advantage of the crypto boom. In addition to developers, crypto companies need to hire for all the other roles of a growing business, including marketing, human resources, and cyber security.

The Takeaway

There are several ways to put crypto holdings to work to earn returns and additional money. All have their risks and potential rewards, but for enterprising crypto investors, there can be more to a return-boosting tactics than simply a “crypto HODL” strategy, or starting up a Bitcoin IRA.

Photo credit: iStock/filadendron

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.

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

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.

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	Bonus Payout
$50	$99.99	$10
$100	$499.99	$15
$500	$4,999.99	$50
$5,000+		$100

SOIN0621266

Aug

2021

Litecoin vs Bitcoin: Prices, Growth, & Advantages

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

Tempted to start investing in cryptocurrency? There are plenty of ways you can and many coins and tokens to invest in. However, it can be difficult for crypto newbies to know where to begin or which specific cryptocurrency might be best to build your portfolio with.

While many individuals start with Bitcoin, there are many different types of cryptocurrencies out there, like Ethereum, Litecoin, and Dogecoin.

Below, we’ll look at Litecoin versus Bitcoin, as well as the similarities and differences between the two markets.

Litecoin vs. Bitcoin: An Introduction

Litecoin may be a relative newcomer to many crypto investors’ lexicons. Litecoin is considered in the cryptocurrency market to be an altcoin, which is the term used for coins and tokens that aren’t Bitcoin.
So, before we delve into the differences and similarities between Litecoin and Bitcoin, we’ll quickly give an overview of both.

What is Litecoin?

Litecoin is a cryptocurrency that dates back to 2011 when it was created by Charlie Lee, a former Google computer scientist. Litecoin came about from a fork of the Bitcoin blockchain—meaning that it’s something of a Bitcoin offspring. In fact, Litecoin is often considered to be Bitcoin’s “little brother.”

Despite the “little brother” moniker, Litecoin is one of the largest cryptocurrencies in the world. As of July 19, 2021, Litecoin was the 13th biggest cryptocurrency in the world, data from CoinMarketCap.com show. Litecoin works in a very similar fashion to Bitcoin, allowing peer-to-peer, instant payments to be transacted across the globe.

Recommended: What is Litecoin?

Litecoin was designed as a faster alternative to Bitcoin, which is what makes it attractive to crypto traders and investors. It can create blocks on the chain (blockchain!) four times faster than Bitcoin, for example.

Back in 2017, the first time there was a wave of cryptocurrency buying among mainstream retail investors, Litecoin reached as high as $359.13 in December of that year. Around that time, founder Charlie Lee announced on Reddit that he was selling and donating all his Litecoin tokens. Prices tumbled throughout 2018, getting to as low as around $25.

In 2021, as stay-at-home orders and stimulus package checks drove investors back to buying cryptocurrency, Litecoin soared again, reaching as high as $386.45 in May. However, the market fell along with other cryptocurrencies, and as of July 19, 2021, Litecoin was trading at around $113.65.

What is Bitcoin?

Bitcoin is a cryptocurrency employing blockchain technology—essentially a decentralized ledger system—to operate. It’s decentralized, meaning that it isn’t issued or managed by a central authority, like a government. And usually Bitcoin is used as a currency to conduct transactions, or as an investment to buy, sell, and trade.

Since its initial inception in 1998 to its market debut in 2009, Bitcoin has become the largest and most recognizable cryptocurrency out there. And it’s the crypto that most others, including Litecoin, are trying to catch up with.

As mentioned, there was a wave of cryptocurrency buying among retail investors in 2017. That year, the price of Bitcoin went from $963.77 on Jan. 1 to $19,497.40 by mid-December–a more than 1,900% move! However, the crypto frenzy cooled in 2018, causing prices to plunge to the $3,000s by December 2018.

Recommended: What is Bitcoin and How Does it Work?

It took a pandemic and stay-at-home orders to drive the price of Bitcoin to new highs again. Other factors that potentially drove the price of Bitcoin included signs that institutional investors were warming up to the digital coin, as well as a decision by PayPal Holdings to allow customers access to cryptocurrencies.

Bitcoin was trading at around $5,000 when stay-at-home orders went into effect in the US in mid-March 2020. It went on to soar to $29,000 by the end of December 2020. Bitcoin eventually reached a new record high of about $63,000 in April. However, volatility plagued Bitcoin again in 2021, with prices plummeting, and on July 19, 2021, they were around $30,000.

Litecoin vs Bitcoin: Similarities

We already noted that Litecoin was somewhat born of Bitcoin. For that reason, it makes sense that there’d be a lot of similarities between the two. Here is a rundown of some of the ways that the two stack up.

Storage and Transactions

One way in which Litecoin and Bitcoin are similar is how they are transacted and stored. Both can be purchased or traded for US dollars. And when it comes to actually making transactions using either crypto, the underlying processes involving validation and confirmation are more or less the same.

As for storing Litecoin and Bitcoin, investors need a hot wallet or cold wallet in order to keep their holdings. Much the same with many other cryptocurrencies.

Proof of Work and Algorithms

Both Bitcoin and Litecoin use a “proof of work” algorithm, albeit they use different specific algorithms. Essentially, a proof of work algorithm is a process or ecosystem by which miners or other actors active on the crypto’s blockchain network validate ownership. It also relates to how new coins are mined.

Since new Litecoins and Bitcoins are both mined by solving complex equations, new blocks added to the blockchain are validated by the network using this proof of work protocol. It’s an energy-intensive process and one that both Litecoin and Bitcoin use (again, in slightly different ways) to summon new coins.

Utility

While you may not be able to use Bitcoin or Litecoin to purchase goods or services everywhere—although some businesses will accept crypto as a form of payment—the basic utility for both Bitcoin and Litecoin comes from their ability to store value.

With that in mind, both operate and are used like any other currency, in that they can be used to pay for stuff. If the person on the other side of the transaction is willing to accept it, that is. While it may be relatively rare to find a business willing to accept Litecoin for, say, a pizza, that may change in the future if and when crypto becomes a more common form of accepted payment.

In that case, the utility of cryptos will increase substantially.

Recommended: How to Start Trading Litecoin

Bitcoin vs Litecoin: Differences

As we’ve laid out, the battle between Litecoin versus Bitcoin is something akin to a slap-fight between two brothers or cousins. The two have several similarities, in other words. But that doesn’t mean there aren’t some rather stark differences between the two, as well.

Availability and Distribution

In terms of availability, Litecoin reigns supreme. Bitcoin is limited to a supply of 21 million coins, and the majority of them have already been mined. Conversely, Litecoin’s supply is limited to four times that amount: 84 million total coins. This is because Litecoin’s developers created it to process transactions four times faster than Bitcoin, and thus, produce four times as many coins.

So, while there may be more Litecoins (eventually) on the market, it’s important to remember that cryptos like Bitcoin and Litecoin can be divided up and sold as fractionals. For example, an investor could purchase 1/10,000 of a Bitcoin, which, in effect, can help mediate the scarcity effects over time.

Mining Rewards

For many in the crypto space, the prospect of earning rewards via the mining process is a selling point. And this is another important area in which Litecoin versus Bitcoin differ to a degree.

Bitcoin mining rewards gradually reduce over time, as fewer and fewer Bitcoins remain to be mined. At first, a miner would be rewarded 50 Bitcoins for mining a block, a reward that falls by 50% every four years or so, until the reward reaches zero. That won’t happen until the next century, though. The current reward is 6.25 Bitcoins.

As for Litecoin, the mining and “halving” process is similar. But the rewards are different. Miners can currently earn 12.5 Litecoins per block—twice as much as Bitcoin miners.

Transaction Speed

As mentioned, Litecoin processes transactions a whole lot faster than Bitcoin—four times faster. Transactions occur on the blockchain, where they are confirmed and validated. And this takes a little bit of time: For Bitcoin, something like ten minutes. That means that a new block is mined and added to the chain every ten minutes.

But Litecoin is faster. Since Litecoin processes transactions four times faster than Bitcoin, the same validation and confirmation process occurs roughly every two-and-a-half minutes.

The reason Litecoin is so much faster is partly due to design by the founder Charlie Lee, who made tweaks to the original Bitcoin system. Litecoin transactions are also faster due to the fact that there’s less congestion on the network. The transaction time accounts for the amount of time it takes for a block to be verified and added to the blockchain.

Transaction Fees

Transaction fees also tend to be cheaper on the Litecoin network, usually totaling around 3 to 4 cents on average per transaction. Meanwhile, Bitcoin’s average transaction fee is around $7.60.

Fees are partly lower on the Litecoin network because the design sets aside coins to incentivize miners, which isn’t incorporated into the transaction fees.

The Takeaway

Whether you choose to invest in crypto will ultimately come down to you—your goal, risk tolerance, etc. And whether or not you should do it is a question best suited for a financial professional.

That said, if you are looking at investing in Litecoin versus Bitcoin, you can use the above criteria to help gauge your decision. There are pros and cons to each, and though they’re similar in a number of ways, it may simply come down to price. The price of a Bitcoin is, as of June 2021, around $40,000, whereas the Litecoin price is around $165.

In addition to price, altcoins like Litecoin can demonstrate greater volatility. However, it’s also true that transaction fees and costs tend to be lower with Litecoin.

If you do decide to pull the trigger and invest, the steps to invest in Litecoin are more or less the same as they are to invest in Bitcoin—so, at least there’s one easy aspect to making the decision. And also remember that there are other cryptos out there, too. It’s not merely a choice between Litecoin versus Bitcoin, it can also be a decision between Litecoin versus Ethereum, for example, too.

Photo credit: iStock/Pekic

Aug

2021

What Is Proof of Stake?

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Proof-of-stake is what’s known as a consensus mechanism, as is proof-of-work. They are both mechanisms by which a blockchain can maintain its integrity.

Consensus needs to be achieved on a blockchain as a solution to the “double spend” problem of money in the digital realm. To have value, users of a cryptocurrency have to be able to only spend their coins one time. Otherwise, people could send the same transaction over and over, and the currency would be worthless.

This is a tough problem to solve in the absence of any kind of centralized governing authority like governments or banks. The first digital currency to solve this problem was the Bitcoin network using proof-of-work (PoW).

Proof-of-stake (PoS) has started to be seen as a potential alternative to proof-of-work. Some developers believe that PoS could be more efficient than PoW while accomplishing the same thing, although the subject is still being debated.

What Is Proof-of-Stake (PoS)?

Proof-of-stake is a different consensus mechanism that can be used by blockchain technology to verify their transaction history. While miners in PoW networks use electricity to mine blocks, validators in PoS commit stakes to validate blocks.

Why Do Blockchains Need Consensus?

In centralized systems, preventing double spending is relatively easy. A single entity manages the ledger of transactions, simplifying the process. If Alice wants to give a dollar to Bob, the central manager just takes a dollar from Alice’s account and gives it to Bob. Nothing more is needed. Third-party payment apps like PayPal function in this manner.

With cryptocurrencies, however, things get more complicated because there is no single entity controlling the system. Keeping a record of the ledger of transactions becomes more difficult.

Instead of one central server, many thousands of people around the world run the Bitcoin software. These individuals are referred to as “nodes.” The nodes need to have a way to agree with each other, or to “achieve consensus.” All the nodes need to be on the same page for the network to function seamlessly.

Accomplishing this is harder than it might sound. This made decentralized digital currency something that eluded the grasp of researchers and developers for decades. That is, until 2009 when the Bitcoin network launched, thanks to Satoshi Nakamoto. That’s the pseudonym used by the person or group who wrote the Bitcoin white paper and invented the proof-of-work algorithm that first made cryptocurrency a real-world phenomenon.

Proof-of-Stake vs Proof-of-Work

Proof-of-stake has hopes of being an improvement over proof-of-work, but this has yet to be proven and is still a topic of much debate. It seems likely that proof-of-stake will indeed use less energy than proof-of-work, but other variables seem less clear.

Namely, it’s not certain if proof-of-stake will be as secure against threats like 51% attacks, and it remains to be seen if PoS will wind up being decentralized or not.

Let’s first take a look at how PoW works before getting into how PoS is different.

Proof-of-Work

Proof-of-work is the most commonly used consensus mechanism. So far, it has proven to be fairly secure and reliable, though not infallible. Proof of work is fundamental to how bitcoin mining operates.

Miners are the people who run computers that maintain the network by solving complex mathematical problems. The miner that first solves the problem gets to add the next block of transactions to the blockchain and also earns the new coins minted along with that block. This process creates a verifiable history of transactions on the blockchain.

PoW has shown to be a strong and secure consensus mechanism. It would be so difficult to overtake a large PoW network that any potential bad actors would be incentivized to become honest participants in the network instead. In other words, it’s easier and more rewarding to just become a miner than it is to attack the network.

Some of the main criticisms of the PoW mechanism of achieving consensus are that the process can be energy-intensive, it has difficulty scaling, and it can trend toward centralization due to the high costs of entry.

Proof-of-Stake

With PoS, validators are the network participants who run nodes. They do this by staking crypto on the network, which involves locking up a certain amount of coins for a set period of time, making them unusable. Validators who do this become eligible to be randomly selected to find the next block.

Other validators then “attest” that they also believe the block to be valid. Once enough validators have done this, the block will be added to the blockchain. All validators involved in the process are rewarded with new coins. Validators that propose blocks or go offline for a time get punished by having some of their staked crypto slashed by the protocol.

One of the main differences between PoS and PoW is that PoW requires network participants to expend energy in the form of electricity to mine blocks. PoS requires network participants to stake their own crypto on the network, or in other words, to deposit money. For this reason, proof-of-stake is praised for using less energy than proof-of-work.

While some argue in favor of proof-of-stake’s potential decentralization, others criticize it. For example, when Ethereum upgrades to Ethereum 2.0 and a proof-of-stake model, it will require a minimum of 32 ETH (about $67,200 at the time of writing) to become a validator. The average individual cannot afford this.

So, centralized exchanges will deposit the crypto necessary to become validators (using the crypto they have on deposit from users) and distribute some of the rewards to their account holders. This could wind up making the entire system even more centralized than proof-of-work, with a few large exchanges being the only validators.

Proof-of-Stake and 51% Attacks

A 51% attack refers to an event where an individual or group attempts to gain control of a network by controlling the majority of hashing or staking power.

It’s unclear if PoS networks are more or less prone to 51% attacks than PoW networks. The subject is mostly theoretical, and 51% attacks have rarely occurred in the real world.

Conducting this type of attack against a network as large as Bitcoin would be practically impossible due to the enormous amount of computational power required.

When it comes to proof-of-stake, attackers would have to buy up more than half the number of tokens being staked. From there, the attacker could become the sole validator and control the network.

One theory is that this could be difficult to achieve because of how high it would drive the price of any particular token. The hope is that people would rather participate honestly in the system by staking tokens than go through the trouble of trying to attack the network, which could get expensive fast.

The Takeaway

While it’s not too hard to answer the question “what is proof-of-stake,” answers to how it works over the long-term on a large scale are lesser-known. Some existing tokens do utilize PoS, but they tend to be altcoin cryptos that are younger and smaller than Bitcoin or Ethereum.

Proof-of-stake could be an improvement over proof-of-work or it could be a regression. The world will have more certainty on the matter after the Ethereum network upgrades to the Ethereum proof-of-stake model known as “the Merge”.

While it does take significant energy to validate transactions using proof-of-work, some reports indicate that over 70% of energy used to mine bitcoin comes from renewable sources. On top of that, the total energy used is also a fraction of that needed to power the gold mining or banking industries.

However, it’s significant that the Bitcoin network has faced criticism for its high energy usage. Less energy-intensive consensus mechanisms might not be a bad thing if they can achieve similar results.

Photo credit: iStock/shapecharge

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.

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.

SOIN0621255

Aug

2021

Blockchain in Insurance: Evaluating the Pros & Cons

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Blockchain, the technology that powers cryptocurrency, has several other use cases, including the ability to facilitate financial agreements and contracts quickly and transparently. That makes blockchain a particularly interesting technology for the insurance industry, which revolves around the creation and execution of financial contracts.

Blockchain 101: The Basics

Blockchain technology is the technology allows users to hold and transfer Bitcoin and other cryptocurrencies. A person or group known as Satoshi Nakamoto invented blockchain technology in 2009.

Blockchains are a specific type of distributed ledger technology (DLT). While all blockchains are distributed ledgers, not all distributed ledgers are blockchains.

Distributed ledgers keep records of transactions or other information throughout different computers in different locations. A blockchain is a special type of distributed ledger that developers created to be immutable (can’t be changed) and decentralized (can’t be centrally controlled).

A blockchain works by processing transactions into groups referred to as “blocks.” Each new block gets attached to the block that came before it, creating an ever-growing chain of blocks. This is where the term “blockchain” comes from. Altering the data inside any single block would require changing the entire chain, something almost impossible to do in most cases.

However, the data held in blocks can take many forms, not just financial transactions. The ability to create an immutable, transparent, decentralized ledger of data without a single point of failure means there are many potential applications of blockchain.

Recommended: A Guide to Blockchain Technology

How Does Blockchain Help Insurance?

There are a number of key ways that insurance blockchain could benefit the industry:

Enhanced efficiency

With so many time-consuming manual processes with the potential for human error, blockchain can streamline the processing of insurance contracts.

Trust and transparency

The encrypted nature of blockchains mean that transactions can be trusted as secure and authentic, which both ensures customer privacy and leads to less confusion.

Claims processing

Real-time data collection and analysis become possible with blockchain, bringing with it the potential to speed up claims processing and payouts.

Smart contracts

These virtual contracts can be programmed to automatically execute when certain conditions are met. These could be used to create insurance policies that are cheaper to administer and also cost less for customers.

Insurance fraud

People often falsify information in claims for casualty and property insurance, costing the industry more than $40 billion per year. The way the insurance industry conducts business today leaves room for error and increases the risk of fraud. If insurance companies were able to store information about their claims on a blockchain, this could help them more easily identify suspicious behavior.

Block chain could reduce such fraud by introducing:

• Automated claims via smart contracts

• Automated insurance claim payouts

• Authentication for documentation, lowering the risk of fraud

• Creating a permanent record of all transactions

Drawbacks to Blockchain in Insurance

Introducing Blockchain to insurance also has some potential downsides. While decentralization makes a blockchain more secure by eliminating any single point of failure, it can be difficult to maintain. When a single organization creates its own blockchain for specific purposes, the computers that run the network (referred to as nodes) could wind up becoming centralized, leading to the destruction of one of the key benefits of blockchain.

There could also be a problem with trust. With the Bitcoin blockchain, people may trust the transaction data because from the moment they’re mined, users can see where coins go, at what time they moved, what crypto wallets they’re in and what crypto wallets they used to be in. all of this information is transparent, provided that the asset being tracked is native to that blockchain.

Most of the potential use cases for blockchain involve assets that didn’t originate on-chain (like insurance claims) but were first created somewhere else. For this reason, it’s possible that the data being put onto a blockchain could be inaccurate. And if the blockchain truly is immutable, those inaccuracies might be impossible to fix.

Potential Blockchain Use Cases in Insurance

Blockchain for insurance could create many advantages for the industry. The potential benefits mostly stem from the universal features of blockchains, like immutability, blockchain security, and transparency (or privacy, if that’s what’s required). There are several ways that insurers could put this to use:

Health Insurance

One potential area of use for blockchain is in health insurance. Insurers currently keep health records on their own systems, and transmitting that information from one provider to another can be inefficient.

However, blockchain could make it possible to conduct faster and more accurate sharing of medical data between insurers and healthcare providers in a way that is private and secure. This could result in health insurance claims being processed faster and customers paying lower premiums for their coverage.

Property Insurance

Property insurance and casualty insurance includes home, commercial, and auto insurance. The dollar amount of premiums written for this type of insurance was more than $638 billion in 2019. Introducing smart contracts could make claims processing more accurate and efficient. Smart contracts execute themselves automatically when certain network conditions are met.

For example, a smart contract for auto insurance could automatically execute and trigger a payment after a car accident.

Travel Insurance

Delayed flights and other unexpected travel interruptions can create headaches for everyone involved. People who hold travel insurance policies have to go through a long and arduous process just to file a claim. Blockchain can make the whole process smoother and faster, allowing customers to automatically get paid for events like flight delays and receive payouts immediately.

Title Insurance

Title insurance is intended to make up for losses created due to mistakes in titles or similar legal documents. Title insurance underwriters often share information about their policies between themselves. A blockchain-based platform could allow underwriters to easily see previous title insurance policies automatically. This could not only speed up real estate transactions, but also reduce potential fraud due to the transparent and immutable nature of blockchain.

What Companies Use Insurance in Blockchain?

Some companies throughout the world have already begun implementing blockchain technology in insurance for their day-to-day activities. While decentralized finance (DeFi) is revolutionizing financial services, blockchain is being used by some existing insurance companies to improve their existing practices.

Blue Cross

Blue Cross, based in Hong Kong, uses blockchain to prevent fraud and accelerate the processing of insurance claims. The platform verifies data in real time and gets rid of the need to reconcile claims data between different parties like insurers and healthcare providers.

Lemonade

Lemonade, based in New York, is a company that combines artificial intelligence and blockchain to offer insurance to homeowners and renters. Lemonade uses smart contracts to instantly verify losses when a customer makes a claim. If a claim gets approved, the AI and blockchain system makes payment immediately.

FidentiaX

FidentiaX, based in Singapore, is a marketplace for tradeable insurance policies. Users have the ability to buy and sell their policies on a blockchain. Users can buy insurance policies from others and access all relevant data in a single location. The company developed something called ISLEY, which lets customers get detailed overviews of policies, receive notifications about premiums, and see records of their history.

IBM

IBM is making its blockchain available to insurers, streamlining recordkeeping and allowing for instant updates after transactions. The company claims that users also reduce management costs and enhance customer satisfaction.

Allianz

The insurer is testing a blockchain-powered platform for its commercial insurance business that would allow for faster and more secure police and claims management.

Universal Fire & Casualty Insurance

This small business insurer has begun accepting crypto as a method of premium payments.

MetroMile

This pay-as-you-drive car insurer is not only accepting crypto for premium payments but also using it to pay out claims.

The Takeaway

The blockchain has many uses outside of sending cryptocurrency, and the insurance industry could likely benefit from many of those uses.

Photo credit: iStock/blackCAT

Aug

2021

SegWit: Definition & How it Works

By Matthew Zeitlin | Growing Wealth, invest, Investing, Terminology | Comments Off

SegWit is an update to Bitcoin’s protocol that changed the way that the blockchain transfers information. Protocols are the rules that govern the way that Bitcoin and other cryptocurrencies work.

What Is SegWit?

SegWit is an example of the Bitcoin development community being able to solve a problem while still maintaining the integrity of the Bitcoin protocol and blockchain.

SegWit stands for “segregated witness,” and it’s a key turning point in the history of Bitcoin and cryptocurrency, and represents a fork in the road, or at least a fork in Bitcoin. The SegWit fork changed the rules, allowing for larger blocks and removing signature data from Bitcoin transactions.

How Does SegWit Work?

SegWit removes (or segregates) the signature (or witness) from the block, moving it instead to the back of the transaction. This frees up more space for the transaction itself.

What Problems Does SegWit Solve?

SegWit solves several issues with earlier versions of the Bitcoin protocol.

The Transactions Problem

The original Bitcoin protocol limits the size of “blocks” to a single megabyte. The whole Bitcoin network “confirms” a new block every ten minutes, with a few transactions taking place every second. These blocks and the confirmation process comprise the foundation of Bitcoin.

As Bitcoin scaled and got bigger and more miners, developers, and users became part of the Bitcoin community, a debate arose around the size of blocks. Should it increase beyond founder Satoshi Nakamoto’s original vision or stay the same?

If the community decided to make an increase, it would have to receive approval by consensus, or perhaps risk splitting Bitcoin apart into separate protocols.

The Malleability Problem

The Blockchain also had some security and efficiency issues, known as “malleability.” Prior to Segwit, every Bitcoin transaction included a “signature” that became part of the transaction confirmation. The signature, with the use of a private key, would become part of the block transfer, taking up space that could have been more Bitcoin transactions. Another word for these signatures is “witness,” and so was born the idea of Segregated Witness, or SegWit.

The theory behind SegWit held that Bitcoin transactions could be more efficient, more secure, and better recorded on the Blockchain itself. This would also allow for developers to build transfer improvements on top of the original Bitcoin protocol, leading to the development of the Lightning Network.

The Scalability Problem

One of the major issues addressed by SegWit was the so-called “scalability problem,” which refers to the issue with block sizes that can limit the speed and scale of transactions on a Blockchain network.

When Was SegWit Created?

The Bitcoin Segwit update took place on August 23, 2017 and changed the way information was transferred on the blockchain.

Prominent Bitcoin developer Pieter Wuille originally proposed the update in 2015 as a way to address a problem in the less-than-a-decade-old protocol that governed the cryptocurrency. He and others believed that transactions took too long to process and that they had some security issues.

There were two ways, known as forks, to address the problem.

A hard fork

A hard fork creates a new system all together. Bitcoin Cash is an example of a hard fork, which enabled large block sizes, but ultimately created a new network.

A soft fork

With a soft fork, the new system works with the old one. This is the option that developers used for SegWit, which became one of the most prominent and important Bitcoin forks. In the dispute between soft fork vs hard fork, SegWit’s successful adoption is a victory for the soft forks.

What Was Segwit2x?

Some prominent Bitcoin miners supported several approaches to the scale issue inherent in the original Bitcoin protocol. To move forward, they came to what’s known as the “New York Agreement,” a plan to implement SegWit and do a hard fork of Bitcoin to increase the block size limit. This was “SegWit2X.”

However, Bitcoin’s developers didn’t endorse the plan and it never reached the consensus necessary for a successful hard fork. These developers have huge sway over the greater Bitcoin community and without their support, a fork wouldn’t have enough takers to challenge Bitcoin in its present set-up. By late 2017, SegWit2X had collapsed and early the next year, SegWit was fully operational on consumer cryptocurrency platforms like Coinbase. And major crypto wallets, the hardware and software products that allow for safe crypto storage, had signed on to the SegWit update.

The failure of SegWit2x shows that even large Bitcoin mining pools, groups of miners that run the hardware that creates new Bitcoin, don’t have total sway over the Bitcoin community and can’t singlehandedly dictate its direction – or its forks. Bitcoin miners have tended to prefer Bitcoin changes that would increase the block size as opposed to segregating out signatures, since that would bolster the fees they get from the network for processing blocks. But the Bitcoin community is more than just its miners, and so their opinion only means so much.

Should You Use SegWit?

While the Bitcoin scalability debate is hardly over, for the time being, Bitcoin itself remains in the driver’s seat in terms of usage and developer activity compared to its rivals and hard forks.

By early last year, at least two thirds of transactions used SegWit, indicating that the soft fork “works” for many in the Bitcoin community. By the end of 2020, one of the last exchanges to hold out, Binance, announced that it would support SegWit.

There are several benefits to using Segwit for crypto transactions, including lower transaction fees and faster transactions.

The Takeaway

SegWit was a major upgrade to the Bitcoin protocol, and one that has helped accelerate widespread adoption of the cryptocurrency in recent years.

Photo credit: iStock/BartekSzewczyk

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The Takeaway

Litecoin vs Bitcoin: Prices, Growth, & Advantages

Litecoin vs. Bitcoin: An Introduction

What is Litecoin?

What is Bitcoin?

Litecoin vs Bitcoin: Similarities

Storage and Transactions

Proof of Work and Algorithms

Utility

Bitcoin vs Litecoin: Differences

Availability and Distribution

Mining Rewards

Transaction Speed

Transaction Fees

The Takeaway

What Is Proof of Stake?

What Is Proof-of-Stake (PoS)?

Why Do Blockchains Need Consensus?

Proof-of-Stake vs Proof-of-Work

Proof-of-Work

Proof-of-Stake

Proof-of-Stake and 51% Attacks

The Takeaway

Blockchain in Insurance: Evaluating the Pros & Cons

Blockchain 101: The Basics

How Does Blockchain Help Insurance?

Enhanced efficiency

Trust and transparency

Claims processing

Smart contracts

Insurance fraud

Drawbacks to Blockchain in Insurance

Potential Blockchain Use Cases in Insurance

Health Insurance

Property Insurance

Travel Insurance

Title Insurance

What Companies Use Insurance in Blockchain?

Blue Cross

Lemonade

FidentiaX

IBM

Allianz

Universal Fire & Casualty Insurance

MetroMile

The Takeaway

SegWit: Definition & How it Works

What Is SegWit?

How Does SegWit Work?

What Problems Does SegWit Solve?

The Transactions Problem

The Malleability Problem

The Scalability Problem

When Was SegWit Created?

A hard fork

A soft fork

What Was Segwit2x?

Should You Use SegWit?

The Takeaway

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