Growing Wealth Archives | Page 213 of 224

Aug

2021

Guide to Eco-Friendly Cryptocurrencies

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Although there are many benefits to Bitcoin, the cryptocurrency has come under scrutiny due to the significant electricity use involved in mining and keeping the blockchain network running. This issue is one of the reasons Bitcoin has not become more widely adopted than it has so far.

Bitcoin miners globally use thousands of computers to solve complex algorithms in order to mine new bitcoins and verify transactions. This computational work keeps Bitcoin decentralized, secure, and available for use 24/7, but it also has a relatively large carbon footprint. However, not all digital currencies use as much electricity as Bitcoin, and there are ways that Bitcoin can be made into a more eco-friendly cryptocurrency as well.

The crypto industry recognizes Bitcoin’s electricity use, and is taking steps to reduce it. Some crypto miners use renewable energy sources in an effort to keep their costs down. The Bitcoin Mining Council claims that more than half of Bitcoin mining uses sustainable electricity, but some scientists have found that the Bitcoin network could consume nearly as much electricity as all global data centers combined.

Still, leaders in the crypto industry signed the “Crypto Climate Accord ,” an agreement to power 100% of global blockchains by renewables by 2025.

Why Does Bitcoin Require So Much Energy?

Bitcoin requires so much electricity because it uses a “proof-of-work” system that requires “work” using computing power in order to keep it running. The proof-of-work system essentially uses the proof of work as a way of validating transactions, mining new bitcoins, and keeping the blockchain working.

In addition to using more renewable energy for Bitcoin mining, there are other ways that Bitcoin can reduce its energy use in the coming years, such as the introduction of the lightning network, cloud mining, and off-chain transactions. But for now, Bitcoin’s electricity use continues to be high.

Recommended: How Much Energy Does Bitcoin Use?

12 Most Sustainable Cryptocurrencies

Are any cryptocurrencies eco-friendly? Yes, there are other types of cryptocurrencies and proof systems that don’t use as much electricity. These include “proof-of-stake (PoS),” “proof-of-storage,” and “proof-of-space.” Rather than relying on energy-intensive work, these proof systems use other types of verification and incentive structures. Even among proof-of-work cryptocurrencies, some are more energy-efficient than others, depending on the type of devices used for mining and the way the algorithm works.

There are alternative cryptocurrencies, or altcoins, that use far less electricity than Bitcoin. Some coins simply have fewer transactions, while others are actually designed in ways that are more energy efficient. Some popular cryptocurrencies that may be more eco-friendly than Bitcoin include:

1. Ethereum (ETH)

Ethereum is in the process of switching over to a PoS model, which will drastically cut its electricity use.

2. Nano

Nano is very energy efficient because it doesn’t even use mining, it uses a different form of proof-of-work system. It offers instant transactions with zero fees.

3. Chia (XCH)

Touted as one of the most eco-friendly cryptocurrencies, Chia uses a unique “proof of space and time” model that utilizes storage space on users’ personal computers to keep its network running. It creates “plots” of numbers, which it “farms” over time. Bram Cohen, the creator of BitTorrent, created Chia. The coin’s only environmental downside is that it requires the use of solid-state drives, burning through them quickly and creating a lot of e-waste.

4. Stellar Lumens (XLM)

A popular cryptocurrency that uses a small amount of electricity, Steller has a unique consensus model that uses nodes instead of a proof algorithm. It is a network created to be a bridge between cryptocurrencies and traditional financial institutions, similar to PayPal. Users like Stellar because it is fast, simple, and cost-effective for sending large transactions all over the world across any currency.

5. Polkadot (DOT)

Another Ethereum co-founder, Gavin Wood, created Polkadot, which uses a multi-chain network to go between different blockchains. It uses a nominated proof-of-stake (NPoS) model that requires holding or staking coins in the network instead of a mining process that would use more electricity.

6. Hedera Hashgraph (HBAR)

Like Nano, HBAR doesn’t use mining, and has quick, low-fee transactions. Large corporations such as Google, Boeing, and IBM support this cryptocurrency, which is used for micropayments and transaction fees.

7. Holo (HOT)

Holochain doesn’t use mining or much electricity, and it is scalable and less expensive than many other cryptos. Instead of a proof system, the cryptocurrency enables users to earn “HoloFuel” in exchange for sharing computing power and space on their personal computers to host peer-to-peer (P2P) apps on the network. This creates a very large network that can scale over time without centralization or huge increases in energy use.

8. Ripple (XRP)

Another popular cryptocurrency designed to use less electricity than Bitcoin, Ripple has its own calculator which determines the environmental impact of events and assets on its blockchain network.

Recommended: What Is Ripple (XRP)? How Does It Work?

9. IOTA

Iota doesn’t use mining, but instead uses a network of smaller devices that use less electricity.

10. Solarcoin (SLR)

This unique eco-friendly cryptocurrency promotes the creation and use of solar energy. Users who create solar energy are rewarded with Solar coins.

11. Bitgreen (BITG)

Similar to Solarcoin, Bitgreen rewards users for eco-friendly activities such as volunteering or carpooling.

12. EOSIO (EOS)

Another eco-friendly cryptocurrency. EOS uses proof-of-stake along with pre-mined tokens, rather than energy-intensive mining. Users like this crypto because it is very easy for developers to use, is low cost and highly scalable.

The Takeaway

Crypto evangelists may appreciate the many benefits of investing in digital assets, but worry about the impact on the environment and question whether blockchain is environmentally friendly. However, there are many other cryptocurrencies besides Bitcoin, many of which have a much smaller carbon footprint, and may make sense as one type of investment in a diversified portfolio.

Photo credit: iStock/MicroStockHub

Aug

2021

What is a Crypto Bear Market?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Since Bitcoin’s launch in 2009, several crypto crashes have occurred, including some that have completely wiped out specific altcoins. Since those crashes happened in lesser-known forms of crypto or without extensive media coverage, not all investors are aware of them.

Despite the crashes, however, there haven’t been any sustained bear markets in Bitcoin, which is the de facto benchmark for cryptocurrencies.

What Is a Crypto Bear Market?

A crypto bear market is one in which the value of major cryptocurrencies, such as Bitcoin, have fallen at least 20% from their recent highs, and are continuing to fall. By contrast, a crypto bull market is one in which the major cryptocurrencies are on the rise.

One of the most famous crypto crash occurred in December 2017, when Bitcoin fell from almost $20,000 per coin to just over $3,200 in a matter of days. After that, it rallied, reaching a price of nearly $65,000 per coin in April of 2021, before dropping again to below $32,000 in May.

Traders aiming to time the markets aim to purchase cryptocurrencies or other assets at the bottom of a bear market, but it’s often difficult to know when a bear market has actually ended.

Why Is It Called a Bear Market?

The terms bull and bear markets come from stock trading, and according to some accounts their origins come from the style of attack each animal uses – a bull will charge with its horns pointed upward. A bear, on the other hand, towers over its opponents and swipes down.

Similarities Between Crypto and Stock Bull & Bear Markets

Investors don’t have experience with the performance of cryptocurrency during a stock bear market. The last true, sustained stock bear market occurred in 2007-2009. At the time, Bitcoin had just launched, gaining attention, if not yet acceptance. While calling a bull or a bear market in stocks or in cryptocurrency requires technical analysis of values, there are several other that both markets have in common:

Volatility

The value of both stocks and cryptocurrencies fluctuate over time, but some cryptocurrencies tend to gyrate severely due to liquidity constraints within the market and a less established derivatives market.

Recommended: Why Is Bitcoin So Volatile?

Trader Sentiment

In both the stock market and cryptocurrency negative trader sentiment can portend a bear market. However, contrarian traders in both cases may see market dips as an opportunity to buy cryptocurrency at a discount. Outside Influences Bear markets, in both stocks and cryptocurrency, can reflect external factors that change the way that investors value a particular asset. Those factors can include overall economic strength, interest rates, or geopolitical factors.

What Are the Signs of a Crypto Bear Market?

One of the most famous maxims in all of investing is “buy low, sell high.” In four words, it’s how investors make money. And it’s why, for crypto investors, knowing when a bear market is coming, or when one is just about to end, can make all the difference.

This is where the relative youth of the crypto market makes things difficult. With the stock market, economists, analysts and traders have decades and even centuries of data to sift through to find the trends and triggers that occurred just before a bear market turned to a bull and vice versa. Bitcoin, on the other hand, was launched in 2009.

Some warning signs of a crypto bear market include:

• Lower trading volume: This could indicate that people have begun holding their coins amid market uncertainty.

• “Backwardation”: This occurs when the price of an asset in the futures market is lower than its current market price.

• Death cross: This is a technical indicator in which an asset’s 50-day moving average crosses its 200-day moving average.

What Are Indicators of a Crypto Bull Market?

Even though crypto’s history has essentially been a very lengthy bull market followed by a short, terrifying market free-fall, and another market bull run, some trends have popped up for investors to watch.

• Liquidity. Crypto took a hit at the beginning of the lockdowns in spring of 2020, when investors needed cash. But so did everything else. Then it rose, as the crisis receded and the Fed pumped trillions into the economy, aiding in Bitcoin’s liquidity and other cryptos alike.

• Adoption: If more companies and financial institutions adopt crypto, then it should move more in step with the economy, and be subject to less violent fluctuations. It’s a sign that the Wild West is being tamed. But adoption is a double-edged sword. If it’s your cab driver and barber who are talking about crypto, then it could mean that the market is oversaturated.

Should I Invest in Crypto?

There is also a baseline level of uncertainty with crypto that doesn’t exist in many other asset classes. While nobody thinks that regulators will shut down or curtail the stock market or that hackers will breach a stock exchange, these are common concerns with Bitcoin and other forms of cryptocurrency.

In addition to concerns about cryptocurrency regulation and blockchain security, there is also a growing debate about the energy costs of Bitcoin and other cryptocurrencies, which adds to the question mark over the long-term viability of crypto as a whole, at least in its current form. Those existential doubts rear up whenever Bitcoin, or other major cryptos, take a steep decline, or fall for too long.

That existential doubt can also be a major plus for investors, however. The shadows over crypto means that their declines are often incredibly steep. That creates regularly occurring opportunities to buy the crypto of your choice at a very steep discount, if you believe in the long-term growth of crypto as a whole, and if you can wait for the dip. Proponents of cryptocurrencies, including Bitcoin, believe that its growing adoption and use make it a smart long-term investment.

The Takeaway

Like all assets, cryptocurrencies go through cycles in which their value rises and falls. For short-term investors, especially, knowing the signs of a bear market can help you create a portfolio strategy that makes sense for your risk appetite and financial goals.

Photo credit: iStock/Eva-Katalin

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.

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

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

SOIN0521234

Aug

2021

What is an Impermanent Loss?

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Impermanent loss can be a financial fact of life for cryptocurrency token holders – who may not even be aware it exists.

Impermanent loss involves a liquidity risk centered on the pricing algorithms used by so-called decentralized finance (DeFi) exchanges, which can impact portfolio asset values.

To define impermanent loss, cryptocurrency investors must first understand the difference between holding tokens in an automated market maker (AMM) and holding coins on your own, usually in a crypto wallet. (An AMM is a digitalized and decentralized cryptocurrency exchange protocol that uses its own statistical formula to set cryptocurrency prices.)

Liquidity providers act as a broker of sorts, by depositing an equal number of assets into the exchange, with two funded assets per liquidity pool. Liquidity providers stake their digital assets to earn trading fees made in the pool, with the size of the liquidity pool contribution. Impermanent loss is the opportunity cost that comes from staking crypto with an AMM.

Recommended: What Is DeFi (Decentralized Finance)?

As in-the-know crypto traders might say, impermanent loss could leave an investor rekt, meaning with a substantial loss.

What Is Impermanent Loss?

An impermanent loss is the money that a liquidity provider loses when the value of crypto deposited into an automated market maker, a type of DeFi exchange, differs from the value of that crypto if it were stored in a crypto wallet.

Pricing volatility can present an investment risk when liquidity-minded investors hold tokens in an AMM, and when those prices do diverge significantly, impermanent losses can mount up, impacting the value of an overall crypto portfolio.

However, the losses can be offset–completely or partially–by fees that the decentralized exchange pays for liquidity providers. Exchanges that have high volume tend to pay higher fees to liquidity providers, which can minimize the impermanent losses that leave investors at a net negative.

How Does Impermanent Loss Happen?

The key factor with impermanent loss is the way automated market makers work. As noted above, AMM’s enable investors to trade digital financial assets like cryptocurrencies without the permission of the token holder. AMMs allow for this type of trading by leveraging liquidity pools in lieu of the more stable and traditional form of asset trading, which relies on the “buyer-and-seller” stock exchange model.

AMMs allow any investor to fund a liquidity pool and act as a de facto market maker in pairing trades and charging trading fees. Impermanent risk is the downside risk in that scenario.

With volatile assets like cryptocurrency, over time the value of those assets may not equal the value they held when first deposited (i.e., their dollar value can shift downward or upward from the time of deposit to the time of withdrawal.) The more substantial the price change, the higher the chances the liquidity provider is exposed to impermanent loss.

How much can a liquidity pool funder lose? The science isn’t exact, but data indicates that an asset price change of just 1.25% can lead to a 0.6% deprecation in funded pool assets, relative to holding the assets in a digital wallet instead of using the assets to pair trades. A significantly higher price change of five times the initial price deposit could lead to a 25% decrease in asset value.

When pairing trades, liquidity pools may have one asset that’s relatively stable and one asset that is susceptible to higher pricing volatility. In that case, the odds of a significant loss impairment are higher than when the paired tokens are both stable and have a low exposure to impairment loss.

An Impermanent Loss Example

In an AMM scenario, the protocol’s decentralized structure digitalizes the cryptocurrency trading model, essentially setting a price between two different cryptocurrency assets. AMM uses an algorithm to set these prices on a constant basis, which can trigger volatility between the two assets.

Often, those assets can differ in structure. For instance, one cryptocurrency may be a stablecoin and the other can be a more volatile crypto asset, like Ethereum. In this scenario, the more volatile asset is Ethereum, which can change value quickly on trading markets, even as de-fi exchanges set prices on the cryptocurrency.

Ideally, exchanges want to offer equal liquidity levels when setting a price between two assets. Yet when one of the assets quickly rises or declines significantly in value, it changes the pricing structure. Now, the automated market’s trading price on stablecoin and Ethereum (using the above examples) is out of skew with the real value of the more volatile asset (Ethereum, in this case.) The markets will try to fix this pricing discrepancy, as traders wade in to the AMM to buy and invest in Ethereum at a discounted price. When enough traders do this, they drive the price up, and the AMM pricing structure once again is in balance.

Recommended: What Is a Stablecoin?

That scenario can have a major impact on the liquidity holder’s portfolio value. The liquidity provider, usually a cryptocurrency investor who leverages automated markets to find profit opportunities, may lose value based on the way AMM operates. When the provider trades on an AMM platform, they’re normally required to fund the two assets (as in the stablecoin and Ethereum example above) so traders can transition between the two assets by trading those assets in pairs.

When one of the paired asset prices is volatile, the investor can wind up with more of one of the cryptocurrency assets than expected, and less of the other. That hit to the current value of their portfolio assets compared to what the assets would be worth if left untraded, and kept stored in a digital wallet (that difference represents the impermanent loss).

It’s worth noting the loss in value may be temporary, if the value of the asset returns to the value at deposit, before the liquidity provider removes their crypto. Until then it’s an unrealized loss that only becomes permanent when the investor pulls their coins from the liquidity pool for good.

The Takeaway

Cryptocurrency investors are increasingly using liquidity pools to cull profits from automated market makers. In the process, liquidity-minded investors may be leaving themselves exposed to imperfect DeFi asset pricing, leading to impermanent loss that can reduce the value of their cryptocurrency portfolios.

Jul

2021

Crypto Diversification: Can You Diversify with Crypto?

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

In 2021, as bitcoin and cryptocurrencies have become more of an acceptable asset class to many big investors and institutions, many retail investors might find themselves wondering if it’s worth having an allocation to crypto in their own portfolios.

Is investing in cryptocurrency worth it? Should crypto diversification be a part of every investor’s diversification strategy? Here’s a closer look.

What is Diversification?

Diversification involves spreading investments across different asset classes in an attempt to minimize risk and maximize returns. A diversification strategy often involves making investments across different sectors of the economy and within particular sectors.

The factors that make an asset good for portfolio diversification will vary depending on an investor’s existing holdings. One of the main goals is to ensure that if a particular sector or asset class takes a dive, the event won’t decimate the entire portfolio.

Ideally, a well-diversified portfolio will see gains in other areas when certain areas see corrections. In this way, downside risk can be mitigated even amidst the many unpredictable factors that come with investing.

Here are a few examples of assets that can be used to create diversification in a portfolio.

REITs

Real estate investment trusts (REITs) are tradable securities that give investors exposure to real estate. REITs also provide shareholders with a substantial portion of their income in the form of dividends.

Furthermore, there are different types of REITs, and these could provide even more diversification. Some REITs specialize in commercial real estate, like shopping malls. Others hold residential real estate like single-family homes, apartment complexes, and condominiums. There are even REITs for the healthcare industry and data centers.

Recommended: Pros and Cons of Investing in REITs

ETFs

Exchange-traded funds (ETFs) can serve many purposes as part of an asset diversification strategy. There are ETFs for almost anything imaginable.

An ETF typically holds a basket of securities that aims to recreate the market performance of a particular index. Or the ETF could simply be a collection of top stocks in a particular sector, making it easy for investors to gain exposure without having to pick specific stocks. For instance, thematic ETFs focus on niche sectors like electric cars or artificial intelligence.

Gold

Gold is an asset that investors might diversify with. Other precious metals investments like silver, platinum, and palladium also fall into this category. Gold is what’s known as a “safe haven asset,” meaning people prefer it during times of uncertainty.

Holding gold can serve as a financial shelter during times when other asset classes see increased volatility or subpar returns. During the initial panic of early 2020, for example, gold performed well at a time when stock markets around the world witnessed historic corrections.

Gold is sometimes compared to Bitcoin when it comes to asset classes and diversification. Investors may consider both as a long-term store of value (though Bitcoin’s volatility makes it somewhat unstable in that regard), a hedge against inflation, and a non-correlated or less-correlated asset.

Recommended: Bitcoin vs. Gold

Asset Diversification With Crypto

One of the key reasons some market observers see crypto as a potential choice for asset diversification is because it sometimes isn’t correlated with other asset classes.

Bitcoin was positively correlated with the S&P 500, the benchmark index for U.S. equities in the fall of 2020. However, the correlation between the two dropped in February 2021, as the cryptocurrency market surged ahead. The 90-day correlation between the two dropped to 0.21 from a high of 0.5 in October.

Meanwhile, Bloomberg reported in May 2021 that some of the volatility of Bitcoin was spilling over into the stock market . A study by Singapore-based DBS Group found that S&P 500 futures contracts tended to post bigger swings after Bitcoin swung 10% up or down in the span of an hour.

How to Diversify a Crypto Portfolio

Once someone has learned the crypto basics and made the decision to diversify with crypto, they might then start asking whether or not they should diversify within crypto. In other words, should they invest in different types of cryptocurrency other than bitcoin?

The answer can be complicated and dives deep into what cryptocurrencies are and how they work. Bitcoin may be the easiest to understand as it only has one use case at present, and that is to serve as digital gold (a store of value) that can be easily divided and transferred among individuals (a medium of exchange).

Most other cryptocurrencies have myriad potential applications and tout themselves as being decentralized solutions. After learning how a crypto exchange works, investors are likely to be exposed to many different tokens.

Bitcoin vs. Smaller Coins

Bitcoin is the largest crypto by market cap and has the highest hash rate of any proof-of-work coin, making it the most secure network and the most liquid market. It was also the first cryptocurrency created and therefore has the longest track record. These features make Bitcoin the investable asset of choice for many large investors, despite the crypto’s ongoing volatility and extreme price fluctuations.

Smaller and newer crypto assets can see high returns in short periods, but their risk is also higher by several orders of magnitude. Many altcoins have seen their values plummet by 90% or more over time, with some going to 0.

Some courageous investors sometimes choose to speculate on the value of an altcoin’s alleged use case through regular crypto trading. These investors are similar to venture capital or angel investors who take on substantial risk for the hopes of finding a rare jackpot or “unicorn” project. This is an available option, but not one well-suited to the average investor with lower risk-tolerance.

Different Strategies for Crypto Diversification

Here are some ways investors can try to diversify within the crypto market:

1. Different types of crypto: Stablecoins, altcoins, Bitcoin itself–investors can seek coins and tokens that have different backgrounds and histories.

2. Different crypto market caps: Larger market-cap crypto tokens and coins include Ethereum and Bitcoin, but there are smaller ones, like Tezos, Aave, Theta, and more, that investors may also want to consider.

3. Different crypto industry focuses: Some cryptocurrencies focus on payment, others on video or the Internet. Investors can seek out different industry focuses.

The Takeaway

While the cryptocurrency market is volatile and not suitable for every investor, there can be benefits to this market, such as periods of time when it’s less correlated to other asset classes and offers a form of diversification.

Photo credit: iStock/Eoneren

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.

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

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.

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.

SOIN0521227

Jul

2021

5 Strategies for Day Trading Cryptocurrency

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

The term “day trader” comes from the stock market, where trades generally only happen during regular business hours on weekdays. One notable difference when day-trading cryptocurrency is that crypto markets stay open 24 hours a day, 7 days a week.

For would-be day traders, it helps to know some day-trading basics along with a few things to know before investing in crypto in this manner.

First, What is Day Trading?

Day trading is a short-term trading style involving trades that are bought and sold during the same trading day. This is also sometimes called “intraday trading.” Day traders attempt to use intraday trading strategies to profit from the price moves of a particular asset or financial instrument.

Recommended: What Is Day Trading?

Things to Know About Crypto Day Trading

There are two market conditions that must be present for day trading to be profitable:

• Liquidity: Traders need to be able to enter or exit trades quickly without moving prices too much. In a market with low liquidity, slippage—when a large position can’t be liquidated at the price a trader desires—could eat into a trader’s profits. With slippage, the position must be sold in increments, with each order having a lower price than the previous one, leading to smaller gains overall by the time the whole position has been sold.

• Volatility: A lack of volatility means prices aren’t moving, and there’s no chance of buying low and selling high. Because day traders try to buy and sell during the same day, markets have to be going up and down on a short-term basis for this strategy to be viable.

Crypto mining could also play a role in markets at times. If miners are selling most of their coins as they mine them, this could increase downward pressure on prices for a time.

5 Day Trading Crypto Strategies

On a multi-year timespan, simply holding certain cryptocurrencies has been a profitable strategy in some cases, not in others.

So when considering how to invest in crypto, one strategy might be to just buy and hold. This can be especially true during crypto bull markets, when corrections tend to be short-lived. However, it’s also important for investors to remember that Bitcoin and other cryptocurrencies are highly speculative investments. Just because an investment has risen in the past, that doesn’t mean it will continue to do so.

For investors specifically interested in day trading, there are numerous strategies to try. Technical analysis might be among the most popular strategies, as entire communities of traders have sprung up around this school of thought.

One thing’s for sure: having a rule-based trading strategy of some kind is a must for short-term traders. Here are five strategies for day trading cryptocurrency.

1. Technical Analysis

Technical analysis (TA) involves using mathematical indicators and chart patterns to try and predict which way prices will move next. Some technical indicators are simply generated with a computer program like TradingView (RSI, for example), while others must be identified by humans looking at charts (the cup-and-handle pattern, for example).

One popular technical indicator is the relative strength index (RSI). This appears as a single line beneath a chart with a value between 0 and 100. The closer the RSI gets to 100, the more overbought conditions are thought to be, meaning prices could fall. The closer the RSI gets to 0, the more oversold conditions are thought to be, meaning prices could rise. This is one example of how someone day-trading cryptocurrency might use TA.

2. News and Sentiment Analysis

While it’s less popular among short-term traders, looking at headlines and overall market sentiment can also be used in crypto day-trading. Sometimes, big news items can move crypto markets quickly.

For example, on the day this article was written in mid-April 2021, the nation of Turkey announced that it would ban Bitcoin and other cryptocurrencies as payment options within its borders. This sparked a global crypto market selloff, with Bitcoin falling about 3.2% initially and more than 10% later.

Additionally, there are websites that attempt to track the sentiment of the most popular cryptocurrencies by analyzing Twitter chatter. More positive tweets about a crypto equals more bullish sentiment, while more negative tweets equals more bearish sentiment—or so the theory goes.

3. Range Trading

Range trading assumes that prices tend to move within a certain range. Using this strategy involves looking at candlestick charts and support and resistance levels.

Traders might buy when prices reach a support level and sell when prices reach a resistance level. Or they might go short when prices hit resistance and close out the short when prices fall to support.

Pivot points are an example of range-bound trading. Calculating pivot points gives investors an idea as to what price levels are likely to see reversals in momentum.

4. Scalping

This strategy involves trying to profit from very small price moves over short periods. Often these are market inefficiencies like gaps in the bid-ask spread or gaps in liquidity.

Because they are aiming to take advantage of tiny price movements, “scalpers” often trade using leverage like margin or futures contracts to amplify their gains. This also amplifies potential losses, however, so managing risk is especially important with this strategy.

Scalpers might utilize strategies like volume heatmaps, order book analysis, or a range of technical indicators to determine entry and exit positions for their trades.

Due to the fast-paced and high-risk nature of scalping, it’s better suited for experienced traders.

5. Bot Trading

Bot trading, or high-frequency trading (HFT), involves the use of algorithms and trading bots that can be programmed to execute a large number of trades very quickly. Using this method requires knowledge of advanced trading strategies and programming.

While crypto trading bots conduct the trading itself, high-frequency traders don’t simply sit back and let a computer program do all of the work. Trading bots involve coming up with a specific strategy, developing the appropriate program to execute that strategy, and then constant monitoring, backtesting, and updating of the algorithms to keep up with changing market conditions.

There are some pre-made trading bots available for purchase from certain dealers. One thing to keep in mind when considering such a bot is this: if the bot is profitable and easy to use, why isn’t everyone using it, and why are its creators selling it rather than using it themselves?

Which Cryptocurrency is Best for Day Trading?

It depends on what’s currently happening in the crypto markets. As mentioned, liquidity and volatility are key for any day trading strategy, so any cryptocurrency with sufficient liquidity that is showing high volatility could be a good option.

It’s difficult to pinpoint specific examples—as any coin mentioned could be irrelevant by the time you read this article. Such is the volatile nature of cryptocurrency.

Crypto Day Trading: Taxes and Regulations

It’s important for traders to educate themselves about the rules and taxes associated with day trading in their area. For example, two important things for day traders to be familiar with are short-term capital gains taxes and the wash sale rule.

Short-term capital gains taxes apply to the sale of any asset that was held for less than a year. This means any earnings are taxed as regular income or at the “marginal rate,” so based on an investor’s tax bracket. The IRS changes these numbers every year in order to adjust for inflation. For the 2021 to 2022 tax rate, the rates ranged from 0% to 37%.

The wash sale rule is also a must-know for day traders. This rule prevents investors from taking a loss on their taxable income when they sell a security then buy the same security within the next 30 days.

There are many more nuances regarding taxes and day trading. Traders should consult with a certified tax professional to understand all the necessary details for their own situation.

What Are the Downsides of Day Trading Crypto?

The majority of people who engage in day trading lose money. An estimated 85% of professional money managers underperform their market benchmarks. Timing the markets can be difficult, and human traders now compete with sophisticated computer bots.

Another issue is trading fees. Every trade involves a small fee, and these fees can quickly add up when making large numbers of trades. Some crypto exchanges, such as Binnace, have their own exchange tokens that provide users a discount when paying trading fees in the form of that token. Even then, day traders still have to subtract fees from their profits.

The Takeaway

Day trading is a strategy that involves buying and selling stocks throughout the course of the trading day to try and turn a profit. With crypto, the trading “day” is even longer, as crypto markets are open 24/7. That said, day trading can be an especially risky pursuit, with no guarantee of profits.

Photo credit: iStock/MF3d

SOIN0421175

Terms 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

Guide to Eco-Friendly Cryptocurrencies

Why Does Bitcoin Require So Much Energy?

12 Most Sustainable Cryptocurrencies

1. Ethereum (ETH)

2. Nano

3. Chia (XCH)

4. Stellar Lumens (XLM)

5. Polkadot (DOT)

6. Hedera Hashgraph (HBAR)

7. Holo (HOT)

8. Ripple (XRP)

9. IOTA

10. Solarcoin (SLR)

11. Bitgreen (BITG)

12. EOSIO (EOS)

The Takeaway

What is a Crypto Bear Market?

What Is a Crypto Bear Market?

Why Is It Called a Bear Market?

Similarities Between Crypto and Stock Bull & Bear Markets

Volatility

Trader Sentiment

What Are the Signs of a Crypto Bear Market?

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What Are Indicators of a Crypto Bull Market?

Should I Invest in Crypto?

The Takeaway

What is an Impermanent Loss?

What Is Impermanent Loss?

How Does Impermanent Loss Happen?

An Impermanent Loss Example

The Takeaway

Crypto Diversification: Can You Diversify with Crypto?

What is Diversification?

REITs

ETFs

Gold

Asset Diversification With Crypto

How to Diversify a Crypto Portfolio

Bitcoin vs. Smaller Coins

Different Strategies for Crypto Diversification

The Takeaway

5 Strategies for Day Trading Cryptocurrency

First, What is Day Trading?

Things to Know About Crypto Day Trading

5 Day Trading Crypto Strategies

1. Technical Analysis

2. News and Sentiment Analysis

3. Range Trading

4. Scalping

5. Bot Trading

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Which Cryptocurrency is Best for Day Trading?

Crypto Day Trading: Taxes and Regulations

What Are the Downsides of Day Trading Crypto?

The Takeaway

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