Apr
06
2021
What is DeFi? Decentralized Finance, Explained

What Is DeFi? Decentralized Finance, Explained

By | Growing Wealth, invest, Investing | Comments Off on What Is DeFi? Decentralized Finance, Explained

DeFi, short for decentralized finance, is more than just a popular buzzword in the cryptocurrency sphere. It’s a concept that is disrupting the centralized financial services model, equalizing access and bringing more control to users across the globe.

In this article, we will cover everything a consumer might want to know about DeFi, including:

•   What is DeFi?
•   How does DeFi work?
•   How DeFi is disrupting traditional financial services
•   What’s a DApp?
•   Examples of DeFi DApps

What is DeFi?

DeFi is a blanket term referring to trustless and transparent protocols that don’t require intermediaries to operate. Traditionally, financial services and products have relied on centralized authorities such as banks, financial advisors, and clearinghouses. DeFi has reengineered this power dynamic to provide the same financial services programmatically without a central authority, thus reducing fees and making financial services and products more accessible to more people everywhere.

One way to better understand this concept is to look at the two parts of the term separately.

”De” = Decentralized

DeFi’s “de” stands for “decentralized,” or distributed control. By removing power from the hands of a few central authorities and distributing it across programmatic and autonomous code, DeFi transforms a previously centralized governance model into a decentralized one controlled by no one.

”Fi” = Finance

DeFi’s “Fi” is an abbreviation for “finance”—and more specifically, it refers to financial services. DeFi has disrupted traditional finance by transforming popular and long-standing financial services into decentralized versions without any central authority. DeFi offers an alternative to traditional financial services like the following:

•   Borrowing
•   Lending
•   Investing
•   Trading
•   Saving
•   Insurance
•   Crowdfunding
•   Crowdraising

DeFi has also enabled the creation of new financial products:

•   Cryptographic tokens: There are a number of these digital assets, one of the most common tokens is a “utility token,” which serves a specific function within a digital ecosystem. One example is the Basic Attention Token (BAT), which is used as payment for advertisers, users, and content creators on the Brave browser.

•   Non-Fungible Tokens (NFTs): These tokens transform digital images (for example, works of art, a tweet, a video clip, a GIF) into unique assets that can be traded on a blockchain.

How Does DeFi Work?

With DeFi, services and products are not subject to approval by a small group of decision makers but rather by smart contracts. Like traditional contracts, smart contracts contain information and terms regarding transactions between parties, but they are completely digital. They function like a small computer program stored inside of a distributed ledger known as a blockchain, a permanent and ever-growing record of information and transactions stored in individual blocks.

DeFi shares many aspects with cryptocurrencies, including the following:

Permissionless/Borderless

DeFi applications are permissionless—completely free of charge and available to anyone who wants to use them, the only requirement being an internet-connected smartphone or computer. Unlike traditional financial services, DApps don’t require lengthy applications to create an account, as users interact directly with smart contracts from their crypto wallet.

DeFi applications are also borderless, meaning they are country-agnostic and do not discriminate against users based on citizenship, geographic location, or government standing. Anyone can access funds on a DeFi app in one country, travel to another, and access their funds abroad without any restrictions whatsoever.

Transparent

DeFi applications are built on a blockchain network, a distributed ledger composed of smart contracts that stores transaction details as they occur and builds on top of them. Transaction activities become permanently cemented into the blockchain’s history of transactions across the entire network, while constantly updating it with new ones.

Because smart contracts and blockchain technology are designed to be permanent and publicly visible, transaction records cannot be hidden or altered thereafter. This allows all transaction activities to be visible to all market participants without violating privacy, because addresses are not directly tied to personal identities. It also allows anyone to audit the code and find bugs.

Trustless

DeFi recognizes and circumvents the trust problem of traditional finance by minimizing the need for third parties, banks, and clearinghouses. For most DeFi apps, users interact with self-executing smart contracts based on conditions being met, as opposed to waiting on approval from overseeing stakeholders.

Interoperable

Different DeFi applications (DApps) are designed to be compatible with each other, allowing DApps to be built or composed by combining DeFi products. This interoperability enables simple blockchain operation and a scalable ecosystem.

How DeFi is Disrupting Traditional Financial Services

Financial services such as borrowing, lending, and investing have traditionally been areas with a high barrier to entry, typically preventing people with little money or financial expertise from gaining access to these services. Though traditional banking is common in first world countries, there are over 1.7 billion people who are unbanked globally , representing over 30% of the human population, according to the most recent World Bank Global Findex report.

Domestically, 22% of US adults are underbanked or unbanked , according to the Federal Reserve’s most recent Report on the Economic Well-Being of U.S. Households. “Underbanked” means they have at least one account at an insured institution but also obtain financial services outside of the banking system such as money orders, check-cashing stores, payday loans, pawn shops, and more. The FDIC found in its 2019 “How America Banks” survey that 5.4% of US adults are unbanked entirely , having no accounts with any financial institution.

With the advent of DeFi, previously inaccessible financial services such as borrowing, saving, investing, and international payments are now accessible to anyone with access to the internet regardless of age, income, nationality, financial background, or credit score. To date, there are currently 3,809 DApps, with 140.59k daily active users.

What’s a DApp?

A DApp, or decentralized application, is a digital program that runs on a decentralized blockchain network without the control of a single authority. DApps are open-source and the basis for any cryptocurrency project; Bitcoin is considered the first DApp.

While the actual DApps themselves are typically ‘unownable’ services, DApps sometimes distribute underlying tokens that allow users to buy crypto.

DeFi applications can be built on any decentralized protocol but are primarily built on Ethereum, the premier decentralized blockchain network used for building new DApps which is powered by smart contracts and its native digital currency Ether. Ethereum enables developers to write smart contracts on the Ethereum blockchain which automatically execute when certain conditions are met. Smart contracts are then stored and executed across every node on the Ethereum network, making them decentralized applications.

The Ethereum DApps enable developers to build far more advanced technology than just trading cryptocurrency. Instead of needing to develop a new blockchain for every application, Ethereum created a secure platform for DApps to be built and deployed. Ethereum is one of the most popular blockchain networks and its native Ether token is the second-largest cryptocurrency behind Bitcoin.

DApps are similar to centralized applications but benefit from the features of existing on a decentralized blockchain network. Because they don’t have a single point of failure, they are thought to be more secure against cyberattacks. A distributed network of nodes maintains the network and prevents any system downtime common among centralized applications. DApps aren’t owned by anyone and aren’t subject to owner malfeasance such as embezzlement.

Examples of DeFi DApps

DeFi is a new space that only started to see the launch of live products in 2017 or so. Here are a few of the most popular types of DApps that emerged in 2020:

Borrowing and Lending Platforms

Securing a traditional loan typically involves submitting an application at a financial institution with ample personal information, agreeing to a credit check, pledging collateral (if necessary), and waiting for interest to be factored in by the intermediary for facilitating the loan that’s sourced by a federal institution. With DeFi, smart contracts connect interested lenders and borrowers, impose terms of loans, and impose interest without a third party. Lending DApps typically require collateral to be pledged in the form of crypto or stablecoins as a measure of insuring risk taken on by the lender. Through smart contract automation and elimination of a third-party intermediary, DApp lending platforms have formed loans with interest sometimes below 10 percent .

Decentralized Exchange (DEX)

A decentralized exchange (DEX) is an exchange that uses smart contracts to enforce trading rules, execute trades, and securely handle funds if necessary. Unlike centralized exchanges, DEXs don’t have an exchange operator nor do they require account creation, identity verification, or impose exchange fees. Because DEX’s are unique and don’t have a centralized authority, it is debated whether or not some or all DEX’s are subject to the crypto regulations enforced on centralized exchanges. Further, many DEX’s do not custody users’ funds at any point during trading, adding additional uncertainty as to the application of regulations. However, like any exchange, they do require liquidity to be able to match buyers and sellers.

Betting Platform

DeFi disrupts one of the most restricted and heavily centralized industries in existence: Gambling. In addition to an intensive and exclusive registration process, users of traditional online gambling platforms are subject to getting their betting limits lowered and accounts closed. With a decentralized peer-to-peer platform, this is not possible.

Several betting DApps have been launched as global betting platforms with no limits, allowing users to bet on traditional sports events as well as real-world events such as economics, elections, pop culture, and m
ore. Users can place bets using digital currencies and get rewarded in them upon winning a bet. Users buy or sell on a particular outcome of an event, with the DApp showing the current odds based on active user bets.

NFT Marketplace

An innovative DeFi development has been the launch of marketplaces for exchanging non-fungible tokens , or NFTs. NFTs are unique cryptographic tokens that represent digital goods such as online gaming goods and also tokenize real-world assets such as art, collectibles, company equity, and commodities. An NFT marketplace allows users to freely buy, sell, and trade NFTs representing otherwise non-fungible assets.

The Takeaway

DeFi is a term for the decentralized finance model that’s reengineering traditional financial services and products. By reallocating decision-making from central authorities to executable code within smart contracts, many financial services are becoming cheaper and easier to access for anyone.

Photo credit: iStock/akinbostanci

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.

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.

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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How To Buy Bitcoin Cash (BCH) 5 Steps To Buy BCH

By | Growing Wealth, invest, Investing | Comments Off on How To Buy Bitcoin Cash (BCH) 5 Steps To Buy BCH

While there are hundreds of cryptocurrencies, a few of them make up a substantial portion of the total value of the asset class. The most prominent is, of course, Bitcoin, which kicked off the whole phenomenon of cryptocurrency and is worth nearly $1 trillion.

And then there’s Bitcoin Cash, an offshoot of the original Bitcoin, that itself is worth just over $9.5 billion as of late March 2021, according to CoinDesk, and is one of the ten most valuable cryptocurrencies.

What is Bitcoin Cash and How Did it Start?

If you want to know what Bitcoin Cash is, you should first ask, what is Bitcoin?

Bitcoin is the foundational cryptocurrency, the first to utilize blockchain technologies that generate unique entries on a “ledger” and can then be exchanged between users without an intermediary or third party. While there are now hundreds of types of cryptocurrencies, coins, and tokens, Bitcoin is one of just a handful of cryptos, including Ethereum, that make up the bulk of the cryptocurrency economy.

Bitcoin Cash (BHC) was launched in 2017, eight years after the original Bitcoin. It is what’s known as a Bitcoin “fork”—a new branch in the technology that was designed with the intent of easier and more efficient transactions on its blockchain. Bitcoin Cash proponents argued that the size of Bitcoin “blocks”—one megabyte or less—was too small, and designed Bitcoin Cash to have eight megabyte blocks in order to drive the cost of processing payments on the blockchain down. Since then the Bitcoin Cash block size has gone up even more, to 32 megabytes.

When Bitcoin forked to Bitcoin Cash, everyone who owned Bitcoin on that date received the same amount of Bitcoin Cash, deposited into their wallet (the software used for storing cryptocurrency).

Bitcoin Cash (BCH) Price

As of this writing in March 2021, the price of Bitcoin Cash (BCH) is $547.24. That’s up from a record low in November of 2020, when it dropped to 241.13.

But Bitcoin Cash’s all-time high to date occurred 5 months after its 2017 launch, in December 2017. At that time, BCH hit $3,556.

5 Steps to Buying Bitcoin Cash

Buying Bitcoin Cash is not that different from buying Bitcoin or other well known and popular cryptocurrencies.

Before investing in crypto, it can be helpful to do some reading. In fact, we’ve put together a list of 6 things you should know before investing in crypto. Additionally, while the exchange you ultimately choose to buy crypto will have its own extensive guidelines and rules, it’s a good idea to familiarize yourself with basic cryptocurrency regulations beforehand.

Then you can buy Bitcoin Cash in 5 simple steps:

1. Sign Up for an Exchange to Buy BCH

Most investors exchange “fiat money” (aka the currency you use in everyday life to pay bills, taxes, etc) for cryptocurrency through a consumer-facing exchange. When choosing between the many crypto exchanges available, there are a few things to consider. Safety and security is paramount, but things like fee structure and ease of use are also important. Some common exchanges you might come across include Coinbase, Gemini, CoinEx, or Kraken.

2. Choose an Account to Fund Your Crypto Investments

Although one promise of cryptocurrencies like Bitcoin and Bitcoin Cash is freedom from the traditional financial system, you typically need a bank account to use a mainstream cryptocurrency exchange. Coinbase, for instance, takes payment through ACH transfer, wire transfers, debit cards, and PayPal. These different methods have different times to clear, so you may not be able to buy Bitcoin Cash immediately if you’re using an exchange for the first time.

3. Be Prepared to Verify Your Identity

While crypto is identified with cryptographic keys and is thus “pseudonymous,” to actually make a financial transaction like buying BCH, you will most likely have to verify your identity.

Generally, like virtually all US financial institutions, cryptocurrency exchanges have to abide by so-called “Know Your Customer” and money laundering rules which require identity verification. After verifying ID, you’ll be able to do a bank transfer or debit card payment and fund your account.

4. Download a Crypto Wallet

While anytime you own a cryptocurrency that uses blockchain technology, you have a “public” key, you also have a “private” key that needs to be secured. Many mainstream crypto exchanges, like Coinbase or Gemini, also offer wallets which keep private keys secure. You can also download your own stand-alone wallet software or even store your private key on paper or on standalone hardware systems.

5. Buy Bitcoin Cash

At this point you can actually buy BBCH and then decide to hold onto it, sell, or whatever you like depending on your risk tolerance and preferences. In general, it’s a good idea to look up the price of Bitcoin Cash before buying, although you can sometimes buy fractions of cryptocurrency that will cost less than the value of a single unit of cryptocurrency. Typically, investors can buy Bitcoin Cash using either fiat money (dollars) or other cryptocurrencies if the exchange offers crypto-for-Bitcoin-Cash trades.

Remember to Pay Crypto Taxes

If you’re buying Bitcoin Cash as an investment with an eye to selling it in the future, keep in mind your tax situation. Just because Bitcoin and other cryptocurrencies are not fiat currency, that doesn’t mean they can’t entail tax obligations when they’re bought and sold: you have to pay your crypto taxes. In most cases the IRS currently taxes crypto as property, not income. So it can be helpful to learn the rules and regulations before selling.

The Takeaway

Bitcoin Cash is a fork of Bitcoin, the OG of cryptocurrency. Buying Bitcoin Cash is much like buying any other cryptocurrency—investors can get set up with an exchange, a wallet, and everything else they need to buy, sell, and hold Bitcoin Cash in just 5 easy steps.


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.

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

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

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Apr
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Different Types of Crypto Airdrops and How to Find Them

By | Growing Wealth, invest, Investing | Comments Off on Different Types of Crypto Airdrops and How to Find Them

A crypto airdrop is sort of like receiving a coupon to get a sample of something for free. New shops or restaurants sometimes offer a free drink or small item to first-time customers, for example. The hope is that the people who receive free items or coupons will enjoy the service, tell their friends, and become long-time customers.

When a company airdrops crypto to users, they aim to accomplish something similar. By depositing free coins into the wallets of users, the company is betting that the users might spread word of the new project and its potential use cases.

Of course, as with anything crypto-related, there’s more to it than just getting a simple “freebie” out of nowhere. This article offers answers to the most common questions regarding crypto airdrops, including:

•   What is a Crypto Airdrop?
•   What Are the Different Types of Airdrops?
•   How Do I Get Airdrops from Crypto?
•   Are Crypto Airdrops Worth It?
•   Are Crypto Airdrops Safe?

What is a Crypto Airdrop?

In a crypto airdrop, a new crypto project gives cryptocurrency to new users for free, or in exchange for a simple task like sharing a social media post. This practice became popular during the initial coin offering (ICO) craze of 2017 and 2018. Many crypto projects used airdrops to promote their ICOs and spark enthusiasm about their new digital asset.

In addition to regular coins, governance tokens are also sometimes airdropped, giving early adopters a larger say in how a project will develop going forward.

For users, the appeal is simple: Crypto airdrops allow people to obtain tokens without having to buy cryptocurrency. And for the companies, the benefit is clear: People who otherwise would never have known about the project could wind up becoming investors, or at the very least, provide free advertising for the company.

What Are the Different Types of Airdrops?

Airdrops can happen several different ways. The term is most often used to apply to free tokens being deposited to a user’s wallet in exchange for nothing more than registering with an email address. But that’s not the only type of crypto airdrop.

Standard Airdrop

This is the type of airdrop just mentioned, where users receive free tokens just for signing up for a newsletter or something similar.

Bounty Airdrop

Bounty airdrops require users to perform a simple task to receive the airdropped tokens. Most often this involves re-tweeting something about the project, creating an Instagram post and tagging a few friends, or joining a Telegram group.

Exclusive Airdrops

Airdrops of this type are designated exclusively for people who have an established history with a particular project, website, or community. For example, Uniswap gave its loyal users 2500 UNI tokens in September 2020. This equaled about $1,200 at the time, and there were no strings attached.

Hard Fork Airdrop

This one is a little different. When a coin hard forks from its original blockchain, a new coin gets created, and those who held the original coin will receive an equal amount of the new tokens in their wallets. The most well-known example of this would be the Bitcoin Cash (BCH) hard fork that occurred in 2017: Bitcoin users who held BTC received an equal amount of BCH automatically.

Holder Airdrop

These airdrops are similar to hard forks in that users who already hold certain tokens will receive new ones. EOS and Ethereum, for example, have sometimes offered users free tokens when a new project was created on one of their blockchains. These are not hard forks of the original coins, but rather entirely new projects created on top of the EOS or Ethereum protocol.

All these types of airdrops have one thing in common—the distribution of new coins.

How Do I Get Airdrops From Crypto?

The easiest way to find crypto airdrops might be to simply search for “crypto airdrops” or “what is a crypto airdrop.”

Since these events are designed for marketing and project promotion, they tend to make themselves relatively easy to find. There are even some websites exclusively devoted to listing upcoming airdrops, like Coin Airdrops .

However, scams abound in the cryptocurrency world, and users would do well to safeguard their information wherever possible. When searching for airdrops, it’s possible to encounter someone claiming to offer an airdrop when they’re actually just engaging in a phishing attempt (trying to steal information).

If an alleged airdrop were to ask for something like your login credentials to a website or bank account, the private keys to a cryptocurrency wallet, or any other personal details, it might be a scam. Requests to download “special” software or clicking links found in emails could also be phishing attempts designed to expose your device to malware or steal sensitive information.

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Is it Even Worth the Effort?

When considering that airdrops provide something for nothing, some people might say they are worth it.

At the same time, when a new project decides to airdrop crypto, this leads to a supply glut that can drive prices to tank later on. Because a lot of users end up receiving coins, a lot of them tend to cash out at the earliest opportunity. It’s not uncommon for airdropped coins to lose most or all of their value over time.

One good example of this involves the Auroracoin (AUR) airdrop. AUR was a cryptocurrency designated for citizens of Iceland in March 2014. All residents of the country were eligible to register for free receipt of 31.8 AUR, which was worth roughly $380 at the time.

At the time of writing, one AUR was worth about $0.10, meaning the 2014 airdrop would be worth little more than $3 in 2021. Auroracoin can only be traded on two smaller crypto exchanges as well, meaning there is very little liquidity in the market and holders might find it difficult to sell.

This demonstrates the degree to which airdropped coins can become almost worthless over time.

Are Crypto Airdrops Safe?

Some users have also fallen victim to fraudulent airdrops in the past. During the ICO craze of 2017 and 2018, there were many fake crypto startups that were actually frauds.

Amid an industry with much more hype than regulation, some savvy scammers devised a way to attract investment funds without actually creating anything. They would create a coin or say they were planning on creating a coin, and then claim to have plans to airdrop crypto.

Sometimes the companies would require small fees to be eligible for the alleged airdrop, or other speculators would make investments believing that the airdrop itself would lead to a successful project.

While these types of scams might be less common today than they were three or four years ago, investors would still do well to be wary when it comes to crypto airdrops.

Looking at the idea of “safe” from another perspective, few would argue that the coins received in an airdrop could be considered a safe investment. Altcoins in general can be highly speculative, and that goes double for any new coin that has been airdropped.

As we saw in the Auroracoin example, airdropped crypto can lose nearly all of its value.

Many people who sign up for or become eligible for airdrops are aware of the situation, and could likely to take profits as soon as possible. The few airdrop recipients who happen to receive a coin of significant value at a time when there is a liquid market for it might make some money. Others may be left holding a bag of worthless coins later on.

The Takeaway

Crypto airdrops involve users receiving something for virtually nothing—an email address, or some social media promotion. But while some recipients have gotten lucky enough to be the first movers in an airdrop that actually had value, many others have also fallen victim to lofty promises of the “next big thing” in crypto.


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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

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Are There Bitcoin ETFs?

Cold Wallet vs. Hot Wallet: Choose the Right Crypto Storage

By | Growing Wealth, invest, Investing | Comments Off on Cold Wallet vs. Hot Wallet: Choose the Right Crypto Storage

In traditional finance, money is kept in a bank account, whereas in cryptocurrency, money is kept in an individual “wallet”—some digital, some paper. Like traditional bank accounts, there are cold wallets and hot wallets, each with its distinct uses and advantages.

To choose which type of wallet is right for you—a cold wallet or hot wallet—it can be helpful to compare which features best suit your crypto storage needs. In this article, we will explore all the aspects of each type of wallet:

•   What is a Cold Wallet?
•   What Is A Hot Wallet?
•   Cold Wallet vs. Hot Wallet: Which is Right for You?

What is a Cold Wallet?

A cold wallet is a digital wallet that allows users to store cryptocurrency offline. The wallet only ever accesses an internet-connected device when the user needs to send or receive funds using the wallet. This makes it an exceptionally secure option for crypto holders.

Unlike traditional currencies, cryptocurrency is not held nor protected by a bank or central governing body thus giving the user full authority over their funds. However, cryptocurrency must be kept somewhere, so individual wallets were created.

Types of Cold Wallets

Hardware Wallet

A hardware wallet is a digital wallet that allows users to store cryptocurrency on a physically-detachable device. When the hardware wallet is not in use, it remains disconnected from any other device, disabling any internet, local area network, or physical transferability.

When the user needs to send or receive funds using the cold storage wallet, the device connects to an internet-connected computer via a USB cable. Even then, the wallet is only accessible with the correct private key which is generated offline. This adds another layer of security to the already multi-layer encrypted security protocol.

Offline Software Wallet

Offline software wallets are similar to hardware wallets but are more complex to set up and use. An offline software wallet separates a wallet into two platforms—an offline wallet containing the wallet’s private keys, and an online wallet containing the public keys. The online wallet and offline wallet function separately to initiate new transactions that must be manually processed incrementally by the user. This allows transactions to be sequentially processed without the offline wallet ever connecting to the internet, securing its stored private keys.

Paper Wallet

A paper wallet is the most basic form of cold storage. It is an actual paper document with the public and private keys written or printed on it, using an offline printer. A paper wallet typically features a QR code to be easily scanned and signed to process transactions. Paper wallets are effective cold wallets, however, they are susceptible to being lost, damaged, illegible, destroyed, copied, or stolen, rendering the wallet’s funds irrecoverable.

Sound Wallet

A sound wallet is an audio device that records and stores a wallet’s private keys in encrypted sound files into mediums such as CDs and vinyl discs. Sound wallets are not common nor popular among cryptocurrency holders, yet they are a viable option for safely storing digital currencies. To retrieve the keys from a sound wallet, code hidden within these audio files can be deciphered with a spectroscope app or high-resolution spectroscope.

What is a Hot Wallet?

A hot wallet is an online storage tool that allows owners of cryptocurrency like Bitcoin to send, receive, and store cryptocurrency. Hot wallets are cryptocurrency wallets provided by third-party entities and are connected to the internet. Because they are connected to the internet, hot wallets allow for fast and easy transactions at any time, regardless of location.

Upon creating a hot wallet, users are given a unique public wallet address which is shared with others to receive cryptocurrency, similar to a username or bank account number. A private key for the wallet is also provided, and functions much like a password. Finally, a recovery seed phrase is provided—this is a sequential list of random words similar to a password recovery secret question’s answer.

Despite the name, hot wallets don’t actually store cryptocurrency in the same way traditional wallets do. Hot wallets are primarily used for temporarily holding a small amount of funds used for everyday transferring, trading, or buying cryptocurrency. These wallets help facilitate any changes to the record of transactions permanently stored on the decentralized blockchain ledger for any given cryptocurrency.

Types of Hot Wallets

Wallets on Investing Platforms

When a cryptocurrency investor creates an account with a digital currency exchange or investing platform, they are provided with a hot wallet protected by the platform. These hot wallets are firmly protected by their respective exchanges, as the company’s success and survival depends on protecting customers’ funds from getting stolen. Some centralized exchanges may even insure their customers’ funds, providing reimbursement guarantees in the event of a security compromise or loss of funds.

Note that a decentralized exchange, an exchange with no central authority, offers no similar protections and requires users to use their own wallets.

Desktop Wallet

A desktop wallet is a computer or smartphone application installed on an internet-connected device that gives the user complete control over their wallet. Desktop wallets have a public address and allow the user to send or receive cryptocurrency, and they also have a private key to protect stored funds.

Web Wallet

Web wallets are hot wallets hosted by a company through a website or a web browser extension. Web wallets facilitate access to cryptocurrency from anywhere and are accessible on web browsers or mobile devices.

Mobile Wallet

A mobile wallet is similar to a desktop wallet, but is designed for mobile devices such as smartphones or tablets. Mobile wallets allow for mobile payments and transfers in physical stores, via touch-to-pay and scanning of a QR code.

Cold Wallet vs. Hot Wallet Security

Because cold storage stores cryptocurrency through an offline medium, it is the strongest form of security and self-custody for protecting cryptocurrency, similar to storing gold in a vault. Since the funds remain offline when not in use, it is nearly impossible to hack or gain unauthorized access to a cold storage wallet. A cold wallet is only susceptible to being physically lost, damaged, or stolen.

While hot wallets can be considered “safe,” they are technically more vulnerable to attacks because they are connected to the internet. Maintaining a constant internet connection provides the opportunity, however small, for malicious actors to gain unauthorized access to and steal funds from wallets even when a wallet isn’t actively being used by the owner.

Hot wallets are ultimately secured by the individual user. There are only two ways to access a wallet: A confidential “private key” and a recovery “seed phrase.” However, hot wallets ultimately have three attack vectors:

•   Back-end: via an unsecured exchange, web wallet company, a bug in desktop wallet’s code)
•   Front-end: if the individual wallet owner saves private key in an email which is then hacked)
•   Random: brute force attack

Experienced cryptocurrency investors typically only keep a small percentage of their holdings in a hot wallet to reduce risk, as there could be less chance for hackers to break into a hot wallet for a small sum of tokens. Hot wallets commonly will only have a small amount of tokens planned to be traded, spent, or sold in the near future. Otherwise, the core remaining assets may remain in a cold storage wallet until needed.

Cold Wallet vs. Hot Wallet: Which Is Right for You?

Choosing the right crypto storage can be a difficult task and there might not be one perfect solution. Deciding what kind of wallet to use depends on a multitude of factors such as:

•   Accessibility: If the wallet is purely for longer-term storage and will not be used often, a cold wallet with stronger security might make more sense.
•   Frequency of use: For someone who needs to access the wallet often for trading, sending, and receiving without much hassle, a hot wallet might be better suited.
•   Purpose of use: Spreading cryptocurrency across multiple wallets — with small amounts needed for daily transacting to hot wallets, and core holdings not needed for years to cold wallets — could reduce long-term risk and optimize day-to-day transacting.
•   Diversity: Individuals are not limited to only one wallet, making it not only possible but potentially advantageous to diversify cryptocurrency investments across multiple wallets.

The Takeaway

When deciding where to store your cryptocurrency, it’s important for an investor to consider what’s more important: security or convenience.

A cold wallet is a cryptocurrency wallet stored on a device or medium that is not connected to the internet. Cold wallets are more secure and difficult to attack, but are inconvenient to use and can be damaged, lost, or stolen.

A hot wallet is a digital currency wallet stored on an online device that is connected to the internet. Hot wallets are more suitable for investors who actively buy, send, and trade cryptocurrency and need to be able to easily access their wallet from anywhere, though they are more vulnerable to hacks and loss of funds.


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.

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.

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

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Apr
01
2021
What is digital currency?

The Difference Between Public and Private Cryptocurrency Keys & Why It Matters

By | Growing Wealth, invest, Investing | Comments Off on The Difference Between Public and Private Cryptocurrency Keys & Why It Matters

For those just starting to invest in cryptocurrency, it’s essential to understand what cryptocurrency keys are and how public and private keys work. Every cryptocurrency wallet has a public and a private key. Not only are keys used during the process of sending and receiving cryptocurrencies, but they are also integral to keeping cryptocurrency holdings secure.

This article covers the differences between private and public keys, how they enable crypto trading and storage, and what investors need to do to keep their crypto secure.

What Is a Private Key?

A private key is a cryptographic string of numbers and letters which is mathematically related to a public key, but impossible to reverse engineer. This is due to its strongly encrypted code base.

A private key is what gives a wallet owner access to their funds and allows them to send funds to others. Think of a private key as a password, used to decrypt messages and transactions.

A public key, on the other hand, can be shared publicly to allow others to send cryptocurrencies to a wallet. Think of a public key as encrypting messages and transactions. In fact, a wallet address is basically a hashed version of a public key—shortened and compressed in order to send an address.

Each cryptocurrency uses its own algorithms for creating keys, so some are longer than others.

Why It’s Important to Secure Your Private Key

It’s very important to keep private keys secure and to keep a back-up in a safe, offline location. If anyone accesses your private key they can steal funds from your wallet, and if a private key gets lost there is no way to retrieve the funds in the wallet.

This can’t be stressed enough. If a private key gets lost or stolen, the funds secured by it are lost too.

It’s estimated that about 20% of all Bitcoin—$3.7 million—that has been mined is lost forever, and 1500 more Bitcoins get lost every day.

Recommended: How Many Bitcoins Are Still Left?

How Do Public and Private Cryptocurrency Keys Work?

Certain crypto exchanges and wallets store users’ private keys in an encrypted form. This can be more convenient for sending and withdrawing funds, but can make users vulnerable to security breaches. If using this type of wallet or exchange it’s imperative to make sure the company is reputable, and one might want to consider only keeping a fraction of their cryptocurrency holdings in this type of wallet at any given time.

Although the same private key is used for every transaction from a particular wallet, it never gets shared with the public network, making it possible to securely use it over and over again. Each transaction gets linked to a unique digital signature which confirms the validity of the wallet owner and ensures that the transaction can’t be changed later.

Bitcoin Private Keys

When someone creates a new bitcoin wallet, a 256-bit long private key beginning with the number 5 is chosen randomly. A public key connected to that private key will also be generated, which is the address used to receive Bitcoins. The public key begins with the number 1. It is next to impossible to reverse engineer to figure out the private key associated with a public key.

Here is an example of what Bitcoin keys look like:

Private Key

5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF

Public Key

1EHNa6Q4Jz2uvNExL497mE43ikXhwF6kZm

Storing Crypto with Private Keys

Cryptocurrencies themselves are not stored locally on one’s phone or laptop. They are stored on the blockchain and accessed using public and private keys. Wallets keep track of how many coins are held by any particular user. This is similar to a traditional online bank account. When an account owner logs into their account online, it tells them how much money is in their account, but the money itself isn’t stored online. The difference is that cryptocurrencies are digital currency, whereas online funds relate to fiat currency backed by physical assets, at least in theory.

If a wallet owner loses track of their phone, laptop, or hardware wallet, they can still gain access to their cryptocurrencies if they have the private keys, or in some cases by using a backup code or recovery phrase provided when the wallet gets created. This is why it’s so important to make a backup of one’s private keys or backup codes.

Different Crypto Wallets Use Different Private Keys

There are a few different types of crypto wallets, each of which utilize private keys in a different way.

Hot Wallets

Some online wallets and exchanges store private keys on behalf of the user. These may be mobile apps or web apps, and are also known as hot wallets. Crypto holders can also send and receive funds on decentralized exchanges, which are peer-to-peer networks that don’t have a central authority.

Desktop Wallets

Desktop wallets get downloaded from the internet but then exist offline on one’s computer. The private key may be written down or stored in an offline file.

Hardware Wallets

Hardware wallets, such as the Trezor and Ledger devices, store private keys offline, and funds can’t be accessed without the device and a pin code. They generally have small screens and buttons used to verify transactions when the device is plugged into a computer. This makes them very secure. If the device breaks or gets lost, the funds can be retrieved using a backup code. These devices support many different cryptocurrencies, including Bitcoin, Litecoin, Ethereum, and more. Both hardware wallets and paper wallets are known as cold wallets.

Recommended: Hot Wallets vs. Cold Wallets: Choosing the Right Crypto Storage

Paper Wallets

A paper wallet is simply a piece of paper where one writes down their private keys or that gets printed out with the keys on it. This is perhaps the most secure way to store private keys, but it’s important to keep the paper dry and in a safe and memorable place. Paper wallets for Bitcoin can be generated at bitaddress.org , while the user is offline.

Trading Crypto With Private Keys

When a wallet owner wants to access or send funds, they will be asked for their private key, or to verify the transaction if the key is held by a wallet service. Crypto wallets generally come with QR codes that can be scanned for sending funds, making the process faster and easier. If even one letter or number in an address is entered incorrectly the transaction will go to the wrong wallet, so using a QR code can help prevent that from happening.

Bitcoin and many other crypto transactions are irreversible. For this reason, it’s very important to double- or even triple-check the address that funds are being sent to and ensure that it’s correct. One should never send funds to an unverified company or unknown individual, as there have been countless instances of crypto fraud.

Tracking Transactions Using Keys

While a private key will get you into your own account, there are other, more anonymous ways to track other crypto transactions. There is a publicly viewable ledger for almost every cryptocurrency showing transactions between wallet addresses. One can also view all incoming and outgoing transactions from any particular wallet address, without knowing who the address belongs to.

This can be useful during the transaction process, because sometimes it takes several minutes or even longer for a transaction to go through and funds to transfer into a wallet. However, one can often see that the funds were sent from the outgoing address, confirming that the transaction has been initiated.

The Takeaway

Understanding private and public keys is integral to investing in and using cryptocurrencies. While a public key is in fact public-facing, one’s private key should always be kept secure, because with it you—or anyone else—can execute crypto transactions, and without it you have no access to your cryptocurrency.


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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