SoFi

The way we handle money is quickly changing. With the rise of apps, online platforms, and cryptocurrencies, people now have more ways than ever to store and move their funds. One tool gaining attention in this evolution is the fiat wallet — a digital wallet that allows you to store fiat currencies (traditional money like U.S. dollars or euros) and easily convert between fiat and crypto.

Fiat wallets are gaining traction due to their vital role as a bridge between traditional banking and the cryptocurrency ecosystem. What follows is a closer look at what fiat wallets are, how they compare to bank accounts and crypto wallets, their benefits and drawbacks, and where they may fit in the future of money.

What Is a Fiat Wallet?

A fiat wallet is a digital account for storing, sending, and receiving fiat currencies. In addition, fiat wallets are typically integrated into cryptocurrency exchanges. This allows you to easily convert your fiat currency into cryptocurrency and vice versa, offering a seamless transition between traditional and digital assets.

Fiat currency is money declared legal tender by a government. It is not backed by a physical commodity like gold or silver but instead derives its value from the trust and confidence people have in the issuing government and its economy. The U.S. dollar is one example of fiat currency; the euro is another.

Fiat Wallets vs. Traditional Bank Accounts

While traditional bank accounts and fiat wallets both hold government issued currency, they serve different purposes.

•   Traditional bank accounts: Operate within the established financial system, offering services like debit cards, check, savings options, and loans. They are regulated, secure, and designed primarily for everyday banking needs. Transfers, however, can be slow — especially when moving money across borders.

•   Fiat wallets: Typically found within crypto exchanges and platforms, fiat wallets are designed for speed and direct integration with digital asset markets. They don’t replace a bank account but act as a staging area where users can deposit cash and instantly use it to buy or sell cryptocurrencies. This makes them less about long-term money management and more about quick access to funds in a digital transaction environment.

Key Differences Between Fiat and Crypto Wallets

A crypto wallet is a holding place for cryptocurrency keys. These keys are passwords that allow you to access and manage various cryptocurrencies, such as Bitcoin and Ethereum. Crypto wallets may be physical, meaning you write your keys down on paper or store it on a hard drive, or you may store your keys digitally. Whatever method you choose, your crypto itself remains on the blockchain.^[1]

By contrast, fiat wallets only hold traditional, government-issued money (like USD, GBP, or EUR). You can link your fiat wallet to a traditional bank account and use the funds in your fiat wallet to interact with cryptocurrency platforms. This allows you to make seamless transitions between traditional and digital assets.

Here’s a look at fiat wallets vs. crypto wallets side by side:

Common Use Cases for Fiat Wallets

Fiat wallets are commonly used as a holding place for fiat currencies before purchasing crypto or after selling digital assets. They are often integrated into or used alongside crypto platforms to facilitate the conversion of traditional currency into digital assets and vice versa.

Here’s how the process typically works:

•   Create a fiat wallet on your chosen platform by providing personal information and ID verification

•   Create a link to your bank account, debit card, or credit card.

•   Deposit money to your fiat wallet using your connected bank account or card.

•   If necessary, link your fiat wallet to your preferred crypto platform and establish a crypto wallet.

•   Follow the platform’s instructions to buy cryptocurrency coins using the money in your fiat wallet.

Once again, the cryptocurrency you buy is stored on the blockchain; the key you need to unlock it is held in your separate crypto wallet.

To sell your cryptocurrency, you would follow the crypto platform’s instructions. The proceeds from the sale are deposited into your fiat wallet. You can then transfer that money to your linked bank account or use it to buy a different coin.

Benefits of Using a Fiat Wallet

Using a fiat wallet can offer a number of advantages. Here are some to consider:

Fast Access to Funds for Trading

In digital markets, timing can be everything. Fiat wallets allow near-instant transfers within digital platforms. That can be particularly helpful for capturing sudden “dips” in volatile crypto markets, where waiting for a traditional bank transfer to clear can take several days and cause you to miss an opportunity.

Seamless Exchange Between Fiat and Crypto

Fiat wallets make it simple to switch between government-issued money and digital assets without extra steps. Instead of moving funds through banks each time you want to trade, you can deposit once into your wallet and quickly convert between fiat and crypto as market conditions change.

Enhanced Convenience and User Experience

Fiat wallets can enhance user experience in a number of ways:

•   They offer a simple interface for managing transactions.

•   Many are already integrated into major crypto exchanges.

•   They allow for quick withdrawals back to a linked account.

•   They provide access to your money at any time and from anywhere.

Potential Cost Savings

Fiat wallets may reduce costs by charging lower transaction fees (compared to repeated bank transfers) and avoiding multiple intermediary steps in the crypto buying and selling process. They may also allow you to avoid currency exchange fees.

Drawbacks to Fiat Wallets

While the benefits are compelling, fiat wallets are not without risks. Here are some to keep in mind:

•   Limited regulation: Not all providers of fiat wallets are regulated like banks, potentially exposing users to risk if a platform fails.

•   Withdrawal limits: Some fiat wallets set caps on deposits, withdrawals, or transactions, which may be frustrating to high-volume users.

•   Platform dependency: Unlike a bank account, a fiat wallet usually ties users to a single platform or cryptocurrency exchange.

•   Security risks: Although providers invest in encryption, cyberattacks and breaches are possible.

How to Choose a Trustworthy Fiat Wallet Provider

Here are some key factors to consider for when choosing a fiat wallet for cryptocurrency:

•   Reputation: Consider established exchanges and fintech companies that are known for reliability and safety.

•   Convenience: Make sure the wallet supports your local currency, accepts your desired payment method, and offers integration with your preferred crypto exchange.

•   Security infrastructure: Look for a wallet that offers strong security features like two-factor and biometric authentication and conducts regular security audits.

•   User experience: A clean, intuitive interface can make regular use much easier.

•   Speed and efficiency: Some wallets may complete transactions at a faster pace than others, offering virtually instant access to funds. That may be important if you want to keep delays to a minimum.

•   Cost: Be aware of any fees you might pay to use a fiat wallet, including monthly or yearly subscription fees, transaction fees, or currency conversion fees.

The Future of Fiat Wallets in Digital Finance

Growing interest in cryptocurrency and digital assets underscores the importance of fiat wallets and their usefulness in connecting centralized vs. decentralized finance. We’ll likely see greater integration between fiat wallets and cryptocurrencies in the coming years as fintech companies continue to challenge the traditional banking narrative.

Trends and Innovations in Fiat Wallet Technology

Here’s a look at some continuing and emerging trends in the fiat wallet ecosystem:

•   Use of artificial intelligence (AI) and machine learning to detect potentially fraudulent activity

•   Biometrics and the use of fingerprint or facial ID to unlock fiat wallets

•   Integration into a broader range of crypto and financial platforms

•   Increased focus on user-friendly interfaces and mobile compatibility

•   Improved regulatory clarity and enforcement, helping to legitimize the crypto industry.

The fiat and crypto wallet market was valued at roughly 1.17 billion in 2024 and is expected to grow to $4.68 billion by 2033, suggesting that more people will turn to both technologies for their financial needs. That may spur even greater demand for tech innovation.

Evolving Role in the Crypto Ecosystem

In the crypto world, fiat wallets are more than just on- and off-ramps — they represent the meeting point between traditional and decentralized finance (DeFi). As regulation surrounding cryptocurrency increases and adoption grows, fiat wallets may serve as the backbone for compliant, mainstream participation in the cryptocurrency universe.

The Takeaway

Fiat wallets are a niche tool that enables users to easily convert fiat to cryptocurrency and vice-versa through crypto exchanges. As technology evolves, they are likely to become an increasingly important link between traditional banking and digital assets.

For anyone exploring the digital economy, understanding how these wallets work can make it easier to move confidently between the traditional financial system of bank accounts and government-backed money and the emerging world of cryptocurrency.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.

FAQ

Are fiat wallets safe to use?

Fiat wallets are generally safe when provided by reputable financial institutions or regulated platforms. They typically use encryption, two-factor authentication (2FA), and other security measures to protect your funds. However, safety also depends on user practices, such as keeping login details secure and avoiding public Wi-Fi for transactions. Always choose wallets with a strong track record of safety and positive reviews.

How do I deposit money into my fiat wallet?

Depositing money into a fiat wallet is usually straightforward. Wallets typically allow transfers via bank accounts, debit/credit cards, or even payment apps. To deposit money, you typically need to log into your wallet, select “Deposit” or “Add Funds,” choose your preferred payment method, enter the amount, and confirm the transaction. The funds should appear in your wallet within minutes to a few business days, depending on the method and your bank.

Can I withdraw money from a fiat wallet to my bank account?

Yes, you can typically withdraw money from a fiat wallet and deposit it into your bank account via electronic transfer. The process usually involves linking your bank account to the wallet, initiating a withdrawal by specifying the amount and destination, and completing any required security verifications. Keep in mind that transfers may take several business days to process.

Can I use a fiat wallet to buy cryptocurrency?

Yes, fiat wallets are commonly used to buy cryptocurrency and are often already integrated with a crypto platform. Buying crypto is often as simple as selecting a cryptocurrency, choosing your fiat wallet as the payment method, and tapping “Buy.” To complete the transaction, you may need to confirm it with a passcode or biometric verification.

Can I convert crypto to cash with a fiat wallet?

Yes, many fiat wallets allow you to convert cryptocurrency to cash. This process usually involves selling your crypto through a connected exchange, then transferring the resulting fiat currency to your wallet. Once the funds are in your fiat wallet, you can withdraw them to your bank account.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/tommaso79

SOCRYP-Q325-087

We use money to pay for things all the time, yet many of us don’t stop to think about what gives it value. A paper bill or digital balance on your checking account has no real worth on its own. So why does it work? The answer lies in the fiat money system.

Fiat money is currency that has value not because it’s backed by a physical commodity like gold or silver, but because governments declare it legal tender and people trust that it will be accepted. In the U.S., fiat money is simply the dollars and cents we use every day. In the UK, it’s pounds, and in Japan, it’s yen. Below, we’ll explore how fiat currency works, how it came to be, its pros and cons, and what the future may hold as digital currencies rise in influence.

What Is Fiat Money?

Fiat money, or fiat currency, is a form of exchange or legal tender that’s backed by faith in the government, not an underlying asset like silver or gold. You can also think of fiat money as a national or regional currency. Examples of fiat currency include the dollar In the U.S., the pound in England, and the yen in Japan. Fiat money gets its value from public trust in the issuing government, the stability of that government, and the dynamics of supply and demand.

Fiat money is different from commodity money (like gold), which is tied to a tangible good’s inherent value, and digital currencies (such as cryptocurrency), which have no tangible form.

Origin and Meaning of the Term “Fiat”

“Fiat” is a Latin word that means “let it be done,” referring to an authoritative declaration or command. This term was chosen for fiat money because the money’s value is established by a government’s authority, not by its intrinsic worth or a commodity like gold. The value of fiat currency relies on public trust in the issuing government and the stability of the economy, making the government’s authority key to its worth.

Fiat Money vs. Commodity Money: Key Differences

Commodity money is a type of currency that is itself a valuable physical good, meaning it has intrinsic value apart from its use as money. A gold coin is valuable both as money and as gold. Commodity money can be used outside the monetary system. For example, silver jewelry retains value regardless of government policy.

By contrast, fiat money has no intrinsic value. A $20 bill is just a piece of money. Its worth comes from collective trust and the fact that the U.S. government requires its acceptance for payments.

A middle-ground money category is representative money, which once dominated economies. Under the gold standard, for example, paper notes were redeemable for a fixed amount of gold stored by the government. Today, however, almost all natural currencies are purely fiat-based.

Why Fiat Money Has Value

While fiat money is not backed by a tangible asset, people accept it in exchange for goods and services. This is due to a combination of legal authority, public trust, and market forces.

The Role of Government Backing and Legal Tender Laws

Fiat money is backed by the authority of the government that issues it. For example, the U.S. dollar is backed by the “full faith and credit of the U.S. government.”

Legal tender laws specify which types of fiat money are considered valid currency. American law, for example, states that:

“United States coins and currency (including Federal Reserve notes and circulating notes of Federal Reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.”^[1]

This definition specifically refers to physical currency. Debit cards, credit cards, and personal checks are not included, since they’re payment methods. However, they’re all tied to fiat money.

By this definition, digital currencies are also excluded. While you could technically use a digital currency to pay for goods or services, the currency itself has no backing from the U.S. government and is not legal tender.^[2]

Public Trust and Perception

Ultimately, fiat money relies on trust. People accept dollars, euros, or yen because they believe others will also accept them tomorrow. This collective belief gives the currency stability.

Trust can be strengthened by sound monetary policy, low inflation, and political stability. Conversely, when trust erodes, people may abandon the currency in favor of alternatives such as foreign money, commodities, or even barter.

Determinants of Fiat Currency Value

The value of fiat money is tied to several factors, some of which we’ve already mentioned. The most significant influences include:

•   Public perception and confidence

•   Government stability

•   Economic policies and conditions

•   Supply and demand

It’s the role of central banks to promote economic and monetary policies that are designed to lend stability to the money supply and currency valuations. In the U.S., the Federal Reserve (aka, “the Fed”) is tasked with conducting monetary policy. The Fed manages the value of fiat money primarily by controlling the money supply through three main tools: open market operations, interest rate adjustments, and reserve requirements.

By buying or selling government securities, setting benchmark interest rates, and influencing how much money banks must hold in reserve, the Fed can stimulate or slow economic activity, manage inflation, and maintain public trust in the currency’s stability and purchasing power.

Fiat Money: Past and Present

Understanding the origins of fiat currency can offer a perspective on why it’s become so important today.

Early Examples and Global Development

Asset-backed coins and paper money are believed to have first emerged centuries ago in China. This representative money caught on because people could use it to pay for goods and services — and also redeem it for its underlying commodity. Eventually, the use of physical money spread to Japan and other parts of Asia.

Silver and gold coins were the standard for payment in Europe until the first paper banknote was printed in Sweden in 1661. However, these notes were backed by a government guarantee to redeem them for gold and silver. That likened them to promissory notes, rather than a form of fiat money.

The United Kingdom, and later the U.S., used the gold standard to determine currency values. Under a gold standard system, a country’s money supply is tied to gold. A certain unit of currency is assigned a value based on a certain amount of gold.

The Move from Gold Standard to Fiat Systems

For much of modern history, nations operated under the gold standard, where currencies were tied to a specific amount of gold. This created stability but also limited governments’ flexibility during economic crises.

The turning point came during the 20th century. After the Great Depression and World War II, the Bretton Woods system established the U.S. dollars as the world’s reserve currency, pegged to gold. However, by the early 1970s, mounting economic pressures led President Richard Nixon to suspend dollar convertibility into gold. This effectively ended the gold standard and ushered the global fiat system we know today.

Here’s a look at other notable milestones in U.S. currency history:^[3]

•   1690: First issuance of paper notes in the Massachusetts Bay colony.

•   1739: Ben Franklin introduces anti-counterfeiting measures to stop the illegal reproduction of paper notes.

•   1775: The Continental Congress issues paper money to fund the Revolutionary War; lack of government backing results in a dramatic loss of value.

•   1791: Alexander Hamilton establishes the Bank of the United States to facilitate borrowing and lending for the U.S. government.

•   1861: “Greenbacks” are issued to finance the Civil War.

•   1862: Legal tender notes are issued in denominations of $1, $2, $5, $10, $20, $50, and $100.

•   1913: Federal Reserve Act establishes the Federal Reserve as the nation’s central bank.

•   1971: Nixon takes the U.S. off the gold standard.

Fiat Money in Modern Economies

Fiat money is the standard currency globally. Governments issue fiat currencies, which can be exchanged for other currencies. For example, if you’re traveling to Asia you could exchange dollars for Japanese yen or South Korean won.

The existence of fiat currencies is what powers governments and gives them the authority to direct monetary policy and the broader economy. Adjusting the money supply or interest rates, for instance, can help promote stability in times of economic uncertainty. The more volatile nature of commodities makes commodity money less attractive as a world currency.

While governments can and do maintain gold reserves, the value of the country’s currency is not dependent on that. That also allows for greater flexibility in managing and regulating currency and the money supply.

Advantages and Disadvantages of Fiat Money

Fiat currencies have many attractions, but they aren’t foolproof. Comparing the pros and cons of fiat money can help in understanding its importance and role on the global stage.

Advantages:

•   Flexibility: Fiat money allows for flexibility in managing economic policy and the money supply, potentially reducing the risk of banking disruptions.

•   Efficiency: Unlike commodity money, fiat money does not rely on scarce resources like gold.

•   Support for modern economies: Fiat money enables complex financial systems, credit expansion, and international commerce.

•   Portability and convenience: Paper bills and digital balances are easier to use than heavy coins and bullion.

Disadvantages:

•   Risk of inflation: Without strict limits, governments can over-issue money, eroding value.

•   Dependence on trust: If public confidence collapses, fiat money can quickly lose worth.

•   Potential for mismanagement: Poor monetary policy or political instability can trigger crises.

•   No intrinsic value: Unlike gold, fiat money has no fallback use if confidence collapses.

Real-World Examples of Fiat Money

If you need an example of fiat currency, look no further than your wallet. However, the dollar is just one type of fiat money in existence.

Major Fiat Currencies in Circulation

Most currencies today are fiat money. Some of the most significant fiat currencies include:

•   U.S. dollar

•   Mexican peso

•   Canadian dollar

•   Indian rupee

•   Japanese yen

•   Chinese yuan

•   South Korean won

•   British pound

•   Euro

•   Australian dollar

•   New Zealand dollar

Notable Cases of Fiat Currency Failure

There are several instances of fiat currency failures throughout history. Some of the currencies that have collapsed in the modern era include the:^[4]

•   Zimbabwe dollar (2000s)

•   Belorussian ruble (1990s)

•   Venezuelan bolivar (1990s – present)

•   Russian ruble (1990s)

•   Indian rupee (1990s)

•   German papiermark (1920s)

The collapse of the papiermark after World War I is notable because of the sheer size of the gap between its value and the dollar. In 1923, you would have needed 4.2 trillion German papiermarks to have the equivalent of one U.S. dollar.

Comparing Fiat Money With Alternatives

Fiat money is the primary means by which global commerce operates. However, a new class of digital currencies is on the rise.

Fiat Money vs. Cryptocurrencies

In recent years, digital currencies like Bitcoin have sparked debates about the future of money. Unlike fiat currencies, cryptocurrencies are managed by a decentralized network rather than any government or single authority.

Transactions made with cryptocurrencies are permanently logged on a ledger known as a blockchain. This ledger is viewable to anyone, therefore functioning as a public database. Cryptocurrencies offer a wide range of potential benefits, including faster transaction speeds, lower fees, and greater accessibility. However, they still face challenges, including price volatility, environmental concerns, and lack of regulation. Security risks and limited consumer protection are also ongoing concerns.

Stablecoins, Digital Assets, and Central Bank Digital Currencies (CBDCs)

Stablecoins are digital currencies whose value is tied to another asset. For example, a stablecoin may be pegged to the U.S. dollar. Most token issuers hold assets in reserve so that stablecoin holders can redeem them at any time. Stablecoins may be bought and sold and used as a form of payment for goods and services.

Accessibility and the potential to earn interest on holdings are fueling interest in stablecoins. However, the safety of a stablecoin depends on its backing assets, the transparency and solvency of its issuer, and the security of the wallet used to store it.

One potentially interesting development in the digital currency landscape could be the advent of central bank digital currencies (CBDC) — virtual currencies that are created and backed by a nation’s central bank.

CBDCs sound to some people like an oxymoron because cryptocurrencies, by definition, are decentralized and don’t have an authority backing them. However, more central banks are exploring the possibilities of using them.

The Future of Fiat Money

Fiat money isn’t going away any time soon, but we may see a blend of traditional systems and digital innovation in the coming years.

The Rise of Digital Currencies and Electronic Payments

The use of digital currencies as a payment method is growing. The federal GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoin) Act, which was signed into law in July 2025, opens the door to a regulatory framework that would allow the use of stablecoins as a form of payment. The Act requires stablecoin issuers to hold reserves in U.S. currency and enforces key rules surrounding transparency. It does not, however, convey government-backed status to stablecoins and prohibits issuers from marketing their coins as being backed or insured by the government.

Changing Role of Central Banks

As the number of digital currencies continues to grow, central banks are increasingly forced to pay attention. The uptick in the number of countries exploring CBDCs is evidence that governments are aware of the risks of digital currencies and are seeking ways to mitigate those risks by integrating them into payment systems.

In the U.S., the Federal Reserve recently withdrew guidance for banks related to crypto assets. They also issued a joint statement with the Office of the Comptroller of the Currency (OCC) and the FDIC addressing the safekeeping of crypto-assets by banks on behalf of their customers, creating a clear signal that banks can serve as custodians of digital assets.^[5]

The Fed has also drafted several papers on the pros and cons of introducing a CBDC in the U.S. In the Board’s opinion, a central bank digital currency would represent a significant innovation and offer Americans access to a form of currency with no liquidity or credit risk.^[6]

It’s unclear whether a CBDC will materialize in the U.S., and questions surrounding the risks of CBDCs continue to be obstacles to widespread adoption.

Ongoing Debates on Stability and Longevity

Cryptocurrency’s decentralized nature puts it at risk for wide swings in valuation. Compared to the dollar or other forms of fiat money, digital currencies may see values go up or down dramatically in a short period of time. Lack of government backing means that public confidence can play an even greater role in determining which way a cryptocurrency’s price moves.

Stablecoins are structured to maintain a relatively stable value and reduce volatility by pegging themselves to fiat currencies. However, concerns remain about how to make digital currencies accessible on a broad scale, as well as their overall longevity. Numerous cryptocurrencies have been abandoned for various reasons, but the common thread among them is that they lost all or nearly all of their value. Stablecoins could depeg, moving farther away from their intended value, for a number of reasons, such as illiquidity, regulatory challenges, or tech failures.

Banks are opening pathways with crypto checking and savings accounts that blend traditional banking with digital asset management. They allow you to hold fiat money in an FDIC-insured bank account while storing cryptocurrency in a secure digital wallet. (Keep in mind, however, that crypto assets are not FDIC insured and may lose value.) These hybrid account options may entice more people to explore digital currencies and help push them to the forefront of financial systems in the U.S. and abroad.

The Takeaway

Fiat money is a form of currency, such as the U.S. dollar or the euro, that is not backed by a physical commodity like gold or silver, but is instead given value by a government’s decree. Its value is based on the trust and confidence that people have in the issuing government and its economy. Most modern economies use fiat money, allowing central banks to control economic factors like inflation by managing the money supply.

Digital currencies offer an alternative to the fiat currency system, and are attracting significant interest from governments and the public due to their potential for faster, cheaper transactions, and new financial applications. These newer currency options range from decentralized cryptocurrencies to stablecoins and CBDCs.

Staying up to date on the latest trends affecting fiat currency and digital currencies can help you make informed decisions with your money.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.

FAQ

Why does fiat money have value if it isn’t backed by a commodity?

Fiat money has value because people trust the government that issues it and accept it as a medium of exchange. Its worth comes from legal tender laws requiring its acceptance for debts and taxes, along with widespread confidence in its stability. Unlike gold or silver, fiat currency doesn’t rely on intrinsic value but on collective belief in its purchasing power. This is supported by strong institutions, economic productivity, and central bank policies that maintain confidence in the system.

How does fiat money impact inflation and hyperinflation?

Fiat money gives central banks flexibility to manage the money supply, which can help control inflation when used responsibly. However, if too much money is printed without corresponding economic growth, inflation rises as purchasing power declines. In extreme cases, such as political instability or uncontrolled spending, this can spiral into hyperinflation, where prices skyrocket, and money rapidly loses value. Fiat money’s reliance on government discipline makes inflation risk management crucial to maintaining trust and economic stability.

How is fiat money regulated?

Fiat money is regulated primarily by central banks, which oversee its issuance and circulation. They use tools like interest rates, reserve requirements, and open market operations to control money supply and maintain price stability. Governments also enforce legal tender laws, banking regulations, and anti-counterfeiting measures. Financial institutions also play roles in monitoring cross-border flows and exchange rates. This system of regulation ensures fiat money remains stable, trustworthy, and effective as a medium of exchange in modern economies.

Are cryptocurrencies likely to replace fiat money?

Cryptocurrencies provide decentralized, borderless transactions, but they face challenges in replacing fiat money. Most lack price stability, broad adoption, and government backing, making them less practical for everyday use. Governments also prefer to retain monetary control, which cryptocurrencies bypass.

While digital assets may complement fiat money, offering alternatives for financial portfolios or niche transactions, full replacement is unlikely soon. Instead, central banks are exploring central bank digital currencies (CBDCs), which blend digital innovation with government oversight, bridging the gap between crypto and fiat.

What happens if trust in a fiat currency disappears?

If people lose trust in a fiat currency, its value can collapse because it depends on public confidence rather than intrinsic worth. In such cases, individuals may turn to foreign currencies, commodities like gold, or even barter to preserve purchasing power. Severe loss of trust often leads to hyperinflation, economic instability, and social unrest. Governments may respond with monetary reforms, introducing a new currency, pegging value to a commodity, or adopting international support to restore stability and rebuild confidence.

Why do governments continue to use fiat money over alternatives?

Governments use fiat money because it’s stable, reliable, and flexible. Fiat currencies can be exchanged for goods and services in countries around the world. There’s no need to store large quantities of physical commodities, like gold or silver, that in the past have been used to determine the value of currency.

Governments use fiat money because it provides flexibility to manage economies. Unlike commodity-backed systems, fiat currency allows central banks to adjust supply in response to crises, growth, or inflation. It also simplifies transactions, reduces reliance on scarce resources, and supports modern financial systems like credit and banking. Alternatives, such as gold standards or purely decentralized currencies, limit monetary policy options.

What makes fiat currencies different from digital assets?

Fiat currencies are government-issued, legally recognized as legal tender, and regulated by central banks. They rely on public trust and institutional backing, ensuring broad acceptance for everyday transactions. Digital assets, such as cryptocurrencies, are decentralized, often unregulated, and rely on blockchain technology rather than government authority. While fiat money is relatively stable, most digital assets are volatile and speculative. In addition, fiat currencies integrate seamlessly into traditional financial systems, while digital assets operate outside them, offering new opportunities but also greater risks.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

SOCRYP-Q325-080

As the most widely recognized and adopted cryptocurrency, Bitcoin’s price can in many ways serve as a barometer for the health of the entire crypto market. With the highest market cap of all cryptocurrencies by a wide margin, it has the potential to lift the prices of other cryptocurrencies in the wake of its own price increases, and likewise pull broader market prices down when its own numbers fall.

The price of Bitcoin (BTC) has been on a wild ride since it launched over 14 years ago, on January 3, 2009. Those who bought Bitcoin early have seen its price rise significantly, surpassing $124,000 for a brief moment in mid-2025, following a steep decline in 2023. However, the fluctuations in Bitcoin’s price — as with all forms of crypto — have also led to considerable losses.^[1]

A review of Bitcoin price history shows plenty of ups and some significant downs, but despite the risks, crypto fans continue to seek it out. Like other cryptocurrencies, Bitcoin’s price is largely driven by sentiment, and those who buy in must be comfortable with the elevated risk that buying and selling crypto entails.

Bitcoin Price History Over the Years

A glance at the Bitcoin historical price chart illustrates the cryptocurrency’s steep rise since its inception. It’s equally clear that the path to Bitcoin’s current price has not always been a smooth one, and that it may continue to see fluctuations over time.

While some enjoy comparing Bitcoin’s price history to past speculative manias like Beanie Babies circa 1995 (or the infamous tulip bubble circa 1636), speculation is only one factor in any given Bitcoin price fluctuation.

Over the years, one pattern can be seen in Bitcoin’s prices. Every four years, the network undergoes a change called “the halving,” where the supply of new BTC rewarded to Bitcoin miners gets cut in half. This has happened four times so far:

•   2012: 50 BTC to 25 BTC

•   2016: 25 BTC to 12.5 BTC

•   2020: 12.5 BTC to 6.25 BTC

•   2024: 6.25 BTC to 3.125 BTC2

The next Bitcoin halving is set to occur in March or April of 2028.

In each instance, the price of BTC reached new record highs in the year or so following each halving event. This was typically followed by a Bitcoin bear market. After a period of consolidation, the price then tended to move upwards again in advance of the next halving, though there’s no guarantee that this may occur in the future.

While the price of BTC can hardly be considered predictable, it’s useful to view the chapters in the Bitcoin price history and what it may mean for potential buyers, sellers, and holders.

Bitcoin Price History by Year (2014-2025)

Source: Yahoo Finance, CoinDesk

Bitcoin Price 2009-2012: $0 to $13.50

Early Bitcoin price history shows relatively modest growth. As buzz around Bitcoin grew, more crypto-curious individuals began to pay attention to this seemingly novel idea and its potential as a serious vehicle for growth.

2009: $0

On October 31, 2008, the pseudonymous person or group known as Satoshi Nakamoto published the Bitcoin white paper. This paper introduced a peer-to-peer digital cash system based on a new form of distributed ledger technology called blockchain.

Then, on January 3, 2009, the Bitcoin network went live with the mining of the genesis block, which allowed the first group of transactions to begin a blockchain. This block contained a text note that read: “Chancellor on Brink of Second Bailout for Banks.” This referenced an article in The London Times about the financial crisis of 2008 – 2009, when commercial banks received trillions in bailout money from central banks and governments. This event helped mark Bitcoin’s original price at $0.

For this reason and others, many suspect that Nakamoto created Bitcoin, at least in part, in response to the way the events of those years played out.

2010: $0.00099 to $0.30

Bitcoin’s price increased nominally for most of 2010, never surpassing the $1 mark. The first recorded price at which Bitcoin was exchanged was equivalent to roughly one-tenth of a cent, and the year closed with a price near $0.30. The first notable price jump would not be far off, however.

2011 – 2012: $1 to $13.50

Real adoption of Bitcoin began to take place about two years after it was first introduced, and a major Bitcoin price surge happened for the first time.

In 2011, the Electronic Frontier Foundation (EFF) accepted BTC for donations for a few months, but quickly backtracked due to a lack of a legal framework for virtual currencies.

In February of 2011, BTC reached $1.00 for the first time, achieving parity with the U.S. dollar. Months later, the price of BTC reached $10 and then quickly soared to $30 on the Mt. Gox exchange. Bitcoin had risen 100x from the year’s starting price of about $0.30.

By year’s end, though, the price of Bitcoin was under $5. No one can say for sure exactly why the price behaved as it did, especially back when the technology was so new. It could be that 2011 marked the launch of Litecoin, a fork of the Bitcoin blockchain — and other forms of crypto began to emerge as well — signaling greater competition.

In 2012, of course, Bitcoin saw its first halving, from a 50-coin reward for mining BTC to 25 coins. This set the stage for its precipitous growth. But the pattern of an 80% – 90% correction from record highs would continue to repeat itself going forward, even as much more Bitcoin liquidity would come into being.

Recommended: Is Crypto Mining Still Worth It in 2025?

2013 – 2016: $13 to $1,000

The period between 2013 and 2016 would mark the beginning of Bitcoin’s ascension as a cryptocurrency to be taken seriously. Pricing increased dramatically during this time, as more people began to take notice of Bitcoin’s potential.

2013: $13 to $1,193

In 2013, the EFF began accepting Bitcoin again, and this was the strongest year in Bitcoin price history in terms of percentage gains. Starting at $13 in the beginning of the year, the price of Bitcoin rose to almost $250 in April before correcting downward by over 50%. The price consolidated for about six months until another historic rally in November and December of that year, when the price hit $1,193.

This increase saw Bitcoin’s market cap exceed $1 billion for the first time ever. The world’s first Bitcoin ATM was also installed in Vancouver, allowing people to convert cash into crypto.

While the price spiked above $1,000 again briefly in January 2014, it would be nearly three years before the Bitcoin price would reach four digits again.

Amidst all this volatility was a surge in crypto interest, with Dogecoin being one of the more notable coins to emerge at that time. Though considered a meme coin, Dogecoin still exists.

2014 – 2015: $760 to $430

While the cryptoverse quietly exploded in this time period, with technological innovations that permitted a move away from proof-of-work to the less resource-intensive proof-of-stake, as well as the emergence of smart contracts, and the real foundations of decentralized finance — Bitcoin was relatively quiet.

While 2014 opened at about $760, the price overall held steady in the $200 to $500 range for much of this time, briefly dipping below $200 in January and August of 2015. Bitcoin closed out 2015 at $430, marking a period of overall price stability. The official B symbol that has come to be associated with Bitcoin was adopted in November of that year.

2016: $430 to $960

In 2016, Bitcoin halved for a second time, prompting a notable jump in prices by year’s end. January ended the month with a closing price of $368, but by December, Bitcoin’s price had almost reached $1,000. A slight dip in pricing occurred around August, but for the most part, the cryptocurrency saw a steady and consistent rise in price.

2017 – 2019: $960 to $7,200

Between 2017 and 2019, Bitcoin would dazzle crypto watchers with big price leaps, but the outlook was not entirely rosy during this period. In 2018, a major crash would deliver a blow to BTC’s price and raise questions about the stability of cryptocurrency markets as a whole.

2017: $960 to $20,000

The Bitcoin price in 2017 breached the $1,100 mark in January, a new record at the time — following the Bitcoin halving in July of 2016. By December, the price had soared to nearly $20,000. That’s a 20x rise in less than 12 months, and it was followed predictably by a decline through 2018 and 2019. Bitcoin wouldn’t see the other side of $20,000 until late 2020.

Like the 2013 price surge, the 2017 rally occurred about one year after the halving. What made this time different was that for the first time ever, the general public became more aware of cryptocurrency. Mainstream news outlets began covering stories relating to Bitcoin and other cryptocurrencies. This price rise largely reflected retail buyers entering the market for the first time.

Opinions on Bitcoin ranged from thinking it was a scam to believing it was the greatest thing ever. For the believers, this was an opportunity for many to purchase Bitcoin for the first time, but there’s little doubt that the influx of retail interest in the crypto markets contributed heavily to volatility across the board.

2018: $14,000 to $3,700

The year 2018 was an unpredictable one for Bitcoin pricing. Following a relatively strong start in January, with prices closing above $10,000, the cryptocurrency ended the year at $3,742. This period stands out as one of the most significant cryptocurrency crashes, affecting not only Bitcoin but more than 90 other digital currencies that had arisen.

Bitcoin’s decline during this period was attributed to numerous factors, including the launch of several new crypto offerings that quickly fizzled, which triggered fear in the markets.

Apart from these concerns were rumors that South Korea was contemplating banning cryptocurrency, and the hacking of Coincheck, Japan’s largest OTC cryptocurrency exchange network. Combined, these factors created a perfect storm for price drops and criticism of Bitcoin from none other than Warren Buffett, who characterized it as “rat poison squared”.

2019: $3,700 to $7,200

Bitcoin began to see some recovery in 2019, though it was initially slow going. For most of the first quarter, Bitcoin’s price hovered between $3,500 and $5,000, before a surge in June of that year that tipped its price above $13,000.

June saw the cryptocurrency’s price rise above $10,000 again, and Bitcoin held steady throughout July. By August, the tide had begun to turn, and the remainder of the year saw a gradual slide in pricing. In December 2019, Bitcoin closed at $7,193, still well above its January price point but far from the highs reached in 2017.

The next big test of Bitcoin’s strength in the crypto markets would come in 2020, with the arrival of the COVID-19 pandemic.

2020 – 2025: $7,200 to $124,000

The period from 2020 to 2025 would see Bitcoin prices reach their highest levels yet — and one of the worst crashes in the cryptocurrency’s history. Against mounting pressure, Bitcoin would continue to attract new buyers hoping to get exposure to the crypto market.

2020: $7,200 to $29,000

The crypto feeding frenzy was well underway by the end of 2019, with hundreds of new coins on the market. By January 3, 2020, Bitcoin’s price was $7,347 and rising steadily for the most part. As the halving in May of 2020 approached, Bitcoin’s price shot north of $9,100, nearly a 25% increase in just a few months.

But that was just the start of a meteoric rise — and fall — for BTC that few will forget, and a phase of Bitcoin’s story that many tie to the pandemic. With millions of people worldwide confined at home from 2020 through 2021 (in some cases longer), online speculation became a widespread phenomenon. One offshoot of that may have been the biggest Bitcoin bull market to date.

2021: $29,000 to $69,000

In August 2021, the price of Bitcoin was hovering around $46,000, and by November 2021 BTC hit its all-time best over $68,500.

Toward the end of 2021, however, the Bitcoin hash rate, a factor thought to have some correlation to the Bitcoin price, plummeted to around $47,000 — a loss of close to 30%.

The price drop occurred partly as a result of China requiring its citizens to shut down Bitcoin mining operations. The country previously housed a significant portion of the network’s mining nodes. As a result, these computers had to go offline. Many believe this reduction in mining capacity was a key factor weighing on the Bitcoin price.

In addition, politicians and regulators raised concerns about the future of crypto laws and regulations, adding to the general mood that crypto mavens refer to as FUD (fear, uncertainty, doubt) — one of many crypto slang terms now in wider use.

But as 2021 shifted into 2022, the specter of inflation — in addition to the global energy crisis and geopolitical turmoil thanks to Russia’s war on Ukraine — put a drag on the price of BTC and just about every other major crypto.

2022: $47,000 to $16,5000

From January 2022 through May, Bitcoin’s price continued to sag as the Crypto Winter officially took hold. By May, BTC dipped under $30,000 for the first time since July of 2021. June would see Bitcoin’s price move even lower, dropping to $17,708 at its lowest point that month.

What Is a Crypto Winter?

Unlike a bear market, a crypto winter doesn’t have specific parameters or criteria. But, similar to a bear market, it does mark a period of steady and sometimes precipitous losses that pervade the crypto markets as a whole.

Crypto Struggles in the Face of Crises

This downward trend proved to be the case as crypto prices overall declined through Q2 — partly affected by the collapse of stablecoins like TerraUSD and Luna. In June, Bitcoin fell below $20,000.

Crypto prices struggled through Q3 of 2022, and took another hit in November 2022, thanks to the sudden failure of crypto exchange FTX.

The exchange crashed amid a liquidity crunch and allegations of misused funds by its CEO, Sam Blankman Fried. A bailout by Binance was possible, but the deal fell through because of FTX’s troubled finances and implications of fraud.

The rapid downfall of FTX shocked the financial industry, and the crash had a massive ripple effect throughout the crypto market, affecting consumer confidence. Widespread worries about inflation, as well as steady interest rate hikes, affected broader markets. Bitcoin’s price continued to be a gauge of overall crypto health in many ways, plunging below $20,000 by the end of December, 2022.

2023: $16,500 to $44,000

January 2023 saw Bitcoin’s price increase to around $23,300, sparking hopes that the crypto winter had begun to thaw. Meanwhile, other cryptocurrencies began showing similar price patterns in Q1.

The rest of 2023 proved to be fruitful for those who were able to hold on through the crypto winter. At mid-year, Bitcoin’s price had topped $30,000 once again, and while there were some slight declines, the crypto finished the year strong. By December 2023, Bitcoin’s price notched a high of $44,705, before closing the year just above $42,000.

2024: $42,000 to $100,000+

Bitcoin would hit new benchmarks in 2024, breaking the $100,000 mark for the first time. In January of that year, the SEC would allow Bitcoin to be accessed via exchange-traded funds (ETFs), which led to the addition of several new funds to the market.

The introduction of physical Bitcoin ETFs brought major price increases, as crypto users rushed to buy shares. Bitcoin’s price surged to $63,913 in February 2024, then to $73,750 in March.

After this peak, prices would decline slightly, hovering between $65,000 and $73,000 for most of the year. In November, Bitcoin’s price brushed $100,000, before finally surging past that figure in December. That month, it reached $108,268, ending the year at $93,429.

2025: $94,000 to $124,000

Building off the momentum of 2024, Bitcoin has continued to push toward new heights for much of 2025. Despite some dips in the first quarter, the cryptocurrency reached its highest price ever in mid-August, cresting $124,457. The price fell back slightly to below $110,000 later that month.

Part of the increase can be attributed to ongoing interest in Bitcoin ETFs, which offer exposure to cryptocurrency without having to buy individual coins. Market sentiment has also moved in a more positive direction this year, thanks in part to the current administration’s stance on cryptocurrency.

In July 2025, U.S. securities regulators announced plans to modernize crypto rulemaking, which could pave the way for further innovation in the digital currency space. Dubbed “Project Crypto”, it would make a major shift in the market and potentially make the U.S. a leader in the cryptocurrency market. What that might mean for Bitcoin pricing going forward remains to be seen.

The Takeaway

Bitcoin’s historical price records are a mix of surges and setbacks, but even through crashes, it’s continued to attract interest from buyers and sellers.

As the oldest and still the largest form of crypto, BTC has gone from being worth a fraction of a penny to about $110,000 in mid-2025, which is nothing short of impressive. However, cryptocurrencies are highly volatile, and past performance doesn’t guarantee future results.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.

FAQ

What was the highest price Bitcoin has ever reached?

Bitcoin reached its highest price in mid-August 2025, when it was briefly valued at $124,457. As of late August 2025, the price held above $110,000.

When was Bitcoin worth $1?

Bitcoin reached $1 in early 2011, after hovering around the $0.30 to $0.40 mark for most of 2010. In mid-2011, the price jumped to $30 before tapering off to around $2 to close out the year.

What was the original price of Bitcoin?

The first recorded price of Bitcoin was $0.00099. This price was notched in 2009, when a BitcoinTalk forum member exchanged 5050 Bitcoin with another forum member for $5.02 through PayPal.

If you bought $1,000 in Bitcoin 10 years ago, how much would it be worth today?

If you bought $1,000 in Bitcoin 10 years ago, in 2015, your Bitcoin would be worth approximately $405,000, as of August 2025. That would equate to a 40,425% rate of return on your money.

How many times has Bitcoin “crashed”?

Historically, Bitcoin has crashed nearly a dozen times, with some of the most notable crashes occurring in June 2011, April 2013, and December 2017. Bitcoin crashes occur when there are extreme price fluctuations that cause sharp declines. These fluctuations may be driven by market speculation, regulatory concerns, and macroeconomic factors, such as talk of interest rate hikes or rising inflation.

What is the significance of the Bitcoin halving?

Bitcoin halving is designed to reduce the supply of new Bitcoins entering the market. Halving occurs every four years and cuts the number of new coins created by 50%. The theory behind halving is that scarcity should lead to price appreciation if demand for Bitcoin remains high.

About the author

Brian Nibley

Brian Nibley is a freelance writer, author, and investor who has been covering the cryptocurrency space since 2017. His work has appeared in publications such as MSN Money, Blockworks, Business Insider, Cointelegraph, Finance Magnates, and Newsweek. Read full bio.

Photo credit: iStock/simarik

SOCRYP-Q325-045

Trend analysis is considered a type of technical analysis that traders use to forecast a security’s price direction. Trend analysis is a lagging indicator, which uses historical data to identify price trends, and help traders spot potential buy and sell opportunities.

Trend traders often rely on technical analysis tools such as momentum indicators, moving averages (MA), and support and resistance levels to identify trend patterns.

Depending on the direction of the trend, traders may take a long position (if prices show an upward trend) or a short position (if they’re moving downward).

Trend trading is a sophisticated strategy that comes with its own risks, as there are no guarantees a trend will hold, and trends frequently reverse.

What Is Trend Trading?

Trend trading, sometimes called trend following, is an offshoot of technical analysis: using a set of tools and metrics to assess stock price movements over time, whether investing online or through a traditional brokerage. Technical analysis helps traders identify patterns in price movements in order to decide whether to enter or exit a position.

Traders may follow a trend over any period of time, including short- , medium-, and long-term trends.

A trend may go upward (a bullish trend), downward (a bearish trend), or sideways (a neutral or range-bound trend).

Trend Trading and Technical Analysis

Traders typically combine different types of analysis and technical tools to help decide when to enter and exit stock positions, how best to profit from a trend, and how to manage the inevitable risk factors.

Technical analysis is different from fundamental analysis, which examines a company’s core financials, like its earnings and revenue. Professional technical analysts are called Chartered Market Technicians or CMTs.

Although the time-honored market adage holds that past performance never guarantees future results, technical analysts often take into account how market psychology, and sentiments like fear and greed, may influence trends or cause them to repeat over time.

For example, if a trader believes that a stock price is on a downward trend, they might take a short position (a strategy known as short-selling), selling stock and potentially rebuying later at a lower price.

On the other hand, if a trader believes that a stock is on an upward trend, they might take a long position. In other words, they would buy stock with the belief that it might increase in value over a certain period, and that they would be able to sell it at a higher price.

Trend Trading Fundamentals

Trend trading may sound straightforward, but it requires a deep understanding of market dynamics and the factors that can help investors evaluate price movements. A few fundamentals to know:

Support and Resistance Levels

One of the patterns that analysts look out for when looking at stock charts are certain thresholds at which stock prices tend to rise or fall.

•   The support level is a point to which a stock will sink but won’t usually fall any further before rising again. It is essentially the level at which demand is strong enough to bolster the price.

•   The resistance level is the level at which selling is strong enough to prevent prices from rising further.

For traders who want to take a long position, they might enter a position near a known level of support and exit within a known level of resistance. Traders interested in taking a short position, would do the opposite.

The Impact of Volume

Trend traders may also take trading volume into consideration. Stock trading volume is a measure of the number of shares that are being bought and sold during a given period.

Another way to look at volume is that it represents investor interest in a stock. The more stock being traded, the heavier the volume and the greater the interest — although additional information is needed to determine the direction of a possible trend.

Recommended: Support and Resistance: A Beginner’s Guide

3 Types of Market Trends to Identify

You might also notice that asset prices during rising and falling trends tend to move in waves. For example, a stock price during a rising trend might rise a little, then make a brief dip before rising again, and so on. The inverse would be true for falling trends.

The end of a rising wave is known as swing high. It’s the price peak before a downturn. The end of a falling wave is called a swing low — the low point before prices rise.

Traders will often zero in on these moments, using them to their advantage, helping them make buy or sell decisions, or using them as key data points for other types of analysis.

1. The Uptrend (Higher Highs and Higher Lows)

You might hear rising trends described as “bullish” because of the way they’re moving forward. Typically during these periods, there is relatively low volatility.

These periods are characterized by short pullbacks on stock price, which are also known as countertrends. In general, however, the rising trend is a series of higher swing highs and higher swing lows, indicating that the price is rising over time, despite the dips along the way.

Because of their low volatility, rising trends may be relatively easy for the average investor to trade in. That said, the countertrends tend to be short and shallow, which means it’s not always easy to know when to jump on board.

2. The Downtrend (Lower Highs and Lower Lows)

“Bearish” or falling trends are characterized by a series of lower swing lows and lower swing highs. In other words the wave pattern starts to reverse itself. The falling trend often differs from a rising trend because there is more volatility, and highs and lows are quick to follow each other.

Falling trends can be tricky for the average investor to negotiate due to their inherent volatility. Price movements and countertrends can be big, which can make it difficult to profit from the trend.

3. The Sideways Trend (Ranging Market)

Neutral trends tend to represent a break between rising or falling trends during which stock price moves up and down in small increments during an extended period of time. This occurs as the price bounces back and forth between levels of support and resistance, with the range between the two possibly being more narrow than in a rising or falling trend.

Think of it a bit like ping-ponging between the floor and ceiling of supply and demand. At this point the price is moving “sideways,” and if you plot the trend lines they will look horizontal and relatively flat.

5 Essential Trend Indicators to Know

Following are some of the technical indicators that traders employ to help identify trends.

1. Moving Averages (MA)

A moving average (MA) is the average value of a security over a specific time. The MA can be:

•   Simple Moving Average (SMA)

•   Exponential Moving Average (EMA)

•   Weighted Moving Average (WMA).

By looking at moving averages traders are able to tune out stock price volatility to a degree, to focus on the signal rather than the noise, and gauge the direction a price may be headed. If the price is above the moving average, it’s considered an uptrend versus when the price moves below the MA, which can signal a downtrend.

Moving averages are typically used in combination with each other, or other stock indicators, to identify trends.

2. Relative Strength Index (RSI)

The relative strength index or RSI is an oscillator tool that looks at price fluctuations in a given period, and calculates average price losses and gains. It ranges from 0 to 100. Generally, above 70 is considered overbought and under 30 is thought to be oversold.

Traders often use the RSI in conjunction with the MACD (see below) to confirm a price trend. The RSI can sometimes identify a divergence, when the indicator moves in opposition to the price; this can show the price trend is weakening.

3. Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) helps investors gauge whether a security’s movement is bullish or bearish, and helps gauge the momentum of the trend. The MACD uses two different exponential moving averages (EMAs) and a signal line to do so.

The 26-period EMA is subtracted from the 12-period EMA to generate the MACD line. Then a signal line, based on a nine-day EMA, is plotted on top of the MACD to help reveal buy and sell entry points.

If the MACD line crosses above the signal line, that can signal a potential buy opportunity. If it crosses below the signal line, that could signal a price decline and a potential opportunity to sell or take a short position.

4. On-Balance Volume (OBV)

OBV is a little different from the other indicators mentioned. It primarily uses volume flow to gauge future price action on a security or market. When there’s a new OBV peak, it generally indicates that buyers are strong, sellers are weak, and the price of the security may increase.

Similarly, a new OBV low is taken to mean that sellers are strong and buyers are weak, and the price is trending down.

The numerical value of the OBV isn’t important — it’s the direction that matters. In that respect it can be used as a trend confirmation tool. It can also signal divergences, when the price and the volume move in opposite directions.

5. Average Directional Index (ADX)

The ADX is used to evaluate the strength of a given trend, and it’s typically used in conjunction with other indicators because alone it doesn’t show the direction of a trend, but measures its power.

As such, the ADX is a smoothed average of two directional movement indicators (DMI): +DMI (which measures the strength of an uptrend) and -DMI (which measures the strength of a downtrend), typically over a 14-period window. The three lines are typically plotted together on a chart, with the ADX providing a clear read of the +DMI or the -DMI. This can help traders decide when and whether it’s worth “trading the trend.”

The ADX has a range of 0 to 100. Values below 20 indicate a sideways or nonexistent trend; a value between 20 and 25 may show a trend developing; and scores above 20 indicate a strong trend.

Common Trend Trading Strategies

Trend traders typically use technical indicators to execute certain types of strategies.

Breakout Trading

In a market that’s displaying strong trends, either up or down, traders may look to see signs of a breakout, i.e. a change in the trend direction. One signal of a potential breakout is when previously known indicators of support and resistance now show a reversal. Depending on the momentum of the trend, this could signal a breakout trend.

Simple Moving Average Crossover Strategy

A simple moving average (SMA) crossover strategy uses two different SMAs for relevant time periods (short, intermediate, and long), plotted on the security’s price chart, to gauge potential entry and exit points.

For example, a trader looking at short-term opportunities might take a 10-day SMA and a 20-day SMA to look for crossover points. When the shorter SMA line crosses over the longer SMA, that can signal an uptrend — and a possible buy opportunity.

If the shorter SMA crosses below the longer SMA, that could signal a reversal or a downtrend, and traders may consider selling.

Trading Pullbacks and Dips

Trading pullbacks and dips requires a different sensibility, because these patterns involve spotting a temporary break from a trend that isn’t a full reversal. The trader looks for a shorter pullback, so they can enter a position at a favorable price, while expecting the prevailing trend to resume. The challenge is being able to tell the difference between a temporary dip and reversal, which requires experience and technical savvy.

Retracement trading occurs when there are temporary reversals in price that nonetheless present traders with an opportunity to place a trade, and take advantage of the price change when the trend resumes.

Fibonacci retracements are a type of tool that some traders use to gauge the support and resistance levels for a certain stock price.

Benefits and Risks of Trend Trading

Because trend trading can be complex, and requires substantial technical know-how, it offers potential upsides and downsides.

Potential Benefits of Trend Trading

At its best, trend trading offers traders a time-tested system for anticipating price movements. As such, it can help guide traders to enter or exit certain positions, perhaps helping to manage risk or maximize certain outcomes.

Trend analysis is somewhat adaptable as well. Traders, as well as investors, can base their trend trading strategy on a range of applicable data points. This may include market data, fundamental analysis, economic indicators, and more. In short, there’s no one way to do trend trading; it’s a matter of experience and skill.

Potential Risks and How to Manage Them

That said, trend trading offers no guarantees of success. Traders have to be disciplined in their analysis, and resist the impulse to make decisions based on sudden price movements.

In addition, trend trading as a methodology cannot possibly take into account all market movements, never mind external factors. For that reason, experienced trend traders must learn to use a combination of tools when looking for trend confirmation, and accept a certain degree of risk.

Last, trend trading is based on historical data, i.e., past performance. While many traders believe that insights into an asset’s future movements can be gleaned this way, others debate the merits of this strategy.

How to Start Trend Trading in 5 Steps

It’s relatively easy to start trend trading, and many platforms provide a learning environment that simulates actual trend trading in order to help you get the hang of it. Here are a few steps to help get you started:

1.    Start by opening an account that enables DIY trading.

2.    Identify what you want to trade. It’s possible to take positions in a range of markets, but less experienced investors may want to start by mastering one.

3.    Decide how you want to manage risk. Commonly, trend traders might use a combination of stop-loss and different types of limit orders to minimize losses.

4.    Take advantage of demo testing where available. This enables you to build skills and confidence before investing in the markets.

5.    Start trading, and be sure to monitor your positions and adjust as needed.

The Takeaway

Which strategy you use when buying stocks or other securities ultimately depends on your experience and understanding of different tools and techniques. If you’re a hands-on investor, trend trading is a strategy that might help you identify when to buy and sell individual stocks.

Other investors may be interested in a more hands-off approach, such as considering buying mutual funds or exchange-traded funds (ETFs) that hold large portfolios of securities that don’t require active trading strategies or technical analysis.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

Is trend trading a good strategy?

Trend trading can be an effective strategy, especially for experienced traders who are skilled at using various technical analysis tools. While there is always risk involved in trend trading, it might be more risky for investors who don’t understand all that’s required to analyze the price movements of various assets.

Can trend trading be profitable?

It’s possible that trend trading might be profitable, and that the careful use of technical analysis could provide an advantage when making trades. But trend trading is a high-risk endeavor, and it’s not guaranteed to deliver a profit.

How do I analyze trends?

Analyzing trends requires understanding some of the factors that go into price movements (such as support and resistance levels, as well as volume), and knowing which technical indicators can provide the most relevant information for a possible trade.

How is trend trading different from day trading?

Day trading is the practice of buying and selling securities within a single trading day. Trend trader look to identify trends that may occur over several days, weeks, months, or even years. While some day traders may use trend-trading techniques, generally the much-shorter timeframe makes some trend trading strategies less useful.

Is trend trading the same as swing trading?

No. Trend trading is where a trader identifies a price trend and takes a position in order to ride out the trend (and ideally see a profit). Swing trading takes advantage of price changes, whether on the upswing or during a dip.

Photo credit: iStock/ArtistGNDphotography