Student Loan APR vs. Interest Rate: 5 Essential FAQs

This article contains breaking news and events related to the current state of politics and the economy. While we try our best to keep our articles as up-to-date as possible, the ongoing effects of COVID-19 are happening in real time and information is subject to change.

Pop quiz: What’s the difference between student loan APR and student loan interest rate?

Both terms are related to how much money you’ll spend on total interest, so they should factor into your decision when comparing loans and lenders. It can be hard to weigh your options when some student loans display an interest rate, while others state an APR. The main difference is that APR includes any upfront charges and fees the lender may add to the loan principal and the interest rate does not. But there are complexities to each, which we’ll break down here.

What Do I Need to Know About Student Loan Interest Rates?

The interest rate represents the amount your lender is charging you to borrow money. It’s expressed as a percentage of your principal and doesn’t reflect any fees or other charges that might be connected to your loan.

Since interest is spread out over the life of a loan, the number of years it takes you to pay the loan in full will affect how much total interest you pay. The total interest can be estimated, of course, but if it takes you longer to pay off the loan than you estimated, you’ll pay more interest.

What Is Student Loan APR, and How Is It Different From Interest Rate?

The annual percentage rate (APR), represents a more comprehensive view of what you’re being charged—meaning it includes additional loan fees, if there are any. Because of that, a loan’s APR may be higher than its interest rate.

What Additional Fees/Charges Might Be Included in Student Loan APR?

For student loans, the most common fee is the loan origination fee—an upfront fee most lenders charge for processing your loan application. Another fee that might be charged is an application fee, which is generally non-refundable even if you don’t end up taking out the loan. Fees related to non-payment are late fees and returned check fees, both of which add to the total amount of your loan, accrue interest, and increase the amount you must repay.

Fees can vary widely from one lender to the next, and some lenders, including SoFi, may not charge any fees.

Another factor included in the APR is the time the loan might be in deferment or forbearance , when payments are on hold but interest is still accruing.

When payments resume, that accrued interest is capitalized (added to the loan’s principal), which means the amount spent on interest increases, so your APR increases, too.

Since it’s unknown if and when you might put your loan in forbearance, a new loan’s APR won’t typically reflect this cost, but it will likely affect your APR on the back end.

If a Loan’s Interest Rate and APR Are the Same, Does That Mean There Are No Hidden Fees?

Not necessarily. Lenders handle origination fees in different ways, and that has a bearing on the APR. For example, the origination fee on a federal student loan is deducted from the loan disbursement up front, which keeps the fee out of the APR calculation. That deduction means that you don’t receive the full amount you borrowed, but you are responsible for paying the full amount back.

Private lenders that charge an origination fee may add it to the principal loan amount and charge interest on it over the life of the loan. This fee and any others that a lender charges must be listed in the loan disclosure documents.

When I’m Shopping for a Loan, Should I Look at Interest Rate or APR—or Both?

The benefit of the APR is that it can give you a more apples-to-apples comparison of loan costs. If you just compare straight interest rates, you could miss the big picture in terms of the total cost of the loan, and sometimes those additional fees can make a big impact.

However, even the APR doesn’t always tell the whole story. As mentioned above, the APR on a federal student loan doesn’t include the origination fee, which, in some cases, is pretty significant. For example, the current interest rate on a Direct PLUS loan (disbursed on or after 10/1/20 and before 10/1/22) is 6.28%, but the loan origination fee is a hefty 4.228%.

And since the federal student loan origination fee is deducted from the total loan amount, leaving you with less to put toward your college costs, you may have to come up with additional funding from another source to make up the difference. The origination fee on a $10,000 Direct PLUS loan, for example, would be $422.80. If you’re counting on those dollars to cover your costs, you’ll have to get them from somewhere else.

The Takeaway

When considering a new student loan or refinancing an existing student loan, asking questions about APR and interest rate will inform you of any fees or charges and how they are to be paid.

And remember, finding the best rate is only one factor in the loan consideration process. You’ll also want to look at the potential benefits that come with the loan. Federal student financial aid options (loans, grants, and work-study) as well as scholarships and private grants should be exhausted before considering a private student loan option. This is because private student loans may lack benefits like forgiveness programs and other protections that come with federal student loans. These benefits are also forfeited when refinancing federal student loans.

SoFi Private Student Loans are available for undergraduate students, graduate and professional school students, and parents or sponsors of college students. With no fees, competitive interest rates, and flexible repayment plans, there are several options for different budgets. For current borrowers who want to refinance an existing student loan, SoFi takes the same no-fee approach with low fixed- or variable-rate loan options.

Check your rate today on a SoFi Private Student Loan.


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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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.

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Should I Pay Off Debt Before Buying a House?

Ready to buy your own home? There’s a lot to consider, especially if this is your first time applying for a mortgage and you’re carrying debt. Debt is not necessarily a dealbreaker by any means.

Is it a good idea to pay off debt or save for a house? Is it possible to do both? Understanding how the home loan process works could help you make those decisions—and avoid mistakes that could keep you from getting your dream home.

When a lender considers you for a mortgage, you can expect debt to be a factor when it comes to how much you’ll be able to borrow, the interest rate you might pay, and other terms of the loan.

Recommended: How to Prepare for Buying a New Home

How to Manage Debt before Buying a Home

Understand Your Debt-to-Income Ratio

When lenders want to be sure borrowers can responsibly manage a mortgage payment along with the debt they’re carrying, they typically use a formula called the debt-to-income ratio (DTI).

The DTI ratio is calculated by dividing a borrower’s recurring monthly debt payments (future mortgage, credit cards, student loans, car loans, etc.) by gross monthly income.

The lower the DTI, the less risky borrowers may appear to lenders, who traditionally have hoped to see that all debts combined do not exceed 43% of gross earnings.

Here’s an example:

Let’s say a couple pays $600 combined each month for their auto loans, $240 for a student loan, and $200 toward credit card debt, and they want to have a $2,000 mortgage payment. If their combined gross monthly income is $8,000, their DTI ratio would be 38% ($3,040 is 38% of $8,000).

The couple in our example is on track to get their loan. But if they wanted to qualify for a higher loan amount, they might decide to reduce their credit card balances before applying.

That 43% threshold isn’t set in stone, by the way. Some mortgage lenders will have their own preferred number, and some may make exceptions based on individual circumstances. Still, it can be helpful to know where you stand before you start the homebuying process.

Consider How Debt Affects Your Credit Score

A mediocre credit score doesn’t necessarily mean you won’t be able to get a mortgage. Lenders also look at employment history, income, and other factors when making their decisions. But your credit score and the information on your credit reports likely will play a significant role in determining whether you’ll qualify for the mortgage you want and the interest rate you want to pay.

Typically, a FICO® Score of 620 will be enough to get a conventional mortgage, but someone with a lower score still may be able to qualify.

Recommended: What Credit Score is Required to Buy a House?

Or they might be eligible for an FHA or VA backed loan. The bottom line: The higher your score, the more options you can expect to have when applying for a loan.

A few factors go into determining a credit score, but payment history and credit usage are the categories that hold the most weight. Payment history takes into account your record of making on-time or late payments, or if you’ve filed for bankruptcy.

Credit usage looks at how much you owe in loans and on your credit cards. An important consideration in this category is your credit utilization rate, which is how much revolving credit you have available compared with how much you’re using. The lower your rate, the better. Most lenders prefer a utilization rate under 30%.

Does that mean you should pay off all credit card debt before buying a house?

Nope. Debt isn’t the devil when it comes to your credit score. Borrowers who show that they can responsibly manage some debt and make timely payments can expect to maintain a good score. Meanwhile, not having any credit history at all could be a problem when applying for a loan.

The key is in consistency—so borrowers may want to avoid making big payments, big purchases, or balance transfers as they go through the loan process. Mortgage underwriters may question any noticeable changes in your credit score during this time.

Don’t Forget, You May Need Ready Cash

Making big debt payments also could cause problems if it leaves you short of cash for other things you might need as you move through the homebuying process, including the following.

Down Payment

Whether your goal is to put down 20% or a smaller amount (the median down payment for recent buyers was 12%, according to a 2021 National Association of Realtors® report), you’ll want to have that money ready when you find the home you hope to buy.

Closing Costs

The cost of home appraisals, inspections, title searches, etc., can add up quickly. Average closing costs are 2% to 5% of the full loan amount.

Moving Expenses

Even a local move can cost hundreds or even thousands of dollars, so you’ll want to factor relocation expenses into your budget. If you’re moving for work, your employer could offer to cover some or all of those costs, but you may have to pay upfront and wait to be reimbursed.

Remodeling and Redecorating Costs

You may want to leave yourself a little cash to cover any new furniture, paint, renovation projects, or other things you require to move into your home.

Be Aware of Housing Market Trends

Trends in the housing market may help you with prioritizing saving or paying down debt. So it’s a good idea to pay attention to what’s going on with the overall economy, your local real estate market, and real estate trends in general.

Here are some things to watch for.

Interest Rates

When interest rates are low, homeownership is more affordable. A lower interest rate keeps the monthly payment down and reduces the long-term cost of owning a home.

Rising interest rates aren’t necessarily a bad thing, however, for buyers who’ve been struggling to find a home in a seller’s market. If higher rates thin the herd of potential buyers, a seller may be more open to negotiating and lowering a home’s listing price.

Either way, it’s good to be aware of where rates are and where they might be going.

Inventory

When you start your home search, you may want to check on the average amount of time homes in your desired location sit on the market. This can be a good indicator of how many houses are for sale in your area and how many buyers are out there looking. (A local real estate agent can help you get this information.)

If inventory is low and buyers are snapping up houses, you may have trouble finding a house at the price you want to pay. If inventory is high, it’s considered a buyer’s market and you may be able to get a lower price on your dream home.

Price

If you pay too much and then decide to sell, you could have a hard time recouping your money.

The goal, of course, is to find the right home at the right price, with the right mortgage and interest rate, when you have your financial ducks in a row.

If the trends are telling you to wait, you may decide to prioritize paying off your debts and working on your credit score.

Have debt? See how a credit card consolidation
loan can help get you on track to pay off your debt.


Remember, You Can Modify Your Mortgage Terms

If you already have a mortgage, you can make some adjustments to the original loan by refinancing to different terms.

Refinancing can help borrowers who are looking for a lower interest rate, a shorter loan term, or the opportunity to stop paying for private mortgage insurance or a mortgage insurance premium.

Consider a Debt Payoff Plan

If you decide to make paying down your debt your goal, it can be useful to come up with a plan that gets you where you want to be.

Because here’s the thing: All debt is not created equal. Credit card debt interest rates are typically higher than other types of borrowed money, so those balances are more expensive to carry over time. Also, lenders generally look at loans for education as “good debt” and credit card debt as “bad debt,” which means they might be more understanding about your student loan debt when you apply for a mortgage. (Car loans are usually categorized as somewhere in the middle of the two.)

As long as you’re making the required payments on all your obligations, it may make sense to focus on dumping some credit card debt.

Recommended: What is Considered “Good” Debt and “Bad” Debt

The Takeaway

Should you pay off debt before buying a house? Not necessarily, but you can expect lenders to take into consideration how much debt you have and what kind it is. Considering a solution that might reduce your payments or lower your interest rate could improve your chances of getting the home loan you want.

When you consolidate your credit card debt, you pay off each one of your credit cards with a single fixed-rate personal loan with a set term. The interest rate may be lower than the rates on your credit cards.

Taking control of your debt can bring you one step closer to owning a home. View your rate on a SoFi Personal Loan.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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 or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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What is a Cash Account? Margin vs Cash Account

What Is a Cash Account? Margin vs Cash Account

When opening a brokerage account to invest in securities, investors can choose between a margin account or a cash account. There are reasons for choosing either account, and it’s important for investors to understand them both in order to make the best decision for their own financial goals.

The main difference between the two accounts is that with a margin account an investor can borrow from their broker, whereas with a cash account they can’t.

What is a Cash Account?

A cash account is an account with a brokerage firm that requires investors to purchase securities using the money they have available in their account at the time of settlement. They can’t borrow money from the broker and they can’t take short positions on margin. If they don’t have cash available they can also sell securities in their account to purchase different ones. Investors have two business days to pay for securities they buy with their cash account, according to the Federal Reserve’s Regulation T, also referred to as T+2.

How Does a Cash Account Work?

Cash accounts allow both institutional and retail investors to buy securities using whatever amount of money they put into their account. For instance, if they deposit $3,000 into their account, they can invest in $3,000 worth of securities.

Cash Account Regulations to Be Aware Of

There are several regulations that investors should keep in mind when it comes to cash accounts, pertaining to having enough cash in their account to pay for securities.

Cash Liquidation Violations

Transactions can take a few days to settle, so investors should always sell securities before purchasing new ones if they are using that money for the purchase. If there is not enough cash in the account to pay for a purchase, this is called a “cash liquidation violation.”

Good Faith Violation

This is another regulation to keep in mind. A Good Faith Violation occurs when an investor buys a security, buys another security, then sells it to cover the first purchase when they don’t have enough cash in their account to cover the purchase.

Free Riding Violation

In this type of violation, an investor doesn’t have cash in their account, and they attempt to purchase a security by selling the same security.

Benefit of a Cash Account: Lending

One benefit of cash accounts is that investors can choose to lend out money from their account to hedge funds, short sellers, and other types of investors. The account holder can earn interest or income from lending, known as securities lending or shares lending.

If a cash account holder wants to lend out cash or shares, they can let their broker know, and the broker will provide them with a quote on what borrowers will pay them. Securities that earn the highest interest rates are those in low supply and high demand for borrowers.

These tend to be securities with a lower trading volume or market capitalization. If an investor lends out shares of securities, they can earn interest while continuing to hold the security and earn on it as it increases in value. Account holders may need to meet minimum lending requirements.

What is a Margin Account and How Does It Work?

Using a margin account, an investor can deposit money but they can also borrow money from their broker. This allows investors to use leverage to buy larger amounts of securities than a cash account allows, but if the value of securities goes down, the investor will owe the broker additional money and lose the initial amount of funds they deposited into the account.

Margin accounts also charge interest, so any securities purchased need to increase above the interest amount for the investor to start seeing profits. Different brokers charge different interest rates, so it’s a good idea for investors to compare before choosing an account.

Usually there is no deadline to repay a margin loan, but the debt accrues interest each month, so the longer an investor waits the more they owe. The securities held in the account act as collateral for the margin loan, so if needed they can be used to pay it off.

Other requirements generally associated with margin accounts include:

Minimum Margin

Investors must deposit a minimum amount of cash into their account before they can start investing and borrowing. Each broker may have a different minimum, but the Financial Industry Regulatory Authority (FINRA) requires investors to have either $2,000 or 100% of the purchase amount of any securities the investor wants to buy on margin, whichever amount is lower.

Initial Margin

Usually investors can only borrow up to 50% of the purchase amount of securities they want to buy. For example, if an investor with $3,000 in their account, can borrow $3,000, allowing them to purchase $6,000 worth of securities.

Maintenance Margin

Both before and after purchasing securities, investors must hold a certain amount in their account as collateral. The investor must own at least 25% of the assets (cash or securities) in their account when they have taken out a margin loan. If the amount in the account dips below this level, the investor may receive a margin call, requiring them to either deposit more cash into their account or sell some of their securities. This could occur if the investor withdraws too much from their account or if the value of their investments decreases. This is one of the main risks of margin accounts.

Margin Account vs. Cash Account

There are some similarities between margin accounts and cash accounts, but there are some key differences in terms of the monetary requirements for investors to consider when choosing which type of brokerage account works best for them. The type of account you choose will have an impact on the amount of money you’re able to invest, and the risk level that accompanies it.

The accounts can be equated to a debit card vs. a credit card. A debit card requires the user to have funds available in their account to pay for anything they buy, while a credit card allows a user to spend and pay back the expense later.

Similarities Between Margin and Cash Accounts

Both are brokerage accounts that allow investors to purchase securities, bonds, funds, stocks, and other assets in addition to holding cash. (You typically can’t have a margin account in a retirement account such as an IRA or Roth IRA)

Differences Between Margin and Cash Accounts

Margin accounts allow investors to borrow from their broker and typically require a minimum deposit to get started investing, while cash accounts don’t. However, margin accounts usually don’t come with additional fees.

On the other hand, cash account holders may only purchase securities with cash or settled funds, and cash accounts don’t allow short selling, or ‘shorting’ stocks.

Should You Choose a Margin Account or a Cash Account?

Although being able to borrow money with a margin account has benefits in terms of potential gains, it is also risky. For this reason, cash accounts may be a better choice for beginner investors.

Cash accounts may also be better for long-term investors, since investments in a margin account may go down and force the investor to have to sell some of them or deposit cash to maintain a high enough balance in their account. This could result in an investor being forced to sell a security at a loss and missing its potential price recovery.

With a cash account, the value of securities can rise and fall, and the investor doesn’t have to deposit any additional funds into their account or sell securities at a loss. Investors may also choose a cash account if they want to ‘set it and forget it,’ meaning they invest in securities that they don’t want to keep an eye on all the time since they will never owe the broker more money than they invested.

The risk level on a cash account will always be lower than with a margin account, and there are less risky ways to increase returns than by using margin.

On the other hand, for investors interested in day trading, margin accounts may be a great choice, since they allow the investor to double their purchasing power. They also allow investors to short trade. Margin account holders can borrow money to withdraw to pay for any life expenses that need to be paid off in a rush.

Recommended: What is Margin Trading?

Since there is no deadline to pay off the loan, the investor can pay it back when they can, unless the value of the stocks fall. Traders can also borrow money to buy stocks when the market is down or to prevent paying capital gains taxes, but this requires more experience and market knowledge.

Margin accounts provide flexibility for investors, who can choose to use them in exactly the same way as a cash account.

The Takeaway

There are many factors to consider when deciding between a cash account vs margin account. Both margin accounts and cash accounts have benefits and risks for new and experienced traders. If you’re just getting started trading, one simple way to start building a portfolio is using SoFi Invest® brokerage platform.

It lets you research, track, buy, and sell securities right from your phone.

Photo credit: iStock/PeopleImages


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Bitcoin Price History: Price of Bitcoin 2009 - 2021

Bitcoin Price History: 2009 – 2021

Bitcoin’s price has gone on a wild ride since its founding 12 years ago. Over the long-term, however, the price has been on a steady rise, compounding at roughly 100% – 200% per year. Those who bought Bitcoin early and held on to it have typically seen phenomenal returns. Of course, past performance is not indicative of future results.

Here we will look at the volatile price history of the world’s most famous cryptocurrency in terms of three waves of big price increases, some general history of the technology, where the price is now, and what the future could hold.

Bitcoin Price History

While some enjoy making Bitcoin price history comparisons to past speculative manias like Beanie Babies or tulip bulbs, speculation is only one factor in any given Bitcoin price surge. There are other factors to consider as well.

Over the years, a rather reliable pattern has emerged amidst the price history of Bitcoin. Every four years, the network undergoes a change called “the halving,” where the supply of new crypto coins rewarded to miners gets cut in half. This has happened three times so far. The first Bitcoin halving occurred in 2012, the second in 2016, and the third in 2020.

Recommended: What is Bitcoin Halving and Why Does it Matter?

Bitcoin reached new record highs the year following each halving event. And then, about 18-months post-halving, a bear market took hold. After a period of consolidation, the price then moved upwards again in anticipation of the next halving, beginning a new Bitcoin bull market.

Bitcoin Price in 2009: The Beginning

Bitcoin Price in 2009: $0

On October 31st, 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 3rd, 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.

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. Bitcoin is a decentralized cryptocurrency sent over a peer-to-peer network that allows people and organizations to bypass legacy financial institutions.

Bitcoin is also the first-of-its-kind scarce digital asset, with a fixed supply cap of 21 million. Some refer to it as “digital gold” for this reason. Like gold, Bitcoins have to be “mined” and can’t be created out of thin air like fiat currencies. Mining involves solving complex mathematical problems using advanced computers. The computers who do this work receive newly minted coins as a reward.

The Bitcoin timeline and Bitcoin price history have largely developed patterns around the halving cycles that occur every four years.

Bitcoin Price in 2011: The Surge Pt. 1

Bitcoin Price in 2011: $1 – $30

The Bitcoin price in 2009 was barely above zero. Real adoption of Bitcoin began to take place about two years later, 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, achieving parity with the U.S. dollar for the first time. 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, 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. 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.

Bitcoin Price in 2013: The Decisive Year

Bitcoin Price in 2013: $13- $1,100

In 2013, the EFF began accepting Bitcoin again, and this was the strongest year in Bitcoin price history in terms of percentage gains. The cryptocurrency saw gains of 6,600%.

Starting at $13 in the beginning of the year, the price of Bitcoin rose to almost $250 in April before correcting downward over 50%. The price consolidated for about six months until another historic rally in November and December of that year, when the price peaked out at $1,100. This bull run 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.

It would be over three years before the Bitcoin price would reach $1,000 again. The Bitcoin price in 2013 bottomed out at -85% off its record high.

Bitcoin Price in 2017: The Surge Pt. 2

Bitcoin Price in 2017: $1,100 – $20,000

The Bitcoin price in 2017 breached the $1,100 mark in January, a new record high at the time. By December, the price had soared to nearly $20,000. That’s a 20x rise in less than 12 months.

Like the 2013 price surge, the 2017 rally occurred 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 investors 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 to learn how to invest in Bitcoin for the first time.

Where is the Bitcoin Price Now?

In August 2021, the price of Bitcoin was hovering around $46,000. This is down approximately 23% from the 2021 high above $60,000, which is currently also the all-time record high.

The Bitcoin hash rate, a factor thought to have some correlation to the Bitcoin price, has plummeted recently. This occurred as a result of China forcing 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 have had to go offline while their operators search for a more friendly jurisdiction in which to do business.

Many believe this reduction in mining capacity has been a key factor weighing on the Bitcoin price (which is still more than 200% higher than it was one year ago). Politicians and regulators have also come out with anti-cryptocurrency rhetoric in 2021, adding to the general environment that crypto advocates refer to as FUD (fear, uncertainty, doubt).

The Stock-to-Flow Model

Any discussion of Bitcoin price history would be incomplete without mentioning the stock-to-flow model. This is a model created by an anonymous trader known as “Plan B.”

There are many different valuation models for equities – the dividend discount model, the discounted cash flow model, and more. Stock-to-flow intends to give a valuation estimate of the price of a scarce commodity like Bitcoin.

The basic idea is that because the new supply of Bitcoins coming online remains fixed and gets cut in half every four years, the price will react accordingly within a certain range assuming demand remains constant or rises.

Recommended: How Many Bitcoins Are Left?

So far, the stock-to-flow model has proven incredibly accurate in all but a few short timeframes. At the time of writing, the Bitcoin price remains below where the model says it should be. This has only happened two other times – once during 2015 and once again during late 2018 through early 2019.

The Takeaway

If Bitcoin continues to grow at even a fraction of the rate it has over the past 12 years, the gains for long-term crypto investors would outpace that of most other asset classes. If the stock-to-flow model remains accurate, then Bitcoin would reach the $100,000 mark in the near future. Past performance does not indicate future results, however, and it’s always possible that models like these can break down.

If you’re interested in beginning to trade crypto, a great way to start is by opening a SoFi Invest® brokerage account. With a little as $10 you can start trading not only Bitcoin but other cryptocurrencies as well, such as Litecoin, Ethereum, Dogecoin, Cardano, and Tezos.

Photo credit: iStock/simarik


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

Strike Price: What It Means for Options Trading

In options trading, a strike price represents the price at which an investor can buy or sell a derivative contract. An option strike price can also be referred to as an exercise price or a grant price, as it comes into play when an investor is exercising the option contract they’ve purchased.

Strike price can determine the value of an option–and how much or how little an investor stands to gain by exercising option contracts. Trading options can potentially generate higher rewards for investors, though it can also entail taking more risk. Understanding strike price and how they’re set is key to developing a successful options trading strategy.

Recommended: How-to Guide on Trading Options

What Is Strike Price?

An option is a contract that gives an investor the right to buy or sell a particular security on or before a specific date, at a predetermined price. In options trading terminology, this price is called the strike price or the exercise price.

Strike prices are commonly used in derivatives trading, a derivative draws its value from an underlying investment. In the case of options contracts, this can be a stock, bond, commodity or other type of security or index.

Recommended: What Are Index Options?

There are two basic types of options: calls and puts. With either type of option, the strike price is set at the time the options contract is written. This strike price then determines the value of the option to the investor should they choose to move ahead with exercising the option and buying or selling the underlying asset.

Options contracts can trade European-style or American-style. With European-style options, investors can only exercise them on their expiration date. American-style options can be exercised any time up until the expiration date. This in itself doesn’t affect strike price for options contracts.

Calls

A call option conveys the right to buy shares of an underlying stock or other security at a set strike price.

Puts

A put option conveys the right to sell shares of an underlying stock or other security at a set strike price. This is one way that investors can short a stock.

Examples of Strike Price in Options Trading

Having an example to follow can make it easier to understand the concept of strike prices and how it affects the value of a security when trading option contracts. When trading options, traders must select the strike price and length of time they’ll have before exercising an option.

The following examples illustrate how strike price works when buying or selling call and put options, respectively.

Buying a Call

Call options give investors the right, but not the obligation, to purchase a security at a specific price. At the same time, the seller of the call option must sell shares to the investor exercising the option at the strike price.

Let’s say you hold a call option to purchase 100 shares of XYZ stock at $50 per share. You believe the stock’s price will increase over time. This belief eventually pans out as the stock rises to $70 per share thanks to a promising quarterly earnings call. At this point, you could exercise your option to buy shares of the stock at the $50 strike price. The call option seller would have to sell those shares to you at that price.

The upside here is that you’re purchasing the stock at a discount, relative to its actual market price. You could then turn around and sell the shares you purchased for $50 each at the new higher price point of $70 each. This allows you to collect a $20 per share profit, less any trading fees owed to your brokerage and the premium you paid to purchase the call contract.

Buying a Put

Put options give investors the right, but not the obligation, to sell a security at a specific strike price. The seller of a put option has an obligation to buy shares from an investor who exercises the option.

So, assume that you hold a put option to sell 100 shares of XYZ stock at $50 per share. Your gut feeling is that the stock’s price is going to decline in the next few months. The stock’s price drops to $40 per share so you decide to exercise the option. This allows you to make a profit of $10 per share, since you’re selling the shares for more than their current market price.

Writing a Covered Call

A covered call is an options trading strategy that can be useful in bull and bear market environments. This strategy involves doing two things:

• Writing a call option for a security

• Owning shares of that same security

Writing covered calls is a way to hedge your bets when trading options. You can generate income by writing a call option from the premiums investors pay to purchase it. Premiums paid by a call option buyer are nonrefundable, so you get to keep these payments even if the investor decides not to exercise the option later. Covered calls can offer some downside protection if you’re waiting for the market price of the underlying asset to rise.

So, say own 100 shares of XYZ stock, currently trading at $25 per share. You write a call option for 100 shares of that same stock with a strike price of $30. You then collect the premium from the investor who buys the option.

One of two things can happen at this point: If the stock’s price remains below the $30 stock price then the option will expire worthless. You still keep the premium for writing it and you still own your shares of stock. On the other hand, if the stock’s price shoots up to $35. The investor exercises the option, meaning you have to sell them those 100 shares. You still collect the premium but you might have been better off holding onto the stock, then selling it as the price climbed.

Recommended: How to Sell Options for Premium

Moneyness

Moneyness describes an option’s strike price relative to its market price. There are three ways to measure the moneyness of an option:

In the Money

Options are in the money when they have intrinsic value. A call option is in the money when the market price of the underlying security is above the strike price. A put option is in the money when the market price of the underlying security is below the strike price.

At the Money

An option is at the money when its market price and strike price are the same.

Out of the Money

An out-of-the-money option has no intrinsic value. A call option is out of the money if the market price of the underlying security is below the strike price. A put option is out of the money when the market price of the underlying security is above the strike price.

Understanding moneyness is important for deciding when to exercise options and when they may be at risk of expiring worthless.

How Is Strike Price Calculated?

The strike price of an option contract is set when the contract is written. The writer determines where to set the strike price, based on the fair market value of the underlying asset being traded. So options contract writers may use the security’s closing price from the previous day as a baseline for determining the strike price while taking into account volatility and trading volume.

A writer can issue multiple option contracts for the same security with varying strike prices. For example, you might see five option contracts for the same stock with strike prices of $90, $92.50, $95, $97.50 and $100. This allows investors an opportunity to select varying strike prices when purchasing call or put options for the same stock.

How Do You Choose a Strike Price?

When deciding which options contracts to buy, strike price is an important consideration. Stock volatility and the passage of time can affect an option’s moneyness and your potential profits or less from exercising the option.

As you compare strike prices for call or put options, consider:

• Your personal risk tolerance

• Where the underlying security is trading, relative to the option’s strike price

• How long you have to exercise the option

You can also consider using various options trading strategies to manage risk. That includes covered calls as well as long calls, long puts, short puts and married puts. Learning more about how to trade options can help you apply these strategies to maximize returns while curbing the potential for losses.

What Happens When an Option Hits the Strike Price?

When an option hits the strike price it’s at the money. This means it has no intrinsic value as the strike price and market price are the same. There’s no incentive for an investor to exercise an option that’s at the money as there’s nothing to be gained from either a call or put option. In this scenario, the option will expire worthless.

If you’re the purchaser of an option that expires worthless, you would lose the money you paid for the premium to buy the contract. If you’re the writer of the option you would profit from the premium charged to the contract buyer.

The Takeaway

If you’re interested in options trading, getting started isn’t complicated. You simply need to choose an online brokerage that offers options trading. When comparing brokerages be sure to check the fees you’ll pay to trade options.

If you’re not quite ready to trade options, you may consider trading individual stocks, cryptocurrency or IPOs instead. You can do all three by opening an account on the SoFi Invest® online brokerage platform, which offers members no commission trades.

Photo credit: iStock/Paul Bradbury


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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