Life Stages Archives | Page 513 of 569

Feb

2022

Everything You Need to Know About AXIE Infinity

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

With the invention of cryptocurrency, smart contracts, and NFTs has come a new business model for the gaming world: play-to-earn. Play-to-earn games are those in which participants have the ability to earn digital assets that have real market value by simply playing a game.

Axie Infinity tops numerous lists as the current most popular play-to-earn game, but in fact the Tamagotchi craze of the late 1990s served as inspiration for the characters in the game. Axie Infinity is also a lot like Pokemon in that most of the game involves players collecting and battling different anime-like creatures.

How Does AXIE Infinity Work?

Axie Infinity is a play-to-earn crypto game. This is a new business model that creates an open economy within the game that can deliver financial benefits to players who perform certain actions.

In the game, players own Axies — cute digital monsters — and take turns battling them against each other. Each Axie has abilities based on its type. There are bird, bug, plant, and other types of Axies.

Where the game differs from Pokemon or Tamagotchi is that players can earn digital currency by winning battles or breeding their Axies and selling the new characters to other players.

The in-game economy includes Axies, which are NFTs, and two digital currencies: Smooth Love Potion (SLP) and Axie Infinity Shards (AXS). All of these have potential market value and can be sold outside of the game.

How Players Generate Income

To play, gamers need to purchase three Axies, which can cost around $350 each (as the game’s popularity has increased, the cost of Axies has risen). Players can earn about $10-50 worth of digital assets per day by playing the game. Players can also earn by selling SLPs or Axies.

SLPs can be earned by completing challenges or winning battles. SLP is an ERC-20 token on Ethereum that can be sold on different decentralized exchanges. If the price of SLP rises, users can earn more by selling their SLP tokens.

Or, users can spend their SLP in the game to breed additional Axies from two existing Axies. Each time Axies are bred, the SLP cost to breed the next generation rises. An Axie can be bred a maximum of seven times and can be sold at any time. The characters exist as NFTs and can be sold on NFT marketplaces.

How the Business Generates Revenue

If Axie Infinity players are making money with crypto through the game, it begs the question: how does the business itself make money? There are actually three ways that the Axie Infinity company generates revenue:

• By taking a 4.25% fee on every NFT sale

• By charging a small fee for every new Axie that users breed

• Through fundraising rounds

In July 2021, revenues exceeded $23 million, which represented a doubling of growth from the previous month. In January of that same year, revenue was only about $100,000.

One way the business has generated revenue is by attracting the interest of big investors. Sky Mavis, the company behind Axie Infinity, is now valued at $3 billion after raising $7.5 million in a Series A funding round and another $152 million in a Series B.

Is Playing Axie Infinity Really Profitable?

Axie Infinity has become a big way for people to earn some extra income in developing countries like Vietnam and the Philippines. The game serves as a better revenue-generator for people in countries like these due in part to the fact that their local fiat currencies are weaker, making the crypto they earn more valuable by comparison.

For example, the average daily minimum wage in the Philippines is the equivalent of about $5-10 dollars. This means that some workers may be able to make more money by playing Axie Infinity than they would by working their regular jobs.

For the average person in a first-world country, the income generated by playing the game is likely to be small, although some players have allegedly made as much as $2,500 a month playing the game. Getting lucky by breeding a few rare Axies and selling them could theoretically lead to higher-than-average profits, for example. As of now, that is not the norm.

Those asking the question “is Axie Infinity legit?” can rest assured that there’s potential for profit to be made in games like this, although the actual amount will vary and there is never a guarantee of any profit at all.

How the Game Works

In Axie Infinity, players can raise, collect, breed and battle token-based creatures called Axies. The digital creatures take on different combinations of characteristics and more than 500 available body parts which are categorized according to their rarity. Categories include:

• Common

• Rare

• Ultra-rare

• Legendary

An Axie is an NFT and has its own unique attributes. Players can upgrade their Axies and trade them for one of the two types of cryptocurrency in Axie Infinity: the Special Love Potion (SLP), and Axie Infinity Shards (AXS), the native token of the Axie network. Users can stake their AXS to earn income or use it to participate in the game’s governance.

How AXIE Infinity Is Growing

Aixe Infinity grew more than 30x over the course of the last year, with about 350,000 daily active players as of mid-2021. The game’s Discord server, where players can meet and chat, has also grown exponentially, making it one of the most popular Discord servers in the world.

A lot of the growth is thought to be coming from people in developing countries seeking economic opportunity. Given that anyone can access the Axie economy without even needing a bank account, this seems to be ideal for those with few other options and a lack of access to traditional financial tools.

As word spreads about the ability to make money playing a game, growth can continue coming from just about anywhere.

The Takeaway

Axie Infinity is a play-to-earn game in which players enter their Axies in battle with others, and can earn crypto tokens for certain game moves. In addition to the novelty and fun of the game, and the ability to own NFTs (the Axies themselves), players might be drawn to the game in hopes of earning real-world money.

FAQs

Is Axie Infinity a game?

Yes. Axie Infinity is a video game that uses a play-to-earn business model, where users can earn one or more types of digital currencies by performing certain actions within the game. The tokens can then be sold on marketplaces outside of the game.

How much money can you make using AXIE Infinity?

This is always changing, but on average, right now users might be able to make anywhere from $10-50 per day playing the game. Various factors influence this, such as the current market price of the tokens involved, demand for Axies, and how much time someone spends playing.

How can you buy an AXIE?

Axies can be bought and sold on various NFT marketplaces. Doing so requires the MetaMask Ethereum wallet and some ETH tokens. A minimum of three Axies is required to have a big enough team to start battling.

Photo credit: iStock/Edwin Tan

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Feb

2022

SPAN Margin: How It Works, Pros & Cons

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing, Terminology | Comments Off

Options trading is far more complex than trading stocks and exchange-traded funds (ETFs). Trading and valuing options includes many variables including intrinsic value and time value, implied volatility, and weighing changes in interest rates.

The SPAN system determines margin requirements on options accounts by considering many inputs along with a portfolio’s global (total) assets to conduct a one-day risk assessment. This article will dive deep into how SPAN works and what investors need to know about it.

What Does SPAN Stand For?

SPAN stands for standardized portfolio analysis of risk, and is an algorithm used in options and futures margin trading.

What Is SPAN Margin?

The SPAN margin calculation helps options traders understand risk in their accounts and assists brokers in managing risk. SPAN is used by options and futures exchanges around the world to determine a trader’s one-day worst-case scenario based on their portfolio positions. Margin requirements can be set in an automated way from the calculation’s output.

Unlike the margin in a stock trading account, which is essentially just a loan from a broker, the margin in an options or futures account is considered a good-faith deposit or a performance bond. It is helpful to understand how a margin account functions before trading complex strategies.

How Does SPAN Margin Work?

The SPAN margin calculation uses modeled risk scenarios to determine margin requirements on options and futures. The primary variables included in the algorithm are strike prices, risk-free interest rates, price changes in the underlying assets, volatility shifts, and the effect of time decay on options.

While buying options typically does not require margin, writing (or shorting) options requires a deposit. In essence, the options seller exposes the broker to risk when they trade. To reduce the risk that the trader cannot pay back the lender, margin requirements establish minimum deposits that must be kept with the broker.

Rather than using arbitrary figures, the SPAN system automates the margin setting process, using algorithms and many sophisticated inputs to determine margin requirements. SPAN margin looks at the worst-case scenario in terms of one-day risk, so the margin requirement output will change each day.

The analysis is done from the portfolio perspective since all assets are considered. For example, the SPAN margin calculation can take excess margin from one position and apply it to another.

SPAN margin also imposes requirements on options and futures contract sellers, known as writers. Traders who are short derivatives contracts often expose the lender to greater risk since losses can be unlimited depending on the positions taken. The broker wants to ensure their risk is protected if the market turns against options and futures writers.

Pros and Cons of SPAN Margin

There are upsides and downsides to SPAN margin in options and futures trading.

The Advantages

Futures options exchanges that use the SPAN margin calculation allow Treasury Bills to be margined. Though fees are typically also imposed by many clearinghouses, the interest earned on the Treasurys may help offset transaction costs if interest rates are high enough.

There is another upside: Net option sellers benefit from SPAN’s holistic portfolio approach. SPAN combines options positions when assessing risk. If you have an options position with a substantial risk in isolation but another options position that offsets that risk, SPAN considers both. The effect is a potentially lower margin requirement.

The Downsides

While SPAN is savvy enough to look at both pieces of an option seller’s combination trade, there are never perfect hedges. Many variables are at play in derivatives markets. There can still be strict margin levels required based on SPAN margin’s one-day risk assessment.

Summary

Pros	Cons
Determines margin requirements from an overall portfolio perspective	There still might be high margin requirements when two positions do not offset
Traders know their margin amount each day based on the latest market variables	Changing market conditions can mean big shifts in day-to-day SPAN margin amounts
Margin deposits in options or futures accounts can collect interest

SPAN and Exposure Margin

Exposure margin is the margin blocked over and above the SPAN margin amount to protect against any mark-to-market losses. Like SPAN margin, exposure margin is set by an exchange. The exchange will block off your entire initial margin (both SPAN margin and exposure margin) when you initiate a futures transaction.

The Takeaway

SPAN margin is helpful to manage risks in trading markets. Algorithms determine margin requirements based on a one-day risk analysis of a trader’s account. While primarily used in futures trading and when writing options, investors should know about this critical tool in financial markets.

Margin accounts come with a unique set of risks and rewards. You can learn more about margin trading with SoFi’s resources.

You can also explore investing options on the SoFi Invest® app. It allows members to research investment opportunities based on their individual risk and return objectives.

Find out how to get started at SoFi Invest.

FAQ

What does SPAN stand for in margin trading?
SPAN margin stands for “standardized portfolio analysis of risk.” It is a system used by many options and futures exchanges worldwide.

How is SPAN margin used?

SPAN margin is used to manage risk in trading markets. It calculates the suggested amount of good-faith deposit a trader must add to their account in order to engage in options or futures trading. To help mitigate the risk that traders will not be able to pay back the funds the broker lends them, exchanges use the SPAN system to calculate a worst possible one-day outcome and set a margin requirement accordingly. SPAN margin reduces the risk of a trader growing their leverage ratio too high based on the automated risk calculations. SPAN margin can also allow lower margin requirements for options sellers who trade multiple positions.

What is a SPAN calculation?

SPAN is calculated using risk assessments. That means an array of possible outcomes is analyzed based on different market conditions using the assets in a portfolio. These risk scenarios specify certain changes in variables such as price changes, volatility shifts, and decreasing time to expiration in options trading.

Inputs into a SPAN calculation include strike prices, risk-free interest rates, price changes in underlying assets, implied volatility changes, and time decay. After calculating the margin on each position, SPAN can shift excess margin on a single position to other positions that might be short on margin. It is a sophisticated tool that considers a trader’s entire portfolio.

Photo credit: iStock/NakoPhotography

Feb

2022

What Is a Naked Call Options Strategy?

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

A naked call, or uncovered call, is an aggressive, high-risk option strategy. It occurs when an investor sells or writes call options for which they don’t own the underlying security. The seller is betting that the underlying stock price will not increase before the call’s expiration date.

It is safer for traders to sell calls on a stock they already own. This way, if the stock price increases sharply, the trader’s net position is hedged. A hedged position, in this example, means that as the stock value rises, the long-stock position grows while the short-call option position loses. This situation describes a “covered call” position, which is a much lower risk strategy.

Naked calls, on the other hand, are speculative trades. You keep the premium if the underlying asset is at or in the money at expiration, but you also have the potential for unlimited losses. Read on for more about what naked calls are, how they work, their risks and rewards, and more.

Understanding Naked Calls

When a trader sells or writes a call option, they are selling someone else the right to purchase shares in the underlying asset at the strike price. In exchange, they receive the option premium. While this immediately creates income for the option seller, it also opens them up to the risk that they will need to deliver shares in the underlying stock, should the option buyer decide to exercise.

For this reason, it is significantly less risky to use a “covered call strategy” or sell an option on an underlying asset that you own. In the case of stocks, a single option generally represents 100 shares, so the trader would want to own 100 shares for each option sold.

Trading naked calls, on the other hand, is among the more speculative options strategies. The term “naked” refers to a trade in which the option writer does not own the underlying asset. This is a neutral to bearish strategy in that the seller is betting the underlying stock price will not materially increase before the call option’s expiration date.

In both the naked and the covered scenarios, the option seller gets to collect the premium as income. However, selling a naked call requires a much lower capital commitment, since the seller is not also buying or owning the corresponding number of shares in the underlying stock. While this increases the potential return profile of the strategy, it opens the seller up to potentially unlimited losses on the downside.

How Do Naked Calls Work?

The maximum profit potential on a naked is equal to the premium for the option, but potential losses are limitless. In a scenario where the stock price has gone well above the strike price, and the buyer of the option chooses to exercise, the seller would need to purchase shares at the market price and sell them at the strike price. Hypothetically, a stock price has no upper limit, so these losses could become great. When writing a naked call, the “breakeven price” is the strike price plus the premium collected; a profit is made when the stock price is below the breakeven price.

Investing in naked calls requires discipline and a firm grasp on common options trading strategies.

Writing a Naked Call

While there are significant risks, the process of naked call writing is relatively easy. An individual enters an order to trade a call option, but instead of buying they enter a sell-to-open order. Once sold, the trader hopes the underlying stock moves sideways or declines in value.

So long as the shares do not rise quickly, and ultimately remain below the strike price at expiration, the naked call writer will keep the premium collected (also known as the credit). Unexpected good news or simply positive price momentum can send the stock price upward, leading to higher call option values.

On the most common stocks and exchange-traded funds (ETFs), there are dozens of option strike prices at various expiration dates. For this reason, a trader must make both a directional bet on the underlying stock price and a time-wager based on the expiration date. Keeping a close eye on implied volatility is important, too.

Closing Out a Naked Call

When the trader wants to exit the trade, they punch in a buy-to-close order on the short calls. Alternatively, a trader can buy shares of the underlying asset to offset the short call position.

Finally, user-friendly options trading is here.^*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Naked Call Example

Let’s say a trader wants to sell a naked call option on shares of XYZ. Let’s also assume the stock trades at $100 per share.

For our example, we will assume the trader sells a call option at the $110 strike price expiring three months from today. This option might have a premium, or cost, of $5. The call option is said to be “out of the money” since the strike price is above the underlying stock’s current price.

Thus, the option only has extrinsic value (also known as time value). This naked call example seeks to benefit from the option’s time decay, also known as its theta. At initiation, the trader sells to open, then collects the $5 premium per share.

The trade’s breakeven price is $115 ($110 strike price plus $5 premium). Jump ahead a month, and shares of XYZ have rallied to $110. The value of the $110 strike call option, now expiring in just 60 days, is worth $9 since the share price rose $10.

On the other hand, the option’s time value dropped modestly since the expiration date drew closer. After pocketing the $5 premium at the trade’s initiation, the trader effectively owes $9 back, resulting in a net loss on paper.

Fast-forward to the week of expiration: XYZ’s stock price has fallen to $100. The $110 call option with just a few days left until expiration – Friday, is worth just $0.50 of time value with no intrinsic value. The trader chooses to close the trade with a buy-to-close order to lock in that $0.50 price.

In summary, the trader collected the $5 premium at the onset of the trade, experienced paper losses when XYZ’s stock price rose, but then ended on the winning side of the ledger by expiration when the position closed. The traders realized a profit of $4.50 considering the $5 sell and $0.50 buy-back. The trader could have also allowed the option to potentially expire worthless, which could have netted a $5 profit.

Using Naked Calls

Trading naked calls sometimes appeals to new traders who do not fully grasp risk and return probabilities. The notion that you can make money simply if a stock price or ETF does not go up in value sounds great. The problem arises when the underlying security appreciates quickly.

A naked call writer might not have enough cash to close the position. For this reason, brokers often have margin requirements on traders seeking to sell naked calls. When an account’s margin depletes too far, the broker can issue a margin call requiring the trader to deposit more cash or assets.

In general, naked calls make the most sense for experienced traders who have a risk management strategy in place before engaging in this type of trade.

Risks and Rewards

The potential for unlimited losses makes naked call writing a risky strategy. The reward is straightforward — keeping the premium received at the onset of the trade. Here are the pros and cons of naked call option trading:

Pros	Cons
Potential profits from a flat or declining stock price	Unlimited loss potential
Allows theta to work in your favor	Reward limited to the premium collected
Generates income	Margin calls when the underlying appreciates

Naked Call Alternatives

A common alternative to selling a naked call is to simply own the stock then sell calls against that position. This technique is known as “covered call writing”. This is a safer alternative to risky naked calls, but the trader must have enough cash to purchase the necessary shares.

One options contract covers 100 shares, so purchasing 100 shares of XYZ at $100 per share requires $10,000 of capital, unless the investor makes use of margin trading.

Other complex options strategies can achieve results similar to naked call writing. Covered puts, covered calls, and bear call spreads are common alternatives to naked calls. Experienced options traders have strategies to manage their risk, but even sophisticated traders can become overconfident and make mistakes.

Selling naked puts is another alternative that takes a neutral to bullish outlook on the underlying. When selling naked puts, the trader’s loss potential is limited to the strike price (minus the premium collected) since the stock can only go to $0.

The Takeaway

A naked call strategy is a high-risk technique in which a trader seeks to profit from a declining or flat stock price. The maximum gain is the premium received while the risk is unlimited potential losses. As with all option trading strategies, traders need to understand the risks and benefits of selling naked calls.

To make informed options trading decisions, it can help to have a platform that offers educational resources you can reference along the way. SoFi’s options trading platform offers a library of such resources, as well as an intuitive and approachable design. Plus, investors have the choice of trading options either on the mobile app or the web platform.

Trade options with low fees through SoFi.

Photo credit: iStock/twinsterphoto

Feb

2022

Trading Futures vs. Options: Key Differences to Know

Futures vs Options: What Is the Difference?

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

Futures and options are similar in that they are both derivative contracts between a buyer and seller to trade an asset at a certain price, on or before a certain date. Investors can use these instruments to hedge against risk and potentially earn profits — but options and futures function quite differently.

Options are derivatives contracts that give buyers the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) an asset at a specified price within a certain period of time.

Futures are another type of contract in which buyers and sellers are obligated to trade a specific asset on a certain future date, unless the asset holder closes their position prior to the contract’s expiration. A futures contract consists of a long side and a short side, where the short side is obligated to make delivery of the underlying asset, and the long side is obligated to take it.

Both options and futures typically employ some form of financial leverage or margin, amplifying gains and losses, creating a greater level of risk.

Futures	Options
Buyer is obliged to take possession of the underlying asset, or make a trade to close out the contract.	Buyer has the right, but not the obligation, to buy or sell a certain asset at a specific price.
Futures typically involve taking much larger positions, which can involve more risk.	Options may be less risky because the investor is not obliged to acquire the asset.
No upfront cost to the buyer, other than commissions.	Buyers pay a premium for the options contract.
Price can fall below $0.	Price can never fall below $0.

Options Explained

Options are contracts that establish an agreement for the trade of a certain underlying asset, such as a stock or currency. An options contract typically reflects 100 shares of the asset.

Buyers of options have the right to buy or sell the asset, but they are not required to. These contracts are known as derivatives because they are tied to the underlying assets they represent but are not the assets themselves.

To enter into an options contract, the buyer pays what is known as a premium in options terminology. The premium is non-refundable, so that is what the buyer risks when they enter the contract.

Types of Options

The two types of options are call options and put options.

• Call options, or calls, allow the option holder to buy an underlying asset at the strike price any time until the expiration date.

• Put options, or puts, allow the option holder to sell an asset at a certain price for the duration of the contract.

Example of a Call Option

An investor buys a call option for XYZ stock with a strike price of $40 per share, paying a $3 premium to enter into the contract. The contract expires in six months, and the stock is currently trading at $39 per share.

Within the next six months, if the stock price goes up to $50, the buyer can choose to exercise their call option and purchase the stock at the $40 strike price. They could then sell that stock on the market for $50 per share and make a $10 per share profit, minus the cost of the premium.

Or, the buyer could choose to sell the option itself rather than exercising it and buying the shares. The contract will have gone up in value as the price of the stock went up, so the buyer would likewise see a profit.

If the price of the stock is below the $40 strike price at the time of expiration, the contract would expire worthless, and the buyer’s loss would be limited to the $3 premium they paid upfront.

Example of a Put Option

Meanwhile, if an investor owns a put option to sell XYZ stock at $80, and XYZ’s price falls to $60 before the option expires, the investor will gain $20 per share, minus the cost of the premium.

If the price of XYZ is above $80 at expiration, the option is worthless, and the investor loses the premium paid upfront.

Who Trades Options

Experienced investors who are able to buy and sell on margin are typically those who trade options contracts.

Because options investing entails a certain amount of risk, as well as access to a margin account, retail investors may need approval from their brokerage in order to trade options.

Futures Explained

Futures contracts are similar to options in that they set a specific price and date for the trade of an underlying asset. One of the most common forms are futures on commodities, which speculators can use to make a profit on changes in the market without actually buying or selling the physical commodities themselves. Futures are also available for individual stock market indices and other assets. Rather than paying a premium to enter the contract, the buyer pays a percentage of the notional value called an initial margin.

Example of a Futures Contract

Let’s look at an example of a futures contract. A buyer and seller enter a contract that sets a price of $40 per bushel of wheat. During the life of the contract, the market price may move above $40, putting the contract in favor of the buyer, or below $40, putting it in favor of the seller. If, for example, the price of wheat goes to $45 at expiration, the buyer would make $5 per bushel, multiplied by the number of bushels the contract controls.

Who Trades Futures?

Some of the most commonly traded futures contracts are related commodities, including agricultural products (e.g. wheat, soybeans), energy (e.g. oil), and metals (e.g. gold. silver). There are also futures on major stock indices, such as the S&P 500, government bonds, and currencies.

Traders of futures are generally divided into two camps: hedgers and speculators. Hedgers typically have a position in the underlying commodity and use a futures contract to mitigate the risk of future price movements. An example of this is a farmer, who might sell a futures contract against a crop they produce, to hedge against a fall in prices and lock in the price at which they can sell their crop.

Speculators, on the other hand, take some risk in order to profit from favorable price movements in the underlying asset. These include institutional investors, such as banks and hedge funds, as well individual investors. Futures enable speculators to take a position on the price movement of an asset without trading the actual physical product. In fact, much of trading volume in many futures contracts comes from speculators rather than hedgers, and so they provide the bulk of market liquidity.

Futures vs Options: Main Differences

So far, we’ve described some of the differences in how options and futures are structured and used. Here are some additional factors to consider when comparing the two instruments.

Risk

Trading options comes with certain risks. The buyer of an option risks losing the premium they paid to enter the contract. The seller of an option is at risk of being required to purchase or sell an asset if the buyer on the other side of their contract exercises the option.

Futures can be riskier than options because of the high degree of leverage they offer. A trader might be able to buy or sell a futures contract putting up only 10% of the actual value. This leverage magnifies price changes, meaning even small movements can result in substantial profit or loss.

With futures, the value of the contract is marked-to-market daily, meaning each trading day money may be transferred between the buyer and seller’s accounts depending on how the market moved. An option buyer, on the other hand, is not required to post any margin, since they paid the premium upfront.

Value

Futures pricing is relatively intuitive to understand. The price of a futures contract should approximately track with the current market price of the underlying asset, plus the cost of carrying or storing the physical asset until maturity.

Option pricing, on the other hand, is generally based on the Black-Scholes model. This is a complicated formula that requires a number of inputs. Changes in several factors other than the price of the underlying asset, including the level of volatility, time to expiration, and the prevailing market interest rate can impact the value of the option.

Holding constant the price of the underlying asset, futures maintain their value over time, whereas options lose value over time, also known as time decay. The closer the expiration date gets, the lower the value of the option gets. Some traders use this as an options trading strategy. They sell options contracts, knowing that time decay will eat away at their value over time, betting that they will expire worthless and pocketing the premium they collected upfront.

The Takeaway

Futures and options are popular types of investments for those interested in speculation and hedging. But these two types of derivatives contracts operate quite differently, and present different opportunities and risks for investors.

There are several differences between futures and options, most notably that futures contracts specify an obligation — for the long side to buy, and for short side to sell — the underlying asset at a specific price on a certain date in the future On the other hand, options contracts give the contract holder the right to buy or sell the underlying asset at a specific price, but not the obligation to do so (which removes some of the risk).

Another distinction, though, is that a futures contract is a simpler transaction in a way, as it only involves a buyer who wants to buy the contract/asset, and the seller who wants to sell it. Options, however, come in two flavors, puts and calls, which involve different rules and potential outcomes. Puts give investors the option to buy a certain asset, while calls give investors the right to sell a certain asset.

If you’re interested in getting started with trading options, SoFi now offers an options trading platform. This intuitive and approachable platform allows users to trade options from the web platform or mobile app. Plus, you’ll have a library of educational content at your fingertips to continue learning as you trade.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/DonnaDiavolo

Feb

2022

Tokenized Stocks and How They Work

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

Tokenized stocks are digital assets that mimic the price action of publicly traded stocks. These tokens allow cryptocurrency traders to gain exposure to the price action of stocks without leaving the crypto ecosystem.

What Is a Tokenized Stock?

There are key differences when it comes to cryptocurrency vs. stocks. Tokenized stocks occupy the middle ground.

A tokenized stock is basically the same thing as a share of equity in a publicly traded company, like stocks traded on the Nasdaq or S&P 500. The difference is tokenized stocks come in the form of digital tokens.

When an investor buys a traditional stock on an exchange or during an initial public offering (IPO), their shares typically arrive in an investor’s brokerage account. The process for tokenized stocks is the same but with one key difference: because these shares are based on a blockchain, they can be bought and traded on a cryptocurrency exchange.

There’s usually a custodian and an investment institution involved in the process of creating a tokenized stock. The institution buys the underlying stock and deposits it with the custodian. Based on the shares that the custodian holds in reserve, tokens are issued on a blockchain. The price of each token is pegged to the value of the shares.

The tokens can then be listed on a cryptocurrency exchange where they can be bought and traded like any other cryptocurrency. Those who hold a stock token gain exposure to the underlying stock pretty much as if they owned it, including dividend payouts where applicable. However, they don’t actually own shares. They own a derivative that is backed by actual shares.

How Does Tokenized Stock Trading Work?

Tokenized stock trading isn’t the same as trading actual stocks. The tokens are cryptocurrencies and can only be traded as such.

Trading tokenized stocks involves many of the same steps required for trading cryptocurrency in general.

1. Find an exchange that trades the tokenized stock you’re interested in. This could be a centralized exchange or a decentralized exchange.

2. Create an account on the selected exchange. This usually involves submitting some basic personal info and verifying your identity.

3. Fund your account. This can usually be done with a variety of cryptocurrencies or fiat currencies. (note: be sure to use a currency paired with your token of choice. For example, if the token only trades against BTC, you will need to deposit Bitcoin).

4. Buy the stock token of your choice. Make sure the stock fits your risk tolerance.

Why Are Companies Tokenizing Equity?

The chief reason that many companies are tokenizing equity is the same reason that they issue shares of stock: To raise capital. There can be some distinct advantages to raising additional capital by issuing digital tokens, rather than going through the traditional method of either going public (IPO) or issuing additional shares.

With the goal of tokenized equity being to raise capital, and digital equity tokens taking on the role of stocks in some cases, it opens some cans of worms. For instance, while the federal government has been somewhat slow to determine how or if it wants to handle Bitcoin regulation and other cryptocurrencies, tokenized equity is essentially forcing the Securities and Exchange Commission’s hand.

The tokens issued by companies in lieu of stocks have the same characteristics and functions, and thus, are securities. That means they’re subject to registration and filing requirements. That’s brought on security token offerings (STOs), which are more or less the same as initial coin offerings (ICOs), but with the added caveat that the company issuing the tokens acknowledges that the token represents equity and is therefore a security.

Examples of Tokenized Stocks

Many tokenized stocks will be familiar to most investors. They include stock tokens of companies like Twitter, Tesla, Apple, and Alibaba, as well as some exchange-traded funds (ETFs).

Here are the top ten tokenized stocks by market cap according to CoinMarketCap data as of December 2021 (the top tokens change frequently since they trade on very little volume). Nine of the top 10 are “Mirrored” tokens that were minted on the Mirror Protocol and can be traded on one or more decentralized exchanges.

1. Mirrored Apple (mAAPL)

A tokenized stock of the Apple computer company, mAAPL has traded as low as $142 and as high as $171 over the last three months.

2. Mirrored iShares Gold Trust (mIAU)

The Mirrored iShares Gold Trust is a tokenized stock of the iShares Gold Trust ETF. The price has held steady between $17 and $18 for much of the past three months. From 11/30 – 12/3, however, there was a flash crash that saw the price of mIAU trade as low as $15.38 for a time.

3. Mirrored Tesla (mTSLA)

Mirrored Tesla (mTSLA) is a tokenized stock of Tesla, the electric car company. The token has traded as low as $748 and as high as $1,210 over the last three months.

4. Mirrored iShares Silver Trust (mSLV)

The Mirrored iShares Silver Trust (mSLV) is a tokenized stock of the iShares Silver Trust ETF. The token has traded as low as $20.83 and as high as $24.40 over the past three months.

5. Mirrored Netflix (mNFLX)

Mirrored Netflix is a tokenized stock of Netflix, the online streaming entertainment company. The token has traded as low as $590 and as high as $700 over the last three months.

6. Mirrored United States Oil Fund (mUSD)

Mirrored United States Oil Fund (mUSD) is a tokenized stock of the United States Oil Fund ETF. It has traded between $50 and $60 over the last three months.

7. Mirrored Alibaba (mBABA)

Mirrored Alibaba is a tokenized stock of Alibaba, the Chinese wholesale company. It has traded as low as $117 and as high as $183 over the last three months.

8. Mirrored Google (mGOOGL)

Mirrored Google is a tokenized stock of Google, the tech giant. The token has traded as low as $2,713 and as high as $3,073 over the last three months.

9. Mirrored Twitter (mTWTR)

Mirrored Twitter (mTWTR) is a tokenized stock of Twitter, the social media company. The token has traded down to $41.23 and up to $67.77 over the last three months.

Not all tokenized stocks are backed by real shares at a 1:1 ratio. Some of these tokens, particularly those based on DeFi platforms like Synthetix or Mirror, only track the prices of the stocks themselves. They accomplish this by using Chainlink or Band Protocol, which feed real-time price data into the blockchain from elsewhere.

Pros of Trading Tokenized Stocks

Tokenized stocks provide some advantages over trading regular shares of equity with a licensed brokerage, including:

• Greater liquidity. Because a broader segment of the population can access tokenized stocks compared to traditional shares, these tokens can have greater liquidity than their counterparts that are traded thinly on major brokerages.

• Faster transaction and clearance time. Depending on the network and exchange, token transactions might settle in a matter of minutes. Compare this to traditional stock transactions, which may take a number of business days to clear.

• Fractional shares are easy to obtain. While fractional stocks are only available from specialized firms (like SoFi, for example), fractions of any tokenized stock are readily available wherever it is traded.

• Low fees. Some crypto exchanges don’t charge fees for the trading of tokenized stocks.

• 24/7 trading. Tokenized stocks can be traded any time of day, any day of the week. The cryptocurrency markets never close. However, in an attempt to make sure that stock tokens trade in tandem with their equity counterparts, trading of some of these tokens is restricted to the regular hours that traditional stock exchanges are open (which typically 9:30 AM to 4 PM Eastern time Monday-Friday in the U.S.).

Cons of Trading Tokenized Stocks

Tokenized stocks also come with some drawbacks. These include:

• Token holders are not technically shareholders. They don’t own any equity in the underlying company, and therefore they don’t have the right to participate in the Annual General Meeting (AGM) of the company behind their tokenized stock, nor are they granted voting rights in the decision-making process of the company.

• Tokenized stocks come with additional risks. There are several additional intermediaries involved, including the custodial firm that holds shares and the crypto exchange that holds the tokens.

• Additional know-your-customer (KYC) requirements. Extra KYC requirements from the custodian or exchange can create a hassle for investors.

Holding a tokenized stock is a way to gain exposure to the price of a stock. Other than possibly receiving dividend payouts, token holders are not considered to be shareholders within a company in the same way as those who hold traditional equities are.

Tokenized Equity: Advantages and Drawbacks
Advantages	Drawbacks
Accessibility for investors	Availability still not widespread
More efficient markets	Lack of clarity around regulation
More market liquidity	Investors may lack voting rights

Who Can Trade Tokenized Stocks?

In theory, anyone can trade tokenized stocks. That’s the beauty of cryptocurrency in general — there are no barriers to entry in the market besides an internet-connected device and some funds to get started with.

Tokenized stocks might be ideal for investors who want but don’t have access to traditional financial markets. For example, someone without a bank account can’t register with a stock brokerage, but they could potentially trade tokenized stocks.

To do so, a potential stock token investor might buy Bitcoin with cash at a Bitcoin ATM, send it to their own wallet, and deposit it at an exchange that trades tokenized stocks. As long as they are able to verify their identity to pass KYC requirements, they’d be unlikely to encounter any problems with this process.

Tokenized Stock Regulations

The Securities and Exchange Commission (SEC) makes it clear that a tokenized stock is subject to the same regulations as regular stocks.

The SEC asserts that all tokenized securities need to be registered. Tokenized stocks that do not register their issuances will be regarded as illegal. In the past, the agency has taken legal action against both the Paragon and AirFox tokens for failing to comply.

In addition, all exchanges that trade tokenized securities are required to register with the SEC as national securities exchanges or request an exemption. The Commission has previously taken action against EtherDelta for failing to comply with this requirement.

What it comes down to is this: while crypto regulation in general may still have some legal gray areas surrounding it, this is not the case for tokenized stocks. According to the SEC, these tokens are to be regulated just as if they were regular stocks. And the exchanges providing trading services for these tokens can be subject to the same regulations as traditional broker dealers.

The Takeaway

The tokenization of stocks is a fairly new phenomenon in crypto and comes on the back of a wave of DeFi innovation over the last few years.

Keep in mind that some decentralized exchanges don’t actually trade tokenized stocks. Instead, they trade something called “synthetic assets” or “synths.” These are tokens designed to mirror the performance of other assets. But they’re not directly pegged to actual shares in the way that tokenized stocks are.

Another important fact is that these tokens can be highly concentrated into a few wallets. Mirrored Alibaba (mBABA), for example, has 100% of its supply held by the top 10 holders, according to CoinMarketCap data. Many other tokenized stocks have 90% of their supply controlled by the top 10 or top 50 wallets.

Photo credit: iStock/Prostock-Studio

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Tokenized Stocks and How They Work

What Is a Tokenized Stock?

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Why Are Companies Tokenizing Equity?

Examples of Tokenized Stocks

1. Mirrored Apple (mAAPL)

2. Mirrored iShares Gold Trust (mIAU)

3. Mirrored Tesla (mTSLA)

4. Mirrored iShares Silver Trust (mSLV)

5. Mirrored Netflix (mNFLX)

6. Mirrored United States Oil Fund (mUSD)

7. Mirrored Alibaba (mBABA)

8. Mirrored Google (mGOOGL)

9. Mirrored Twitter (mTWTR)

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