Mar
23
2023
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How to Calculate Return on Equity

By | Growing Wealth, invest, Investing | Comments Off on How to Calculate Return on Equity

A common way to invest money is by buying stocks. But with so many choices of stocks to consider, investors may find themselves comparing one option to another — yet still feeling uncertain about what’s the best decision.

So, what’s the best way to compare a variety of stock buying options? One commonly used method is a ratio called the return on equity, also known as the “return on net worth.” By knowing how to calculate return on equity, you’ll have a helpful metric to turn to when determining how stocks stack up.

The Return on Equity Formula

The formula for return on equity is a fairly straightforward calculation that can provide a key comparative metric to investors. Here it is:

Return on Equity = Net Income/Average Shareholder Equity

The ratio helps to determine how well a particular company is managing contributions from their stockholders. The higher the number, the more efficiently the company’s management is likely generating growth from the money invested.

Investors can then compare the result for one company to the ratio of another company, and so forth.

How to Use the ROE Formula

Calculating return on equity requires two pieces of information: net income and shareholder equity. Once this information is at hand, divide net income by the shareholder’s equity — and the result is the return on investment ratio.

So, how can you find those numbers?

Net income, also called “net earnings” or the company’s “bottom line,” is a figure that’s included on a company’s income statement, also called a P&L statement or profit and loss statement.

Publicly traded companies are legally required to distribute income statements in their annual financial reports to shareholders. Many companies may choose to also include financial statements on their websites and may otherwise distribute this information. So, when calculating return on investment, the net income figure can usually be found through one of these methods.

Reverse Engineering Net Income

Net income is calculated by taking the amount of a company’s sales and then subtracting what’s called the “cost of goods sold” from the figure.

Cost of goods sold, in turn, is calculated by determining the direct costs of making products, which includes the cost of materials used and direct labor costs. It does not include indirect costs, such as marketing.

Subtract the costs of goods sold from the sales total — and then also subtract operating expenses, administrative expenses, taxes, depreciation, and so forth. What’s left is a company’s net income.

Reverse Engineering Stockholder Equity

This can also be called “shareholder equity.” Information can be found on a company’s balance sheet, and the formula for shareholders’ equity is as follows: total assets minus total liabilities = SE. In other words, it’s what a company owns minus what it owes.

As another way to look at this, if all of a company’s assets (buildings, equipment, investments, and so forth) were liquidated into cash and all debts were paid off, what remained would be shareholder equity.

How to Use Return on Equity Ratios to Invest

Here’s an example of how you can make use of return on equity ratios when investing. If a company has $5 million in net income, with shareholder equity of $15 million, then return on equity can be calculated in this way: $5,000,000/$15,000,000 = 33.3%.

Using this figure as a benchmark, an investor can then compare the desirability of buying stocks from this company versus those available from another company.

When calculating the ROE ratio, an investor gains visibility into a moment in time. Investors may choose to do that before buying or selling shares — or they may track the performance of a stock over a period of time. Some investors like to see the return on equity calculation rise by 10% or more each year, as a reflection of the S&P performance.

In general, when ROE rises, it means the company is generating profit without needing as much capital — meaning without needing as much influx of cash. It demonstrates that the company is efficiently using the capital invested in the business by shareholders. When the ratio goes down, it is generally a sign of a problem.

This, however, is not universally true. There are times when return on equity artificially goes up. This can happen if a company buys back shares of its own stock or if the company has a significant amount of debt. So, although ROE is a key metric for investors to use when deciding if a particular stock is a worthwhile investment for them, it’s not a stand-alone metric.

Here are a few additional factors to consider. Because some industries as a whole typically have higher ROE ratios than others, comparisons between companies are more meaningful when done between two companies of the same industry.

Plus, in general, the more risks taken in investment choices, the higher the potential for return, as well as for loss. So, some investors with a higher tolerance for risk may choose to buy shares of stock in companies that don’t look as desirable if they have reason to believe that there is enough potential for significant financial rewards.

What Else to Consider with ROE

When buying shares of stock, an investor is buying ownership shares of the company. So, when the company does well, the stockholders typically benefit. When all goes south, the stockholders usually lose out.

This means that, when an investor knows a reasonable amount of information about the company and the industry it’s in, as well as its financial structure, better investment choices can typically be made. Other factors that influence the investor during the decision-making process include the economy, customer profiles of a business, and more.

To glean these types of insights, savvy investors often look at financial reports and figures, in addition to return on equity, when choosing how and where to invest.

Experienced investors will often take their time reviewing documents of companies that interest them, such as the financial reports that the Securities and Exchange Commission (SEC) requires public companies to file. These need to be filed quarterly, and they can provide insights into the companies’ financial performances.

Here is an overview of important information that can be found in the different types of financial documents:

•   Income statement: This document provides an overview of a company’s revenue (cash coming in), expenses of significance (cash going out), and the bottom line (the difference between what’s coming in and what’s going out). Consider what trends exist.

•   Balance sheet: Look at the company’s debt (how much they owe). Is the amount going up or down? In what ways? Consider what can be learned about the company’s financial performance from this review.

•   Cash flow statement: What did the company actually get paid in a particular quarter? This is different from what’s owed (accounts receivable) and instead focuses on when the cash arrives to the company. Does the company have steady cash flow?

Investors typically look at a company’s after-tax income (its “earnings”), which can be found in quarterly and annual financial statements. In addition to looking at the company’s current earnings, it can make sense to review its history to see how much earnings have fluctuated and whether there’s a pattern to these fluctuations. Overall, good earnings indicate a company is profitable and may be a good investment to consider.

Another figure to consider reviewing is a company’s operating margins (also known as its “return on sales”). This indicates how much a company actually makes for each dollar of its sales. This calculation involves taking the company’s operating profit and dividing it by net sales. Higher margins are typically better and may indicate good financial management.

Now, here are other financial ratios to consider, besides the return on equity ratio:

•   Price-to-earnings ratio: This allows investors to compare stock prices between companies offering shares. To calculate this ratio, take the market price of a share of stock and divide that number by the amount of earnings that a company is paying per share. This ratio allows investors to see how many years a company may need to generate enough value for a stock buy-back.

•   Price-to-sales ratio: This can be a good metric to use when reviewing a company that hasn’t made much of a profit yet — or one that’s made no profit at all, so far. To calculate this, take the value of the company’s outstanding stock in dollars and divide that number by the company’s revenue. The resulting figure, ideally, should be as close to one as possible. If the number is even lower, this is an outstanding sign.

•   Earnings per share: This metric helps investors to know how much money they might receive if the company liquidates. So, if this number is consistently going up, this may entice more people to buy shares because this at least suggests they’d get more for their investment dollars if liquidation happened.

Earnings per share can be calculated by taking the company’s net income and subtracting a certain type of dividends (preferred stock), and then taking that figure and dividing it by the number of outstanding common stock shares. Preferred stocks don’t have voting rights attached to them like common stocks do, but they receive a preferential status when earnings are paid out.

•   Debt-to-equity: Investors use this metric to try to determine the degree that a company is using debt to pay for its operations. To calculate this figure, take the company’s total liabilities and then divide that number by the total shareholder equity. A high ratio indicates that the company is borrowing to a significant degree.

•   Debt-to-asset ratio: Investors may decide to compare debts to assets of a company — and then compare the resulting ratio with other similar companies to determine how significant a debt load a company has. It may be wise to calculate this within the context of a particular industry.

What Is a Good Rate of Return?

First, consider that, when cash is kept under the mattress at home, the rate of return is zero percent. And, when factoring in inflation, this means the person is actually losing money over time. Keeping money in a checking account can amount to virtually the same thing.

There is no guaranteed return on investment in stocks. That’s because of variations in the market, varying degrees of risk taken by investors, and so forth. There are, however, historical precedents that indicate how stock ownership over the long haul can often allow the investor to weather economic fluctuations for an ultimately positive result. And, when looking at the average annual return on investments for stocks since 1926, that number has been 10%.

A topic mentioned in this post is risk tolerance. This is the amount of risk that a particular investor is comfortable taking — here’s a quiz to help investors determine their risk tolerances. By knowing your risk tolerance, you’ll have a better idea of what’s a “good” rate of return based on the level of risk you’re taking, knowing that higher risk can net higher returns.

Things to consider when determining how much risk to take include:

•   Financial factors: How much could a person afford to lose without it having a negative impact on their financial security? When people are young, they typically have much more time to recover from a big market loss, so they may decide it’s okay to be more aggressive. People closer to retirement age, though, may decide to be more protective of their assets. It’s important to review current financial obligations, from mortgage payments to college tuition, to make an informed decision, as well.

•   Emotional risk: Some people feel energized when taking risks while others feel stressed. A person’s emotional responses to risk taking can play a key role in their risk tolerance when investing.

The Takeaway

Even the most experienced investors can become frustrated when choosing which stocks to buy. By knowing how to calculate return on equity, investors can have a comparative metric to turn to that can help them evaluate and compare different companies.

To use return on equity effectively, however, you’ll need to know where to find the revenant numbers and what to look out for. Also remember the ROE isn’t the only metric to consider — you’ll also want to take into consideration information found in financial documents, other financial ratios, your own risks tolerance, and more.

And if you’re feeling overwhelmed, consider an online investing platform like SoFi’s to make your investing experience easier. SoFi members can benefit from personalized advice, access to SoFi events, and much more.

Take a step toward reaching your financial goals with SoFi Invest.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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Mar
23
2023
Simple IRA vs. Traditional IRA

Is a SIMPLE IRA the Same as a Traditional IRA?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Is a SIMPLE IRA the Same as a Traditional IRA?

One of the most popular retirement accounts is an IRA, or Individual Retirement Account. IRAs allow individuals to put money aside over time to save up for retirement, with tax benefits similar to those of other retirement plans.

Two common IRAs are the SIMPLE IRA and the Traditional IRA, both of which have their own benefits, downsides, and rules around who can open an account. For investors trying to decide which IRA to open, it helps to know the differences between SIMPLE IRAs and Traditional IRAs.

SIMPLE IRA vs Traditional IRA: Side-by-Side Comparison

Although there are many similarities between the two accounts, there are some key differences. This chart details the key attributes of each plan:

SIMPLE IRA Traditional IRA
Offered by employers Yes No
Who it’s for Small-business owners and their employees Individuals
Eligibility Earn at least $5,000 per year Under 70 ½ years old and earned income in the past year
Tax deferred Yes Yes
Tax deductible contributions Yes, for employers and sole proprietors only Yes
Employer contribution Required No
Fee for early withdrawal 10% plus income tax, or 25% if money is withdrawn within two years of an employer making a deposit 10% plus income tax
Contribution limits $15,500 in 2023
$16,000 in 2024		 $6,500 in 2023
$7,000 in 2024
Catch-up contribution $3,500 additional per year for people 50 and over $1,000 additional per year for people 50 and over

SIMPLE IRAs Explained

The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is set up to help small-business owners help both themselves and their employees save for retirement. It’s a retirement plan that small businesses with fewer than 100 employees can offer employees who earn at least $5,000 per year.

A SIMPLE IRA is similar to a Traditional IRA, in that a plan participant can make tax-deferred contributions to their account, so that it grows over time with compound interest. When the individual retires and begins withdrawing money, then they must pay income taxes on the funds.

With a SIMPLE IRA, both the employer and the employee contribute to the employee’s account. Employers are required to contribute in one of two ways: either by matching employee contributions up to 3% of their salary, or by contributing a flat rate of 2% of the employee’s salary, even if the employee doesn’t contribute. With the matching option, the employee must contribute money first.

There are yearly employee contribution limits to a SIMPLE IRA: in 2023, the annual limit is $15,500, with an additional $3,500 in catch-up contributions permitted for people over age 50. In 2024, the annual limit is $16,000, with an additional $3,500 in catch-up contributions permitted for people over age 50.

Benefits and Drawbacks of SIMPLE IRAs

It’s important to understand both the benefits and downsides of the SIMPLE IRA to make an informed decision about retirement plans.

SIMPLE IRA Benefits

There are several benefits — for both employers and employees — to choosing a SIMPLE IRA:

•   For employers, it’s easy to set up and manage, with online set-up available through most banks.

•   For employers, management costs are low compared to other retirement plans.

•   For employees, taxes on contributions are deferred until the money is withdrawn.

•   Employers can take tax deductions on contributions. Sole proprietors can deduct both salary and matching contributions.

•   For employees, there is an allowable catch-up contribution for those over 50.

•   For employers, the IRA plan providers send tax information to the IRS, so there is no need to do any reporting.

•   Employers and employees can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

SIMPLE IRA Drawbacks

Although there are multiple benefits to a SIMPLE IRA, there are some downsides as well:

•   Employers must follow strict rules set by the IRS.

•   Other employer-sponsored retirement accounts have higher limits, such as the 401(k), which allows for $22,500 per year in 2023 and $23,000 in 2024. (Check out our IRA calculator to see what you can contribute to each type of IRA.)

•   If account holders withdraw money before they reach age 59 ½, they must pay a 10% fee and income taxes on the withdrawal. That penalty jumps to 25% if money is withdrawn within two years of an employer making a deposit.

•   There is no option for a Roth contribution to a SIMPLE IRA, which would allow account holders to contribute post-tax money and avoid paying taxes later.

What Is a Traditional IRA?

The Traditional IRA is set up by an individual to contribute to their own retirement. Employers are not involved in Traditional IRAs in any way. The main requirements to open an IRA are that the account holder must have earned some income within the past year, and they must be younger than 70 ½ years old at the end of the year.

Pros and Cons of Traditional IRAs

When it comes to benefits and downsides, there’s not too much of a difference between Traditional vs. SIMPLE IRAs, given what an IRA is. That being said, there are a few that are unique to this type of plan.

Traditional IRA Pros

Some of the upsides of a Traditional IRA include:

•   It allows for catch-up contributions for those over age 50.

•   One can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

•   Contributions are tax-deferred, so taxes aren’t paid until funds are withdrawn. If you’re hoping to pay taxes now instead of later, you might weigh a Traditional vs. Roth IRA.

Traditional IRA Cons

Meanwhile, downsides to a Traditional IRA include:

•   They have much lower contribution limits than a 401(k) or a SIMPLE IRA, at $6,500 in 2023 and $7,000 in 2024.

•   Penalties for early withdrawal are also the same: if you withdraw money before age 59 ½, you’ll pay a 10% fee plus income taxes on the withdrawal.

Is a SIMPLE IRA or Traditional IRA Right for You?

The SIMPLE IRA and Traditional IRA are both individual retirement accounts, but the SIMPLE is set up through one’s employer — typically a small business of 100 people or less. The Traditional IRA is set up by an individual. In other words, whether a SIMPLE IRA is an option for you will depend on if you have an employer that offers it.

There are many similarities in the attributes of the plans, if you’re choosing between a SIMPLE IRA vs. Traditional IRA. However, two major distinctions are that the SIMPLE IRA requires employer contributions (though not necessarily employee contributions) and allows for a higher amount of employee contributions per year.

Can I Have Both a SIMPLE IRA and a Traditional IRA?

Yes, it is possible for an individual to have both a SIMPLE IRA through their employer and also a Traditional IRA on their own — though they may not be able to deduct all of their Traditional IRA contributions. The IRS sets a cap on deductions per calendar year.

In 2023, single people with an AGI (adjusted gross income) of more than $73,000 are restricted to a partial deduction; those with AGI above $83,000 may not take a deduction at all. Married couples filing jointly with an AGI of $116,000 to $136,000 may take a partial deduction; those with AGI above $136,000 may not take a deduction at all.

In 2024, single people with an AGI (adjusted gross income) of more than $77,000 are restricted to a partial deduction; those with AGI above $87,000 may not take a deduction at all. Married couples filing jointly with an AGI of $123,000 to $143,000 may take a partial deduction; those with AGI above $143,000 may not take a deduction at all.

Can You Convert a SIMPLE IRA to a Traditional IRA?

If you’re hoping to convert a SIMPLE IRA to a Traditional IRA, you’re in luck — you can roll over a SIMPLE IRA into a Traditional IRA. However, you can’t roll over the funds from a SIMPLE IRA to a Traditional IRA within the first two years of opening a SIMPLE IRA. Otherwise, you’ll get hit with a 25% penalty in addition to the regular income tax you must pay on your withdrawal.

Once that two-year period is up, however, you can roll over the money from your SIMPLE IRA — even if you’re still working for that employer. Just note that you can only roll over money from a SIMPLE IRA one time within a 12-month period.

Can You Max Out a Traditional and SIMPLE IRA the Same Year?

While you cannot max out a SIMPLE IRA and another employer-sponsored retirement plan like a 401(k), you can max out both a Traditional IRA and a SIMPLE IRA.

The maximum contribution for a SIMPLE IRA in 2023 is $15,500 (plus $3,500 in catch-up contributions), while the maximum for a Traditional IRA is $6,500 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $22,000 across both plans in a year — or $26,500 if you’re 50 or older.

The maximum contribution for a SIMPLE IRA in 2024 is $16,000 (plus $3,500 in catch-up contributions), while the maximum for a Traditional IRA is $7,000 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $23,000 across both plans in a year — or $27,500 if you’re 50 or older.

Are SIMPLE IRAs Most Similar to 401(k) Plans?

There are a lot of similarities between SIMPLE IRAs and 401(k) plans given that they are both employer-sponsored retirement plans. However, while any employer with one or more employees can offer a 401(k), SIMPLE IRAs are reserved for employers with 100 or fewer employees. Additionally, contribution limits are lower with SIMPLE IRAs than with 401(k) plans.

Another key difference between the two is that while employers can opt whether or not to make contributions to employee 401(k), employer contributions are mandatory with SIMPLE IRAs. On the employer side, SIMPLE IRAs generally have fewer account fees and annual tax filing requirements.

Opening an IRA With SoFi

Understanding the differences between retirement accounts like the SIMPLE and Traditional IRA is one more step in creating a personalized retirement plan that works for you and your goals. While a SIMPLE IRA is only an option if your employer offers it, you’ll want to weigh the pros and cons of a SIMPLE IRA vs. Traditional IRA if both are on the table for you. As we’ve covered, the two types of IRAs share many similarities, but a SIMPLE IRA is not the same as a Traditional IRA.

If you’re looking to start saving for retirement now, or add to your investments for the future, SoFi Invest® online retirement accounts offer both Traditional and Roth IRAs that are simple to set up and manage. By opening an IRA with SoFi, you’ll gain access to a broad range of investment options, member services, and a robust suite of planning and investment tools.

Find out how to further your retirement savings goals with SoFi Invest.

FAQ

Do you pay taxes on SIMPLE IRA?

Yes, you will pay taxes on a SIMPLE IRA, but not until you withdraw your funds in retirement. You’ll generally have to pay income tax on any amount you withdraw from your SIMPLE IRA in retirement. However, if you make a withdrawal prior to age 59 ½, or if money is withdrawn within two years of an employer making a deposit, you’ll have to pay income taxes then, alongside an additional tax penalty.

Is a SIMPLE IRA better than a Traditional IRA?

When comparing a SIMPLE IRA vs. traditional IRA, it’s important to understand that each has its pros and cons. If your employer offers a SIMPLE IRA, they require employer contributions, and they have higher contributions. At the end of the day, though, both allow you to save for retirement through tax-deferred contributions.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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

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Mar
22
2023
What Is a Bitcoin Faucet? How Bitcoin Faucets Work

Guide to Bitcoin and Crypto Faucets

By | Growing Wealth, invest, Investing | Comments Off on Guide to Bitcoin and Crypto Faucets

What Are Crypto Faucets?

A crypto faucet allows crypto users and investors to earn small cryptocurrency rewards — basically free – for completing small or simple tasks. Investors generally do not need to make a purchase or put up any additional assets in exchange. The term “faucet” comes from the fact that the rewards are very small — like drops of water dripping from a faucet.

The idea of earning free crypto may sound intriguing, but know that crypto faucets have been used in scams in years past. However, when used wisely they can be a way to increase your crypto holdings over the long term.

There are numerous types of crypto faucets, like Bitcoin faucets. A Bitcoin faucet, for example, sends small amounts of free or earned Satoshis or “sats” (the smallest unit of Bitcoin) to a user’s wallet. To claim these rewards, users typically have to perform a task such as:

•   Watching product videos

•   Viewing or clicking on advertisements

•   Completing a Captcha

•   Solving a puzzle

•   Playing a game

As payment for these tasks, users could receive a single Satoshi, which is one millionth of one Bitcoin (0.00000001 BTC). While that may sound like a very small drop in the bucket indeed, Bitcoin is still the oldest cryptocurrency (and by far the largest) on the market, and its value could increase over time. (Remember that past performance doesn’t guarantee future results.)

How Do Crypto Faucets Work?

Most crypto faucets are relatively easy to use. Sometimes, using one can be as simple as entering a public key address for your crypto wallet, clicking a few buttons, and receiving the coins or tokens. In general, the more complex the tasks required, the higher the rewards.

Keep in mind that some faucets tend to give out very small rewards — and it is unlikely that users will amass a large amount of crypto from them.

Faucets often have a web-hosted crypto wallet, which stores coins for users up until a certain threshold. To avoid transaction fees eating up most or all of the rewards, many crypto faucets have a minimum threshold that users must reach before they can withdraw the coins to their own wallet.

What Is the Point of Crypto Faucets?

A bit of context is required to fully understand why crypto faucets are a part of the crypto universe.

During the first few years after the creation of Bitcoin 2009, few people had heard of virtual currencies, let alone used them. And those who had couldn’t do much with their coins, as businesses did not accept Bitcoin for payment, and there were no opportunities for trading, because modern crypto exchanges didn’t exist yet.

Gavin Andresen, an early Bitcoin adopter, believed in the future of Bitcoin and devised a way for more people to learn about cryptocurrency. He offered free Bitcoins in exchange for completing Captchas.

In 2010, the first Bitcoin faucet ever created paid out 5 BTC in exchange for the simple task of clicking on images. This was, at a time, when one Bitcoin was worth less than a penny. Today, 5 BTC would be worth well into the six-figures.

As crypto and crypto faucets became more popular, the rewards fell to the smallest denominations possible. Faucets became an integral part of cryptocurrency history, as they helped get crypto into more people’s hands.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Pros and Cons of Crypto Faucets

Crypto faucets have both benefits and drawbacks that investors should make note of:

Pros

 Cons
Free crypto Some faucets could be scams
Easy way to get started learning about crypto Small rewards
Anyone can use faucets Mindless tasks required

Pros of Crypto Faucets

•   The biggest pro of crypto faucets might be the free crypto. There aren’t many other ways to get crypto simply handed to you. Crypto airdrops also involve users receiving free crypto, but those are usually distributed to select users based on certain eligibility requirements.

•   Faucets are an easy way to get started with Bitcoin or other cryptocurrencies. There’s no real investment required beyond getting a crypto wallet and the time required to complete the task in question.

•   Faucets don’t require much knowledge or know-how to get started. Anyone can use them — you don’t need to know how to trade crypto to use a faucet.

Cons of Crypto Faucets

•   The amount of crypto earned is very small. As mentioned earlier, the reward could be as little as one Satoshi from a Bitcoin faucet, which is worth only a tiny fraction of a cent.

•   The tasks that a Bitcoin faucet will require can quickly get monotonous. How long will someone be willing to sit there and repeatedly complete a Captcha, after all?

•   The general risks associated with crypto also apply to faucets. Some can be types of crypto scams, phishing attempts, or ways to steal a user’s funds or identity. Some faucets could infect users’ devices with malware.

The lure of free money can be an effective way for hackers to compromise the devices or identity of potential users. The website or app might be phishing for information or download malware to a user’s device after having them click a link or download a file. Here are a few red flags that a crypto faucet is a scam:

◦   The rewards are too good to be true. If the rewards seem significantly higher than other faucet rewards, they are likely not legitimate.

◦   You’ve received an unsolicited offer. If you’ve received a faucet offer via email or message without asking for it, it could be from a scammer.

◦   Error-heavy messages. Multiple grammatical errors and misspellings could indicate the email is fraudulent.

Bitcoin Faucets

As noted, Bitcoin faucets were the original crypto faucet, as Bitcoin itself was the original cryptocurrency. As such, Bitcoin faucets are likely the most common on the market. Also as mentioned, Bitcoin faucets distribute BTC to users who are willing and able to complete certain tasks or activities.

Other Types of Crypto Faucets

It all began with a Bitcoin faucet many years ago, but today, there are crypto faucets for all types of different cryptocurrencies. Some of the most popular include Litecoin faucets, Ethereum faucets, and Dogecoin faucets.

Litecoin Faucets

A Litecoin faucet functions in the same manner as a Bitcoin faucet. The only difference is that the faucet distributes Litecoin (LTC) rather than Bitcoin (BTC).

To use Litecoin faucets, users will have to first set up a Litecoin wallet. Then it’s just a matter of choosing the highest-paying Litecoin faucet. Some faucets could pay up to 1,000 litoshis (the smallest units of Litecoin).

Ethereum Faucets

An Ethereum faucet is one that distributes ETH, the native token of the Ethereum network.

Ethereum faucets, like some other faucets, may also have referral bonuses. Users who refer their friends could get an extra faucet drip without having to do anything more.

When trying to withdraw funds, however, users could run into an issue: The Ethereum network tends to have very high transaction fees, known as gas fees. So, to send $2 worth of ETH to another wallet could easily cost more than the transaction itself.

Dogecoin Faucets

Dogecoin faucets have been popular since the meme cryptocurrency was first invented back in 2014. These faucets distribute Dogecoin (DOGE). Because DOGE has such a low value, larger portions of coins can come out of faucets.

When one DOGE was worth a fraction of a penny, faucets would distribute between one and five DOGE at a time. Today’s Dogecoin faucets mostly distribute anywhere from 0.1 to 1 DOGE at a time.

The Future of Crypto Faucets

The future of crypto faucets probably looks a lot like the past. These are basically fun apps for people who are new to crypto (as long as you’re careful). It gives individuals a way to get started learning how to interact with the cryptocurrency ecosystem without having to make an initial investment. Some modern or current crypto faucets even allow users to play games, making it a bit more fun to earn rewards.

But, keep in mind: No one keeps clicking on a faucet all day hoping to cash in on big rewards. In terms of today’s value, the typical crypto faucet pays out a tiny fraction of a cent each time, and there are often limits on the number of payouts a user can receive in a given timeframe.

Are There Any Real Crypto Faucets?

Yes, there are numerous real crypto faucets, but it may take a little time for users to do some research to make sure they’re not falling for a scam or some sort of fake faucet. A simple internet search for a desired, certain cryptocurrency faucet is likely to yield a list of results.

But again: It’s up to you, the user, to take a little time and make sure you don’t see any red flags that could indicate a faucet is a scam.

Other Ways to Make Money With Crypto

Crypto faucets are an option for earning crypto, or adding additional holdings to your portfolio. But, as mentioned, it’s a slow, tedious process. Here are some other ways to make money with crypto.

Investing

Investing is likely the most common or popular way that people make money with crypto, which more or less entails buying at one price, and selling it at a higher price. There are numerous ways to invest in crypto, however (even through retirement accounts), and the risks involved are significant — even more significant than investing in stocks.

Mining/Staking

You can also mine certain cryptocurrencies, like Bitcoin, or stake others, to earn even more crypto. Whether you can mine or stake crypto will depend on the specific cryptocurrency, but know that an increasing number of cryptos are moving to a proof-of-stake system (which allows for staking), as it’s generally more efficient and less resource-intensive.

Play to Earn

You can also try your hand at any number of play-to-earn crypto games, of which there are many. These games reward players or participants with tokens or NFTs for playing, which may or may not have value — they allow the player to participate in the in-game economy, though.

If any of these methods don’t strike your fancy, there are numerous ways to earn passive crypto income, too, such as lending, cloud mining, and running lightning nodes.

Buying Crypto With SoFi

Crypto faucets can give new users their first foray into the crypto world. They reward users with small amounts of crypto, though the actual amounts are often miniscule. Crypto faucets take advantage of the divisibility of cryptocurrencies, or their ability to be divided into many smaller units — and the potential for growth over time (although with crypto there is also considerable volatility).

There are numerous types of crypto faucets, such as Bitcoin faucets or Litecoin faucets. There are also many scams out there using the guise of crypto faucets in order to take advantage of unsuspecting users — which is important to keep in mind.

FAQ

Are there any crypto faucets?

Yes, there are many crypto faucets out there. You should be able to find them through simple internet searches, but you’ll want to make sure you’re finding a faucet for the specific cryptocurrency you hope to accumulate through rewards.

Are crypto faucets legit?

Many crypto faucets are legit, but there are numerous scams out there — so, faucet users should proceed with caution.

Is using a crypto faucet profitable?

Crypto faucets are not really profitable. Though they do offer users “free” rewards in the form of tiny amounts of crypto, those amounts are often so tiny that they carry next to no value.

How can I get 1 Bitcoin for free?

It’s not likely that you’ll find anyone or anywhere that’s willing to give you a free Bitcoin as of 2023, given that a single Bitcoin’s value is more than $20,000, as of March 14, 2023.

Photo credit: iStock/Fabian19

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