Sep
20
2022
Guide to Crypto Staking What it is, How it works, and How to Get Started_780x440

Guide to Crypto Staking: What It Is, How It Works, and How to Get Started

By | Growing Wealth, invest, Investing | Comments Off on Guide to Crypto Staking: What It Is, How It Works, and How to Get Started

Generally, when investors contemplate investing in cryptocurrencies, they think about either mining crypto or purchasing it outright on a crypto exchange. But crypto staking—or staking coins, as it’s often called—is another viable alternative for the crypto-curious to get assets in their crypto wallets.

While “staking” may be a relatively new addition to the financial lexicon, it’s important for those interested in crypto investing to understand what it is, how it works, and what cryptocurrencies it can be used to obtain.

Crypto staking may feel like it’s a step beyond simply learning how to buy Bitcoin or how a crypto exchange works, but learning about cryptocurrency staking can broaden your knowledge, making you a more informed investor.

This article will run through it all, from staking basics to the platforms investors can use for staking coins.

What Is Staking in Crypto?

Crypto staking is the process of locking up crypto holdings in order to obtain rewards or earn interest. Cryptocurrencies are built with blockchain technology, in which crypto transactions are verified, and the resulting data is stored on the blockchain. Staking is another way to describe validating those transactions on a blockchain.

Depending on the types of cryptocurrency you’re working with and its supporting technologies, these validation processes are called “proof-of-stake” or “proof-of-work.” Each of these processes help crypto networks achieve consensus, or confirmation that all of the transaction data adds up to what it should.

But achieving that consensus requires participants. That’s what staking is—investors who actively hold onto, or lock up their crypto holdings in their crypto wallet are participating in these networks’ consensus-taking processes. Stakers are, in essence, approving and verifying transactions on the blockchain.

For doing so, the networks reward those investors. The specific rewards will depend on the network.

It may be helpful to think of crypto staking as similar to depositing cash in a savings account. The depositor earns interest on their money while it’s in the bank, as a reward from the bank, who uses the money for other purposes (lending, etc.). Staking coins is, then, similar to earning interest.

Recommended: Proof of Stake, Explained

How Crypto Staking Works

For the investor, crypto staking is a passive activity. When a crypto investor stakes their holdings (in other words, leaves them in their crypto wallet), the network can use those holdings to forge new blocks on the blockchain. The more crypto you’re staking, the better the odds are that your holdings will be selected.

Information is “written” into the new block, and the investor’s holdings are used to validate it. Since coins already have “baked in” data from the blockchain, they can be used as validators. Then, for allowing those holdings to be used as validators, the network rewards the staker.

How Crypto Staking Works

How to Stake Crypto

To start crypto staking, an investor needs to decide where and what they want to stake. Here are five simple steps to get started.

Step 1: Choose a crypto or coin to stake

To begin staking cryptocurrency independently, a user would have to decide which coin they want to stake and buy their cryptocurrency of choice.

Step 2: Learn the minimum staking requirements

ETH, for example, requires a minimum of 32 ETH (worth about $47,000 at the time of writing) for users to begin staking.

Step 3: Download the software wallet for the desired coin

Choose and download a crypto wallet in which to store your coins for staking. That may mean going directly to the specific crypto’s main website and downloading its corresponding wallet.

Step 4: Figure out what hardware to use

To stake crypto, users need a constant, uninterrupted internet connection. A standard desktop computer will likely do the job, although a Raspberry Pi might save on electrical costs.

Step 5: Begin staking

Once the hardware has been chosen and the software wallet downloaded, a user can get started staking cryptocurrency.

Tip:The native tokens of the Tezos network can be staked automatically when a user holds those coins in a wallet hosted by Coinbase, for example.

For those holding the appropriate crypto in an exchange-hosted crypto wallet, the exchange handles all the staking on the backend, and users simply have to hold the crypto in their wallets.

Crypto Staking: Advantages and Disadvantages

Here are some pros and cons of staking crypto.

Advantages

•   Less energy-intensive. PoS networks use much less energy than PoW platforms. Each mining machine requires a constant supply of electricity and consumes much more power than a regular computer. But you can also run validator nodes on an average computer.

•   Easier to earn rewards. Crypto staking and mining rewards can be much different. Almost anyone can stake a small amount of crypto on a crypto exchange and earn some kind of yield. To become a miner, however, often requires a much bigger commitment. First, you’d need to acquire the proper computer, which can be costly; then you’d need to learn to use it, which can be time-consuming.

•   No special equipment required. Anyone can become a validator using a regular computer, assuming they have enough money and can keep the node running constantly. By contrast, mining requires specialized hardware.

Disadvantages

•   Questionable security. PoS is relatively new compared to PoW. Developers and users have had less time to test it, and its security capabilities are not totally proven. While a high hash rate provides a wall of encrypted energy to protect PoW networks, it’s not clear exactly how PoS networks are similarly secured. In theory, an adversary with the right amount of resources could take control of a PoS network rather easily.

•   Potential for takeover. PoS networks can be controlled by those who hold the most tokens. While attacking a PoW network would involve acquiring large amounts of computing power, attacking a PoS network requires only one thing: money. Moreover, PoS coins are pre-mined, meaning that the entire supply is created at once by a few people. Users need to trust that the core developers didn’t keep many coins for themselves, or that an outside third-party won’t acquire enough coins to take control of the network. Further, it is common knowledge in the industry that founders of crypto projects regularly give many pre-mined coins to insiders.

•   Increased centralization. The creator(s) of blockchain technology intended for blockchains to be decentralized. But in some cases, PoS networks can wind up becoming more centralized because becoming a validator can be more expensive than becoming a miner. Ethereum (ETH), for example, plans to change from PoW to PoS. To become an ETH validator would require 32 ETH, or about $51,000 as of July 2022. Many centralized exchanges have chosen to become validators of PoS coins to share staking rewards with their customers.

Crypto Staking Advantages

 Crypto Staking Disadvantages
Low energy usage Uncertain security
Easier to earn rewards Potential for takeover
No special hardware needed Increased centralization

Just a few years ago, the entire concept of proof-of-stake consensus was still relatively new, and options for staking coins were few and far between.

A growing number of projects are utilizing PoS and some exchanges are making it easier than ever for users to earn crypto by staking their coins.

Here is a list of common proof-of-stake coins, along with annual average yield, expressed as a percentage of the amount of cryptocurrency staked.

1. Ethereum (ETH)

Ethereum (ETH) has become one of the most popular cryptocurrencies on the market—although it is not exactly a cryptocurrency itself. Staking Ethereum on your own will require a minimum of 32 ETH. Rewards vary, but it’s expected that the rate of return on Ethereum staking is 5-17% per year.

2. EOS

EOS is similar to Ethereum in that it’s used to support decentralized programs. EOS tokens are native to the EOS blockchain, and like other cryptos, can be staked to earn rewards. The expected rate of return for EOS staking is about 3%.

3. Tezos (XTZ)

Like EOS and Ethereum, Tezos (XTZ) is an open-source blockchain network with its own native currency, with a symbol of XTZ. And it, too, can be staked on certain platforms and networks. The current expected rate of return for Tezos staking is around 6%.

4. Polkadot (DOT)

Polkadot is a newer cryptocurrency, created in August 2020. Polkadot hopes to provide interoperability and is designed to support “parachains,” or different blockchains created by different developers.

The Kraken crypto exchange supports staking for DOT.

DOT staking yields about 15% annually.

Investors would do well to remember that while these above yields may sound high when compared to traditional financial markets, the risk is also quite high, as the coins could quickly lose value.

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Where to Stake Crypto

There are numerous platforms that allow users to start staking coins, and quickly.

There are big-name platforms that most crypto investors are probably familiar with, including Coinbase and Kraken, which allow users to stake coins. On exchanges like these, investors must opt in to staking in order to benefit from rewards.

Enterprising stakers could also look at “staking-as-a-service” providers—which specialize in staking, rather than exchanging. Examples of those platforms include MyContainer, Stake Capital, and Staked.

It’s important to note that each of these platforms will have different offerings, rules, and fees. It’s worth the time spent researching a few to make sure your goals align with a certain platform before you jump in.

Is Crypto Staking Profitable?

Anyone can earn crypto by staking cryptocurrency. But unless someone is sitting on a huge stash of proof-of-stake coins, they’re not likely to get rich from staking.

Staking rewards are similar to stock dividend payouts, in that both are a form of passive income. They don’t require a user to do anything other than holding the right assets in the right place for a given length of time. The longer a user stakes their coins, the greater profit potential there will be in general, thanks to compound interest.

But unlike dividends, there are a few variables particular to proof-of-stake coins that influence how much of a staking reward users are likely to receive. Users would do well to research these factors and more when searching for the most profitable staking coins:

•   How big the block reward is

•   The size of the staking pool

•   The amount of supply locked

Additionally, the fiat currency value of the coin being staked must also be taken into account. Assuming this value remains steady or rises, staking could potentially be profitable. But if the price of the coin falls, profits could diminish quickly.

The Takeaway

Staking is a way to use your crypto holdings or coins to earn additional rewards. It can be helpful to think of it as along the lines of generating interest on cash savings, or earning dividends on stock holdings.

Essentially, coin holders allow their crypto to be used as a part of the blockchain validation process, and are rewarded by the network for the use of their assets. For crypto investors, staking can open up another potential avenue to generating returns.


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.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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

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2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
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Sep
19
2022
What Does FUD Mean in Investing in Crypto?

What Does FUD Mean?

By | Growing Wealth, invest, Investing | Comments Off on What Does FUD Mean?

FUD stands for “fear, uncertainty, and doubt” and refers to a general mindset of pessimism about a particular asset or market, as well as the manipulation of investor or consumer emotions so that they succumb to FUD.

While the term “fear, uncertainty, and doubt” has been in circulation for a century or so, it became popular as the abbreviation FUD in the 1970s — and widely known more recently, thanks to the highly volatile crypto markets. FUD is also used throughout finance and can apply to any asset class.

Here’s what you need to know about FUD now.

What Does FUD Mean in Investing?

Investment strategies based on fear, uncertainty, and doubt are not usually recommended. Sometimes FUD might be justified, but in general, the term is used to describe irrational, overwhelming negative sentiment in the market.

Many investors have concrete or pragmatic fears and doubts. Some investors worry that they’ve invested too little or too late (or both). Others might fear a total market meltdown. Some investors worry that an unforeseen factor could impact their investments. These are ordinary, common concerns.

FUD is different, and it’s important to understand what FUD is. When investors talk about FUD, they’re referring to rumors and hype that spread through media (and social media) that drive impulsive and often irrational investor decisions. Think about the meme stock craze.

Thus the term FUD can often have a demeaning edge, in the sense that it refers to these unpredictable waves of investor behavior.

FUD vs FOMO: What Is the Difference?

What is FUD in stocks or the stock market? FUD can be thought of as the opposite of FOMO (fear of missing out). While FOMO tends to inspire people to do what others are doing — often in that they don’t want to miss out on a hot stock and potential gains — FUD can be described as a collective negative effect that spreads like wildfire, typically through social media.

When markets are going up, many people fall victim to FOMO trading, but when markets are going down, FUD can also spread swiftly. In the most basic sense, you could think of it like this: FUD equals fear and FOMO equals greed.

The two can sometimes be contrary indicators. In other words, when FUD seems to be everywhere, astute investors might actually be buying assets at reduced prices (aka buying the dip), and when many people are experiencing FOMO, seasoned traders might actually be selling at a premium.

Crypto traders offer a counter to FUD by using the term “hodl.” The hodl meaning is interpreted as “hold on for dear life.” Hodl comes from an old Reddit post where an investor posted a rant about having trouble timing the market, while misspelling the word “hold” several times.

The phrase was initially used in reference to Bitcoin but can apply to different types of cryptocurrency.

What Does FUD Mean in Crypto?

While FUD is often associated with investor sentiment in the crypto markets, the phrase “fear, uncertainty, and doubt” actually has a much longer history than many people realize.

The History of FUD

According to Wikipedia, the general term “fear, uncertainty, and doubt” dates back to the 1920s, but its abbreviation as FUD may have begun in 1975 when an executive departed IBM to start his own company, and noted that FUD was being used as a tactic to discourage customers from leaving IBM.

The use of FUD soon gained traction in marketing, sales, and public relations, and was used to indicate a psychological manipulation through disinformation.

As FUD traveled over to the investing realm, it has taken on a broader connotation — particularly in the crypto markets — referring to the potential many investors have to succumb to sudden anxiety or pessimism that changes their behavior.

FUD and Crypto

In crypto, FUD has become a well-known crypto term, and it means one of two things:

1.    To spread doubt about a particular token or project in an attempt to manipulate prices downward.

2.    The general skepticism and cynicism about crypto as an asset class, and any related news/events. Even the rumor of a negative event possibly happening can generate FUD.

•   A crypto influencer tweets that a large company won’t accept BTC as payment: FUD

•   China allegedly bans Bitcoin for the umpteenth time: FUD

•   An investment manager says they will never own crypto: FUD

FUD Crypto and Memes

Crypto FUD also tends to involve the spreading of memes that can either amplify or lessen the FUD’s effect. Sometimes FUD being spread by the media is widely seen as trivial, in which case memes making fun of the idea might pop up. Or, if the FUD is perceived as more legitimate, memes making fun of those not taking the threat seriously might start circulating.

When Can FUD Occur?

FUD can occur whenever prices are falling or a big event happens that’s widely thought to be bearish. A company could miss earnings expectations or it could be revealed that an influential investor has taken a short position against a stock. Or the FUD could come from a larger source, like a pandemic, natural disaster, or the threat of a government defaulting on its debt.

The more catastrophic something could theoretically be, and the greater uncertainty surrounding its outcome, the more it becomes a suitable subject for people to spread FUD.
Sometimes markets react swiftly across the board to such news. Other times people take things out of context or exaggerate them, creating a sort of fake news buzz to scare others into selling.

In stocks and other regulated securities, it’s against the law to spread FUD with the intention of lowering prices. Doing so is considered to be a form of market manipulation and could subject individuals to legal action from regulatory agencies like the SEC, FINRA, or FINCEN.

As not all cryptocurrencies have been definitively classified as securities by all regulatory agencies, there is still some gray area. The idea that many altcoins could one day be deemed securities has itself become a big topic of FUD, because it would have a big impact on the regulatory landscape surrounding crypto.

FUD Crypto Examples

Here are a few well-known examples of FUD in crypto. These examples show FUD at its finest. There are elements of truth to them, but the idea is that their detrimental impacts to asset prices are exaggerated to the point of hysteria.

China Banning Bitcoin

This might be one of the best examples of FUD in crypto, and perhaps the one that has been the subject of more memes and Twitter rants than any other.

Practically every year since crypto hit the scene in a big way, and sometimes multiple times per year, officials in China claim to ban Bitcoin in one way or another. Of course, a real, comprehensive “ban” on Bitcoin would be a one-time event. What really happens is the Chinese government introduces some kind of restrictions for individuals or organizations involved in crypto markets, and media outlets report the event as a “ban on Bitcoin.”

In 2021, China really did make Bitcoin mining illegal in the country. Even so, markets shrugged off the event over time.

Government Regulation

Regulatory concerns coming from any national government can be a big source of fear, uncertainty, and doubt. Because crypto markets are still somewhat new, many countries have yet to adopt regulatory frameworks around crypto that provide specific rules around the use and taxation of cryptocurrencies.

Several countries have tried to make any use of crypto illegal, while others make public statements about harsh restrictions coming down the line. Whether the threat is real or perceived, the mere suggestion of governments cracking down on crypto transactions tends to spook investors.

Bitcoin Boils the Oceans

Another example of FUD is the argument that some forms of crypto use so much energy that it’s not sustainable, making it a dangerous threat to the planet. These concerns usually refer to proof-of-work (PoW) crypto like Bitcoin, Dogecoin, Litecoin, Bitcoin Cash, Ethereum Classic, and others that require vast amounts of computer power for mining coins.

However, some analysts claim that a good portion of crypto mining is done with renewable energy. Moreover, these analysts note that gold mining, banking, transportation, construction, healthcare, and other industries use exponentially more energy than it takes to maintain the Bitcoin network.

💡 Recommended: How Much Electricity Is Needed to Mine Bitcoin?

The Fear of Lost Crypto

Nothing stokes investors’ fears like the idea of investment losses, but with crypto there’s the even greater dread of actually losing your coins. Unfortunately, there is some truth to that anxiety, in that there are notable cases of crypto being lost and never recovered, usually because someone loses the private keys that gave them access to their crypto.

Unfortunately, because crypto is decentralized, investors’ assets aren’t protected the same way they would be in traditional, centralized banking systems. (While it’s theoretically possible that all your cash money could vanish from your bank overnight, it’s highly improbable. And even if it did, you’d have the benefit of FDIC insurance.)

Influential Crypto Tweets

Another example of FUD includes some well-known Tweets and/or social media posts by famous people that had an immediate impact on a given type of crypto.

It’s important to remember that FUD moments don’t last, and the impact of a single power person on the price of a certain coin — even if it roiled markets for a period of time — was temporary.

Corporate Crypto Assets

In the last couple of years, several big corporations have launched, or announced plans to launch, a proprietary form of crypto. These include Facebook/Meta, JP Morgan Chase, Google, Amazon, Mitsubishi, and others.

Unfortunately, it’s not that easy to get a new crypto off the ground — despite the many comparisons between the crypto markets and the frontiers of the Wild West — and the failure of at least one high-profile coin helped to sow FUD for some investors.

Crypto Tax Law Changes

Whenever the question of crypto’s regulatory identity comes up (Is it a security or a commodity?) FUD ensues. That’s largely because of tax issues. Right now the regulations are up in the air, but the fear is that if crypto is deemed a security the SEC will have oversight and that could impact crypto companies and investors in a big way.

Solar Storms

Because crypto is digital, a great deal of FUD stems from technology-based fears that random events could take down electrical grids and effectively wipe out crypto holdings. One such FUD-inducing rumor is about the possibility of Earth being zapped by solar storms, but the scientific validity of this has yet to be confirmed.

The Takeaway

Crypto FUD is one of many crypto terms that have become popular, but the underlying concept — that fear, uncertainty, and doubt can influence investor behavior — is not new. In fact, FUD as an actual strategy exists in many spheres, including marketing, sales, public relations, politics (and of course crypto).

FUD can come from anywhere and be focused on just about anything, but crypto can be particularly vulnerable to FUD because this market is already quite volatile. It’s also a very new sector, and some investors don’t fully understand the technology involved, and they can be manipulated by alarmist rumors or even celebrity opinions.

Fortunately, many investors take a more rational approach to the markets and to crypto in particular.

FAQ

Who uses FUD?

Some FUD arises naturally from market movements or economic conditions. Some FUD is deliberately cooked up to instill enough fear in the markets that investors make impulsive decisions, e.g. selling one type of crypto for another.

Why does FUD matter?

It’s important for investors to understand the concept of FUD so that they don’t get caught in the inevitable waves of negativity that can lead some people to panic and make poor choices.

What Counts as FUD?

Ordinary fears and concerns about market performance, or an investor’s personal long-term goals, don’t count as FUD. FUD refers to a broader market or crypto phenomenon, where highly negative information goes viral and causes investors to panic.

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

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

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.

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

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Sep
15
2022
12 Factors to Consider When Choosing a Cryptocurrency Exchange

14 Things to Consider When Choosing a Crypto Exchange

By | Growing Wealth, invest, Investing | Comments Off on 14 Things to Consider When Choosing a Crypto Exchange

There are many factors to think about when choosing a cryptocurrency exchange, but for many investors, things like liquidity, ease of use, and whether the exchange operates in your area should likely be top of mind. Those considerations could save you time and money right off the bat.

While not all crypto investors will have the same specific priorities when it comes to choosing a crypto exchange, a majority of people in the crypto space may consider the following variables — in the following order — to open an account, and start trading.

Understanding Crypto Exchanges

Cryptocurrency exchanges are platforms that provide investors and traders a place to buy or sell cryptocurrencies, and generally, exchange their fiat currency (such as U.S. dollars) for crypto. They typically work much like a brokerage account, where users open an account, fund it, and then buy and sell securities, like stocks, bonds or ETFs.

How They Work

Curious about the inner workings of crypto exchanges? Thankfully, as a user you don’t need to worry too much about it, as most of these exchanges do their best to make the trading process as seamless as possible to attract and retain users.

But again, these exchanges more or less work in a very similar way to a brokerage account — which allows you to buy and sell securities on the stock market. Effectively, they serve as market-makers and pair buyers with sellers. They will sell you certain cryptocurrencies (not all cryptos are available on all exchanges!) for your fiat (such as U.S. dollars), and then trade one crypto for another.

Crypto exchanges usually can be accessed through a smartphone app or a web browser, and allow users to connect a crypto wallet, or use the exchange’s custodial wallet, in order to execute trades.

14 Key Factors for Choosing a Crypto Exchange

As mentioned, there are a slew of factors that investors should consider before settling on the best crypto exchange for their trading or investing style. Here are 14 of those factors, in descending order, based on what might be the most important for the average crypto investor:

1. Jurisdiction

First and foremost, figure out if the exchange your eyeing serves customers in the state and country in which you live. There are a lot of rules and regulations at play here, so if the answer is no, then you won’t be able to use the exchange in question.

Some exchanges have website addresses specific to each country, too. Instead of “exchange.com,” for example, U.S.-based users might have to visit “exchange.us.” An exchange’s jurisdiction reflects not only their target market, but also where they’re allowed to do business due to certain cryptocurrency rules and regulations.

2. Ease of Use

How familiar with trading are you? That’s an important consideration when choosing a crypto exchange.

Newer investors might feel intimidated by exchanges that display things like order books, or have a complex interface with lots of charts and other information.

If that’s the case, a newbie-friendly exchange might be the best option. Some cryptocurrency exchange sites have “basic” and “advanced” views, allowing users to choose their layout. Others are designed specifically for those getting into crypto investing as a beginner to avoid any potential confusion.

3. Liquidity

Traders need liquidity so they can make trades at any time. This means an exchange must have a high enough volume of orders flowing through its order books on any given day.

In order to get that volume, an exchange must have either a lot of users, or users who hold a large amount of assets on the exchange and trade them frequently. If there are only a small amount of orders available, then there may not be available trading partners.

Liquidity is also important during times of high volatility, which happen often in the crypto markets. Less liquidity can exacerbate volatility to the point where prices can experience dramatic rises and falls.

4. Asset Choices

Does the exchange in question trade the assets you want? With thousands of different types of cryptocurrency in existence, no exchange can make trading pairs available for all of them. For instance, most exchanges will likely have popular coins like Bitcoin, Ethereum, and Binance coin available for trading, but not all may have a less-popular crypto.

In general, the higher market cap coins have a higher likelihood of being traded on popular exchanges. Investors looking for more exotic, lesser-traded coins might have to search out smaller exchanges. That may require some research, so have a wishlist handy, and see what’s out there.

5. Security

Numerous exchanges have had security issues over the past couple of years, so it goes without saying that you’ll want to keep security top-of-mind when choosing an exchange.

Holding coins on an exchange means trusting someone else with that money. In most cases, if the exchange gets hacked or an employee steals coins, investors end up empty handed. And yes, that’s entirely possible!

Most exchanges will offer information about their security practices somewhere on their websites. While no exchange is 100% secure, and it’s hard to know which is the most secure cryptocurrency exchange, you might consider looking for which exchanges have been around for the longest time, have the most customers, and have had the least amount of problems.
Potential features worth considering might include:

Cold Storage

The term “cold storage” refers to crypto assets being kept in a crypto wallet that stays offline where hackers can’t access them.

💡 Recommended: Cold Wallet vs. Hot Wallet: Main Differences

Multi-Signature Wallet

Multi-signature wallets require multiple forms of verification, or signatures to be accessed. Users might have to use two different email addresses to open a multi-sig wallet, for example.

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*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.

6. Reputation

When choosing what restaurant to go to on the weekend, many people check reviews to help them decide where to go. Those looking at cryptocurrency exchange sites can consider doing the same. To do a little background research on what past and existing users of a particular exchange have said about it, do a search for “xyz crypto exchange reviews.”

7. Trading Fees

Fees often represent a hidden cost when it comes to purchasing cryptocurrency. Exchanges make their money by extracting fees from most or all transactions.

Be sure to understand what you’re being charged on any crypto exchange.

Some exchanges have their own native “exchange tokens,” similar to how ETH is the native token for the Ethereum blockchain. The exchanges create these tokens and often use them to give holders discounted trading fees.

For example, if a Binance user holds Binance Coin (BNB) in their Binance wallet, for example, then they would likely pay lower fees. The fees for each trade they make will be taken in the form of BNC, rather than from the currency pair they are trading.

8. Customer Support

Newer users might have a number of questions regarding the basics of crypto and how the exchange works. And odds are, you’re going to run into problems at some point — that’s why it’s good that an exchange has quick support options.

Sometimes the need for customer support could be urgent, as your money could be at stake. Crypto markets move quickly, and waiting days for a response from customer support could have real financial consequences. That’s why investors should look into the reputation of an exchange’s customer support service. Ensure that they respond quickly, that customers seem generally satisfied, and that the exchange makes customer service a priority.

9. Insurance

Some exchanges insure some or all of user funds. This might be an attractive selling point to investors who don’t like the idea of entrusting their money to a company with whom they’re unfamiliar. An exchange that offers insurance could shield investors from losses should anything catastrophic happen (like a hack or employee theft).

Insurance policies vary, so finding out details for a particular exchange would require independent research.

Crypto exchanges that offer various types of insurance include:

• Coinbase

• Binance

• Bittrex

• Gemini

Be aware, though, that crypto exchanges are not traditional financial institutions, and are not protected under the same rules and regulations. Your funds are not protected by SIPC insurance, for example.

10. Tech Infrastructure

Matching engines (which sync up buyers and sellers) built by developers aim to give exchange users a seamless experience when placing orders. A high-quality matching engine gives an exchange the ability to match orders even during times of extreme volume and volatility.

A good matching engine represents just one part of the infrastructure needed to create new trading pairs and order types, making it easy for the exchange to better serve its customers.

11. Leverage and Products

Most popular crypto exchanges are spot exchanges, meaning that they trade the actual cryptocurrency against fiat currency or other cryptocurrencies (most cryptocurrencies traded against Bitcoin or U.S. dollar stablecoins).

But some exchanges are derivatives exchanges, meaning they trade derivatives of cryptocurrency and not the actual coins themselves. Some common forms of derivatives include options and futures, where investors agree to buy or sell a commodity at a future date for a set price. The underlying commodity — crypto, in this case — doesn’t actually trade hands.

💡 Recommended: What Are Bitcoin ETFs?

Derivatives exchanges sometimes allow traders to make use of leverage, which allows them to make bets with more money than they have in the exchange. For example, 10x leverage would allow a trader with $1,000 in their account to trade with $10,000. This can amplify both gains and losses, and for many traders, can be extremely risky.

12. Deposit and Withdrawal Limits

Even if you’re planning on HODLing for as long as possible, you may still want to make withdrawals at some point. So, it’s important to know that while most exchanges don’t have a minimum deposit requirement, exchanges may put limits on how much money a user can withdraw or deposit in a given timeframe.

For example, a trader might only be able to withdraw $25,000 worth of fiat or crypto per day. As such, those interested in moving large amounts of money might want to consider limits like these. Even the best cryptocurrency exchange app might have strict limits on the amount of funds that users can move within a specific time period.

13. Transparency

As it relates to crypto exchanges, “transparency” refers to whether the exchange itself is upfront with its fee structure, the time it takes to complete trades and transactions, what jurisdictions it operates in, and, perhaps most importantly, how secure the exchange itself actually is.

If an exchange is evasive about those things, it may signal a lack of transparency, and send up red flags. Given how many scams and hacks there have been in the crypto space, investors and traders should take transparency seriously.

14. User Experience (UX)

If you’re going to use a crypto exchange, the experience should be pleasant. So, UX should be yet another factor to consider when choosing an exchange. Ask yourself: Does the exchange’s interface have an intuitive, modern feel? Are you getting lost in the settings and menus? Is the whole thing filled with confusing jargon?

If you answered in the affirmative to any of those questions, you may want to see what other exchanges are out there, and which may provide a smoother ride for users.

The Takeaway

Crypto exchanges are complicated, and choosing the right one for you and your goals requires some due diligence. It helps to know what kind of crypto you plan to trade (not all types of crypto are available on every exchange), and to set up a crypto wallet.

When choosing a crypto exchange, you also want to consider the fee structure, overall security, whether or not the exchange operates in your given jurisdiction — and how easy the exchange is to use.

FAQ

Which crypto exchanges are considered the most secure?

Generally, the biggest and most popular crypto exchanges are considered the most secure, as they have the most users and likely the biggest teams supporting their networks. They also have the most to lose from a potential hack or security snafu.

What do consumers look for in a crypto exchange?

Depending on their preferences, consumers can and do look at a number of factors and variables. Among the most common are security, liquidity, ease of use, fees, and whether or not the exchange operates in their country or state.

What are the crypto exchanges with the most users?

Some of the largest crypto exchanges in the world by user count include Binance, Coinbase, Kraken, Crypto.com, Gate.io, and OKX.

Photo credit: iStock/Drazen_

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

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

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

2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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Sep
15
2022
man concerned on laptop

Should I Pull My Money Out of the Stock Market?

By | Growing Wealth, invest, Investing | Comments Off on Should I Pull My Money Out of the Stock Market?

When markets are volatile, and you start to see your portfolio shrink, there may be an impulse to pull your money out and put it somewhere safe — but acting on that desire may actually expose you to a higher level of risk.

In fact, there’s a whole field of research devoted to investor behavior, and the financial consequences of following your emotions (hint: the results are less than ideal).

A better strategy might be to anticipate your own natural reactions when markets drop — or when there’s a stock market crash — and wait to make investment choices based on more rational thinking (or even a set of rules you’ve set up for yourself in advance).

After all, for many investors — especially younger investors — time in the market often beats timing the stock market. Here’s an overview of factors investors might weigh when deciding whether to keep money in the stock market.

Investing Can Be an Emotional Ride

An emotion-guided approach to the stock market, whether it’s the sudden offloading or purchasing of stocks, can stem from an attempt to predict the short-term movements in the market. This approach is called timing the market.

And while the notion of trying to predict the perfect time to buy or sell is a familiar one, investors are also prone to specific behaviors or biases that can expose them to further risk of losses.

Giving into Fear

When markets experience a sharp decline, some investors might feel tempted to give in to FUD (fear, uncertainty, doubt). Investors might assume that by selling now they’re shielding themselves from further losses.

This logic, however, presumes that investing in a down market means the market will continue to go down, which — given the volatility of prices and the impossibility of knowing the future — may or may not be the case.

Focusing on temporary declines might compel some investors to make hasty decisions that they may later regret. After all, over time, markets tend to correct.

Following the Crowd

Likewise, when the market is moving upwards, investors can sometimes fall victim to what’s known as FOMO (fear of missing out) — buying under the assumption that today’s growth is a sign of tomorrow’s continued boom. That strategy is not guaranteed to yield success either.

Why Time in the Market Matters

Answering the question, “Should I pull my money out of the stock market?” will depend on an investor’s time horizon — or, the length of time they aim to hold an investment before selling.

Many industry studies have shown that time in the market is typically a wiser approach versus trying to time the stock market or give in to panic selling.

One such groundbreaking study by Brad Barber and Terence Odean was called, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors.”

It was published in April 2000 in the Journal of Finance, and it was one of the first studies to quantify the gap between market returns and investor returns.

•   Market returns are simply the average return of the market itself over a specific period of time.

•   Investor returns, however, are what the average investor tends to reap — and investor returns are significantly lower, the study found, particularly among those who trade more often.

In other words, when investors try to time the market by selling on the dip and buying on the rise, they actually lose out.

By contrast, keeping money in the market for a long period of time can help cut the risk of short-term dips or declines in stock pricing. Staying put despite periods of volatility, for some investors, could be a sound strategy.

An investor’s time horizon may play a significant role in determining whether or not they might want to get out of the stock market. Generally, the longer a period of time an investor has to ride out the market, the less they may want to fret about their portfolio during upheaval.

Compare, for instance, the scenario of a 25-year-old who has decades to make back short-term losses versus someone who is about to retire and needs to begin taking withdrawals from their investment accounts.

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.

Is It Okay to Pull Out of the Market During a Downturn?

There is nothing wrong with deciding to pull out of the markets if they go south. But if you sell stock or other assets during a downturn, you run the risk of locking in your losses, as they say. Depending on how far values have declined, you might lose some of your gains, or you might lose some or all of your principal.

In a perfect world if you timed it right, you could pull your money out at the right moment and avoid the worst — and then buy back in, just in time to catch the rebound. While this sounds smart, it’s very difficult to pull off.

Benefits of Pulling Out of the Market

The benefit of pulling out of the market and keeping your money in cash is that cash isn’t volatile. Generally speaking, your cash won’t lose value over night, and that can provide some financial as well as psychological comfort.

As noted above if you make your move at the right time, you might prevent steeper losses — but without a crystal ball, there are no guarantees. That said, by using stop-limit orders, you can create your own guardrails by automatically triggering a sale of certain securities if the price hits specific lows.

Disadvantages of Pulling Out of the Market

There are a few disadvantages to pulling cash out of the market during a downturn. First, as discussed earlier, there’s the risk of locking in losses if you sell your holdings too quickly.

Potentially worse is the risk of missing the rebound as well. Locking in losses and then losing out on gains basically acts as a double loss.

When you realize certain losses, as when you realize gains, you will likely have to deal with certain tax consequences.

And while moving to cash may feel safe, because you’re unlikely to see sudden declines in your cash holdings, the reality is that keeping money in cash increases the risk of inflation.

💡 Recommended: How to Protect Your Money From Inflation

Using Limit Orders to Manage Risk

A market order is simply a basic trade, when you buy or sell a stock at the market price. But when markets start to drop, a limit order does just that — it puts a limit on the price at which you’re willing to sell (or buy) securities.

Limit orders are triggered automatically when the security hits a certain price. For sell limit orders, for example, the order will be executed at the price you set or higher. (A buy limit order means the trade will only be executed at that price or lower.)

By using certain types of orders, traders can potentially reduce their risk of losses and avoid unpredictable swings in the market.

Alternatives to Getting Out of the Stock Market

Here’s an overview of some alternatives to getting out of the stock market:

Rotating into Safe Haven Assets

Investors could choose to rotate some of their investments into safe haven assets (i.e. those that aren’t correlated with market volatility). Gold, silver, and bonds are often thought of as some of the safe havens that investors first flock to during times of uncertainty.

By rebalancing a portfolio so fewer holdings are impacted by market volatility, investors might reduce the risk of loss.

Reassessing where to allocate one’s assets is no simple task and, if done too rashly, could lead to losses in the long run. So, it may be helpful for investors to speak with a financial professional before making a big investment change that’s driven by the news of the day.

Having a Diversified Portfolio

Instead of shifting investments into safe haven assets, like precious metals, some investors prefer to cultivate a well-diversified portfolio from the start.

In this case, there’d be less need to rotate funds towards “safer” investments during a decline, as the portfolio would already offer enough diversification to help mitigate the risks of market volatility.

Reinvesting Dividends

Reinvesting dividends may also lead the long-term investor’s portfolio to continue growing at a steady pace, even when share prices decline temporarily. Knowing where and when to reinvest earnings is another factor investors may want to chew on when deciding which strategy to adopt.

(Any dividend-yielding stocks an investor holds must be owned on or before the ex-dividend date. Otherwise, the dividend won’t be credited to the investor’s account. So, if an investor decides to get out of the stock market, they may miss out on dividend payments.)

Rebalancing a Portfolio

Sometimes, astute investors also choose to rebalance their portfolio in a downturn — by buying new stocks. It’s difficult, though not impossible, to profit from new trends that can come forth during a crisis.

It’s worth noting that this investment strategy doesn’t involve pulling money out of the stock market — it just means selling some stocks to buy others.

For example, during the initial shock of the 2020 crisis, many stocks suffered steep declines. But, there were some that outperformed the market due to certain market shifts. Stocks for companies that specialize in work-from-home software, like those in the video conferencing space, saw increases in value.

Bear in mind, though, that these gains are often temporary. For example, home workout equipment, like exercise bikes, became in high demand, leading related stocks higher. Some remote-based healthcare companies saw share prices rise. But in some cases, these gains were short-lived.

Also, for newer investors or those with low risk tolerance, attempting this strategy might not be a desirable option.

Reassessing Asset Allocation

During downturns, it could be worthwhile for investors to examine their asset allocations — or, the amount of money an investor holds in each asset.

If an investor holds stocks in industries that have been struggling and may continue to struggle due to floundering demand (think restaurants, retail, or oil in 2020), they may opt to sell some of the stocks that are declining in value.

Even if such holdings get sold at a loss, the investor could then put money earned from the sale of these stocks towards safe haven assets — potentially gaining back their recent losses.

Holding Cash Has Its Benefits

Cash can be an added asset, too. Naturally, the value of cash is shaped by things like inflation, so its purchase power can swing up and down. Still, there are advantages to stockpiling some cash. Money invested in other assets, after all, is — by definition — tied up in that asset. That money is not immediately liquid.

Cash, on the other hand, could be set aside in a savings account or in an emergency fund — unencumbered by a specific investment. Here are some potential benefits to cash holdings:

First, on a psychological level, an investor who knows they have cash on hand may be less prone to feel they’re at risk of losing it all (when stocks fluctuate or flail).

A secondary benefit of cash involves having some “dry powder” — or, money on hand that could be used to buy additional stocks if the market keeps dipping. In investing, it can pay to a “contrarian,” running against the crowd. In other words, when others are selling (aka being fearful), a savvy investor might want to buy.

The Takeaway

Pulling money out of the market during a downturn is a natural impulse for many investors. After all, everyone wants to avoid losses. But attempting to time the market (when there’s no crystal ball) can be risky and stressful.

For many investors, especially younger investors with a longer time horizon, keeping money in the stock market may carry advantages over time. One approach to investing is to establish long-term investment goals and then strive to stay the course — even when facing market headwinds.

Always, when it comes to investing in the stock market, there’s no guarantee of increasing returns. So, individual investors will want to examine their personal economic needs and short-term and future financial goals before deciding when and how to invest.

While managing money during a market downturn might seem tricky, getting started with investing doesn’t need to be. It’s easy, convenient, and secure to set up an investment account with SoFi Invest.

SoFi Invest® is a secure app where users can take care of all their investment needs — including trading stocks, investing in IPO shares, and more. It also gives SoFi members access to complimentary financial advice and actionable market insights. Ready to start investing?

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Should you pull out of the stock market?

Ideally, you don’t want to impulsively pull your money out of the market when there is a crisis or sudden volatility. While a down market can be unnerving, and the desire to put your money into safe investments is understandable, this can actually expose you to more risk.

When is it smart to pull out of stocks?

In some cases it might be smart to pull your money out of certain stocks when they reach a predetermined price (you can use a limit order to set those guardrails); when you want to buy into new opportunities; or add diversification to your portfolio.

What are your options for getting out of the stock market?

There are always options besides the stock market. The ones that are most appealing depend on your goals. You can invest in safe haven investments (e.g. bonds or precious metals), you can put your money into cash; you can consider other assets such as real estate.

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.

SOIN0822025

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Sep
13
2022
Can you Find Lost Bitcoin?

Tracking Down Lost Bitcoins and Other Cryptos

By | Growing Wealth, invest, Investing | Comments Off on Tracking Down Lost Bitcoins and Other Cryptos

It’s a common crypto problem: Because people tend to forget the private keys that give them access to their crypto investments, countless coins — e.g. Bitcoin, Ethereum, Litecoin, Dogecoin — have been lost. As much as 20% of the entire supply of Bitcoin might be lost owing to lost private keys.

Does that mean your lost Bitcoin or other crypto are truly irretrievable?

In many cases, unfortunately, recovering lost Bitcoin or any other crypto is impossible. There are, however, some ways to try and recover an old or lost crypto wallet along with the crypto stored there. The best methods for doing so — and whether or not it will work — depends on how you lost the wallet.

This guide will take you through the process of finding lost crypto, if it’s possible.

What Does It Mean for Crypto to Be Lost?

Crypto is generally considered “lost” if it’s irretrievable, unrecoverable, or otherwise out of circulation. But how you lose your crypto can determine whether you can ever recover it.

Lost Keys

Most often, crypto is lost when people lose the “keys” to their wallet. That is, they have possession of their coins, but may have forgotten their seed phrase or other tools that would help them access the wallet. Their crypto is essentially stuck in the wallet, with no way to get it out.

That’s why it’s important for users who choose to hold their own private keys — a 256-bit string of numbers — to have a backup seed phrase (like a secret password) stored safely.

If you’re able to find or remember your keys, or otherwise access your wallet, you may be in luck. There are some services that may be able to help, but beware of scams.

Sent to the Wrong Address

Coins also get “lost” when they are sent to the wrong address. Sometimes people make the mistake of sending Bitcoin (BTC) to a bitcoin cash (BCH) address, for example. This often results in permanent loss of funds.

💡 Recommended: What’s the Difference Between Bitcoin and Bitcoin Cash?

Fortunately, this has become increasingly rare, now that many wallets validate a recipient’s address (read more about what a Bitcoin address is) before allowing a transaction to go through.

Forgotten Passwords

Finally, you could lose your crypto by forgetting your password for a crypto exchange account. In most cases, however, the crypto exchange will let you create a new password.

Having a platform’s help in reaccessing your wallet and holdings if you lose your password is one of the advantages of investing in a crypto exchange. Similarly, if you lose a hardware wallet, you can get a new wallet and restore your crypto balances using your old backup seed phrase — assuming you have those safely stored away.

What Happens if You Lose Your Crypto Wallet?

Recovering unclaimed crypto isn’t easy. There are cautionary tales about people who have lost millions of dollars worth of Bitcoin and still don’t have access to it. That’s not the end of the story, though, as some people who have lost Bitcoin might still be able to recover their coins.

Recovering Private Keys

Some developers have created software programs that can help recover the private keys to a Bitcoin wallet. But this only works in cases in which the individual who lost their keys has deleted some or all of their keys. Software usually can’t help those who have forgotten their passwords, PIN numbers, or backup seed phrases.

But if the user mistakenly deleted files with the relevant information, they may be able to recover them. And if a user has a portion of the private key, it may be possible to find the rest of the key.

💡 Recommended: Cold Wallet vs Hot Wallet: Choosing the Right Crypto Storage

Recovering the Assets from a Lost Wallet

When you use a wallet, you’ll be able to unlock both the wallet and the crypto inside using your seed phrase. So, as long as you have the backup recovery seed, you can enter that into a new wallet and regain access to your crypto assets in a wallet, even if it’s lost.

But ultimately, whether you can recover assets from a lost wallet will depend on how the assets were lost.

Scammers

If you fall victim to one of the many Bitcoin scams out there, it may be possible to recover your assets. For example, if you’re somehow tricked into giving a scammer your seed phrase or wallet passwords, they can access it, change those passwords, and effectively take ownership of your wallet.

In that case, you may be able to get help from the wallet’s support team. But in many cases, keeping passwords and seed phrases secure is on the user, and no one would be able to help.

You should also be aware that some scammers may pose as crypto recovery specialists in an effort to gain access to your wallet. If you hope to hire a company to help you recover lost Bitcoin wallets, do some serious research to make sure it’s a legit operation.

Losing Cold Wallets

If you lose your cold wallet — and most cold wallets are hardware wallets — it is usually possible to recover the assets you had stored on it. It all depends on whether you have your recovery phrase. If you do, you should be able to safely and securely recover your assets and store them in a new wallet.

But again, it all comes down to whether you kept and securely stored your keys.

Prevent Lost Bitcoin by Safely Storing and Sending It

In a way, Bitcoin allows anyone to become their own bank. This has several advantages, but it also has several risks. Mainly, the risk that users might not be able to recover an old bitcoin wallet if they’ve lost their private keys.

Many people choose to store their private keys in a cold storage wallet in their personal possession. These include hardware, software, audio, and paper storage options that exist offline; cold wallets can be a more secure, long-term method of holding coins. The big tradeoff is that doing so puts 100% of the responsibility for securing those assets in the hands of the holder — if you lose them, there’s no recourse.

The best way to prevent permanent loss of Bitcoin is to make sure that you safely and securely store your coins from the get go, and avoid mistakes when sending Bitcoin.

Storing Crypto

There are a number of ways you can store your crypto for safekeeping, but most investors will likely choose to either leave it on an exchange, or transfer it to a wallet.

Exchanges

Leaving your holdings on an exchange may be worth considering if you only have a relatively small amount of crypto. The chief risks in doing so are that your holdings are out of your hands — and aren’t technically “yours” (as the saying goes: Not your keys, not your coins!) — and they could be more vulnerable to a cyberattack or theft.

Using a custodial wallet on an exchange does, generally, mean that you would be able to gain access to them again if you lock yourself out of your account.

Wallets

If you’d rather get your holdings into your own wallet so that you have full possession and control over them, you can do so by transferring them to a hardware or paper wallet. Just know that if you lose access to that wallet, it could be permanent — that’s the risk.

To ensure that you don’t, however, you can take a few steps:

•   When setting up a new hardware wallet, safely store the backup recovery seed phrase.

•   Create a PIN or password — not one that’s easy to guess or remember — write it down and keep it somewhere safe. Some people even get a safe or a safe deposit box where they store their passwords or seed phrases.

•   Keep your wallet somewhere that you won’t forget. Some people even elect to keep their hardware wallets on their person at all times, putting it on their keychains, for example.

You might want to also consider using a paid service that helps users keep track of their private keys, and that can help you re-access your wallet if you lose your seed phrase. It’s an extra expense, but can provide peace of mind.

Sending Crypto

Making a mistake when sending a crypto transaction, whether from an exchange or from a private wallet, can result in total and permanent loss of funds. If that happens, there’s zero opportunity or chance to find your lost crypto. Here’s how to prevent it from happening:

•   Whenever possible, use a QR code to get the recipient’s address. Sending coins to a QR code prevents mistakes or typos in the address. Using a string of characters can result in the funds being lost if even one character is off.

•   Always double-check to make sure the currency you’re sending matches the one received. For example, that Bitcoin being sent is going to a Bitcoin wallet. Many wallets and exchanges do this automatically, but it’s worth double checking.

•   When sending a large transaction, send a smaller amount first, as a test. After the transaction has at least one confirmation on the network, then send the rest of the transaction.

These simple steps will go a long way toward helping holders avoid sending erroneous crypto transactions.

Total Amount of Lost Bitcoin

We don’t fully know the total amount of lost Bitcoin, but it’s estimated that roughly 20% of the Bitcoin mined thus far is unrecoverable. It may be in lost wallets, or in accounts or wallets that people have forgotten the passwords to.

However, there’s a chance that some of it could be recoverable, as new companies with recovery methods are sprouting up in recent years.

5 Largest Bitcoin Fortunes Lost

If you truly want to make your head spin (or at least force yourself to write down your recovery phrase), read on to learn about the biggest Bitcoin fortunes that have been lost — that are widely known about, anyway.

1. Satoshi Nakamoto

Next to nothing is known about Satoshi Nakamoto, the creator of Bitcoin, including whether it’s an actual person, or a group of individuals. But what is known is that Nakamoto has, or had, a wallet containing more than 1.125 million Bitcoins. At one time, it was worth billions of dollars.

Those coins are still out there, somewhere.

2. Stefan Thomas

Stefan Thomas is a software developer from California who held more than 7,000 Bitcoins, worth, at one time, hundreds of millions of dollars. But Thomas forgot the password to the USB wallet he held them on, and has not been able to recover them.

3. James Howells

James Howell, similar to Thomas, had a laptop that stored roughly 7,500 Bitcoins. And he ended up mistakenly throwing it away, losing hundreds of millions of dollars in digital assets. He offered money to people to try and help him search nearby landfills to find it, but it remains lost.

4. Gerald Cotten

Gerald Cotten, yet another would-be Bitcoin whale, co-founded a crypto exchange called QuadrigaCX. In what’s a fairly long and complicated story, Cotten ended up dying at the age of 30, and the keys and passwords to his exchange’s cold wallets were lost. Those wallets contained more than $100 million in assets.

5. Unknown

Another strange story: Allegedly there’s a Bitcoin wallet floating around with roughly 69,000 Bitcoins in it, and nobody has been able to access it. The U.S. Department of Justice reportedly has the wallet now, after it was passed around by hackers and crackers who had been trying to open it.

Does Lost Bitcoin Affect the Network?

Bitcoin that is lost and deemed irretrievable is presumably out of the market forever. It’s as if you took a $100 bill and burned it — it doesn’t exist anymore. The difference being that there is no particular limit to the supply of $100 bills, but Bitcoin has a capped supply of 21 million (meaning there can never be more than 21 million BTC).

Other types of crypto that have a capped supply include: Litecoin, Stellar, Chainlink.

For that reason, lost Bitcoin shrinks the maximum or existing supply of the asset on the market. Since it makes other Bitcoins more rare, these losses can, in effect, increase the value of the remaining Bitcoin or other capped crypto on the market.

The Takeaway

No matter what type of cryptocurrency you’ve lost, it can be almost impossible to recover — especially if you’ve lost the private keys that gave you access to that crypto.

The easiest way to avoid losing crypto is to make sure it never gets lost in the first place. Doing so involves securing your private keys and other passcodes; setting up and backing up a secure wallet; and being careful when sending transactions. While there are services that may claim to help you recover lost crypto, beware of scams and high fees.

FAQ

Is it possible to recover lost Bitcoin?

Depending on the circumstances, it might be possible to recover lost Bitcoin (for example, if you lose a hardware wallet, but still have your private keys and passwords). However, much of the Bitcoin that has been lost over the years is effectively lost forever.

What is the total amount of Bitcoin that has been lost?

While no one knows the exact amount, it’s estimated that roughly one-fifth, or 20% of the Bitcoin that’s been mined has been lost, chiefly because investors lost their private keys.

Is it possible to lose Bitcoins forever?

Yes, you can lose Bitcoin (or any crypto) forever. You can put your coins in a wallet and forget the passwords, for example, or have your crypto stolen — you could even send them to the wrong crypto address. In those cases, it’s typically impossible to recover your crypto.

Photo credit: iStock/anilakkus

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