Apr

2022

A Beginner’s Guide to Investing in Your 20s

By Michael Flannelly | Debt Payoff, invest, Terminology | No Comments

Deciding how to invest money in your 20s can seem overwhelming at first; many people have differing opinions, and it’s hard to know where to start. But remember that you don’t need to have a lot of money upfront to be a successful and savvy investor. The most important thing is to start investing early, even if your initial investments are small.

Thanks to advancements in investment technology and options available to investors of all income brackets, investing has never been more accessible. Here are a few different strategies for investing money in your 20s.

Think About Financial Goals

When determining your financial goals, you may want to break down short-, medium-, and long-term milestones. You want to ask yourself what you want from your money and figure out when you’ll need to use the money. For example, the money you save for a medium-term goal, like a down payment on your first home, should be treated differently than the retirement savings you won’t touch for 40 or more years.

If you have not earmarked savings for a specific financial goal, take some time to think about what purpose you’d like to apply it to. A great first saving goal is to have three to six months of living expenses in an emergency fund. After that, it might be good to turn your attention toward savings and investing for longer-term goals, like retirement.

Decide Where to House Your Money

When deciding how to invest money in your 20s, it can help to think about immediate, mid-term, and long-term financial needs. Once you have outlined some money goals, you could consider setting up your accounts. The type of account you open often depends on when you need the money.

Where to Put Immediate Money

Food, bills, rent, and everything else you must pay for on a month-to-month basis are immediate needs. Often people keep this money — along with a cushion so as not to overdraft their account — in an online bank account. These types of accounts allow you to withdraw money instantaneously, generally without penalties, making them ideal for your immediate financial needs.

Where to Put Mid-term Money

Mid-term money is any money you might need in the next couple of years, such as a travel fund, wedding fund, or home down payment savings. It might make sense to keep this money in a high-yield savings account, which provides a better return on your money than traditional savings accounts.

High-yield savings accounts, along with other cash equivalents like certificates of deposits (CDs) and money market accounts, are considered to be lower-risk investments (though CDs are not helpful for emergency funds because of the early termination penalties).

Where to Put Mid- to Long-term Money

For money you’ll use in five to 20 years, you may be prepared to take slightly more risk than a high-yield savings account. You might choose to keep the money in your high-yield savings account or in CDs, or a online brokerage account where you can invest that money in stocks, bonds, mutual funds, or other asset classes. You can also do a combination of the different types of accounts.

Longer-term savings options, like a tax-advantage 529 plan, can also be appropriate if you’d like to start planning for higher education needs for current or future children.

Where to Put Long-Term Money

Think of long-term money as cash you won’t need for several decades. A retirement account is a great example of an appropriate place to hold long-term money. Retirement plans like a Traditional IRA, Roth IRA, or a 401(k) account can offer significant tax benefits.

💡 Ready to invest in your retirement? Consider opening a Traditional or Roth IRA with SoFi.

Potential Assets to Invest in During Your 20s

One important thing to understand about investing in your 20s is the tradeoff between risk and reward when implementing your investing strategy. You cannot have one without the other. With this risk and reward calculation in mind, you need to determine what asset classes you might consider when investing in your 20s.

Stocks

A stock is a tiny piece of ownership in a publicly-traded company. When you invest in a stock, you could earn money through capital appreciation, dividends, or a combination of the two.

Stocks can be volatile because prices fluctuate according to supply and demand forces as they trade on an open exchange. Even though stocks can be volatile and experience losses, they tend to provide positive returns over time. The S&P 500 index has had an average annual growth rate of 10.5% from 1957 through 2021.

Bonds

Although not risk-free, experts generally consider bonds less risky than stocks because they are a contract that comes with a stated rate of return. Bonds backed by the U.S. government, called treasury bonds, are the safest within the category of bonds because it is unlikely that the U.S. government will go bankrupt.

Bonds are debt investments, meaning investors fund the debt of some entity. The money you earn on that investment is the interest they pay you for borrowing your money. In addition to treasuries and corporate bonds, there are municipal bonds, which state and local governments issue, and mortgage- and asset-backed bonds, which are bundles of mortgages or other financial assets that pass through the interest paid on mortgages or assets.

Mutual Funds and Exchange-Traded Funds

Some investors might want to utilize mutual funds or exchange-traded funds (ETFs) to gain exposure to certain asset classes.

A fund is essentially a basket of investments — stocks, bonds, another investment type, or a combination thereof. Funds are helpful because they provide immediate diversification: safety against the risk of having too much money invested in one stock, sector, or any other single asset.

Funds are either actively or passively managed. A fund that is passively managed is attempting to track a specific index. An actively managed fund is maintained with a hands-on approach to determine investments in a portfolio. ETFs tend to be passively managed, but there are many actively managed ETFs funds on the market. Mutual funds can be either passively or actively managed.

Tips on Investing In Your 20s

Once you’ve become familiar with the basics of investing, it’s time to put that knowledge into action. These tips can help you shape a strategy for how to invest money in your 20s and beyond.

Gauge Your Personal Risk Tolerance

One of the key things to remember about investing in your 20s is that time is on your side. You have a significant time horizon window to allow your portfolio to recover from bouts of inevitable stock market volatility. Because of this, you could take more risks with your investments to achieve higher rewards, including the benefits of compounding returns.

Getting to know your personal risk preferences can help you decide where and how to invest in your 20s to achieve your investment goals. It’s also important to understand how risk tolerance matches your risk capacity and appetite.

Risk tolerance means the level of risk you’re comfortable taking. Risk capacity is the level of risk you prefer to take to reach your investment goals, while risk appetite is the level of risk you need to hit those milestones. When you’re younger, playing it too safe with your portfolio might mean missing out on significant investment returns.

Know the Difference Between Asset Allocation and Asset Location

asset allocation when investing in your 20s

People often invest in a combination of stocks and bonds, which is easy to do using mutual funds and ETFs. One strategy for investing in your 20s is to invest a higher allocation of your long-term investments in stocks and less in bonds, slowly moving into more bond funds the closer you get to retirement. This big picture decision is called asset allocation.

But asset allocation is only part of the picture. One might also consider asset location: the types of accounts where you’re putting your money, like savings accounts, an online brokerage account, a 401k, or an IRA.

Asset location matters when it comes to investing money in your 20s because it can maximize tax advantages if you’re utilizing a 401k or IRA. But these retirement accounts also have restrictions and penalties for withdrawing money. So if you want to be able to access your investments quickly, an online brokerage may be a complimentary investing account.

Take Advantage of Free Money

One of the simplest ways to start investing in your 20s is to enroll in your workplace retirement plan like a 401k.

Once you’ve enrolled in a plan, consider contributing at least enough to get the full company match if your employer offers one. If you don’t, you could be leaving money on the table.

And if you can’t make the full contribution to get the match right away, you can still work your way up to it by gradually increasing your salary deferral percentage. For example, you could raise your contribution rate by 1% each year until you reach the maximum deferral amount.

Don’t Be Afraid of Investment Alternatives

Stocks, bonds, and mutual funds can all be good places to start investing in your 20s. But don’t count out other alternative investments outside these markets.

Real estate is one example of an alternative investment that can be attractive to some investors. Investing in real estate in your 20s doesn’t necessarily mean you have to own a rental property, though that’s one option. You could also invest in fix-and-flip properties, real estate investment trusts (REITs), or crowdfunded real estate investments.

Adding alternative investments such as real estate, cryptocurrency, and commodities to your portfolio may improve diversification and could create some insulation against risk.

Learn more: What Are Alternative Investments?

The Takeaway

Learning how to invest money in your 20s doesn’t happen overnight. And you may still be fuzzy on how certain parts of the market work as you enter your 30s or 40s. But by continually educating yourself about different investments and investing strategies, you can gain the knowledge needed to guide your portfolio toward your financial goals.

One thing to know about investing in your 20s is that consistency can pay off in the long run. Even if you’re only able to invest a little money at a time through 401k contributions or by purchasing partial or fractional shares of stock, those amounts can add up as the years and decades pass.

If you’re ready to start saving and investing for your financial goals, the SoFi investment app can help. With SoFi Invest®, you can begin building a portfolio of stocks, and ETFs for as little as $5 to meet all the critical financial goals and milestones in your life.

Find out how SoFi Invest® can help you take a big step towards reaching your financial goals.

Mar

2022

What Is Cryptography and How Does It Work?

By Caroline Banton | Growing Wealth, invest, Investing, Terminology | Comments Off

Cryptography is a science that has evolved over time since the ancient Egyptians used it to communicate. Today, it takes many forms, with quantum computer scientists just one group who uses this coded system. Throughout history and into the digital age, the purpose of cryptography has remained the same: It is a means to transmit data in a secure form so that only the recipient can access the information.

Modern cryptography is front and center in advancements in computer science and cryptocurrency ecosystems. Sophisticated encryption algorithms protect data, but the threat levels continue to rise as quantum computers offer a new arsenal to adversaries.

In this article, we’ll explore how cryptography originated, how it has transformed over time, and how it is applied in the world of cryptocurrencies. We’ll delve deep into:

• Cryptography Definition

• The History of Cryptography

• How Cryptography Works

• Cryptography and Cryptocurrencies

• Cryptographic Algorithms

• Cryptography and Quantum Computing

Cryptography Definition

Cryptography is a way to transmit information and data so that only the intended recipient can access it. The message, content, or data is encrypted by the sender and then decrypted by the receiver using codes or other methods.

In computer science, the process of encryption typically takes plaintext, or unencrypted text, and scrambles it into ciphertext. In the context of cryptocurrency, the cryptography definition is the process by which digital assets are transacted and verified without a trusted third party.

Cryptography is the technology that underpins cryptocurrency protocols. One large appeal of cryptocurrencies, such as Bitcoin (BTC) and Ethereum (ETH), is that transactions are anonymous.They occur on a secure, decentralized, peer-to-peer network without the need for a central authority, like a bank or financial institution.

Bank transactions rely on certain protocols and policies to protect transactions and reduce fraud: the signature on a check issued by a bank must be verifiable and counterfeit-proof (not forged), and the signer cannot later go back on the commitment the check represents. Cryptocurrency transactions rely on different protective measures: Cryptography and encryption keys allow cryptocurrencies to be traded without real-world signatures.

The History of Cryptography

Cryptography, derived from the Greek words “kryptos” (meaning hidden) and “graphein” (meaning to write), existed long before the digital age. The history of cryptography dates back to the year 1900 BC, with cryptographic symbols appearing in hieroglyphics found in tombs in ancient Egypt.

Later, around 40 BC, Julius Caesar encrypted messages using a system that became known as “Caesar’s cipher”. He used letter substitution to scramble a message so that only the person who knew the secret could unscramble the letters and read the text.

Giovan Battista Bellaso created the first encryption in the 16th century. It was called the Vigenere cipher (falsely attributed to diplomat Blaise de Vigenere), and featured a grid with the alphabet written across 26 rows. The written encryption matched the length of the message, and Bellaso used the grid to create the code to encrypt the message, letter by letter. The sender shared the secret key word and the encrypted message with the recipient, who possessed the same grid and could decode the message.

Modern computers have made encryption commonplace and much more sophisticated, but the intention is the same: to ensure that only intended parties can access the information.

How Cryptography Works

While cryptography methods have evolved from ancient times, the art has always served the same purposes: confidentiality, integrity, non-repudiation, and authentication.

• Confidentiality ensures that only the intended recipient can access the information.

• Integrity ensures that the data cannot be altered in transit or storage without the change being detected.

• Non-repudiation ensures that the intentions of the sender of the information cannot be denied later.

• Authentication ensures that the sender and receiver can confirm each other’s identity and the origin and destination of the information.

There are three forms of cryptography, each with different levels of sophistication for data protection: hash functions, asymmetric encryption, and symmetric encryption.

Hash Functions

Hash functions secure information using algorithms. Instead of using traditional keys, this approach relies on algorithms to turn data into a fixed-length string of characters. Hash functions are one-way encryption because it’s impossible to decode a hash into its original data.

Blockchain technology uses hash to encrypt large quantities of information without compromising the original data. Hashes create organized, structured, encrypted data that act like digital fingerprints. Any unauthorized modifications that may occur during transport through networks can be verified, and changes to the original data result in a new hash. That new hash would not match the original source and would not be verifiable on the blockchain.

SHA-1 (Secure Hash Algorithm 1), SHA-2, and SHA-3 are cryptography examples of hash functions.

Asymmetric Encryption

Asymmetric encryption, also known as public-key encryption, uses a pair of keys. One key is a public key that can be exchanged with anybody over any network. This key shows how to encrypt the data and anyone can access it. The second key is a private key. The private key explains how to decrypt the message, but only the private key holder has access.

Both keys are generated by an algorithm composed of large prime numbers to create two unique keys that are linked mathematically. Anyone with access to the public key can encrypt a message, but only the private key holder can decode the message.

Rivest-Shamir-Adleman (RSA) is an example of public-key cryptography and is typically used for VPNs, email, web browsers, and chat.

Symmetric Encryption

Symmetric encryption — also called secret-key encryption — relies on a single key. For symmetric encryption, the sender and receiver of the data share the same key used both to encrypt and decrypt the information.

To encrypt data, the secret key is agreed upon in advance. Because there is only one key, and one less layer of security, this level of encryption is riskier than symmetric encryption.

Advanced Encryption Standard (AES) is a cryptography example of symmetric and single-key encryption. AES was established in November 2001 by the National Institute of Standards and Technology (NIST). It is a Federal Information Processing Standard (FIPS 197) for encryption in the private sector mandated by the U.S. government.

Cryptography and Cryptocurrencies

Cryptography is what makes cryptocurrency appealing. Crypto transactions are encrypted as they travel across a blockchain and are both secure and transparent.

Bitcoin creator Satoshi Nakamoto devised blockchain technology to solve the “double-spend” problem, where the same currency unit could potentially be spent twice, and a currency’s value as an online payment solution would therefore be extinguished. Bitcoin’s time-stamped, peer-to-peer distributed ledger is secured cryptographically to prevent double-spending.

This was the beginning of blockchain technology and the evolution of the different types of cryptocurrencies we see today.

Learn more about how cryptocurrency works with SoFi’s Crypto Guide for Beginners.

Cryptographic Algorithms

Cryptographic algorithms, also called ciphers, are used to code messages (like those from Julius Caesar and Giovan Battista Bellaso). Algorithms are derived from mathematical and rule-based calculations. The algorithms are used for keys, digital signing and verification, internet web browsing, confidential email, and secure credit transactions.

An algorithm or cipher suite (also known as a cryptosystem) uses one algorithm for encryption, a second for message authentication, and a third for key exchange.

Cryptography and Quantum Computing

Sophisticated algorithms are not impervious to hackers, and there is growing concern of the threat that quantum computing represents with powers to break current cryptography encryption standards.

The length of encryption keys is gradually increasing — as much as 256 bits (32 bytes) — and the algorithms are becoming more sophisticated in order to stop hackers from decoding them. But even the most complicated algorithms may be no match for quantum computers.

Quantum computing uses quantum bits (qubits) that can process an enormous number of potential results in parallel. These supercomputers can carry out integer factorization (breaking down large composite numbers into smaller numbers) at lightning speed, which is what makes current cryptographic algorithms so vulnerable.

The Future of Quantum Computers

Currently, the simple, small-scale quantum computers that have been created have had limited capabilities. But it may only be a matter of time before more powerful quantum computers are successfully developed.

Jason Soroko, CTO of PKI, Sectigo, explained it like this in an interview with EE Times : “A traditional binary computer solves that mathematical problem slowly, whereas a quantum computer with an efficient algorithm can solve that problem much more quickly. That efficient algorithm known as ‘Shor’s Algorithm’, when coupled with a quantum computer with enough stable qubits, will theoretically be able to break current cryptographic algorithms such as RSA and Elliptic Curve (ECC).”

Large-scale quantum computers are still a few years from existence, but the threat that these machines pose to symmetric algorithms like AES and asymmetric algorithms like RSA are real and causing NIST to seek more robust solutions.

The Takeaway

Cryptographic techniques are the cornerstone of the cryptocurrency market and the very reason market participation remains active. Encryption techniques ensure confidentiality, integrity, non-repudiation, and authentication — so that crypto transactions remain secure and anonymous.

Encryption techniques are growing ever-more sophisticated to combat cyber threats, and these threats are expected to intensify in the future with the development of quantum computers. However, focused scientific work is developing advanced algorithms to maintain protection even from the threat of quantum supercomputers.

FAQ

What is cryptography used for?

Cryptography is used for secure communications and as protection from adversarial third parties. In computer science, cryptography is a process of encryption using an algorithm and a key to transform an input (plaintext) into an encrypted output (ciphertext).

Cryptographic techniques allow cryptocurrencies to be traded anonymously. These techniques ensure confidentiality and that only the intended recipient can access information.They ensure integrity so that the data cannot be altered in transit and the intentions of the sender of the information cannot be denied later. Cryptography also allows the sender and receiver to confirm both each other’s identity and the origin and destination of the information.

How does cryptography relate to computer security?

Cryptography ensures secure computer networks and systems. The science of cryptography ensures the confidentiality of data, protects data from unauthorized modification during storage and transit, and allows data authentication.

How is cryptography used in the cryptocurrency space?

Three cryptography methods are used for cryptocurrencies: symmetric cryptography, asymmetric cryptography, and hashing. Symmetric cryptography uses a single key to encrypt the message at the source, transmit the encrypted message, and decrypt the message at the recipient’s destination. This method is simple to implement, but the shared key implies greater security risks.

Asymmetric cryptography uses two different keys — public and private — to encrypt and decrypt data. The public key — for example, the address of the receiver — is known openly, but the private key is known only to the receiver. The message can only be decrypted by the receiver’s private key. This method facilitates authentication and encryption for cryptocurrency transactions.

Hashing verifies the integrity of the data for network transactions by maintaining the structure of blockchain data. Hashes create organized, structured, encrypted data that resemble digital fingerprints. Any unauthorized modifications during transactions can be identified because they would create a new hash that would not match the original source and would not be verifiable on the blockchain.

Photo credit: iStock/MStudioImages

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Mar

2022

Guide to World of Women NFTs

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Non-fungible tokens (NFTs) are increasingly catching the attention of investors who are looking to step beyond simply buying cryptocurrency. Many different NFTs have gained the spotlight in the decentralized finance (DeFi) space, whether they represent art, music, or other types of collectibles.

The World of Women NFT collection, designed by a female artist with a female-centric focus, is built on the Ethereum blockchain. The goal of the project is to inject more diversity and inclusion into the cryptocurrency space.

Before investing in a World of Women NFT, there’s much to know about this ambitious project and the digital art it has inspired.

• What is World of Women?

• How Does World of Women Work?

• World of Women Value

• How to Buy World of Women NFTs

• World of Women vs. CryptoPunks

What Is World of Women?

The World of Women NFT collection is made up of 10,000 NFTs developed by French artist Yam Karkai. In founding World of Women, along with co-founder BBA (an acronym for Being Bored Ape), Karkai sought to empower women and increase their representation in the NFT and cryptocurrency spaces. The NFTs launched on July 27, 2021, quickly selling out after catching the attention of several high-profile celebrities and influencers.

What Is an NFT?

But what does NFT mean, exactly? An NFT is a type of digital asset. NFTs use blockchain technology, the same technology that powers different types of cryptocurrency, to operate. NFT assets can be sold through peer-to-peer platforms and are typically associated with artwork or digital imagery, though a video or audio file could also be an NFT.

To date, the Securities and Exchange Commission (SEC) doesn’t have any standard guidelines in place for determining if and when an NFT is considered a security. As of January 2022, World of Women NFTs and other NFTs do not fall under any regulatory guidelines established by the SEC or the Financial Industry Regulatory Authority (FINRA).

How Does World of Women Work?

The 10,000 illustrations that make up the World of Women NFT collection were designed by Karkai using Procreate and Adobe Photoshop. Each NFT is a unique piece of art designed to represent an individual woman. When someone purchases a World of Women NFT, they’re purchasing a piece of digital artwork.

These NFTs are officially sold out, but can be bought and sold on the secondary market through the OpenSea platform. You’ll need a compatible cryptocurrency wallet and the required amount of Ethereum to complete the purchase of a World of Women NFT.

In addition to owning the digital artwork itself, World of Women NFTs allow owners to collect royalties for the commercial use of those images. Specifically, owners can receive 50% royalties for any profits associated with commercial use of the NFTs. World of Women does require NFT owners to agree to its licensing terms as a condition of earning royalties.

World of Women also sets itself apart in terms of how it reinvest profits. The company uses part of its earnings to fund women-centered projects around the world, such as Too Young to Wed , She’s the First , and Rockflower . This is all part of the company’s efforts to empower women while supporting art that’s designed to appeal to people of all backgrounds.

World of Women Value

When World of Women NFTs made their debut, they had a minting price of 0.07 ETH, which was equivalent to roughly $130 U.S. dollars. As of January 2022, the floor price (or starting price) for a single World of Women was 7.37 ETH. The average all-time price is 2.17 ETH, with trading volume hovering between 46,000 and 47,000 ETH.

At the lowest point, World of Women NFTs trade at 0.01 ETH. The highest sale price recorded to date is 260 ETH. That NFT, Woman #9248, sold for the equivalent of $587,269.80 USD. One of cheapest options is Woman #3556, which has a most recent sales price of 0.01 ETH or $22.47 in USD. Total trading volume is around $10.73 million.

So what determines how much a World of Women NFT is worth? Several factors related to the design of the image can influence pricing, including:

• Background color

• Clothing

• Skin tone

• Facial features

• Accessories

The rarer or more unique an image is, the more it’s likely to sell for. That’s also the case with other image-based NFTs, such as CryptoPunks. These NFTs, which launched in 2017, have reached astronomical valuations as collectors seek out the rarest or most unusual images. CryptoPunk #7523, for example, sold for $11.75 million at a Sotheby’s auction.

How to Buy World of Women NFTs

If you’re interested in collecting NFTs from World of Women, you can purchase them through OpenSea, which is a secondary market for trading NFTs. To purchase World of Women NFTs, you’ll first need to connect or create a compatible cryptocurrency wallet. From there, you can use different filtering options to find NFTs to buy.

Filtering options include:

• Price

• Status (i.e., buy now, auction, etc.): An NFT that’s listed as “Buy Now” or “Make Offer,” would allow you to purchase it at that moment for the listed price or offer a different price to the seller. Ones that are listed as “Auction” will only allow you to place a bid.

• Design (including backgrounds, facial features, etc.): The design filter feature can help you gauge an NFT’s rarity, as it breaks down what percentage of the NFTs share similar features.

The timing for completing the transaction can depend on which option you choose. It’s also important to keep in mind that demand on the Ethereum blockchain can slow down processing. OpenSea charges fees to use the platform. The fee is equal to 2.5% of every transaction processed.

World of Women vs CryptoPunks

World of Women is a newer NFT option, while CryptoPunks NFTs have been around for several years. In terms of valuation, the recent sale of CryptoPunk #7523 illustrates just how valuable a single CryptoPunk can be. Here’s a closer look at how World of Women and CryptoPunks compare.

	World of Women	CryptoPunks
Year Launched	2021	2017
Collection Size	10,000 images	10,000 images
Owners	Around 5,000	Around 3,400
Image Theme	Illustrations feature colorful images of women from different backgrounds	Illustrations include a mix of pixelated images of men, women, zombies, and animals
Trading Volume	Estimated at 45.9K	Estimated at 791.8K
Highest Valued NFT	Woman #9248, which sold for $587,000 in January 2022	CryptoPunk 7523, which sold for $11.75 million in 2021

The Takeaway

The World of Women NFT collection is another creative entry in a burgeoning digital market. While the entire collection is officially sold out, interested buyers can bid or buy a World of Women NFT on a secondary market, using Ethereum.

Understanding the difference between NFTs and cryptocurrency, as well as what it means to trade each of them, is useful info for anyone who is curious or considering expanding their investing horizons.

FAQ

Who is behind World of Women NFT?

World of Women NFTs were created by digital illustrator and artist Yam Karkai. Karkai co-founded the company along with Being Bored Ape (BBA) in order to empower women and encourage diversity in the NFT space.

When did World of Women NFTs launch?

World of Women NFTs launched on July 27, 2021 and sold out overnight after being mentioned by influencer Gary Vaynerchuk (GaryVee). Other fans of the NFT include actress Reese Witherspoon and YouTuber Logan Paul.

How can you buy a World of Women NFT?

You can purchase World of Women NFTs through the OpenSea platform. You’ll need to connect a compatible cryptocurrency wallet to make your purchase. NFTs are available with “Buy Now,” “Auction,” or “Make Offer” purchase options.

Photo credit: iStock/South_agency

Mar

2022

Ethereum vs Bitcoin: Similarities and Differences

By SoFi | Growing Wealth, invest, Investing | No Comments

More than 13 years ago, Bitcoin emerged as the first blockchain-based cryptocurrency — and Ethereum wasn’t far behind. While Bitcoin (BTC) was created as a store of value, Ethereum (ETH) was established as a more innovative platform aimed at revolutionizing the finance world through the use of smart contracts and DeFi apps.

Although the crypto market has since exploded — with thousands of different cryptocurrencies to choose from — Bitcoin and Ethereum are still the two market leaders. So it can be valuable to understand how they started, and what these two crypto greats each bring to the table for investors.

Table of Contents

Differences Between Ethereum and Bitcoin
Bitcoin Fundamentals
Ethereum Fundamentals
Which to Buy? Bitcoin or Ethereum?

What Are the Key Differences Between Bitcoin and Ethereum?

BTC and ETH have many similarities. Both blockchains offer anonymous transactions, and neither is controlled by a central authority like a bank or government. However, there are some key differences to note. The primary purpose of ETH is not to create an alternative monetary system but to facilitate and monetize the operation of Ethereum’s DeFi capabilities, including smart contracts, dApps, NFTs, and even the creation of new coins via ICOs.

Blockchain Design

The main difference between BTC and ETH is their underlying technology and utility. Block times (how long it takes to produce a new block on the blockchain) are different, as are the programming languages.

And although both BTC and ETH can be used for value transactions, the Ethereum blockchain is programmable and was designed to have additional DeFi uses, such as contracts and applications.

Transaction Times

Bitcoin is known for its slow and expensive transactions. It takes around 10 minutes to complete a Bitcoin transaction, while an Ethereum transaction only takes 12 seconds.

Block Limit

Another limitation is Bitcoin’s block size — the amount of transactions that can take place on a single block. It takes about 10 minutes to mine a new block on the Bitcoin blockchain, and each block can contain 1 MB of information.

As a result, the Bitcoin blockchain can handle three to four transactions per second. The Ethereum blockchain, however, does not have a block limit. The miners decide how many transactions are put into a block, and currently, it can handle about 15 transactions per second.

Bitcoin Fundamentals

Although Bitcoin (BTC) has now become a household name, many people have not purchased Bitcoins because they either don’t understand the technology, or they think it is too difficult to figure out.

At a very high level, Bitcoin (BTC) is a virtual or digital currency that is created and secured using advanced cryptography — essentially, in this case, the solving of complex mathematical problems. Bitcoin can be stored, sent, and spent just like any other form of currency (with limitations), and it can now be used to buy many things from a coffee at Starbucks® to a mansion.

Bitcoin is based on blockchain technology. A blockchain is a a transparent, digital ledger of transactions. In the case of Bitcoin and many other cryptocurrencies, this ledger is public, meaning anyone can look at it to see past transactions. It’s also considered a distributed ledger, because it’s maintained by a global network of nodes, or miners, who compete to verify Bitcoin transactions and earn rewards.

Bitcoin is created through the process of keeping this ledger running and secured. Individuals around the world, or miners, solve complex mathematical equations, to ensure that the Bitcoin blockchain is accurate and up to date. As a reward for doing this work, the miners receive newly minted Bitcoin as well as transaction fees. This is called a proof-of-work (PoW) consensus mechanism.

PoW has been widely criticized as being unsustainable because it requires vast amounts of energy to run computer networks — known as mining rigs — to validate transactions and mint new BTC.

Other types of cryptocurrencies use different methods to create coins and keep their blockchains running.

The total number of Bitcoin that can ever exist is 21 million, and as of March 2022, nearly 19 million have been mined. Approximately three to four million Bitcoin have been lost forever, due to people losing their private keys.

It is estimated that there are over one million unique individuals mining Bitcoin around the world. After all the Bitcoins have been mined, miners will continue to receive transaction fees to incentivize them to keep the network running.

How Bitcoins Are Used

Each Bitcoin is made up of 100 million Satoshis (named for Satoshi Nakamoto, a pseudonym that reflects the person or group of people who developed Bitcoin in 2009). To use Bitcoin for transactions, you’ll need to have a crypto wallet, which allows you to safely store your crypto.

A crypto wallet doesn’t actually contain your Bitcoin or other cryptocurrencies. These digital wallets are simply where you store and secure your proof of ownership using pairs of public and private keys that give you, and only you, access to your crypto.

The private key should never be shared with anyone and is only used when you are sending or selling your Bitcoin. Your wallet should also have a public key, which is where Bitcoins are sent when you buy or are gifted with them. If you tell someone your public key, they can go onto the Bitcoin blockchain ledger and view any past transactions you’ve made.

If you invest in Bitcoin through an exchange (a digital platform that puts buyers and sellers together to make a trade), you may not have access to your private key. This is why exchanges can be vulnerable to hacks. For this reason, it may not be a good idea to store large amounts of Bitcoin on exchanges, but you can decide based on which type of exchange or app you use to trade BTC. You can send and receive Bitcoins using your wallet, or your public and private addresses.

Who Controls the Bitcoin Blockchain?

In 2008, a person or group that went by the name Satoshi Nakamoto proposed the idea of blockchain technology, and in early 2009 he/they launched it. However, he/they doesn’t/don’t own Bitcoin. In fact, due to the way it’s designed, no individual or group entity owns or controls the Bitcoin blockchain because it’s decentralized.

Bitcoin isn’t controlled by a corporation, individual, or government. Instead, the blockchain continues to run through its network of miners. Changes and upgrades to the code can be proposed, and in order for them to be adopted, all of the miners need to implement them.

This is because the same software has to work consistently for all developers in order for Bitcoin to be maintained. The decentralized nature of Bitcoin is perhaps one of its most appealing features, and it helped set the stage for the emergence of decentralized finance or DeFi, which is disrupting the models and institutions of traditional finance as we speak.

Historical Highlights

When it first launched, Bitcoin didn’t have a price. It wasn’t until someone was willing to purchase (transact) it that it began to establish a dollar value. In 2009, the first Bitcoins were sold, giving each Bitcoin a price of $0.0009.

The first Bitcoin product transaction happened in May of 2010, when someone purchased two pizzas with 10,000 BTC. Those bitcoins would be worth millions of dollars today. Since then, the price of Bitcoin has risen and fallen dramatically due to supply and demand, but overall the trend has been towards greater adoption and (mostly) higher value.

There have been a few major Bitcoin crashes, mostly sparked by hacking and illegal activities. The highest price to date was over $68,000 in November 2021.

As of March 16, 2022, one BTC was worth about $39,615.

The Future of Bitcoin

Although Bitcoin has become more widely used over the past decade, it has a long way to go before it becomes a mainstream currency. In the long run, it may become more of a financial asset than a means of purchase.

Its limited supply and decentralized nature make it more similar to gold than to a government-issued fiat currency. Currently, some investors are wary of Bitcoin’s high transaction fees, volatility, and lack of regulation. While work is being done to improve these issues, what will ultimately become of Bitcoin is yet to be seen.

Ethereum Fundamentals

Launched in 2015 by Vitalik Buterin, Ethereum (ETH) is also built using blockchain technology, but as an open-sourced computing platform. Ether (ETH) is the native token.

The platform enables the formation of decentralized applications (dApps) and smart contracts — a digitally facilitated agreement between two parties that’s written in code into the blockchain technology. The code automatically executes the terms of the contract when specific conditions are met by all parties. The chief innovation of smart contracts is that there is no third-party required to enforce the terms of the agreement.

Similar to the Bitcoin blockchain, the Ethereum blockchain can also be used for payments and monetary transactions. Ethereum tokens are the cryptocurrency used for transacting on the Ethereum blockchain.

How Ethereum Is Made

Similar to Bitcoin mining, Ethereum uses a proof-of-work (PoW) algorithm — coded transactions for each new block of data confirmed by miners — to keep its blockchain running and to create new tokens. However, Ethereum has announced a plan to migrate to a proof-of-stake (PoS) algorithm.

With PoS, users can validate blocks of transactions based on how many coins they hold. The more ETH you hold as a miner, the greater your mining control.

Unlike Bitcoin, the total number of ETH is not fixed. Instead, the amount mined grows and shrinks based on demand. Currently there is a limit of about 18 million ETH that can be mined each year, simply based on the amount of time it takes for miners to confirm transactions.

Buying and Using Ethereum

The process of using Ethereum is similar to Bitcoin. You hold an Ethereum wallet and transact using public and private keys.

One key difference between BTC vs. ETH is that you need to hold ETH in order to execute transactions on the Ethereum blockchain. Because every Ethereum transaction consumes computational resources, transactions come with a cost. Gas is the fee needed to conduct an Ethereum transaction.

Ethereum fees can only be paid in Ether (ETH), the native currency of Ethereum. ETH Gas prices are denominated in a unit known as gwei, which is a term used to refer to an amount of ETH equal to 0.000000001 ETH.

Ethereum’s Team

The founder of Ethereum, Vitalik Buterin, first started working in the industry in 2011 when he founded Bitcoin Magazine. He published a paper proposing Ethereum in 2013 and launched the blockchain in 2015.

As an open-source, programmable blockchain, Ethereum welcomes input from contributors around the world. However, they do maintain a small team of developers within the Ethereum Foundation, which supports the project through research and education.

Pricing

As of March 16, 2022, one BTC was worth $39,615 and one ETH was worth $2,679. Although BTC is worth more than ETH, the two cryptocurrencies follow a very similar price trajectory. As one of the largest cryptocurrencies and nearly as famous as Bitcoin, when Bitcoin goes up or down in value, Ethereum tends to follow.

Which to Buy? Bitcoin or Ethereum?

With first to market advantage, Bitcoin continues to hold the largest share of the cryptocurrency market. There is something to be said for brand recognition and reputation. However, that doesn’t mean that Bitcoin necessarily has the best technology, that it will prevail in the long run, or that it’s the only cryptocurrency you might purchase.

Most of the digital currency exchanges, wallets, and other products surrounding cryptocurrencies support both Bitcoin and Ethereum. Nobody knows which coin will grow more in value over time.

With its quicker transaction times and smart contract abilities, the Ethereum network may have some DeFi advantages over Bitcoin. However, debates about whether to cap the total amount of Ethereum, and the merits of moving Ethereum to a PoS protocol, may cause volatility in the coming years.

The bottom line is that investors may find BTC or ETH equally appealing (or not), depending on their own goals and views of the future of crypto.

The Takeaway

When comparing Ethereum vs. Bitcoin, the question is not which of these two leading cryptocurrencies is better, but rather what are the strengths and differences they each may offer investors? While ETH and BTC are both digital currencies, i.e. both are decentralized and operate using distributed ledger technology (a.k.a. blockchain), the underlying architecture and the goals of each project are completely different.

While Bitcoin (BTC) was created as a means of payment and a store of value, the main purpose of ETH was to support and monetize the operation of Ethereum’s DeFi capabilities, including smart contracts, dApps, NFTs, and more. Could the evolution of the Ethereum platform to a proof-of-stake system — sometimes called Ethereum 2.0 – shift its long-held position as the #2 crypto on the market? It’s hard to say, but something that investors and crypto analysts will be watching closely.

Photo credit: iStock/Ridofranz

SOIN19160

Mar

2022

What Is Historical Volatility & How Do You Use It?

A Guide to Historical Volatility

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

Historical volatility (HV) measures the range of returns on a market index or security over a given time period. When an asset’s historical volatility is going up, that means its price is moving further away from its average (in either direction) more quickly than usual.

A stock’s historical volatility is typically one standard deviation using daily returns, and it’s one factor that investors often look at to gauge the risk of a potential investment. An asset’s historical volatility is different from its implied volatility. Read on to learn what historical volatility is, how historical volatility works, and how to calculate historical volatility.

What Is Historical Volatility?

Historical volatility is a statistical measurement of the price dispersion of a financial security or index over a period. Investors calculate this by determining the average deviation from an average price. Historical volatility typically looks at daily returns, but some investors use it to look at intraday price changes.

Analysts can use any number of trading days when calculating historical volatility, but typically options traders focus on a time period between 10 and 180 days. Options traders use historical volatility and implied volatility when analyzing trading ideas.

Investors typically express historical volatility as a percentage reflecting the standard deviation from the average price, based on past price behavior, but there are also other methods they can use to determine an asset’s historical volatility. Unstable daily price changes often result in high historical volatility readings.

How Historical Volatility Works

Historical volatility takes past price data to calculate an annualized standard deviation value that measures how much past prices deviate from an average price over a given period. When a stock sees large daily price swings compared to its history, it will typically have a historical volatility reading. Historical volatility does not measure direction; it simply indicates the deviation from an average.

When a stock’s historical volatility is rising or above average, it means daily price changes are larger than normal. When it is lower than average, a stock or index has been relatively calm.

How Historical Volatility is Calculated

The historical volatility formula is typically a standard deviation measurement. It takes a stock’s daily price changes and averages them over a period. There are several steps to calculating historical volatility:

1. Collect historical prices

2. Calculate the average historical price over a period

3. Find the difference between each day’s price change versus the average

4. Square those differences

5. Find the sum of those squared differences

6. Divide those differences by the total number of prices (this finds the variance)

7. Calculate the square root of the variance

The historical volatility formula is a tedious step-by-step process, but most brokerage platforms automatically calculate it. Many brokers even offer historical volatility charts. With a historical volatility chart, you can easily compare changes through time. For example, if a stock reacted sharply to an earnings release, the historical volatility charts will show a jump immediately after the earnings date while implied volatility might drop sharply after the earnings report.

How to Use Historical Volatility

Traders sometimes use historical volatility to help set stop-loss levels. For example, a day trader might take three times a stock’s daily average range – a measure of historical volatility – to set a stop price. This is known as volatility ratio trading.

Traders also use historical volatility when analyzing a stock, fund, or index to get a sense of its riskiness. High or low historical volatility stocks are not inherently bullish or bearish. Day traders might seek high historical volatility stocks as candidates for high-profit trading opportunities (but they also come with high loss potential).

You can also use historical volatility to help determine whether a stock’s options are expensive to help determine an options trading strategy. If implied volatility is extremely high when compared to a stock’s historical volatility, traders may decide that options are undervalued.

Historical vs Implied Volatility

Like historical volatility, it measures fluctuations in an underlying stock or index over a period, but there are key differences between the two indicators. Implied volatility is a forward-looking indicator of a stock’s future volatility.

The higher the historical volatility, the riskier the security has been. Implied volatility, on the other hand, uses option pricing to arrive at a calculation and estimate of future volatility. If implied volatility is significantly less than a stock’s historical volatility, traders expect a relatively calm period of trading, and vice versa.

Typically, when implied volatility is low, options pricing is low. Low options prices can benefit premium buyers. Sometimes investors will use a graph to determine how an option’s implied volatility changes relative to its strike price, using a volatility smile.

Historical Volatility	Implied Volatility
Measures past price data to gauge volatility on a security	Uses forward-looking option-pricing data to gauge expected future volatility on a security
Higher historical volatility often leads to higher options pricing and higher implied volatility	Imminent news, like a company earnings report or a key economic data point, can drive implied volatility higher on a stock or index
Traders can use historical volatility to help set exit prices	Traders can use implied volatility to find stocks expected to exhibit the biggest price swings

The Takeaway

Historical volatility is a useful indicator for both institutional and retail investors looking to get a feel for the level of recent fluctuations in a stock or index has been in the recent past. It measures a security’s dispersion of returns over a defined period. Implied volatility is a similar tool, but it is forward-looking and uses option pricing to arrive at its output.

Options trading and the use of historical volatility is helpful for some advanced traders. If that sounds like you, an options trading platform like SoFi could be worth considering. Its intuitive and approachable design offers investors the ability to place traders from the mobile app or desktop platform. Plus, there are educational resources about options available in case you want to answer a question or learn more about a certain topic.

Trade options with low fees through SoFi.

FAQ

What is considered a good number for historical volatility?

It depends. While one stock might have a high historical volatility reading, perhaps above 100%, another steady stock might have a low figure around 20%. The key is to understand the securities you trade. Historical volatility can be an indicator of a stock’s volatility, but unforeseen risks can turn future volatility drastically different than the historical trend.

What is a historical volatility ratio?

The historical volatility ratio is the percentage of short-to-long average historical volatility on a financial asset. You can interpret the historical volatility ratio by looking at short versus long historical volatility. If short volatility on a stock drops below a threshold percentage of its long volatility, a trader might think there will be a jump in future volatility soon.

This is similar to analyzing volatility skew in options. It is important to remember that the interpretation and technical rules of historical volatility can be subjective by traders.

How is historical volatility calculated?

Historical volatility calculations require finding the average deviation from the average price of an asset over a particular time. An asset’s standard deviation is often used. Historical volatility is usually stated as one standard deviation of historical daily returns.

Many trading platforms automatically calculate historical volatility, so you don’t have to do the calculations manually.

Photo credit: iStock/Eva-Katalin

A Beginner’s Guide to Investing in Your 20s

Think About Financial Goals

Decide Where to House Your Money

Where to Put Immediate Money

Where to Put Mid-term Money

Where to Put Mid- to Long-term Money

Where to Put Long-Term Money

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.

Potential Assets to Invest in During Your 20s

Stocks

Bonds

Mutual Funds and Exchange-Traded Funds

Tips on Investing In Your 20s

Gauge Your Personal Risk Tolerance

Know the Difference Between Asset Allocation and Asset Location

Take Advantage of Free Money

Don’t Be Afraid of Investment Alternatives

The Takeaway

What Is Cryptography and How Does It Work?

Cryptography Definition

The History of Cryptography

How Cryptography Works

Hash Functions

Asymmetric Encryption

Symmetric Encryption

Cryptography and Cryptocurrencies

Cryptographic Algorithms

Cryptography and Quantum Computing

The Future of Quantum Computers

The Takeaway

FAQ

What is cryptography used for?

How does cryptography relate to computer security?

How is cryptography used in the cryptocurrency space?

Guide to World of Women NFTs

What Is World of Women?

What Is an NFT?

How Does World of Women Work?

World of Women Value

How to Buy World of Women NFTs

World of Women vs CryptoPunks

The Takeaway

FAQ

Who is behind World of Women NFT?

When did World of Women NFTs launch?

How can you buy a World of Women NFT?

Ethereum vs Bitcoin: Similarities and Differences

What Are the Key Differences Between Bitcoin and Ethereum?

Blockchain Design

Transaction Times

Block Limit

Bitcoin Fundamentals

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.

How Bitcoins Are Used

Who Controls the Bitcoin Blockchain?

Historical Highlights

The Future of Bitcoin

Ethereum Fundamentals

How Ethereum Is Made

Buying and Using Ethereum

Ethereum’s Team

Pricing

Which to Buy? Bitcoin or Ethereum?

The Takeaway

A Guide to Historical Volatility

What Is Historical Volatility?

How Historical Volatility Works

How Historical Volatility is Calculated

How to Use Historical Volatility

Historical vs Implied Volatility

The Takeaway

FAQ

What is considered a good number for historical volatility?

What is a historical volatility ratio?

How is historical volatility calculated?

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