Jan
28
2022
bitcoin vault

Bitcoin IRA: Retirement Investing With Cryptocurrency

By | Growing Wealth, invest, Investing | Comments Off on Bitcoin IRA: Retirement Investing With Cryptocurrency

A Bitcoin IRA (individual retirement account) is a self-guided retirement account that holds Bitcoin in its portfolio. Typically, most IRAs invest in stocks, bonds, mutual funds, and ETFs. A Bitcoin IRA invests in Bitcoin, and perhaps several different types of cryptocurrency.

What is a Bitcoin IRA

The term “Bitcoin IRA” simply refers to an IRA that includes Bitcoin. There is no official designation for a Bitcoin IRA or Bitcoin Roth IRA by the IRS or any other regulatory agency.

How Does a Bitcoin IRA Work?

A cryptocurrency IRA works much like any other IRA. It’s a retirement account that invests in Bitcoin. The main difference for most customers is they will likely be interacting with three different entities:

1. Bitcoin IRA Service Providers: These are the companies an individual will deal with when they want to add Bitcoin to their IRA. They are the financial rails through which assets will be converted into Bitcoin.

2. Self-Directed IRA Custodians: These may be banks, trust companies, or any other entity approved by the Internal Revenue Service (IRS) to act as an IRA custodian. Traditional IRAs invest in stocks and bonds, but self-directed IRAs may allow alternative assets such as real estate, promissory notes, tax lien certificates, or cryptocurrency.

3. Custody or Wallet Providers: Typically, a Bitcoin IRA service will have a partnership established with a trusted wallet provider or custody solution that securely holds the private keys to a customer’s Bitcoin funds.

Can You Invest a 401(k) in Bitcoin?

The answer to this question is “maybe, but probably not.”

Until recently, 401(k) plans didn’t allow for the direct purchase of cryptocurrency. But some companies, like ForUsAll, BitWage, and Digital Asset Investment Management are starting to offer Bitcoin and other cryptocurrencies in 401(k) plans. Of course, since 401(k) plans are employer-sponsored, interested investors may be limited by what their particular company offers in terms of options. A self-employed individual seeking out a solo 401(k) may find they have more options.

There are other potential ways to roll over a portion of your 401(k) plan into Bitcoin, but the easiest way might be to use a traditional IRA.

Pros and Cons of Using a Bitcoin IRA

There are plus sides and down sides to including Bitcoin in your IRA planning. Here are some major points worth noting.

Pros of a Bitcoin IRA

A cryptocurrency IRA could provide some unique benefits, including offering overall portfolio diversification, and potentially large price appreciation.

Diversification

Bitcoin provides a unique way to diversify an individual’s overall investment portfolio.

Given Bitcoin’s performance it’s often said that Bitcoin is “uncorrelated” with the rest of the investment world. While that trend was upended in early 2020 as Bitcoin experienced a positive correlation with the S&P 500, some investors still consider it a more volatile investment.

Price Appreciation

Given that cryptocurrency is an uncorrelated asset class and exists outside the control of any single centralized authority, some investors have wondered if it could be a reasonable retirement option.

That said, past performance is never a guarantee of future returns. Bitcoin has also seen some big drops, most recently falling 12% in just 10 days from January 1 – January 10, 2022.

Cons of a Bitcoin IRA

There are also potential drawbacks to holding investments in a Bitcoin IRA, including both volatility and fees.

Volatility

Bitcoin has shown extreme volatility at times. This is one of the main reasons that cryptocurrencies are considered a risky investment.

While the list of large corporations (like PayPal, Square, and MicroStrategy) and self-made billionaires announcing large investments in Bitcoin continues to grow, volatility could be a big drawback for investors with low risk tolerance, as well as people who are close to retirement. Seeing investment funds fall by 10 or 20% (or more) in a single day can be too much for some people.

Fees

Perhaps the biggest and most assured drawback of investing in a Bitcoin IRA is the fees involved.

Aside from initial deposit minimums that are typically in the thousands, investors in Bitcoin IRAs can expect to pay fees including account setup fees, monthly platform fees, yearly administrative fees, transaction fees, and cold storage fees. Additionally, in some cases there are trade minimums, and there may be additional fees in excess of 1% per trade.

And as with other IRAs, withdrawing funds before retirement normally results in additional fees and taxes.

Taken together, the final taxes and fees could eat into a portion of the profits and tax advantages earned by a Bitcoin IRA.

How to Invest in a Bitcoin IRA

The main way to invest in a Bitcoin IRA is to use a trusted service provider that helps investors establish IRAs that hold Bitcoin.

There are some companies that have partnered with Bitcoin custodial services like BitGo, for example, to help safeguard funds for investors — although these companies cannot guarantee against loss. The specific process for starting a Bitcoin IRA might vary according to which provider an individual chooses.

A Bitcoin IRA provider can help investors buy cryptocurrency to add to their portfolio while also safeguarding the funds for them.

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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 a Bitcoin IRA Account Safe?

The safety of a Bitcoin IRA account depends largely on how a Bitcoin IRA company stores the private keys to an investor’s crypto.

It is widely acknowledged that to be truly safe, keys must be held off-line in cold storage and secured using some kind of multi-signature (multi-sig for short) method. This ensures that the funds can’t be accessed by any hacker on the internet, and that multiple access methods are required to retrieve any funds.

Multi-sig works kind of like a safety deposit box, where there are two physical keys — one held by the bank and one held by the customer. There must be at least two means of user verification before funds can be accessed. A basic example would be a customer having to answer emails from two separate email accounts. More complicated methods might involve some kind of photo or voice identification in addition to multiple emails and an additional key held by the custodian of the funds.

Is Bitcoin Investing Safe?

There is no situation in which Bitcoin investing is “safe” — there is always a risk of loss with the current state of volatility in Bitcoin and cryptocurrency in general.

As far as investment gains or losses are concerned, investors will have to decide for themselves whether or not long-term Bitcoin investing falls within their comfort level and their goals.

That said, the prospect of incredible returns seems to sway more and more investors. Since 2009, the price of one Bitcoin in U.S. dollar terms has risen well over 1,000,000%, making Bitcoin the best performing asset of the decade — and in history.

While past performance is never a guarantee of future outcomes, if this trend were to continue, it could potentially mean substantial returns for investors over the long term.

Are Bitcoin IRAs Right for You?

As with any retirement planning, it’s important to take into consideration your time horizon (how many years it will be until you retire) as well as retirement goals, budget, and other personal factors. For individuals who feel comfortable with the general volatility of cryptocurrency in general, and Bitcoin in particular, a Bitcoin IRA might be one way to bring an additional layer of diversity to a retirement portfolio.

But for investors with low risk tolerance, a Bitcoin IRA is more financially risky than opening a traditional IRA composed of stocks and bonds.

The Takeaway

A Bitcoin IRA is an IRA that can hold a variety of assets like gold, real estate, or Bitcoin.

In recent years, several service providers have stepped in to fill the market need for people wanting to add Bitcoin to their retirement accounts.

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.

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.

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.

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.

Stock Bits
Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed.
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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Jan
27
2022
What is BitClout and How Does It Work?

What is BitClout and How Does It Work?

By | Growing Wealth, invest, Investing | Comments Off on What is BitClout and How Does It Work?

Reputation is, in some sense, the ultimate asset — it’s associated with an individual person, it can be degraded quickly and it’s hard to build up, but once it’s established, can be converted into all sorts of value.

This is where BitClout steps in. BitClout, also known as DeSo (which stands for “Decentralized Social”), is a combination social network and cryptocurrency exchange, where individuals can create accounts that have their own coin associated with them, and users of the exchange can buy and sell those coins to express their opinion about the individuals who issue them. BitClout also has its own cryptocurrency called $CLOUT, which is used to buy those coins.

How Does BitCloud Work?

BitClout aims to use cryptocurrency and blockchain technology to create a kind of digital permanence. Each BitClout profile is intended to be associated with one person, giving them the ability to mint and profit from “creator coins.”

These creator coins are meant to be non-fungible tokens (NFTs) — digital images that are on the blockchain and thus have a fixed, non-replicable physical identity — giving people the ability to profit from their creation and trading. But these coins aren’t necessarily created by the account associated with them, which is one of the more intriguing (or controversial) aspects of BitClout.

Who Has a BitClout Profile?

When BitClout launched in March, 2021, there were already 15,000 accounts pre-loaded onto the site without any involvement by their supposed users. In less than a month, over $200 million worth of Bitcoin was deposited onto the platform despite little indication that many of the celebrity “users” of the service would ever opt into it.

As it turns out, some of BitClout’s “users” have since opted in. Several high-profile technology and cryptocurrency influencers and businesspeople rank highly on the network, including some who have actually verified their accounts, including venture capitalist Chamath Palihapitiya, entrepreneur and former CTO of Coinbase Balaji Srinivasan, and Coinbase founder and chief executive Brian Armstrong.

Who Is Behind BitClout?

Many users claimed their BitClout profile by tweeting something along the lines “Just setting up my BitClout,” with the hands and diamond emoji following.

This was a reference to two things: the first the notion of having “diamond hands” as the holder of a speculative or volatile asset like a cryptocurrency or memestock refusing to sell (the idea being that diamonds are very hard and thus someone with “diamond hands” wouldn’t “fold”). It’s also a reference to BitClout’s mysterious CEO. While the leader of the company has done several interviews with reporters, they have yet to reveal their identity.

But BitClout’s investors are quite well known and identifiable. They include Coinbase Ventures and the Winklevoss twins, two of the biggest names in crypto, as well as Andreessen Horowitz and Sequoia, two of high-profile Silicon Valley venture capital firms.

That there would be anonymity associated with BitClout is not surprising. BitClout is both inspired by and deeply enmeshed with the world of Bitcoin, whose creator Satashoi Nakamoto remains anonymous to this day.

How Can Someone Make Money on BitClout?

While BitClout claims to avoid some of the more negative aspects of mainstream social media networks, the idea is that money can be made by driving engagement or tracking those who do. Here’s a breakdown of the different ways a person could potentially make money on BitCloud.

1.    Through rewards on your “creator coins”. According to BitClout, these tokens “allow users to support their favorite creators by buying their coin, a little like a combination of AngelList and Patreon.” Like NFTs and ERC-20 tokens, creator coins are built on top of a different cryptocurrency product and are connected to a mainstream crypto, in this case Bitcoin.

Every user has creator coins and they can be bought and sold with $CLOUT, the BitCloud cryptocurrency. With your own creator coins, you can make money through rewards that flow specifically to you. These are called “founder rewards,” and the default is 10% — meaning you would get one tenth of every purchase of your coins. On the other hand, this makes the coins more expensive for others to buy and may discourage users from buying them.

2.    By holding on to your own creator coins. The idea is that the community would reward the content you create or whatever you do off the platform by bidding up the price of your creator coins, thus increasing the value of your holdings.

3.    Buying other creator coins and then waiting for the price to go up. This can be done by buying some of the more expensive coins and hoping the price shoots up after the individual has real world success that makes them more popular.

While it may seem that these money-making opportunities are more for boldface names than for regular people, there have been reports of users buying up very cheap coins or making money from selling their own coins even if there’s no association with celebrities. That said, these money-making opportunities come with a fair share of risk — it’s entirely possible that a person wouldn’t make any money, or might even lose money.

What Can You Do With $CLOUT?

One of the major complaints about BitClout when the service launched was that there wasn’t a way to turn your $CLOUT back into Bitcoin, let alone dollars. A workaround emerged — a service called BitSwap that allows for exchange from $CLOUT to Bitcoin and Ethereum. $CLOUT is also listed on Blockchain.com .

How Much Is $CLOUT Worth?

As of January 7, 2022, the price for $CLOUT is around $76 and the overall $CLOUT market cap is just under $824 million. In theory the value of $CLOUT, which is necessary to navigate BitClout and buy creator coins, is a good indicator of the overall health and use of the BitClout ecosystem.

The Takeaway

BitClout is a combo social media and cryptocurrency platform that allows users to create their own creator tokens and trade the tokens of other users, thus indicating the popularity of a given user and driving up (or down) the price of the tokens.

Photo credit: iStock/Luke Chan

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.

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.

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.

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

SOIN0721295

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Jan
27
2022
How to Set Up a Cryptocurrency Wallet

How to Set Up a Cryptocurrency Wallet

By | Growing Wealth, invest, Investing | Comments Off on How to Set Up a Cryptocurrency Wallet

Setting up a cryptocurrency wallet can take anywhere from a few minutes to a few hours depending on the wallet type. Hardware wallets and exchange-hosted wallets will take some extra time, thanks to the additional steps involved for each.

The type of crypto wallet a user might choose will depend on what they want to do with their crypto and what level of security they’re looking for.

Understanding Crypto Wallets

A crypto wallet is used to send, store, and receive cryptocurrency. Some wallets have additional functionality, including the ability to:

•   Buy and spend crypto

•   Swap between different tokens

•   Stake tokens for a fixed return

•   Interact with different decentralized applications (dApps)

A wallet has two important parts: a private key and a public key. The private key is used to sign transactions, proving their authenticity. Anyone with the private key to a wallet can take control of the funds held there.

A public key is derived from the private key. One wallet can be used to create many public keys, so users can receive crypto to the same wallet from different addresses. Public keys are also referred to as wallet addresses.

Setting Up Different Crypto Wallets

The process for setting up a cryptocurrency wallet differs depending on the type of wallet.

Crypto wallets fall into one of two broad categories: hot wallets and cold wallets. Hot wallets are those that are connected to the internet, making them less secure. Cold wallets can hold private keys offline in cold storage, making them more secure.

Hardware Wallets

Hardware wallets are small devices that are separate from a user’s computer. This allows for the “signing” of transactions to happen on the wallet device, so a user’s private key is never exposed in the same way as it is when using a software wallet. For this reason, hardware wallets are considered a form of cold storage.

Hardware wallets are generally recommended for long-term storage of large amounts of crypto due to the added security. These wallets can also be used to send and receive transactions, but the additional investment and responsibility involved might not be worth it for those only holding a small amount of crypto.

Steps to Setting Up a Hardware Wallet

The process of setting up a hardware wallet differs somewhat depending on the exact wallet someone chooses. For many popular hardware wallets, users must do the following before their wallet will be ready to send and receive transactions:

1.    Order the physical device. The average hardware wallet costs around 100 USD. Users should do their own research before deciding which manufacturer is right for them.

2.    Install the appropriate software that will provide an interface to the wallet. Ledger wallets, for example, require the Ledger Live app. In some cases, this won’t be necessary — some wallets use a web-based interface, meaning users simply have to visit a website to access their wallet’s dashboard. KeepKey wallets, for example, utilize the ShapeShift web platform.

3.    Plug the wallet into your computer and follow the instructions provided. This usually begins with showing the user their backup seed phrase.

4.    Write down your backup seed phrase on paper. This phrase represents the wallet’s private key. Storing it in any online location can be dangerous, as it could be accessible to hackers. Anyone with this phrase can access all of the funds held in the wallet.

5.    Set up a PIN. This will be used to access the wallet.

6.    Buy or deposit crypto. At this point, it’s possible to put crypto into the new wallet. Some wallet platforms even have built-in exchanges where users can buy and trade crypto.

Paper wallets are also a form of cold storage, but they aren’t typically recommended due to their lack of durability and the high likelihood of user error.

Hosted wallets

In hosted wallets, a third party holds the private keys on a user’s behalf. This is similar to a bank holding someone’s fiat currency. The process of how to open a crypto wallet on an exchange is the same as signing up for an account.

Hosted wallets might be the easiest of all to create. Users simply have to sign up for an account on a crypto exchange and buy or deposit crypto into the wallet of their choice. The process could take some time, however, as exchanges have to verify a user’s identity. This could involve waiting for several days or longer.

For sending and receiving crypto transactions, many people turn to wallets hosted on exchanges.

Non-custodial wallets

Also known as self-custody wallets, these are software wallets that aren’t controlled by a third-party service like an exchange.

Non-custodial wallets allow users to hold their own private keys. This removes the counterparty risk associated with letting another party hold the keys to an individual’s crypto. However, it also makes the person 100% responsible for their funds.

There are many types of non-custodial wallets. Desktop wallets like Electrum work as simple software programs with user-friendly interfaces. If a crypto investor wants to take custody of their own keys, they might use desktop wallets like Electrum or similar non-custodial wallets on mobile devices.

Web wallets like MetaMask allow users to store, send, and receive Ethereum (ETH) right from their web browser.

Steps to Setting Up a Non-custodial Wallet Using MetaMask

Wallets like MetaMask are often used for Ethereum-based applications like decentralized finance (DeFi) and non-fungible token (NFT) platforms. Since MetaMask is one of the most popular non-custodial ETH wallets, let’s look at the step-by-step process of how to set up a cryptocurrency wallet of this kind.

1.    Download MetaMask. First, you’ll need to install the MetaMask browser extension. Visit Metamask.io and click on “Install MetaMask.” The extension is available for the following browsers: Chrome, Brave, Edge, Firefox.

2.    Create an account. After opening MetaMask for the first time, select the “create a wallet” button. Then accept the terms of use and create a password. After that, you’ll be asked to “click here to reveal secret words”. Doing so will reveal your 12-word backup seed phrase.

3.    Store your seed phrase. Write your seed phrase down on paper. Keep it somewhere safe and don’t share it with anyone. Don’t take a screenshot of the phrase or store it anywhere online.

4.    Fund your wallet. The final step in setting up a cryptocurrency wallet is to fund it. MetaMask supports in-app crypto purchases, but you can also deposit some from another location. To do this, simply send a transaction to your wallet address. When logged in to MetaMask, click the icon of two squares laid on top of each other in the top-center part of the screen. This will copy your wallet’s address to your clipboard. Send the right kind of crypto to this address to put funds into the wallet.

The Takeaway

The process of learning how to set up a cryptocurrency wallet is usually quick and simple. Developers have worked hard to make things as user-friendly as possible.

“Not your keys, not your crypto” is a popular saying among crypto enthusiasts. Some users like to hold their own keys while others may opt for hosted wallets for the sake of simplicity.

Note that software wallets are unique to a specific cryptocurrency. Hardware wallets often have the ability to hold multiple types of crypto. In any case, it’s very important to send the right kind of crypto to the appropriate wallet, otherwise those funds could be lost forever. Sending Bitcoin Cash (BCH) to a Bitcoin (BTC) wallet address, for example, could result in the sent funds being unretrievable.

Photo credit: iStock/Poike

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.

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.

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.

SOIN1221535

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Jan
20
2022
What Is USD Coin (USDC)? A Guide to the Stablecoin

What Is USD Coin (USDC)? A Guide to the Stablecoin

By | Growing Wealth, invest, Investing | Comments Off on What Is USD Coin (USDC)? A Guide to the Stablecoin

U.S. Dollar Coin (USDC) is one of the most popular stablecoins — a type of cryptocurrency that keeps its price pegged to the same price as another asset, in this case, the U.S. dollar.

Stablecoins have a variety of use cases and continue to grow in terms of trading volume and market cap. In 2021, the stablecoin market was worth about $130 billion, making USDC the second-largest stablecoin in circulation.

How Does USDC Work?

USD Coin runs on Ethereum, which is a programmable blockchain. The coin was created to be a form of digital money that wouldn’t be subject to wild price swings.

USDC is an ERC-20 token, which means it conforms to a certain set of programmatic standards that developers must follow to have their token issued on Ethereum. ERC-20 is the standard for utility tokens, which serve a specific function. In a sense, a stablecoin like USDC can be thought of as a type of utility token, in that it acts as a substitute for dollars within the digital asset space.

Dollar-denominated assets back the issuance of USDC tokens at a 1:1 ratio. For each coin in circulation, there is an equivalent amount of assets.

Who Created USDC?

USDC was created through a collaboration between Coinbase, the largest U.S.-based cryptocurrency exchange, and Circle, a financial services firm that is backed by some large financial institutions such as Goldman Sachs.

Based in Boston, Circle started in 2013 as a way to quickly and easily send money. The company quickly found its way into crypto and announced that they had acquired crypto exchange Poloniex in April 2020.

Price of USDC

The price of USDC remains pegged at $1. However, because the price of anything is determined by buyers and sellers, it can fluctuate slightly from time to time.

Sometimes investors try to eke out small gains by selling USDC on crypto exchanges for a few fractions of a penny higher than $1. Some traders might be willing to buy USDC at the slightly higher price if they want to exchange a different currency for one pegged to the dollar immediately.

Why Does USDC Have Value?

USDC is thought to have value because of the assets backing it. Circle backs each coin with cash and cash equivalents. For every new U.S. Dollar Coin created, there is supposed to be an equal amount of dollar assets held at Circle.

With the growing popularity of decentralized finance (DeFi) and centralized lending platforms, demand for USDC continues to rise, as the coin makes it easy for people to conduct financial transactions without leaving the crypto ecosystem.

People who don’t have access to the traditional finance system — who are sometimes referred to as the “unbanked” — may also benefit from USDC. Rather than needing a bank account, which can be difficult to get, USDC users only need an internet-connected device and a wallet that supports ERC-20 tokens.

Why Use USDC

There are several reasons someone might choose to use a cryptocurrency with a stable value:

•   As a means of payment. If an individual wants to make a payment using crypto, they can rely on USDC to have a consistent value across time, without the sometimes-extreme price fluctuations that are common among cryptocurrencies.

•   As a way to take profits. Traders like stablecoins because they can lock in gains while remaining within the crypto ecosystem. This may also potentially delay some of the taxable events associated with selling cryptocurrency for fiat currency (note: this is not tax advice).

•   As a way to earn interest. Some platforms offer users interest payments in exchange for USDC deposits. Celsius and Vauld are among those that reward users for offering their USDC as collateral to be lent out to other users. It’s worth noting that there is risk involved with this activity.

•   Making transparent donations to charity. People can use USDC to make charitable contributions that can be seen by everyone.

Advantages and Disadvantages of USDC

There are advantages and disadvantages to using USDC stablecoin. This chart outlines the biggest pros and cons.

Pros

 Cons
Price stability No potential for price appreciation
Lots of liquidity Depending on the current state of the Ethereum network, transaction fees can be high
Good reputation and is backed by Circle’s assets Fees for withdrawing USDC from exchanges can also be high

How Can I Buy USDC?

Investors can buy USDC on any crypto exchange that offers trading for the token. You will need some U.S. dollars or cryptocurrency that trades against USDC to get started.

To buy USDC, do the following:

1.    Find an exchange that trades USDC. Many exchanges have trading pairs that include USDC against Bitcoin and other cryptocurrencies.

2.    Create an account on the exchange.

3.    Fund your account. Tip: depositing cryptos can be faster than depositing fiat currency like U.S. dollars.

4.    Exchange the currency you used to fund your account for USDC.

The exact mechanics will look slightly different depending on the specific exchange, but these steps outline the general process.

How to Sell USDC

Selling USDC involves the same steps as buying. Once an exchange account has been set up, it’s simply a matter of placing a sell order instead of a buy order. USDC can often be sold for other cryptocurrencies or regular U.S. dollars. Note that depositing or withdrawing U.S. dollars typically requires additional user verification and linking a bank account.

Can You Stake USDC?

USDC is not a proof-of-stake token, so it can’t be staked. However, there are crypto lending services that allow investors to deposit their USDC and get paid interest in return. Like a bank, the platforms lend out the USDC at interest and pass on some of the profits to the depositor.

Unlike traditional savings accounts, some crypto lending platforms offer interest rates of anywhere from 8% to 12% or more. As with any investment, there are risks involved, and investors would be wise to do their own research first.

The Takeaway

USD Coin (USDC) can provide an easy way to transfer crypto into dollars without the friction typically associated with using real U.S. dollars. The coin can serve as a bridge between the traditional financial system and the blockchain-powered open financial system.

USDC can be exchanged back into crypto if desired. Some lending platforms also offer attractive interest rates on USDC deposits. One drawback, however, is that because USDC exists as an ERC-20 token on the Ethereum network, the token can be subject to high gas fees at times.

Photo credit: iStock/Prostock-Studio

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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.

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.

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.

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

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Jan
19
2022
A Guide to Sharding in Crypto

A Guide to Sharding in Crypto

By | Growing Wealth, invest, Investing | Comments Off on A Guide to Sharding in Crypto

Sharding is a method of making a database more manageable for computers. This technique has been used in many modern applications but its use in blockchain is still relatively new.

Sharding is important when it comes to crypto because many networks have difficulty scaling. Some of the largest blockchain networks, like Ethereum, are considering sharding as a potential way to manage their rapidly growing number of users and transactions.

In this guide to crypto sharding, we’ll explore the basic concept of sharding and how it could be applied to blockchain technology.

What Is Sharding?

Sharding is one potential solution to the problem of scaling a blockchain network. Sharding involves splitting a blockchain into multiple pieces, or shards, and storing them in different places. By storing the data across different computers, the computational burden on each can be reduced. This allows the network to process a larger volume of transactions.

A typical peer-to-peer (P2P) network such as a blockchain involves multiple full nodes (computers) that each record copies of the entire chain’s history. Using sharding, it’s possible for nodes to function without having to maintain all of that data at once.

How Does Sharding Work?

Sharding involves splitting a large database of the same type into multiple databases. Because this makes for an algorithm that can be more easily generalized, it’s possible to implement sharding at either the application level or the database level.

Sharding has another name — horizontal partitioning. The term horizontal in this case refers to the traditional layout of a database. A database can be split horizontally, with rows of the same database being distributed across multiple nodes, or vertically, with different information in a separate database.

Vertical partitioning involves drawing a logical split within an application’s data. This is often done at the application level, with a piece of code routing commands to a designated database.

Distributed Ledger Technology and Sharding

A distributed ledger is a database that stores information on multiple servers that are distributed throughout different locations. Blockchain technology involves using a type of distributed ledger that aims to be decentralized.

Sharding can be implemented on databases like the ones maintained by distributed ledger technology (DLT). In this case, the database is typically a record of transactions, along with quite a lot of pertinent data, including:

•   The time each transaction was sent

•   Its transaction hash (a unique number identifying the transaction)

•   Which block the transaction was confirmed in

•   The amount of currency sent

•   The public address of the sender and receiver

With millions of users sending millions of transactions, as time goes on, full nodes have to manage a larger and larger database.

Scalability and Sharding

One of the biggest problems faced by blockchains is scaling. Scaling refers to being able to grow the number of users and transactions on a network.

When a new project becomes popular quickly, its network often gets congested, resulting in high transaction fees as people compete to have their transaction processed in the next block (users can adjust the fee they pay to miners in exchange for processing a transaction. When everyone wants to send a transaction, they might be willing to pay more and more, bidding up prices).

Sharding is one of many proposed solutions to this problem. A network that utilizes sharding can reduce the burden placed upon its nodes, allowing them to function more efficiently without an increase in computing power.

How Sharding Is Done

The details of how sharding is implemented get very technical. Those who understand distributed ledgers, coding, and databases might already have an idea of how it works. Others will have a lot of research to do if they want to learn more.

Sharding is typically done on proof-of-stake (PoS) networks, as opposed to proof-of-work (POW) networks. In the PoS consensus mechanism, nodes validate transactions based on the amount of tokens they have staked. Sharding would involve stakers dealing with different shards of the same blockchain.

Implementing sharding on proof-of-work (PoW) networks is very difficult. Nodes would have difficulty validating transactions with only the information from a single shard.

Blockchain Nodes and Sharding

The computers that facilitate transactions in a peer-to-peer (P2P) network like a blockchain are referred to as nodes. The most common type of node is an archival full node. Full nodes archive a copy of the blockchain’s entire history. For larger networks like Bitcoin and Ethereum, this requires quite a lot of memory and computing power.

The tasks of a node include:

•   Processing transactions

•   Recording transactions

•   Broadcasting transactions

These require computing power, storage, and network bandwidth, respectively.

With sharding, full nodes no longer have to store or process the entirety of the network’s activities. Instead, each node only has to maintain data related to its shard.

Shard Sharing

The information of a shard can still be shared with other nodes. This maintains the security and decentralization of the network because all participants can still see all the ledger entries. They just aren’t required to store and process every bit of information.

Is Sharding Necessary?

Sharding is not always necessary. Only networks that are having difficulty scaling are likely to consider sharding. Where other solutions will suffice, developers may opt to forgo sharding due to the additional complexities it can add to an application.

Another method of scaling that has been growing in popularity lately is the use of layer-2s. A layer-2 is a solution that involves processing transactions off-chain, separate from the base layer of the ledger. This can decrease transaction times and decrease fees dramatically.

Bitcoin’s Lightning network is one example of a layer-2 solution. Lightning allows for instant transactions that cost a fraction of a penny.

Pros and Cons of Sharding

There are advantages and disadvantages to using sharding in cryptocurrency. It can be a great way for some networks to scale, but there are still some unknowns, and most developers believe it might not work for every blockchain.

Pros of Sharding

 Cons of Sharding
Allows for greater scalability Difficult for proof-of-work protocols to implement
Reduces the processing and memory burden placed on full nodes Makes the database and its applications more complex
Works well for proof-of-stake networks Mostly untested for blockchain technology, meaning there are some unknowns surrounding security

The Takeaway

Sharding was being discussed a lot several years ago as a potential scaling solution. Recently, layer-2s are increasingly being looked at as an alternative.

Bitcoin’s Lightning and Ethereum’s layer-2 solutions — have both seen increasing adoption lately. It’s worth noting, however, that if Ethereum upgrades to Ethereum 2.0 and adopts proof-of-stake, sharding will become the main method used for scaling.

FAQ

Does ETH 2.0 have sharding?

After a series of delays, ETH 2.0 still hasn’t been launched as of December 2021. If ETH 2.0 does launch at some point in the future, then the network would likely adopt a proof-of-stake consensus mechanism and look to use sharding as its main scaling solution.

Is sharding in crypto always needed?

No, sharding is not always necessary. Because sharding can make things more complicated, developers sometimes opt for other solutions to the problem of scaling. This could simply involve getting a more expensive and powerful computer. Adding additional caches or database replicas can also work as a solution for applications that are bound by read performance. A database can also be vertically partitioned according to functionality.

Photo credit: iStock/Poike

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.

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.

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

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