Sep
27
2021
What Are Underlying Assets? Types & Examples

What are Underlying Assets?

By | Growing Wealth, invest, Investing | Comments Off on What are Underlying Assets?

In financial circles, assets make the world go round. The goal is to accumulate the most valuable assets to create and sustain long-term wealth.

That lifelong process starts with education, and that education starts with understanding a key tenet of wealth building: knowing all about underlying assets and what role they play in portfolio management.

Let’s take a closer look at underlying assets, and why they’re the fuel for growth in building long-term financial stability.

What is an Underlying Asset?

An underlying asset is the foundational security, or investment vehicle, on which derivatives operate. Underlying assets can be individual securities (like stocks or bonds) or groups of securities (like in an index fund).

A derivative represents a financial contract between two or more parties based on the current or future value of an underlying asset. Derivatives can take many forms, with trading in widely used markets like futures, equity options, swaps, and warrants. These are high-risk, high-reward vehicles where investors bet on the future value of an underlying asset, and are often used as hedges against other investments (which seeks to reduce investment risk) or as speculative instruments that pay off down the road (which can heighten investment risk.)

That’s where underlying assets come into play. To make the most optimal derivative bets, investors aim to either hedge risk or enhance it, by making speculative moves in higher-risk areas like options and futures. The underlying assets that enable those bets to be made are critical to the derivatives investment process.

How Underlying Assets Work

To illustrate how underlying assets work in the derivatives market, let’s use options trading as an example.

An option is a financial derivative that gives the contract owner the right to buy or sell an underlying security at a specific time and at a specific price. When an option is exercised by the contract holder, that simply means the holder has exercised the rights to buy or sell an underlying asset and now owns (or sells out of) the underlying asset.

Options come in two specific categories: puts and calls.

• Put options allow the options owner to sell an underlying asset (like a stock or commodity) at a certain price and by a certain date (known as the expiration date.)

• Call options enable the owner to buy an underlying asset (like a stock or a commodity) at a certain price and at a certain date.

The underlying asset comes into play when that options contract is initiated.

Example of an Underlying Asset in Play

Let’s say for example that an investor opts to buy Microsoft (MSFT) at an options strike price (the price you can buy the shares) of $275 per share. The stock is currently trading at $325 per share. The contract is struck on September 1 and the options contract expiration date is November 30.

Now that the contract is up and running, the performance of the underlying asset (Microsoft stock) will define the success or failure of the options investment.

In this scenario, the options owner now has the “option” (hence the name) to buy 100 shares of Microsoft at $275 per share on or before November 30. If the underlying stock, which is now trading at $300, remains above the $275 strike price, the options owner can exercise the contract and make a profit on the investment.

If, for example, MSFT slides to $280 per share in the options contract timeframe, the call options owner can exercise the purchase of Microsoft at $275 per share, $5 below the current value of the stock (i.e., the underlying asset.) With each contract representing 100 shares of stock, the profits can add up on the call option investment.

If on the other hand, Microsoft stock falls below the $275 per share level, and the November 30 deadline has come and gone, the options owner loses money, as the underlying asset is valued at less than $275, although that’s the price the options owner has to pay for the stock by the expiration date.

That scenario represents the power of the underlying asset. The derivatives investment depends entirely on the performance of the underlying asset, with abundant risk for derivative speculators who’ve bet on the underlying asset moving in a certain direction over a certain period of time.

Recommended: 10 Important Options Trading Strategies

5 Different Types of Underlying Assets

Underlying assets come in myriad forms in the derivatives trading market, with certain assets being more equal than others.

Here’s a snapshot.

1. Stocks

One of the most widely used underlying assets are stocks, which is only natural given the pervasiveness of stocks in the investment world.

Derivatives traders rely on common and preferred stocks as benchmark assets when making market moves. Since stocks are so widely traded, it gives derivatives investors more options to speculate, hedge, and generally leverage stocks as an underlying asset.

2. Bonds and Fixed Income Instruments

Bonds, typified by Treasury, municipal, and corporate bonds among others, are also used as derivative instruments. Since bond prices do fluctuate on general economic and market conditions, derivative investors may try to leverage bonds as an underlying asset as both bond interest rates and price fluctuate.

3. Index Funds

Derivative traders also use funds as underlying assets, especially exchange-traded funds (ETFs), which are widely traded in intra-day trading sessions. Besides being highly liquid and fairly easy to trade, exchange-traded funds are tradeable on major global exchanges at any point during the trading day.

That’s not the case with mutual funds, which can only be traded after the day’s trading session comes to a close. The distinction is important to derivative traders, who have more opportunities for market movement with ETFs than they might with mutual funds.

ETFs also cover a wide variety of investment market sectors, like stocks, bonds, commodities, international and emerging markets, and business sector funds (i.e., such as manufacturing, health care, finance, and more recently, cryptocurrencies). That availability gives derivatives investors even more flexibility, which is a characteristic investors typically seek with underlying assets.

4. Currencies

Global currencies like the dollar or yen, among many others, are also frequently deployed by derivative investors as underlying assets. A primary reason is the typically fast-moving foreign currency (FX) market, where prices can change rapidly based on geopolitical, economic, and market conditions.

Currencies usually trade fast and often, which may make for a volatile market — and derivative investors tend to steer cash toward underlying assets that demonstrate volatility, as quick market movements allow for quick money-making opportunities. Given that they move so quickly, currencies can also move in the wrong direction quickly, which is why investment experts generally advise individual investors to shy away from markets where investment risk is abundant.

5. Commodities

Common global commodities like gold, silver, platinum, and oil and gas, are also underlying assets that are widely used by derivatives investors.

Historically, commodities are one of the most volatile and fast-moving investment markets. Like currencies, commodities are often highly desirable for derivative traders, but high volatility may lead to significant investment losses in the derivatives market if the investor lacks the experience and acumen needed to trade against underlying assets.

Recommended: Why Is It Risky to Invest in Commodities?

The Takeaway

Underlying assets used in derivative deals can come with high risk — and trading against those assets require a comprehensive knowledge of trading, leverage, hedging and speculation. Those are attributes typically aligned with high-end investment firms, hedge firms, and other institutional investors. They’re not typically associated with regular people looking to save for retirement and build household wealth.

There are many ways for the individual investor to invest in stocks, bonds, index funds, and other assets. When you open an investment account with SoFi Invest®, our technology helps you determine the right asset allocation mix for you, while SoFi financial planners are available to offer you complimentary, personalized advice.

Find out how to get started with SoFi Invest.

Photo credit: iStock/MixMedia

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.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Sep
24
2021
Dogs of the Dow: Meaning, How It Works & Examples

Dogs of the Dow: Meaning, How It Works & Examples

By | Growing Wealth, invest, Investing | Comments Off on Dogs of the Dow: Meaning, How It Works & Examples

What Are the Dogs of the Dow?

The “Dogs of the Dow” is an investment strategy that focuses on large, established companies that offer relatively high dividends. There are different ways to pursue the strategy, but it generally attempts to outperform the Dow Jones Industrial Average (DJIA) by investing in the highest dividend-yielding stocks from among the 30 stocks that comprise the DJIA.

The Dow Jones is among the oldest and most popular stock indices in the world, with casual investors often using it as a shorthand for the performance of the broader stock market, and even the global economy. Over time, the Dogs of the Dow tends to perform in line with it.

The Dogs of the Dow strategy became popular in 1991 with the publication of Beating the Dow in which author Michael B. O’Higgins coined the term “Dogs of the Dow.” The strategy itself reflects the assumption – usually true – that blue-chip companies have the stability to continue to pay out their regular dividends regardless of the performance of their stocks.

Recommended: What Is the Dow Jones?

How the Dogs of the Dow Work

The formula for identifying the companies in the Dogs of the Dow is – by the standards of economics – fairly simple. It comes down to the stock’s dividend yield, calculated by dividing the annual dividend paid by a stock (in dollars) by its stock price. The stocks with the highest dividend yields are the Dogs of the Dow.

Followers of the Dogs of the Dow strategy believe the dividend paid by a company more accurately reflects its average value than the trading price of that company’s stock. Unlike the dividend, the stock price is always in flux.

When the stock prices of companies go down in response to the business cycle, the ratio of those companies’ dividends to their stock prices will go up. In other words, the dividends of those stocks will be disproportionately high in relation to their stock prices. Adherents of the Dogs of the Dow strategy believe the companies with that high dividend-to-stock-price ratio will eventually revert to their mean and should grow faster when the business cycle turns, and their prices increase. In addition to promising performance, the strategy also offers investors regular income in the form of dividend payments.

Recommended: How Do Dividends Work?

Who Are the Dogs of the Dow in 2021?

The 2021 Dogs of the Dow are led by energy giant Chevron, with a dividend that stood at 6.11% of its stock price at the outset of the year. It was followed by technology stalwart IBM, whose dividend stands at 5.18%. It also includes Dow (5.05%), Walgreens (4.69%), Verizon (4.27%), 3M (3.36%), Cisco Systems (3.22%), Merck (3.18%), and Amgen (3.06%). Soft-drink giant Coca-Cola is the last of the top-ten Dogs with a dividend that’s 3.06% of its share price.

The Dogs are always changing, as are the companies that make up the DJIA itself. In 2020, for example, Salesforce.com joined the index – a rare entrant that has never paid its investors a dividend. In the same year, troubled aerospace titan and DJIA member Boeing suspended its dividend.

The stocks in the Dogs of the Dow didn’t change much between 2020 and 2021, since the relationship between the stock price and the dividend of most of the stocks on the list did see a dramatic change.

It’s easy to see that the highest-yielding stocks in the DJIA are always changing. This means that an investor who is pursuing this strategy needs to regularly rebalance their holdings, whether monthly, quarterly or annually.

One reason such rebalancing is necessary is that even though the large stocks in the DJIA typically have lower volatility than some other stocks, their values still change over time. So rebalancing is an important step toward preventing a situation where one stock plays too big of a role in a portfolio’s performance. But with a Dogs of the Dow strategy, rebalancing is even more important, as the companies that fit the description will change on a semi-regular basis.

Investing in the Dogs of the Dow

Different investors view the Dogs of the Dow differently. Some say it’s only the five or 10 DJIA stocks with the highest dividend-to-share-price relationship. But it’s worth noting that not all 30 companies on the DJIA index currently pay dividends.

Investors can buy 10, 15 or all 30 of those stocks through a brokerage account. Or they can invest in the DJIA by purchasing exchange-traded funds (ETFs). There are even Dogs of the Dow ETFs that invest in the dividend-focused strategies similar to Dogs of the Dow approach. But when buying one of these funds, it is important to read their strategies before investing.

Recommended: What Are Dividend ETFs?

Pros and Cons of Dogs of the Dow Strategy

There are several advantages to using a Dogs of the Dow strategy, but there are also some drawbacks for investors to consider.

Dogs of the Dow: Pros

• The strategy invests in Blue Chip companies with a long history of success and industry-leading positions.

• It has a history of outperforming the DJIA.

• Investors receive regular dividend payments.

Dogs of the Dow: Cons

• The IRS taxes dividends paid by the stocks at the income-tax rate rather than the lower capital gains rate.

• It has underperformed the DJIA the last few years.

• It is a value-oriented strategy that may lag during growth markets.

• The strategy isn’t widely diversified.

Does Dogs of the Dow Still Work?

The Dogs of the Dow struggled during the market upheaval of 2020. As a group of 10, the Dogs lost 13% over the course of the year, well below the 7% increase posted by the DJIA. And 2020 was the second straight year the Dogs didn’t do as well as the broader Dow.

But advocates of the strategy point out that Dogs of the Dow is predominantly a value-investing strategy, and value investors as a group had a terrible time of it in 2020.

Dogs of the Dow has occasionally done worse than the broader DJIA, notably in the financial crisis of 2008, when it suffered larger losses than the index. But through the ten years that followed, it outperformed the Dow, though not profoundly

But even small amounts of outperformance add up over time. A $10,000 investment in the DJIA made at the outset of 2008 would have grown to approximately $17,350 by the end of 2018. The same amount invested in the Dogs of the Dow strategy would have reached $21,420 by the end of 2018, assuming that the investor rebalanced their holdings once per year.

Recommended: What Is the Average Stock Market Return?

The Takeaway

Dogs of the Dow is an investment strategy that uses dividends as a way to spot undervalued Blue Chip stocks, and to benefit from economic cycles. If that’s a strategy in which you’re interested, you could get started by opening an account on the SoFi Invest® brokerage platform.

SoFi Invest offers an active investing solution that allows you to choose stocks and ETFs without paying commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a SoFi management fee.

Photo credit: iStock/Helin Loik-Tomson

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Sep
24
2021
How Does a Bitcoin Transaction Work?

How Does a Bitcoin Transaction Work?

By | Growing Wealth, invest, Investing | Comments Off on How Does a Bitcoin Transaction Work?

It’s something that is among the basics of investing in crypto: Learning how Bitcoin transactions work. It may sound a little silly, but many traders and investors don’t really know what happens behind the scenes to get cryptocurrency into the buyer’s possession.

It’s always worth reviewing how a Bitcoin transaction works. While this may be covered in almost any guide to cryptocurrency, it’s a good thing to keep in mind before you start buying Bitcoin.

Read on to find out how Bitcoin transactions work, how long they take, and the verification processes that ensure they’re safe and secure.

Bitcoin Basics

Before getting into the nitty-gritty details of Bitcoin transactions, it’s worth revisiting the foundational cryptocurrency of Bitcoin itself.

Bitcoin is a digital currency. In essence, bitcoins are simply just small pieces of computer code. The currency has no physical manifestation — you can’t hold it in your hands, or stick it in an envelope — but can be used as a medium for transactions. That is, you can use it to buy or sell things, as long as the party on the other end of the transaction is willing to accept it.

Bitcoin is also a decentralized currency, meaning that it has no regulatory authority like a bank. Its value is dictated by the market, much like a stock. Bitcoin dates back to 2009, when it first became available to the public as the initial cryptocurrency.

Also worth noting: Bitcoin is built on something called “blockchain” technology. Read on for a quick primer on blockchain, and how blockchain works.

Blockchain

Blockchain technology is, in its most basic form, a chain of blocks containing data. The blockchain itself is decentralized — not controlled by a single entity. Instead, a blockchain network is spread across the globe, with hundreds, or even thousands of users participating in it.

Blockchain enables cryptocurrency transactions. It keeps a record of those transactions — storing the data in blocks — using a sort of distributed ledger. Imagine an Excel spreadsheet saved on thousands of different hard drives, all of which reference each other to validate the data’s accuracy.

Blockchain allows for faster, more secure (but not 100% secure) transactions. That’s why blockchain and Bitcoin are so often mentioned in the same sentence.

Crypto Exchanges

As for actually executing a Bitcoin transaction, most of the time this will take place on a cryptocurrency exchange. (Unless you’re into Bitcoin mining, which is a different story altogether.)

How do cryptocurrency exchanges work? More or less like any other financial exchange.

Crypto exchanges are where cryptocurrencies are exchanged between parties. They’re similar to a stock market, in that traders or investors can buy or sell cryptocurrencies, usually in exchange for dollars or other fiat currencies. There are different crypto exchanges, often with different rules and offerings.

Traders sign up on the exchange, create an account, fund that account, and then execute a transaction for bitcoin or any other cryptocurrency they’re looking to add to their portfolio.

Given that these exchanges are typically where Bitcoin transactions go down, let’s run through an example of what that might actually look like.

How Bitcoin Transactions Work (with Example)

Here’s an example of a Bitcoin transaction: Imagine you want to send a bitcoin to your friend, Ted.

You know where the bitcoin is now: in your wallet. And where it needs to go: Ted’s wallet. So, we have point A, and point B. Here are the steps to get there:

1. Consider your crypto storage. There are a couple of ways to store crypto: “Hot wallets” which is typically another word for “online,” and “cold wallets,” which means your crypto is being stored offline, and thus, more securely. If you want to transact, though, you’ll need to get your holdings out of any crypto cold wallets and into hot ones, so that the transaction can commence.

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

2. Enact the transaction. To do this, send a message to the network with all of the details, including

a. Which bitcoin you want to send. This is called an input, and it’s the record of the bitcoin’s address and history.

b. The amount, or value of bitcoin to be transacted.

c. Where it’s going. That’s the output, or verification address.

So, to get your bitcoin to Ted, the network references the coin’s address, verifies that you want to send one bitcoin, and then verifies Ted’s public key, or Bitcoin address.

3. Wait for verification and confirmation. Once the network verifies the transaction, and that Ted is able to receive the bitcoin based on the message you sent. A confirmation process takes place — this is what we often refer to as “mining,” as the data in blocks is verified by other users — and the transaction is enacted.

Each bitcoin has its history written into the blockchain. You can trace each transaction back to each coin’s original creation by following its record over time. That’s how we know that each individual bitcoin exists, and that it belongs to (or is in possession of) the entity that claims it.

Yes, it’s a little abstract, and not as simple as handing Ted a $20 to cover your lunch tab. The thing to remember is that there are a lot of things taking place in the background during a Bitcoin transaction.

Transaction Confirmations

It often takes a little bit of time for the network to verify or confirm Bitcoin transactions. That’s because miners need to get to work, and as such, a transaction won’t be confirmed until a new block has been added to the blockchain.

Miners are rewarded with new bitcoins for creating new blocks on the blockchain. That process involves confirming and verifying data in the blocks. So there’s an incentive for the network to constantly confirm and verify the data on the network, including transaction information.

Until the network creates a new block and verifies the transaction data, the transaction will remain unconfirmed.

Transaction Speeds

Just how long a transaction can take typically depends on a few factors, such as the value or amount of bitcoin being transacted. Much of the delay has to do with the structure of the Bitcoin network itself — a new block is created roughly every 10 minutes, on average.

There is also often a queue to get your transaction confirmed. In some cases, you may have the choice of paying higher fees to get priority treatment.

Bitcoin Transaction Fees

Because “block demand” exists in the Bitcoin network, with users that want to confirm their transactions and thus have the data written into new blocks, there can be backups. Higher demand leads to higher prices, or fees, to confirm a transaction. Essentially, traders are paying a “miner’s fee” to have a transaction processed and confirmed on the blockchain, and the busier the network, the higher the tolls.

For example, fees skyrocketed during late April of 2021 as the crypto bull rush hit its heights. Average fees were around $60. But during calmer times on the network, the costs are typically much more reasonable, at less than $5.

It really comes down to supply and demand. The more demand on the network at a given time, the higher the transaction costs.

The Takeaway

A Bitcoin transaction relies heavily on the blockchain network, but at its heart it’s as simple as transferring one or more bitcoins from your account to someone else’s. Variables like transaction speed and transaction fees can vary based on demand.

Once you’ve read up on all the good stuff related to crypto taxes and applicable cryptocurrency regulations, you might be ready to start some Bitcoin transactions of your own. You can trade Bitcoin and other cryptocurrencies, like Ethereum, Litecoin, Bitcoin Cash, and Ethereum Classic, 24/7 with SoFi Invest®.

Find out how to get started trading crypto with SoFi Invest.

Photo credit: iStock/Olemedia

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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

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

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

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Sep
24
2021
Ethereum (ETH) Fork: History & Definition

Ethereum Fork Guide

By | Growing Wealth, invest, Investing | Comments Off on Ethereum Fork Guide

Ethereum isn’t just the second most valuable cryptocurrency, it’s also perhaps the most active cryptocurrency ecosystem. While Bitcoin and its associated blockchain support a highly volatile but highly valuable currency that is obtaining more and more mainstream adoption, Ethereum underlies a wide range of applications, services, and ambitious plans that include financial systems based on smart contracts, virtual real estate, other coins and tokens, and more.

At less than 10 years old, Ethereum is in a constant state of flux. The cryptocurrency has gone through several “hard” forks, and may be having another one soon. Knowing what a hard fork is and how past ones have affected the Ethereum ecosystem is important before investing in Ethereum or working in the Ethereum space.

Recommended: What Is Ethereum and How Does It Work?

What Is a Crypto Fork?

The first thing to understand about cryptocurrencies is that they are code. Computer code defines the protocols that blockchains run on. Code governs how crypto works at the deepest level. And these are open source projects, meaning that, generally, anyone can copy the code, distribute the code, or make suggestions for how to improve it.

That also means anyone can make a different version of it.

And that’s what a hard fork is. Blockchains are records of transactions and databases of who has “blocks” on the network. This database is maintained not by a central computer or user like in a bank, but by all the users who support it. A hard fork happens when this entire database is copied and the underlying code is altered such that it operates going forward in a different way.

After a hard fork, there are two different blockchains, two different networks, and two different cryptocurrencies. Typically holders of the original crypto get tokens in the new one and then they operate totally separately going forward.

Hard forks differ from soft forks. Think of a soft fork more like an upgrade — everyone accepts it, the status of the network and blockchain remains the same, and it operates going forward in much the same way as it did previously.

Recommended: Bitcoin Soft Fork vs Hard Fork: Key Differences

What Are Ethereum Hard Forks?

Ethereum hard forks are the result of developers wanting a version of Ethereum that either operates more effectively or has features that the original Ethereum doesn’t have. In the debate of Ethereum vs Bitcoin, Ethereum’s ability to function more as a platform for different applications and services beyond just a currency or store of value also means there’s a lot of development activity around it. And that means many hard forks that create a new version of the network — with older versions often abandoned.

How Do Ethereum Hard Forks Work?

Ethereum hard forks happen when the Ethereum community (the miners) reaches consensus on a proposal to change the Ethereum blockchain. Consider, for example, the most controversial and noteworthy hard fork, the so-called DAO fork which created the split between Ethereum and Ethereum Classic. That fork went through after 97% of Ethereum users voted in favor of it.

History of Ethereum Hard Forks

Ethereum has had several hard forks. While it’s important to understand the technology and concept behind Ethereum forks, knowing more about these hard forks and why they happened is essential to getting a grasp on the wider crypto currency landscape.

Ethereum Classic Fork

The Decentralized Autonomous Organization (DAO) fork was one of the most ambitious projects in the history of cryptocurrency, let alone in the then-short history of Ethereum.

The DAO was a roughly $160 million fund (in Ether) for cryptocurrency projects that was launched in 2016. It was governed by a set of smart contracts, code that’s executable on a blockchain that supposedly removes the need for trusted third parties to enforce a deal. But this structure contained a vulnerability: if there was a security hole in the code that could be exploited by a hacker, the hacker could drain away tens of millions of dollars and there would be nothing The DAO could do about it.

And that’s exactly what happened — more than $50 million was stolen. This was not only a huge loss for the investors, but also a potentially fatal blow to Ethereum itself, which had just launched publicly the year before.

In response, Ethereum developers executed a controversial hard fork of the Ethereum blockchain to roll back the transactions caused by the hack — essentially resetting the blockchain to its pre-hack state. While the vast majority of Ethereum users supported this hard fork, it left behind a second blockchain, now called Ethereum Classic.

Recommended: How Safe is Blockchain?

Ether Zero Fork

The Ether Zero (ETZ) fork was a hard fork executed in 2019 with the promise of faster and cheaper transactions. Although millions of ETZ, the new cryptocurrency, were given to holders of ETH, the project appears to have largely floundered. By June 2021 the ETZ coin was the 1890th ranked coin on CoinMarketCap and individual tokens were worth less than one one thousandth of a cent.

Metropolis Fork

Metropolis was part of a large-scale fork planned by Ethereum developers for general maintenance, rather than a rival or rebel project. It was so substantial that it was executed in several named steps, including Byzantium and Constantinople. The first parts of it went live in 2017, and overall changes included technical but substantial shifts in how smart contracts written on the Ethereum blockchain operated.

Serenity Fork

Serenity is a long planned and major overhaul of the network that’s also known as “Ethereum 2.0”.

The first part, Beacon, went live late last year. This updated blockchain is intended to process transactions faster.

Further Serenity updates are scheduled for 2021 and 2022. The goals of the updates include a reduction in the energy used for Ethereum mining, through use of “proof of stake” as opposed to “proof of work” technology.

The latter, which famously underlies Bitcoin, relies on computers to essentially solve math problems in order to maintain the network and generate new Bitcoin. This constant computer power expends huge amounts of energy — a drain on individual resources as well as environmental ones.

Proof of stake technology, on the other hand, allows users to validate the network by “staking” their own ETH tokens, i.e. putting enough ETH into a pool from which random users are selected to carry out the tasks previously done by miners.

The Takeaway

In less than 10 years, Ethereum has experienced a number of notable hard forks — some controversial, some not, but all aimed at improving the cryptocurrency and its functionality.

The decisions around Ethereum hard forks are often highly technical and are largely guided by a small group of developers. But Ether holders are invited to vote on community decisions and participate directly in the maintenance of the network through staking.

You can trade Ethereum with SoFi Invest®, which also offers access to a number of other cryptocurrencies including Bitcoin, Litecoin, Bitcoin Cash, Ethereum Classic, and more.

Find out how to get started with SoFi Invest.

Photo credit: iStock/matdesign24

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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

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

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

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Sep
24
2021
What Is a Bitcoin Whale? How They Affect Bitcoin's Price

What Is a Bitcoin Whale? How They Affect Bitcoin’s Price

By | Growing Wealth, invest, Investing | Comments Off on What Is a Bitcoin Whale? How They Affect Bitcoin’s Price

You’ve probably heard of the “wolf” of Wall Street, but may not necessarily be familiar with Bitcoin whales. While neither of these monikers actually have anything to do with the animal kingdom, they both describe dominant creatures in the financial digital assets and cryptocurrency realm.

So, just what is a Bitcoin whale, or a crypto whale? It’s another one of those crypto terms that are worth knowing. In this article, we’ll run through a few examples of Bitcoin whales, and discuss how these whales can and have created ripple effects through the crypto markets on occasion.

What is a Bitcoin Whale?

Simply put, a Bitcoin whale is an investor that has a massive amount of Bitcoin holdings. If the average Bitcoin investor holds a single bitcoin in their portfolio, for example, a Bitcoin whale may hold 500 or 1,000 bitcoins.

“Whales” in the investing sphere are not solely relegated to the Bitcoin market. Whether it comes to investing in stocks or investing in cryptocurrency, the term “whale” refers to the same thing: An investor with a disproportionate amount of holdings compared to others.

Bitcoin whales buy cryptocurrency like you might buy toilet paper. And they’ll likely continue to, considering how much Bitcoin is left to be mined — a supply that will be exhausted by 2140.

Whales come in different sizes, so some Bitcoin whales are bigger than others. That said, it’s hard to get a clear gauge on the number and size of whales, because a single person or entity can have multiple addresses. As of July 2021, there are only a few whales that hold between 100,000 and 1,000,000 bitcoins, and around 80 that hold between 10,000 and 100,000 bitcoins.

How Do Bitcoin Whales Impact the Price of Bitcoin?

Now that you know what a Bitcoin or crypto whale is, it’s important to understand how these whales can affect the price of Bitcoin. Especially if you’re interested in investing in Bitcoin, or currently have Bitcoin in your portfolio.

Because they hold an outsized position in the market, whales make waves when they make moves. For example, if a whale decides to sell a large amount of bitcoins in one day, that will create a ripple effect in the market, and likely drive prices down as other investors follow suit. A whale could, potentially, shift market trends in whichever direction they’d like. (Yes, this can border on market manipulation.)

For example, let’s say a whale with a balance of 100,000 bitcoins wants to buy more. They could sell 50,000 of them — an amount that could catch the attention of other investors, who would start selling their holdings, which in all likelihood would lead to a drop in Bitcoin prices. The whale could then buy back their 50,000 Bitcoins (and perhaps more) at a lower price — profiting and padding their holdings at a discount.

In other words, they could create a dip, and then buy the dip.

This hypothetical situation highlights the type of leverage a whale could have on a market. They could suppress or pump up prices (which is something seen in other assets, like stocks, too), leaving smaller investors scrambling to keep up.

Because whales have potentially market-moving capabilities, other investors tend to watch them closely. “Whale watching,” as it may be called, keeps tabs on whale activity to get a sense of where the markets are heading. There are a number of social media accounts and websites that any interested whale watchers can follow. Not surprisingly, one need only search “crypto whale watch” or “Bitcoin whale watch” to find them.

Who Are Some of the Biggest Crypto Whales?

There are plenty of fish in the sea, and plenty of whales in the Bitcoin market. But we don’t know who many, if not most of them, are. You may remember that nobody even knows who the creator of Bitcoin is, other than it’s a person (or persons) that goes by the name of Satoshi Nakamoto.

So, just like the deep blue sea is full of mysteries, so is the cryptocurrency market. But there are a few whales that we know about, and that many investors choose to keep an eye on. Here are some of them:

The Winklevoss Twins

If you remember the movie “The Social Network,” you might remember the Winklevoss twins, who were portrayed in the movie by Armie Hammer. The two had a role to play in the early days of Facebook, but these days, the real-life investors are in the Bitcoin game.

Tyler and Cameron Winklevoss have amassed billions of dollars in Bitcoin, with their first acquisitions dating back roughly a decade. Since then, they’ve been involved in several cryptocurrency ventures and exchanges, as investors and founders. In 2015, the two launched Gemini, a crypto exchange that allows users to trade Bitcoin and other cryptocurrencies.

The twins are incredibly bullish on Bitcoin and have even said that they think it will outperform stocks and other assets over the next decade.

Tim Draper

Tim Draper, another Bitcoin whale, is a venture capitalist who’s invested in a variety of companies from Skype to Tesla, and Robinhood to Ancestry.com. When it comes to Bitcoin, Draper made a splash in 2014 when he bought tens of thousands of bitcoins that were seized by the federal government.

Those holdings immediately gained him whale status in the Bitcoin market, and Draper has continued to amass additional bitcoins (along with other altcoins). He has said that he thinks Bitcoin’s value will rise into the hundreds of thousands of dollars.

Recommended: Should We Expect a Bitcoin Bull Run in 2021?

Michael Saylor

Michael Saylor is the CEO of MicroStrategy, a business intelligence company with a Bitcoin focus. Saylor’s become one of Bitcoin’s biggest proponents in recent years, and has seen his company’s holdings climb into the billions of dollars.

Saylor has made Bitcoin investing a primary function of MicroStrategy, which has even issued additional debt in order to raise funds to buy more cryptocurrency. As such, Saylor and his company have become Bitcoin whales in their own right.

The Takeaway

Much like whales found in nature and in other areas of investing, a Bitcoin whale is an investor with a large amount of holdings — enough that they have the potential to move the market. Not surprisingly, the who and how many of Bitcoin whales is someone unknown, with a few exceptions.

Want to swim with the sharks, or pad along with the whales? With a SoFi Invest® brokerage account, you can trade Bitcoin as well as a variety of other cryptocurrencies including Bitcoin, Ethereum, Ethereum Classic, Litecoin, and Bitcoin Cash.

Find out how to get started trading crypto.

Photo credit: iStock/hemul75

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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

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

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

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