InvestGen Archives | Page 83 of 83

Sep

2021

Pros and Cons of Investing in Crypto Exchanges

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

Crypto exchanges provide a platform for people to buy and sell cryptocurrencies with their fiat currency or to trade different cryptocurrencies for one another. These companies take a small fee with each transaction. Given the increasing popularity of crypto, exchanges with a lot of customers and high trading volume can wind up becoming very profitable businesses.

Some crypto exchanges become so profitable that they issue shares of equity in their company on a public stock exchange. This happened for the first time in 2021, when one of the oldest crypto exchanges was the first in the industry to become a publicly traded company.

Why would someone invest in crypto exchange companies? What might be some of the potential benefits and drawbacks to such an investment? We’ll answer questions like these, and more.

A Word on IPOs

First, investors should be aware of the fact that many initial public offerings (IPOs) create a lot of fanfare and buzz. But they don’t always deliver right away.

It’s not uncommon for companies to make their debut on the stock market at valuations that far exceed their true market value. It’s common for IPO stocks to see their prices tank shortly after going public.

While this doesn’t have to dissuade investors from a company they would otherwise remain bullish about, it’s an important thing to keep in mind.

Private investors like venture capital funds can get in on the action before the public, so they don’t care as much about what happens to share prices post-IPO. But for retail investors, buying a lot of shares on the day a stock goes public has quite often proven to be a mistake, at least in the near-term.

Pros of Investing in a Crypto Exchange

Some of the pros of investing in crypto exchanges include potentially taking advantage of rapid growth, owning a piece of crypto infrastructure in a regulated way, and holding a security that can be subjected to more traditional valuation methods than a cryptocurrency.

Rapid Growth

The growth seen in the crypto industry has been unparalleled. In 2015, the entire cryptocurrency market cap was about $7 billion. Today that market cap has risen to over $1 trillion, peaking at over $2 trillion in early 2021.

Bitcoin was only just invented twelve years ago in 2009. To put that into context, it took companies like Apple, Google, and Amazon an average of 20 years or more to reach a valuation in excess of $1 trillion.

If this growth continues at even a fraction of its current rate, then there is a chance that broad investments in the sector like crypto exchange stocks could see substantial returns on a 5-, 10-, or 20-year timeframe. (But as with anything having to do with investing, past performance is no guarantee of future results.)

Indirect Exposure to the Crypto Market

Investing in the stocks of crypto exchanges provides a proxy for investing in cryptocurrency itself. In other words, investors can gain indirect exposure to the crypto market, without exposing themselves to the potential volatility of crypto itself. Investors who aren’t sure about cryptocurrency as an asset class, or who would rather not learn how to own and hold cryptocurrency tokens on their own, might find these stocks appealing.

Buying shares of a crypto exchange lets investors hold a piece of the infrastructure that keeps the cryptocurrency world functioning. Most exchanges also have value beyond simply being brokerages for the buying and selling of cryptocurrencies.

• Exchange-hosted wallets allow users to send crypto off-platform.

• Some exchanges have begun providing staking services, where users who hold proof-of-stake coins can earn what amounts to a crypto dividend by holding those coins in their exchange wallet.

• Exchanges are even beginning to get into borrowing and lending services, letting users lend out their crypto to earn interest or take out a loan using their crypto as collateral.

More Traditional Valuation Methods

The shares are an investment in a real company with cash flow, earnings, a board of directors, and all the things that traditional investors are familiar with. This makes it easier for some investors to grasp than cryptocurrency itself. Crypto exchange stocks can be treated as any other equity in a portfolio. They can also be scrutinized in the same way, using valuation models like the discounted cash flow model, the dividend discount model, and others.

While it seems likely that crypto exchange stocks will have some correlation to the price action and value of Bitcoin and other cryptocurrencies, the relationship might not be 1:1. Traditional company metrics like quarterly earnings will likely also impact share prices.

Cons of Investing in Crypto Exchanges

Some of the cons of investing in crypto exchanges include the potential for speculation, regulatory concerns, a lack of historical precedent, the business models involved.

Potential for Speculation

While crypto markets are often criticized as being speculative, stock markets also have their fair share of speculators. And when crypto markets rally, it’s feasible that some investors could get overly bullish on crypto exchange stocks, creating a mania that ends in a crash. This might be the exact type of thing investors are hoping to avoid by choosing to invest in crypto exchanges rather than actual cryptocurrencies.

Then again, it’s also possible that crypto exchange stocks weather the storm of a crypto market downturn better than the crypto market itself. The phenomenon of exchanges being publicly-traded securities is too new to tell for sure yet.

Lack of Historical Precedent

2021 is the first year that any crypto exchange has been made publicly tradable on a stock exchange. No one knows exactly what will happen, how the securities will trade, what will impact their prices, and so on. Much of the outlook is conjecture at this point.

The future of blockchain technology itself, which powers cryptocurrency, is only 12 years old and also has a degree of uncertainty behind it.

Regulatory Concerns

It’s widely suspected that financial regulators will tighten the noose around cryptocurrencies at some point. What form that might take, and what the impact could be, is largely unknown. Some say that greater regulatory clarity would be a good thing, as larger investors would feel more comfortable entering the space with significant amounts of capital. Others believe over-regulation could cripple the industry and the asset class as a whole. Again, this is somewhat of an unknown.

Fee-Based Business Model

Typically, most of an exchange’s revenue comes from transaction fees. It has been noted that over time, fees like these tend to see downward pressure due to competition. In the world of stock brokerages, for example, trading fees on most platforms have fallen to zero in recent years.

While this could be a possibility, others have argued against it, saying that crypto isn’t analogous to stocks in this respect. Users are also paying for additional services like custody services, or holding crypto, which is an important factor to consider. An exchange-hosted wallet also lets users send and receive crypto transactions without having to create and manage a wallet of their own.

The Takeaway

Investing in crypto exchanges isn’t that different from investing in other companies. And as always, investors should educate themselves about what they’re buying and why. An investigation into the company’s activities, management, history and earnings reports would be warranted regardless of which company an investor chooses.

Photo credit: iStock/valiantsin suprunovich

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

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

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

SOIN0721297

Sep

2021

How Does a Bitcoin Transaction Work?

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

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.

Photo credit: iStock/Olemedia

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

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

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

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.

SOIN0721302

Sep

2021

Ethereum (ETH) Fork: History & Definition

Ethereum Fork Guide

By Matthew Zeitlin | Growing Wealth, invest, Investing | Comments Off

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.

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.

Photo credit: iStock/matdesign24

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

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

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

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.

SOIN0621263

Sep

2021

Guide to Options Prices: How are Options Priced?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

Options are derivative financial instruments that give the buyer the right (but not the obligation) to buy or sell an underlying security, such as a stock, within a predetermined time period for a predetermined price, known as the strike price.

Investors like options because they allow the investor to bet on the price increase or decrease of a stock, without owning the stock itself. There are two main types of options: call options and put options. An investor who buys a call option buys the right to buy the option’s underlying asset. An investor who purchases a put option is buying the ability to sell the option’s underlying asset.

Recommended: A Guide to Options Trading

How is an Option Price Determined?

The sellers of an option take many different factors into account to determine the price, or premium, of an option. The most widely known method for determining the value of an option is the Black-Scholes model. But other models – such as the binomial and trinomial options pricing models – are more commonly used to determine stock option prices.

All of those options pricing models are complex, but they all draw on a few primary factors that drive the investment value of an options contract:

• the market price of the stock that underlies the option

• the current intrinsic value of the option

• the time until the option expires

• volatility

Market Price and Intrinsic Value

The first is easy to understand – it’s the price at which the underlying stock is trading. The second – the intrinsic value of the option – is the value of the option would be worth if sold at that moment. This only applies if the price of the underlying stock has moved to where the option is “in the money,” meaning the owner of the option would make a profit by exercising it.

Time Value

The time until expiration is more complex. It represents the possibility that an out-of-the-money option could eventually become profitable. This so-called time value reflects the amount of time an option has until it expires. It’s one part of an option’s value that only goes down – and which goes at an increasingly rapid rate as the options contract approaches expiration. As the expiration date gets closer, the underlying stock must make bigger moves for those price changes to make significant changes in stock options pricing.

Volatility

That time value reflects the volatility of the underlying security, as well as the market’s expectation of that security’s future volatility. As a general rule, stocks with a history of high volatility underlie options that with a higher likelihood to be in-the-money at the time of their expiration.

Volatility, in many pricing models, is represented by beta, which is the volatility of a given stock versus the volatility of the overall market. And options on stocks with higher historic or expected volatility typically cost more than options contracts on stocks that have little reputation for dramatic price swings.

What Are the Different Option Pricing Models?

There are several models that investors and day traders consider when figuring out how to price an option. Here’s a look at a few of the most common:

The Black-Scholes Merton (BSM) Model

The best-known options pricing method is the Black-Scholes model. The model consists of a mathematical formula that can be daunting for people without a math background. That’s why both institutional and retail investors employ online options calculators and analysis tools.

The economists who created the formula published their findings in 1973, and won the 1997 Nobel Prize in economics for this new method for arriving at the value of financial derivatives.

Also known as the Black-Scholes Merton (BSM) model, the Black-Scholes equation takes the following into account:

• the underlying stock’s price

• the option’s strike price

• current interest rates

• the option’s time to expiration

• the underlying stock’s volatility

In its pure form, the Black-Scholes model only works for European options, which investors can not exercise until their expiration date. The model doesn’t work for U.S. options, because U.S. options can be exercised before their expiration date.

The Binomial Option Pricing Model

The Binomial Option Pricing Model is less well-known outside of financial circles, but it’s more widely used. One reason it’s more popular than the Black-Scholes Model is that it can work for U.S. options. Invented in 1979, the binomial model reflects on a very simple assumption – that in any pricing scenario the premium will go one of two ways: up or down.

As a method for calculating an option’s value, the binomial pricing model uses the same basic data inputs as other models, with the ability to update the equation as new information emerges. In comparison with other models, the binomial option pricing model is very simple at first, but it becomes more complex as investors take multiple time periods into account. For a U.S. option, which the owner can exercise at any point before it expires, traders often use the binomial model to decide when to exercise the option.

By using the binomial option pricing model with multiple periods of time, the trader has the advantage of being able to better visualize the change in the price of the underlying asset over time, and then evaluate the option at each point in time. It also allows the trader to update those multi-period equations based on each day’s price movements, and emerging market news.

Recommended: What Is a Straddle in Options Trading?

The Trinomial Option Pricing Model

The trinomial option pricing model is similar to the binomial model but it allows for three possible outcomes for an option’s underlying asset within a given period. Its value can go up, go down, or stay the same. As they do with the binomial model, traders recalculate the trinomial pricing model over the course of an option’s life, as the factors that drive the option’s price change, and as new information comes to light.

Its simplicity and acknowledgement of a static price possibility makes it more widely used than the binomial option pricing model. When pricing exotic options, or any complex option with features that make it harder to calculate than the common calls and puts on an exchange, many investors favor the trinomial model as a more stable and accurate way of understanding what the price of the option should be.

The Takeaway

Understanding how options pricing works is important, whether you’re interested in trading options or not. However, you can also build a more straightforward portfolio that does not use options at all.

A great way to get started is with SoFi’s options trading platform. The platform has an intuitive design where you can trade options on the mobile app or through the web platform. You’ll also have access to educational resources to continue to help guiding you along the way.

Pay low fees when you start options trading with SoFi.

Photo credit: iStock/ljubaphoto

Sep

2021

What Is Dogecoin?

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

What is Dogecoin?

Dogecoin (DOGE) is a an altcoin launched in December 2013, possibly as a joke. But cryptocurrency investors consider Dogecoin’s blockchain, derived from Litecoin, as reliable, which is one of the many reasons for the cryptocurrency’s rise to prominence.

The “Doge” in Dogecoin comes from the Flash cartoon “Homestar Runner,” in which Homestar calls another character his “D-O-G-E,” deliberately misspelling the word “dog.” In the early 2010s, a blogger posted a picture of her dog smiling excitedly, which struck a chord on Tumblr and Reddit. Then, a Redittor called the image “Doge, “creating a meme.

» Looking for more guides? Check out our crypto glossary.

How Does Dogecoin Work?

That code for Dogecoin is based on Litecoin, and early versions of the coin incentivized block miners through a randomized reward system. But the coin would soon change to a static-reward system for miners in March 2014. Being based on Litecoin, Dogecoin uses scrypt technology. It’s a proof-of-work coin, which is the reason for its low price and virtually unlimited supply.

That scrypt technology set it apart from other kinds of cryptocurrency, including Bitcoin, which uses a different proof-of-work algorithm called SHA-256. While the differences between the two are complicated, the upshot is that Dogecoin’s scrypt allows for an unlimited supply of coins. This makes Dogecoin a so-called “inflationary coin,” whereas Bitcoin and similar cryptocurrencies are considered deflationary, because there’s a fixed limit to the number of coins miners can create.

Who Created Dogecoin?

Jackson Palmer, an Australian project manager, created Dogecoin, which he originally thought of as a way to make fun of the media frenzy around cryptocurrencies. But he did purchase the dogecoin.com domain. At the same time, Portland, Oregon-based software developer Billy Markus looked up from his desk at IBM, and noticed the social-media attention that Dogecoin was gathering. Together, Palmer and Markus began to write the code that would underlie the first actual Dogecoin.

Two weeks after Palmer and Markus launched Dogecoin in 2013, its value rose by a staggering 300%. In those days, Dogecoin marketed itself as a “fun” version of Bitcoin. Its smiling-dog logo fit the playful atmosphere mood of the crypto community at the time, while its underlying code kept it relatively cheap to buy.

That playfulness showed up in the Dogecoin community’s 2014 donation of 27 million Dogecoins (roughly $30,000 at the time) to bankroll the Jamaican bobsled team’s expenses at the Sochi Winter Olympic games.

What Can Dogecoin Be Used for?

Once you have some Dogecoin, you can put it in a BitPay wallet, and via their partnership with Mastercard, you could put it on a prepaid crypto card, which you can spend anywhere Mastercard is accepted. That means you can use your Dogecoin to buy just about anything.

BitPay has also added Dogecoin support for Apple Wallet, which allows you to store their BitPay Card – and the Dogecoins within it – in your iPhone to make Apple Pay purchases.

How Did Dogecoin Become So Popular?

Born from a Reddit meme, Dogecoin had a ready audience of supporters ready to buy into the cryptocurrency, especially on the WallStreetBets subreddit. But it reached a far wider audience through its celebrity endorsements.

How Many Dogecoins Are There?

There were more than 129 billion Dogecoins in circulation on May 21, 2021, according to CoinMetrics. That made it the highest-circulation cryptocurrency in existence. The closest contender is Stellar (XLM), with 105 billion coins in circulation. By comparison, Bitcoin has just over 18.5 million in circulation.

Dogecoin has no limit as to how many coins miners can create. This is a stark contrast to Bitcoin, which is designed to never exceed 21 million coins in circulation, a level it should reach in the year 2140.

Why Is Dogecoin So Cheap?

Dogecoin is so cheap because there are so many of them, and because so many more are coming into existence, without limit, for the foreseeable future. The founders have decided not to cap the amount of Dogecoins in existence. And the law of supply and demand means that, without scarcity, the coins will remain inexpensive.

But that same low price is also why Dogecoin is so liquid, and can trade so quickly. While the price remains low, it has gone up substantially, increasing 12,000% from January to July, 2021. That’s an incredible return for those who managed to HODL their cryptocurrency through the volatility.

Dogecoin Price Prediction: Will It Reach $1?

Of course, it’s impossible to predict the future, but at present, it is very easy and inexpensive to mint new Dogecoins. As a result, one could reason that it is unlikely to reach $1 per coin until it becomes harder and more expensive to mint new Dogecoins.

Is Dogecoin a Good Investment?

While Dogecoin has gone up in recent years, it’s very hard to predict the future of any form of crypto. But if crypto is a big part of your investment strategy, then Dogecoin could make sense as part of a diversified crypto portfolio. It is a popular currency, and has a unique set of investors behind it.

That said, Dogecoin comes with risks. Critics say that Dogecoin, as a cryptocurrency, doesn’t have many advantages built into its code or its applications. They also point out that beyond the popularity of Dogecoin, there’s not much that differentiates it from a new crypto competitor that could emerge tomorrow next year. But boosters point to Dogecoin’s popularity and growth as the kind of first-mover advantage that new competitors may have trouble matching.

How Can I Buy and Sell Dogecoin?

You can invest in Dogecoin through a crypto exchange, like Coinbase, Binance, Kraken, or another platform. After opening an account and funding it, you can use those funds to trade Dogecoin or other cryptocurrencies.

The Takeaway

Dogecoin is an altcoin that has gained a significant following, despite its origins as a joke currency. It is just one of many types of cryptocurrencies that crypto investors might consider adding to their portfolio.

If you want to invest in Dogecoin without opening an account on a crypto exchange, you can open an account on the SoFi Invest® brokerage platform. You can use the app to purchase stocks and exchange-traded funds as well as to build a crypto portfolio.

Photo credit: iStock/Irina Vaneeva

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What Is Dogecoin?

What is Dogecoin?

How Does Dogecoin Work?

Who Created Dogecoin?

What Can Dogecoin Be Used for?

How Did Dogecoin Become So Popular?

How Many Dogecoins Are There?

Why Is Dogecoin So Cheap?

Dogecoin Price Prediction: Will It Reach $1?

Is Dogecoin a Good Investment?

How Can I Buy and Sell Dogecoin?

The Takeaway

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