Aug

2021

How to Start a Cryptocurrency: Can Anyone Create a New Coin?

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

Despite ongoing crypto volatility, there’s nothing to stop people from launching new crypto projects. In fact, anyone could start a cryptocurrency, but not everyone has the knowledge or resources necessary to take on the task.

Even after someone manages to create a new type of crypto, one that offers new features or aims to solve existing problems, there is still work to do in terms of promotion, listing on exchanges, never mind ongoing maintenance and upgrades.

Table of Contents

Understanding Coins vs Tokens
Ways to Create a Cryptocurrency
How to Make a Cryptocurrency in 7 Steps

Understanding Coins vs Tokens

Before getting started, however, it’s important to know the difference between a token and a coin. Both fall under the blanket term of “cryptocurrency,” but while a coin like Bitcoin or Litecoin exists on its own blockchain, a token like Basic Attention Token, functions within an established blockchain technology infrastructure like Ethereum. Tokens also do not have uses or value outside of a specific community or organization.

Cryptocurrencies function like fiat currencies, without the centralized bank. Users typically hope to use their coins to store, build, or transfer wealth.

Meanwhile, tokens usually represent some kind of contract or have specific utility value for a blockchain application. Basic Attention Token for example, rewards content creators through the Brave browser. Tokens can also serve as a contract for or digital version of something, such as event tickets or loyalty points.

Non-fungible tokens (NFTs) represent a unique piece of digital property, like artwork. And DeFi tokens serve many different purposes in that space.

Ways to Create a Cryptocurrency

There are three primary ways to create a cryptocurrency, none of which is fast or easy. Here’s how each of them works:

Create a New Blockchain

Creating a new blockchain from scratch takes substantial coding skills and is, by far, the most difficult way to create a cryptocurrency. There are online courses that help walk you through the process, but they assume a certain level of knowledge. Even with the necessary skills, you might not walk away from these tutorials with everything you need to create a new blockchain.

Fork an Existing Blockchain

Forking an existing blockchain might be a lot quicker and less complicated than creating one from scratch. This would involve taking the open source code found on GitHub, altering it, then launching a new chain with a different name and a new type of crypto. The developers of Litecoin, for example, created it by forking from Bitcoin.

Developers have since forked several coins from Litecoin, including Garlicoin and Litecoin Cash. This process still requires the creator to understand how to modify the existing code.

Use an Existing Platform

The third and easiest option for those unfamiliar with coding is making a new cryptocurrency or token on an existing platform like Ethereum. Many new projects create tokens on the Ethereum network using the ERC-20 standard, for example.

If you’re not familiar with writing code, you might consider a creation service that does the technical work and then hands you a finished product.

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How to Make a Cryptocurrency: 7 Steps

After considering everything above, you can start taking the steps to build the cryptocurrency. Some of these steps will be less relevant when paying a third-party to create the new coin. Even then, anyone undertaking the task should be familiar with these aspects of how to create a cryptocurrency.

1. Decide on a Consensus Mechanism

A consensus mechanism is the protocol that determines whether or not the network will consider a particular transaction. All the nodes have to confirm a transaction for it to go through. This is also known as “achieving consensus.” You will need a mechanism to determine how the nodes will go about doing this.

The first consensus mechanism was Bitcoin’s proof-of-work. Proof-of-Stake is another popular consensus mechanism. There are many others as well.

2. Choose a Blockchain

This goes back to the three methods mentioned earlier. A coin or token needs a place to live, and deciding in which blockchain environment the coin will exist is a crucial step. The choice will depend on your level of technical skill, your comfort level, and your project goals.

3. Create the Nodes

Nodes are the backbone of any distributed ledger technology (DLT), including blockchains. As a cryptocurrency creator, you must determine how your nodes will function. Do they want the blockchain to be permissioned or permission less? What would the hardware details look like? How will hosting work?

4. Build the Blockchain Architecture

Before launching the coin, developers should be 100% certain about all the functionality of the blockchain and the design of its nodes. Once the mainnet has launched, there’s no going back, and many things cannot be changed. That’s why it’s common practice to test things out on a testnet beforehand. This could include simple things like the cryptocurrency’s address format as well as more complex things like integrating the inter-blockchain communication (IBC) protocol to allow the blockchain to communicate with other blockchains.

5. Integrate APIs

Not all platforms provide application programming interfaces (APIs). Making sure that a newly created cryptocurrency has APIs could help make it stand out and increase adoption. There are also some third-party blockchain API providers who can help with this step.

6. Design the Interface

There’s little point in creating a cryptocurrency if people find it too difficult to use. The web servers and file transfer protocol (FTP) servers should be up-to-date and the programming on both the front and backends should be done with future developer updates in mind.

7. Make the Cryptocurrency Legal

Failing to consider this last step led to trouble for many who initiated or promoted ICOs back in 2017 and 2018. At that time, cryptocurrency was in a kind of legal grey area, and they may not have realized that creating or promoting new coins could result in fines or criminal charges depending on the circumstances.

Before launching a new coin, it a good idea to research the laws and regulations surrounding securities offerings and related topics. Given the complexity of the issues and their regular updates, you might consider hiring a lawyer with expertise in the area to help guide you through this step.

The Takeaway

This is only the beginning of what someone needs to know about how to create a cryptocurrency. In addition to the technical aspects, creators of a new coin or token will have to figure out how their cryptocurrency can provide value to others, how to persuade them to buy in, and how the network will be maintained. Doing so often involves many costs like hiring a development team, a marketing team, and other people who will help keep things going and perform needed upgrades.

Creating a cryptocurrency can take a lot of time and money, and there’s a high risk that it will not succeed. There are more than 5,000 different types of cryptocurrencies listed on public exchanges according to data from Coinmarketcap, and thousands more that have failed over the years.

Simply participating in cryptocurrency trading might be a better route for those who don’t have the time, money, or interest in creating their own. A great way to do that is by opening an investment account on the SoFi Invest brokerage platform, which makes it easy to trade crypto, stocks, and exchange-traded funds.

Trade crypto and get up to $100 in bitcoin! (Offer is available through 12/31/23; terms apply.)

Photo credit: iStock/MF3d

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

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

Aug

2021

Everything You Need to Know About GRT (The Graph)

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

GRT, or “the Graph” is a relatively new kid on the block when it comes to cryptocurrency. And like some other cryptos, it’s not merely a digital currency—there’s a little more to it than that.

Read on to learn what “the Graph” is, GRTs role, how to buy it, and whether it’s a good investment.

What Is GRT?

The Graph Network, also known as “the Graph” allows users to build APIs, known as subgraphs, to allow applications to talk to each other, and it also makes querying networks fast and secure. While it may require a further deep-dive to really understand the ins and outs of APIs and querying, we’ll save that for another time.

In technical terms, the Graph is a decentralized query protocol built for use with blockchains. More specifically, it works with Ethereum and the InterPlanetary File System (IPFS) to make it easy for users to build and publish APIs, or application program interfaces. Applications built on the Graph do not need a centralized server.

Users also use the Graph to query specific networks (again, like Ethereum or IPFS) to collect data without a third party.

GRT is an ethereum token that runs on the Graph Network. GRT is central to the Graph’s economy. Users swap it to keep things running.

History of the Graph (GRT) Crypto

The Graph Network and its token, GRT, are a very new type of cryptocurrency. As of spring 2021, GRT has been on the crypto markets for less than a year.

The team behind the Graph Network includes a slew of industry veterans, and the founding team consists of Yaniv Tal, Brandon Ramirez, and Jannis Pohlmann. They started working on the Graph back in 2017, finally seeing the project come to fruition a few years later.

In October 2020, The Graph Foundation sold roughly $12 million worth of GRT during its initial public sale, comprising 400 million tokens. The Graph protocol launched in December 2020, giving GRT utility.

Some traders or investors have not yet heard about GRT because it’s still very new to the market, but it has gained ground with larger investors. Ten holders control more than half of GRT’s supply.

How Does GRT Work?

In effect, the Graph Network works as an intermediary between blockchains and decentralized applications—it helps the two communicate in a secure and efficient way using a query language called GraphQL. The Network comprises users who need queries to be processed, and who are willing to pay for it. As such, there are indexers, curators, and delegators who make it all happen on the back end.

Some of these users act as GRT stakers, supporting the others, who run nodes and process those queries. To run nodes, however, users must hold a certain stake of GRT token—which is where the token comes into the mix.

GRT allocates resources within the Graph Network, and acts as an incentive for users within the network to keep the Network up and running. That can mean processing queries, improving APIs, etc.

Effectively, the Graph Network is similar to networks like Ethereum in which users use the network for their own purposes, and use GRT tokens to facilitate transactions on the network. GRT also has value outside of the Graph’s ecosystem, although not much utility. It’s the utility on the network that gives it value, and why crypto traders and investors may want to add it to their wallets.

Subgraphs

Users can create open APIs, known as subgraphs, to index and store data pulled from the Ethereum blockchain, like Google indexes data from the Internet. Developers query via GraphQL to build on blockchain with these subgraphs.

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GRT Price

Having been in existence on the market for only a handful of months, as of spring 2021, GRT’s price history is short, but fairly volatile.

GRT hit crypto exchanges back in December 2020, as you’ll recall, and its value soon shot up to around $0.70. When many other cryptos started to see values start to skyrocket in February 2021, GRT’s followed suit—although not quite to the lofty heights as some of its crypto cousins.

GRT prices hit their all-time peak (so far) in mid-February 2021, reaching more than $2.70 per token. Since then, prices have slowly declined, and as of July 2021, are hovering around $0.66 per token. So, in a matter of months, GRT’s value has nearly quadrupled, and then fallen by more than 75%.

Recommended: Crypto Bear Markets: What Are They?

Investing in GRT: Benefits and Disadvantages

For investors and traders, GRT won’t have much utility outside of the Graph Network’s ecosystem. Like many other cryptocurrencies, it’s going to be very difficult, if not impossible, to find a business willing to accept GRT in exchange for goods or services. But you can always trade your GRT for US dollars if need be, via an exchange.

Benefits of GRT

For investors or traders, GRT is yet another cryptocurrency that can help diversify a crypto portfolio. GRT’s value is currently down, but there is potential for it to go up in the future, depending on adoption of the Graph Network in the future. But that may require investors to HODL for some time.

Drawbacks of GRT

GRT is a cryptocurrency, which means it comes with a slew of risks. Cryptos are incredibly volatile (as is easy to see with GRT’s price history), and risk-averse investors may have trouble handling daily or weekly price fluctuations. Additionally, there is always the potential that the government could institute or change crypto regulations and rules, which could throw the crypto market into flux.

How to Trade GRT Cryptocurrency

Seasoned crypto traders: You know the drill when it comes to buying GRT or other cryptocurrencies. For newbies, it’s time to go over some investing in crypto basics:

Step 1: Choose an exchange and fund your account

If you want to trade cryptos like GRT, you’ll need to do so on an exchange—it’s pretty much the same thing as choosing a broker to buy stocks. Pick one, fund your account, and get yourself a crypto wallet (if one isn’t offered by the exchange) to store your holdings.

Step 2: Make the trade

Log in to your crypto exchange, and look up GRT—of course, you’ll want to make sure your chosen exchange offers GRT on its platform, first. Assuming it does, the process should be as simple as looking up GRT, deciding how much you want to buy, and executing the trade.

Step 3: Transfer your holdings

With your trade executed and GRT listed among your account holdings, you may want to transfer your tokens to your crypto wallet. Do some research into different types of wallets, and see which is right for you depending on how long you plan to hold onto your GRT.

The Takeaway

GRT is a relatively new ethereum token that powers the Graph, a decentralized protocol that indexes and queries blockchains. Users can build subgraphs, known as APIs, that can collect data without a third-party.

Photo credit: iStock/Eva-Katalin

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.

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

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

SOIN0521213

Aug

2021

What Is Proof of Stake?

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

Proof-of-stake is what’s known as a consensus mechanism, as is proof-of-work. They are both mechanisms by which a blockchain can maintain its integrity.

Consensus needs to be achieved on a blockchain as a solution to the “double spend” problem of money in the digital realm. To have value, users of a cryptocurrency have to be able to only spend their coins one time. Otherwise, people could send the same transaction over and over, and the currency would be worthless.

This is a tough problem to solve in the absence of any kind of centralized governing authority like governments or banks. The first digital currency to solve this problem was the Bitcoin network using proof-of-work (PoW).

Proof-of-stake (PoS) has started to be seen as a potential alternative to proof-of-work. Some developers believe that PoS could be more efficient than PoW while accomplishing the same thing, although the subject is still being debated.

What Is Proof-of-Stake (PoS)?

Proof-of-stake is a different consensus mechanism that can be used by blockchain technology to verify their transaction history. While miners in PoW networks use electricity to mine blocks, validators in PoS commit stakes to validate blocks.

Why Do Blockchains Need Consensus?

In centralized systems, preventing double spending is relatively easy. A single entity manages the ledger of transactions, simplifying the process. If Alice wants to give a dollar to Bob, the central manager just takes a dollar from Alice’s account and gives it to Bob. Nothing more is needed. Third-party payment apps like PayPal function in this manner.

With cryptocurrencies, however, things get more complicated because there is no single entity controlling the system. Keeping a record of the ledger of transactions becomes more difficult.

Instead of one central server, many thousands of people around the world run the Bitcoin software. These individuals are referred to as “nodes.” The nodes need to have a way to agree with each other, or to “achieve consensus.” All the nodes need to be on the same page for the network to function seamlessly.

Accomplishing this is harder than it might sound. This made decentralized digital currency something that eluded the grasp of researchers and developers for decades. That is, until 2009 when the Bitcoin network launched, thanks to Satoshi Nakamoto. That’s the pseudonym used by the person or group who wrote the Bitcoin white paper and invented the proof-of-work algorithm that first made cryptocurrency a real-world phenomenon.

Proof-of-Stake vs Proof-of-Work

Proof-of-stake has hopes of being an improvement over proof-of-work, but this has yet to be proven and is still a topic of much debate. It seems likely that proof-of-stake will indeed use less energy than proof-of-work, but other variables seem less clear.

Namely, it’s not certain if proof-of-stake will be as secure against threats like 51% attacks, and it remains to be seen if PoS will wind up being decentralized or not.

Let’s first take a look at how PoW works before getting into how PoS is different.

Proof-of-Work

Proof-of-work is the most commonly used consensus mechanism. So far, it has proven to be fairly secure and reliable, though not infallible. Proof of work is fundamental to how bitcoin mining operates.

Miners are the people who run computers that maintain the network by solving complex mathematical problems. The miner that first solves the problem gets to add the next block of transactions to the blockchain and also earns the new coins minted along with that block. This process creates a verifiable history of transactions on the blockchain.

PoW has shown to be a strong and secure consensus mechanism. It would be so difficult to overtake a large PoW network that any potential bad actors would be incentivized to become honest participants in the network instead. In other words, it’s easier and more rewarding to just become a miner than it is to attack the network.

Some of the main criticisms of the PoW mechanism of achieving consensus are that the process can be energy-intensive, it has difficulty scaling, and it can trend toward centralization due to the high costs of entry.

Proof-of-Stake

With PoS, validators are the network participants who run nodes. They do this by staking crypto on the network, which involves locking up a certain amount of coins for a set period of time, making them unusable. Validators who do this become eligible to be randomly selected to find the next block.

Other validators then “attest” that they also believe the block to be valid. Once enough validators have done this, the block will be added to the blockchain. All validators involved in the process are rewarded with new coins. Validators that propose blocks or go offline for a time get punished by having some of their staked crypto slashed by the protocol.

One of the main differences between PoS and PoW is that PoW requires network participants to expend energy in the form of electricity to mine blocks. PoS requires network participants to stake their own crypto on the network, or in other words, to deposit money. For this reason, proof-of-stake is praised for using less energy than proof-of-work.

While some argue in favor of proof-of-stake’s potential decentralization, others criticize it. For example, when Ethereum upgrades to Ethereum 2.0 and a proof-of-stake model, it will require a minimum of 32 ETH (about $67,200 at the time of writing) to become a validator. The average individual cannot afford this.

So, centralized exchanges will deposit the crypto necessary to become validators (using the crypto they have on deposit from users) and distribute some of the rewards to their account holders. This could wind up making the entire system even more centralized than proof-of-work, with a few large exchanges being the only validators.

Proof-of-Stake and 51% Attacks

A 51% attack refers to an event where an individual or group attempts to gain control of a network by controlling the majority of hashing or staking power.

It’s unclear if PoS networks are more or less prone to 51% attacks than PoW networks. The subject is mostly theoretical, and 51% attacks have rarely occurred in the real world.

Conducting this type of attack against a network as large as Bitcoin would be practically impossible due to the enormous amount of computational power required.

When it comes to proof-of-stake, attackers would have to buy up more than half the number of tokens being staked. From there, the attacker could become the sole validator and control the network.

One theory is that this could be difficult to achieve because of how high it would drive the price of any particular token. The hope is that people would rather participate honestly in the system by staking tokens than go through the trouble of trying to attack the network, which could get expensive fast.

The Takeaway

While it’s not too hard to answer the question “what is proof-of-stake,” answers to how it works over the long-term on a large scale are lesser-known. Some existing tokens do utilize PoS, but they tend to be altcoin cryptos that are younger and smaller than Bitcoin or Ethereum.

Proof-of-stake could be an improvement over proof-of-work or it could be a regression. The world will have more certainty on the matter after the Ethereum network upgrades to the Ethereum proof-of-stake model known as “the Merge”.

While it does take significant energy to validate transactions using proof-of-work, some reports indicate that over 70% of energy used to mine bitcoin comes from renewable sources. On top of that, the total energy used is also a fraction of that needed to power the gold mining or banking industries.

However, it’s significant that the Bitcoin network has faced criticism for its high energy usage. Less energy-intensive consensus mechanisms might not be a bad thing if they can achieve similar results.

Photo credit: iStock/shapecharge

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.

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.

SOIN0621255

Aug

2021

SegWit: Definition & How it Works

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

SegWit is an update to Bitcoin’s protocol that changed the way that the blockchain transfers information. Protocols are the rules that govern the way that Bitcoin and other cryptocurrencies work.

What Is SegWit?

SegWit is an example of the Bitcoin development community being able to solve a problem while still maintaining the integrity of the Bitcoin protocol and blockchain.

SegWit stands for “segregated witness,” and it’s a key turning point in the history of Bitcoin and cryptocurrency, and represents a fork in the road, or at least a fork in Bitcoin. The SegWit fork changed the rules, allowing for larger blocks and removing signature data from Bitcoin transactions.

How Does SegWit Work?

SegWit removes (or segregates) the signature (or witness) from the block, moving it instead to the back of the transaction. This frees up more space for the transaction itself.

What Problems Does SegWit Solve?

SegWit solves several issues with earlier versions of the Bitcoin protocol.

The Transactions Problem

The original Bitcoin protocol limits the size of “blocks” to a single megabyte. The whole Bitcoin network “confirms” a new block every ten minutes, with a few transactions taking place every second. These blocks and the confirmation process comprise the foundation of Bitcoin.

As Bitcoin scaled and got bigger and more miners, developers, and users became part of the Bitcoin community, a debate arose around the size of blocks. Should it increase beyond founder Satoshi Nakamoto’s original vision or stay the same?

If the community decided to make an increase, it would have to receive approval by consensus, or perhaps risk splitting Bitcoin apart into separate protocols.

The Malleability Problem

The Blockchain also had some security and efficiency issues, known as “malleability.” Prior to Segwit, every Bitcoin transaction included a “signature” that became part of the transaction confirmation. The signature, with the use of a private key, would become part of the block transfer, taking up space that could have been more Bitcoin transactions. Another word for these signatures is “witness,” and so was born the idea of Segregated Witness, or SegWit.

The theory behind SegWit held that Bitcoin transactions could be more efficient, more secure, and better recorded on the Blockchain itself. This would also allow for developers to build transfer improvements on top of the original Bitcoin protocol, leading to the development of the Lightning Network.

The Scalability Problem

One of the major issues addressed by SegWit was the so-called “scalability problem,” which refers to the issue with block sizes that can limit the speed and scale of transactions on a Blockchain network.

When Was SegWit Created?

The Bitcoin Segwit update took place on August 23, 2017 and changed the way information was transferred on the blockchain.

Prominent Bitcoin developer Pieter Wuille originally proposed the update in 2015 as a way to address a problem in the less-than-a-decade-old protocol that governed the cryptocurrency. He and others believed that transactions took too long to process and that they had some security issues.

There were two ways, known as forks, to address the problem.

A hard fork

A hard fork creates a new system all together. Bitcoin Cash is an example of a hard fork, which enabled large block sizes, but ultimately created a new network.

A soft fork

With a soft fork, the new system works with the old one. This is the option that developers used for SegWit, which became one of the most prominent and important Bitcoin forks. In the dispute between soft fork vs hard fork, SegWit’s successful adoption is a victory for the soft forks.

What Was Segwit2x?

Some prominent Bitcoin miners supported several approaches to the scale issue inherent in the original Bitcoin protocol. To move forward, they came to what’s known as the “New York Agreement,” a plan to implement SegWit and do a hard fork of Bitcoin to increase the block size limit. This was “SegWit2X.”

However, Bitcoin’s developers didn’t endorse the plan and it never reached the consensus necessary for a successful hard fork. These developers have huge sway over the greater Bitcoin community and without their support, a fork wouldn’t have enough takers to challenge Bitcoin in its present set-up. By late 2017, SegWit2X had collapsed and early the next year, SegWit was fully operational on consumer cryptocurrency platforms like Coinbase. And major crypto wallets, the hardware and software products that allow for safe crypto storage, had signed on to the SegWit update.

The failure of SegWit2x shows that even large Bitcoin mining pools, groups of miners that run the hardware that creates new Bitcoin, don’t have total sway over the Bitcoin community and can’t singlehandedly dictate its direction – or its forks. Bitcoin miners have tended to prefer Bitcoin changes that would increase the block size as opposed to segregating out signatures, since that would bolster the fees they get from the network for processing blocks. But the Bitcoin community is more than just its miners, and so their opinion only means so much.

Should You Use SegWit?

While the Bitcoin scalability debate is hardly over, for the time being, Bitcoin itself remains in the driver’s seat in terms of usage and developer activity compared to its rivals and hard forks.

By early last year, at least two thirds of transactions used SegWit, indicating that the soft fork “works” for many in the Bitcoin community. By the end of 2020, one of the last exchanges to hold out, Binance, announced that it would support SegWit.

There are several benefits to using Segwit for crypto transactions, including lower transaction fees and faster transactions.

The Takeaway

SegWit was a major upgrade to the Bitcoin protocol, and one that has helped accelerate widespread adoption of the cryptocurrency in recent years.

Photo credit: iStock/BartekSzewczyk

Jul

2021

Crypto Diversification: Can You Diversify with Crypto?

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

In 2021, as bitcoin and cryptocurrencies have become more of an acceptable asset class to many big investors and institutions, many retail investors might find themselves wondering if it’s worth having an allocation to crypto in their own portfolios.

Is investing in cryptocurrency worth it? Should crypto diversification be a part of every investor’s diversification strategy? Here’s a closer look.

What is Diversification?

Diversification involves spreading investments across different asset classes in an attempt to minimize risk and maximize returns. A diversification strategy often involves making investments across different sectors of the economy and within particular sectors.

The factors that make an asset good for portfolio diversification will vary depending on an investor’s existing holdings. One of the main goals is to ensure that if a particular sector or asset class takes a dive, the event won’t decimate the entire portfolio.

Ideally, a well-diversified portfolio will see gains in other areas when certain areas see corrections. In this way, downside risk can be mitigated even amidst the many unpredictable factors that come with investing.

Here are a few examples of assets that can be used to create diversification in a portfolio.

REITs

Real estate investment trusts (REITs) are tradable securities that give investors exposure to real estate. REITs also provide shareholders with a substantial portion of their income in the form of dividends.

Furthermore, there are different types of REITs, and these could provide even more diversification. Some REITs specialize in commercial real estate, like shopping malls. Others hold residential real estate like single-family homes, apartment complexes, and condominiums. There are even REITs for the healthcare industry and data centers.

Recommended: Pros and Cons of Investing in REITs

ETFs

Exchange-traded funds (ETFs) can serve many purposes as part of an asset diversification strategy. There are ETFs for almost anything imaginable.

An ETF typically holds a basket of securities that aims to recreate the market performance of a particular index. Or the ETF could simply be a collection of top stocks in a particular sector, making it easy for investors to gain exposure without having to pick specific stocks. For instance, thematic ETFs focus on niche sectors like electric cars or artificial intelligence.

Gold

Gold is an asset that investors might diversify with. Other precious metals investments like silver, platinum, and palladium also fall into this category. Gold is what’s known as a “safe haven asset,” meaning people prefer it during times of uncertainty.

Holding gold can serve as a financial shelter during times when other asset classes see increased volatility or subpar returns. During the initial panic of early 2020, for example, gold performed well at a time when stock markets around the world witnessed historic corrections.

Gold is sometimes compared to Bitcoin when it comes to asset classes and diversification. Investors may consider both as a long-term store of value (though Bitcoin’s volatility makes it somewhat unstable in that regard), a hedge against inflation, and a non-correlated or less-correlated asset.

Recommended: Bitcoin vs. Gold

Asset Diversification With Crypto

One of the key reasons some market observers see crypto as a potential choice for asset diversification is because it sometimes isn’t correlated with other asset classes.

Bitcoin was positively correlated with the S&P 500, the benchmark index for U.S. equities in the fall of 2020. However, the correlation between the two dropped in February 2021, as the cryptocurrency market surged ahead. The 90-day correlation between the two dropped to 0.21 from a high of 0.5 in October.

Meanwhile, Bloomberg reported in May 2021 that some of the volatility of Bitcoin was spilling over into the stock market . A study by Singapore-based DBS Group found that S&P 500 futures contracts tended to post bigger swings after Bitcoin swung 10% up or down in the span of an hour.

How to Diversify a Crypto Portfolio

Once someone has learned the crypto basics and made the decision to diversify with crypto, they might then start asking whether or not they should diversify within crypto. In other words, should they invest in different types of cryptocurrency other than bitcoin?

The answer can be complicated and dives deep into what cryptocurrencies are and how they work. Bitcoin may be the easiest to understand as it only has one use case at present, and that is to serve as digital gold (a store of value) that can be easily divided and transferred among individuals (a medium of exchange).

Most other cryptocurrencies have myriad potential applications and tout themselves as being decentralized solutions. After learning how a crypto exchange works, investors are likely to be exposed to many different tokens.

Bitcoin vs. Smaller Coins

Bitcoin is the largest crypto by market cap and has the highest hash rate of any proof-of-work coin, making it the most secure network and the most liquid market. It was also the first cryptocurrency created and therefore has the longest track record. These features make Bitcoin the investable asset of choice for many large investors, despite the crypto’s ongoing volatility and extreme price fluctuations.

Smaller and newer crypto assets can see high returns in short periods, but their risk is also higher by several orders of magnitude. Many altcoins have seen their values plummet by 90% or more over time, with some going to 0.

Some courageous investors sometimes choose to speculate on the value of an altcoin’s alleged use case through regular crypto trading. These investors are similar to venture capital or angel investors who take on substantial risk for the hopes of finding a rare jackpot or “unicorn” project. This is an available option, but not one well-suited to the average investor with lower risk-tolerance.

Different Strategies for Crypto Diversification

Here are some ways investors can try to diversify within the crypto market:

1. Different types of crypto: Stablecoins, altcoins, Bitcoin itself–investors can seek coins and tokens that have different backgrounds and histories.

2. Different crypto market caps: Larger market-cap crypto tokens and coins include Ethereum and Bitcoin, but there are smaller ones, like Tezos, Aave, Theta, and more, that investors may also want to consider.

3. Different crypto industry focuses: Some cryptocurrencies focus on payment, others on video or the Internet. Investors can seek out different industry focuses.

The Takeaway

While the cryptocurrency market is volatile and not suitable for every investor, there can be benefits to this market, such as periods of time when it’s less correlated to other asset classes and offers a form of diversification.

Photo credit: iStock/Eoneren

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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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

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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