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Q: Why Do Investors Use Currency-Hedged ETFs?

ETF investors can minimize their currency risk by purchasing a currency-hedged ETF, which can smooth out volatility related to foreign exchange rates.

Jun

2021

What Are Currency Hedged ETFs?

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

Currency-hedged ETFs are exchange-traded funds created to minimize the risks of fluctuating exchange rates in ETFs that have foreign holdings.

Many investment companies offer two versions of the same ETF with one version including a currency hedge. The latter ETF has the same holdings as the former, but it also includes derivatives purchased to protect–or hedge–against currency risk. The protections come at a cost, however, and hedged ETFs may have higher fees than non-hedged ETFs.

Why Do Investors Use Currency-Hedged ETFs?

Since currency values fluctuate, exchange rates can affect the total return on an asset. While ETFs provide investors with a significant diversification, they don’t offer any protection against the investment risk created by foreign exchange rates. So purchasing an ETF focused on overseas markets creates an additional layer of volatility within the investment.

Currency shifts can boost or diminish returns on international investments — but they almost always make them more uncertain. If the local currency loses value against the ETF’s currency (in this case the dollar), that can offset returns for the dollar-based investor, even if the assets that make up the security’s returns go up in their own currency.

Since many ETF investors are not interested in forex trading, they can minimize their currency risk by purchasing a currency-hedged ETF, which can smooth out volatility related to foreign exchange rates.

Currency-hedged ETFs may have a slightly higher expense ratio than non-hedged ETFs, due to the cost of the futures contracts as well as potential expenses associated with the tools and people who develop the hedged currency strategy.

Recommended: How to Invest in International Stocks

How Do Exchange Rates Impact Investment Returns?

While a strong dollar may be good when you’re buying assets in a foreign currency, it can hurt returns on assets denominated in a foreign currency. Over the past decade, the strong dollar has meant that hedged portfolios tend to outperform those that weren’t hedged.

Here’s an example: If the dollar-to-foreign-currency conversion rate is 1 to 2, as in one dollar buys you two units of the foreign currency, and you buy 100 shares of a stock at 5 foreign currency units per share, it will cost you $250, or 500 foreign currency units. Now, let’s say those shares double, so that 100 shares are worth 1,000 foreign currency units instead of 500 and your investment is now worth $500, compared to the $250 you spent initially.

But if the dollar strengthened so that the conversion rate went from 2 foreign currency units per dollar to 4 foreign currency units per dollar, those 100 shares are still worth 1,000 foreign currency units but for a US investor, their $250 investment would have shown no gain. While this is an extreme currency fluctuation, it illustrates the reason that some investors might purchase currency-hedged ETFs.

How Does Currency Hedging Work?

Investors use two methods to hedge against currency risk: static hedging and dynamic hedging.

Static Hedging

Static hedging is the most basic kind of hedging. An ETF that uses static hedging has one strategy that it executes, regardless of market conditions. An ETF using this strategy would buy contracts in the future market that lock in a currency’s value relative to the dollar or set parameters around it.

The contract is an agreement to buy a currency at a future price, which has the same effect of cancelling out currency gains or losses if they move from the currency’s current value against the dollar.

Dynamic Hedging

Dynamic hedging may incorporate multiple strategies or change strategies as market conditions change. Dynamic hedging is not always in effect, instead the hedge is “put on” based on the judgment of the ETF manager. Sometimes this judgment reflects an algorithm or series of rules that looks at market conditions for determining when to buy and sell financial instruments that hedge currency exposure.

For example, an ETF might have a rules-based system that looks at the trend of a currency’s value against the dollar, the interest rates in both countries, and the overall value of that currency (namely if it’s more expensive than the dollar). Those data points and, specifically, how they change over time, would determine whether and how much to hedge the ETF at any given time

The Takeaway

Currency-hedged ETFs are one way to get exposure to foreign markets and protection against the currency risks that come with that type of investment, but they may cost more than non-hedged ETFs. It’s important for investors to understand how they work, as they start to build their own investment strategy and learn how to pick ETFs to include (if any) in their portfolio.

If you’re ready to start putting that strategy into action, a great place to start is the SoFi Invest investing platform, which offers personalized investment advice, a range of ETFs, and automated investing.

Start investing today.

Photo credit: iStock/Delmaine Donson

Jun

2021

How is Bitcoin Valued?

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

As a decentralized digital currency, Bitcoin is valued primarily on supply and demand on the exchanges where it’s bought and sold. But there are other variables that come into play, driving up the value of Bitcoin to new heights, and then driving it down at times, too.

What is the Value of 1 Bitcoin?

The price of Bitcoin has risen dramatically since the technology was created in 2009. While at first one bitcoin had essentially zero value, it gradually rose to a fraction of a penny and then underwent several boom and bust cycles (or “bubbles”) over the years before arriving at today’s valuation of around $37,000.

In March of 2020, the price of one bitcoin fell as low as $4,000 or less on some exchanges. The price then rose 10x to over $40,000 in less than a year as massive government stimulus programs coincided with growing adoption by corporations and large institutional investors.

In April of 2021, Bitcoin notched yet another record high in US dollars at over $63,500, according to Coindesk data—and by mid-May, it was down to $37,739.

What Affects the Price of Bitcoin?

There’s no easy answer to the question “how is the price of Bitcoin determined?” Because Bitcoin is decentralized, there isn’t even one single price like there is for commodities like oil or gold. Being a decentralized digital commodity of sorts has allowed Bitcoin to find a price determined mostly by the sum total of buy orders and sell orders across multiple exchanges.

Bitcoin trades constantly on many different exchanges. The price is discovered through buyers and sellers agreeing on prices at which to settle trades. It can be said that “the market” determines the price of Bitcoin. Indexing services, like those provided by Coindesk, Coinmarketcap, Messari and others, aggregate data from many sources and approximate an average to come up with a single value.

Of course, many external factors may influence the price at which people are willing to pay for Bitcoin. These variables can shed light on the question, “how is Bitcoin valued?”

1. Sentiment

With any asset, general market sentiment can influence present and future price action. This tends to occur in cycles.

It often happens that as more and more people grow increasingly bullish on something, the price keeps rising until everyone thinks it will never go down again. Then at some point, things change, and sentiment starts shifting the other way. Once most people think the price will never go up again, that usually indicates that prices have come close to bottoming.

This is why CNN has something called the “Fear and Greed Index” . The index measures sentiment across financial markets at large using seven broad indicators. These indicators measure things like stock volatility, call-to-put ratios, and the amount of stocks making new highs vs the amount of stocks making new lows.

With Bitcoin, news of increasing adoption or additional capital coming into the asset class tends to drive prices upward. Here are a few examples of headlines that have contributed to Bitcoin’s price performance in 2020 and 2021. Note that positive Bitcoin news doesn’t always have to do with Bitcoin itself, but with the cryptocurrency sector in general:

• “Visa Supports Transaction Settlement With USDC Stablecoin”

• “Paul Tudor Jones reportedly buys bitcoin as an inflation hedge, compares crypto to 70s gold trade”

• “MicroStrategy buys more than $1 billion worth of bitcoin, adding to massive holdings”

• “Tesla Buys 1.5bn in Bitcoin, Pushing Price to New High”

The fact that big names like these (and others) have decided to start investing in bitcoin in just the past 12 months has helped to boost the price. Furthermore, these entities are buying up huge sums of bitcoin with the intent to hold for the long-term, further reducing the overall supply and putting a floor underneath prices.

2. Mining

Bitcoin mining also impacts the price of Bitcoin. Miners are powerful computers that process transactions for the network, and they’re the source of newly minted bitcoins.

Because miners create and accumulate new coins, what they tend to do as a whole can make a big difference in market prices. Miners have to sell some of their Bitcoin to cover electricity and maintenance costs. But what they choose to do with their remaining coin can impact prices.

For example, when miners anticipate the future price of Bitcoin to be higher than it is right now, they could choose to hold most of their coins, reducing overall supply on exchanges. This would create support for prices.

On the other hand, if miners think the price of Bitcoin will fall, or they need cash today for some reason, they could sell their coins, increasing the supply and potentially driving prices lower.

3. Money Supply

Some may argue that the number one factor affecting the price of Bitcoin is the growth in money supply. When central banks print more money, the price of Bitcoin tends to rise in almost direct proportion to the amount of new currency created.

This is part of the supply-and-demand element in Bitcoin’s price. More and more dollars (or Euros, Yen, Pesos, etc.) wind up chasing an ever-dwindling supply of bitcoin. The new supply of fiat currency keeps growing while the new supply of bitcoin gets cut in half every 4 years (a process known as Bitcoin halving).

4. The Network Effect

Some say Bitcoin’s true value lies in the Bitcoin network. In other words, how many people are using Bitcoin.

A rough analogy would be social media networks. We tend to measure the value of a social network by its number of users and how active they are on the platform. Facebook and Instagram both have over a billion users each, with at least half of them logging in everyday in the case of Instagram. This is the main reason people think these networks have value.

With Bitcoin, the more people who create cryptocurrency wallets, convert fiat currency to Bitcoin, and spend or store those coins, the more valuable Bitcoin could become. And as the price of Bitcoin rises, more people tend to join in the network, potentially creating a positive feedback loop.

The Takeaway

There’s no single variable that can be pinned down as the main driver of the Bitcoin price. While some factors, like news and sentiment, are universal in the financial world, others like mining and the network effect are more unique to cryptocurrency. When it comes to what to know before investing in crypto, doing more in-depth research on some of the concepts mentioned above could be a good place to start.

For investors ready to start trading crypto, SoFi Invest® makes it simple to get started. Members can trade a range of crypto, from Bitcoin and Ethereum to Litecoin and more—and manage their account right from the SoFi app.

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

Photo credit: iStock/akinbostanci

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.

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

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

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

SOIN0421173

Jun

2021

What Does Network Effect Mean?

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

The “network effect” is one of the most powerful ideas in technology and business. The idea is that the more users there are in a network, the more valuable the network becomes.

Network effects are a big deal for both businesses and investors. For companies that have critical masses of users and have established lock-in, it can mean profits that grow and grow and grow. It also means that investors may be willing to have a company they fund lose money for a while if they have a shot at becoming the number one business in a field with network effects.

We can see networks in all sorts of businesses, but especially ones based around the internet, which connects individuals to one another. There are network effects in the internet, in social networks, and in digital products like cryptocurrencies.

What Is a Network Effect?

The basic idea behind network effects comes from a relatively old form of technology: the telephone. Imagine you’re the first person with a landline telephone installed. You can pick it up and listen to a dial tone, but without anyone else with a telephone, it’s merely a sculpture plugged into your wall. If you had to pay for it, the phone is perhaps of negative value, unless you really like how it looks.

But there’s value for the second person getting a phone installed—after all, they can call you up and you can call them. As more phones get installed, the value of the phone network increases. When there are strong network effects, the value of new users rises for existing users as more and more users are added to the network.

How Does the Network Effect Work?

Network effects are crucial for basically any internet-related business, including the web itself. One of the most influential attempts to quantify network effects comes from Robert Metcalfe, the co-inventor of Ethernet. He maintained that the value of a network grew as the square of its number of users.

Following this line of thinking, the value of the network to the customers or users would grow exponentially while the cost of adding new users grows linearly. For businesses that can establish network effects, then, it may make sense to invest very very heavily in user growth, even if it means losing money in the short run.

What are Businesses with Network Effects?

There are a number of modern-day industries that benefit from network effects.

Communications Networks

Network effects apply to parts of communications infrastructure that are not exactly businesses per se. For example, the World Wide Web, which is a platform for all sorts of nonprofit and for-profit activity and is not controlled by any one company, is characterized by network effects.

Marketplaces

Online marketplace eBay is a useful look at how network effects work in marketplace businesses, where a service tries to connect buyers and sellers. One reason eBay was so successful in its early years was that it achieved “lock-in” (the point where it doesn’t make sense to go to other services) for individuals wanting to auction items online. It did this in part by making the service free for sellers in its early days, attracting new users eager to make money off their items.

Social Networks

Perhaps the most prominent example of businesses characterized by network effects are social networks. Facebook, YouTube, Twitter, and other social networks improve for users as more users, usually people they know or are interested in, use them. Once everyone you know is on a social network, it may become harder to avoid and easier to simply succumb to signing up.

Cryptocurrency

If the previous examples of network effects were internet infrastructure or internet businesses, cryptocurrency may be a combination of both. Some cryptocurrencies are incredibly valuable and have built up an ecosystem of service around them.

As more people consider Bitcoin to have value, it creates an incentive for miners to secure the network—the network effect at work. In the case of Ethereum, as more apps are deployed, each one becomes a building block. This drives increased usage, and ultimately more demand for Ethereum.

In both cases network effects are a sign that the cryptocurrency could have staying power: If it does something useful for its holders, it may do something useful for people who buy in.

Granted, many other cryptocurrencies have flamed out. One big question going forward is the extent to which crypto can be characterized as having network effects — driving greater organic usage, rather than people primarily viewing cryptocurrency as an investment.

The Takeaway

A network effect is an idea that as a product or service gets more users, it will inherently attract more users — thus creating a pattern of success. The network effect can be seen most clearly in communication technology, including digital products and services like social media. For investors, it can be smart to keep an eye on the network effect in businesses you’re invested in, or are considering.

For investors just starting out, or established investors looking to expand their holdings, the SoFi Invest® online trading app offers an active investing solution that allows you to choose your investments as well as an automated investing solution that invests your money for you based on your goals and risk.

Find out how to get started with SoFi Invest.

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.

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.

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.

SOIN0421151

May

2021

Bitcoin vs. Gold: Prices & Investment Benefits

Bitcoin vs. Gold: What’s the Better Investment?

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

In conversations around portfolio diversification, the merits of Bitcoin vs. gold has become a topic of much debate among investors. The question itself is problematic, implying that one asset is categorically better than the other for all investors.

There are different factors to consider for each, and depending on someone’s risk tolerance and financial or technical knowledge, they may choose to hold gold, Bitcoin, or both. It’s largely a personal decision and any statements made here regarding future price potentials are only estimations based on past trends. Past performance does not indicate future results.

Is It Better To Invest in Gold or Bitcoin?

There’s nothing preventing investors from holding both gold and Bitcoin in their portfolios—after all, the concept of portfolio diversification allows for spreading your money across a variety of different asset classes.

Some investors might want to hold gold as a safer haven asset (though gold can still lose value) and hold while holding Bitcoin for a chance at outsized gains and additional liquidity (though investing in crypto can be risky).

The decision to invest in one or both of these currencies is individual, and may depend in part on a person’s risk profile. For example, someone risk-averse may not be inclined to invest in Bitcoin because it is so volatile. Whereas an investor with a higher risk tolerance may consider the risks of volatile crypto to be worth it. Alternatively, some investors may choose not to invest in gold or Bitcoin.

Bitcoin vs Gold: Pros and Cons

Bitcoin has two clear advantages over gold: liquidity and potential for price appreciation.

And gold has two clear advantages over Bitcoin: an established history and lower volatility.

Here we’ll examine some of the most important pros and cons of investing in Bitcoin vs gold.

Volatility

Bitcoin’s volatility is legendary. The cryptocurrency has been known to rise or fall by 10%, 20%, or even 30% in a matter of hours or days. Few other assets, aside from penny stocks, see anywhere near this kind of volatility.

Gold, while still seeing some volatility at times, tends to have a smoother ride in the markets. Investors largely see gold as a safe haven, “risk-off” asset. If gold moves more than 1% or 2% in a day, it’s usually considered significant and rare.

History

Gold has a 5,000-year established history of serving as a store of value. This gives many investors confidence in the yellow metal. Throughout generations and across cultures, gold has universal recognition as a form of money and has been a proven way to store and preserve wealth. Investing in precious metals is generally a relatively safe bet.

Bitcoin was created in 2009. That gives it a little more than 12 years of history as of the time of this writing. The blockchain technology that underlies the Bitcoin network is just as new, and no decentralized peer-to-peer network like Bitcoin has ever existed before.

Over its lifetime, Bitcoin has risen from a fraction of a penny to over $50,000 at the time of writing in late April 2021. There may not be any other asset in history that can boast those kinds of returns on such a short time frame.

However, the youth and novelty of the Bitcoin network gives some investors pause. There are some unpredictable variables, such as how governments might respond to this new form of money largely outside of their control. Will Bitcoin be criminalized, heavily taxed, or otherwise regulated out of existence somehow?

How might the network respond to a major, global cyberattack? What happens once Bitcoin has been fully mined, and miners only have transaction fees to incentivize their work, rather than the block rewards of newly minted coins?

These and many other questions create too great an uncertainty for some investors.

On the other hand, some Bitcoin proponents claim that Bitcoin will one day replace gold altogether due to the advantages that a scarce digital currency has in today’s increasingly virtual world.

Liquidity

Gold is considered a liquid asset. To get liquidity out of gold, it has to be sold for the fiat currency of an investor’s choice. This process may be cumbersome and usually involves either taking the physical gold to a coin dealer or selling gold to a private party via the internet, for example, through an online auction house.

While some investors might see this as a con, others might see it as a pro. You might be less likely to spend money saved in gold coins than money saved in cash or bitcoin, which could be a good thing for those looking to curtail their spending habits.

By nature of being virtual, Bitcoin is quite liquid. Crypto markets trade 24/7, every single day of the year. Users can access their wallets from anywhere with an internet connection.

Exchanging Bitcoin for fiat currency is quick, cheap, and easy. In some cases, exchanging for fiat may not even be necessary. A growing number of businesses, organizations, and individuals have begun accepting Bitcoin as a direct form of payment.

Additionally, Bitcoin loans provide the option for using Bitcoin as collateral for a fiat currency loan, creating even more liquidity options.

Supply Limit

Gold is a physical commodity that has a scarce supply. No one knows exactly how much gold lies in the Earth’s crust, but it stands to reason the amount is finite. The process of mining and refining gold is difficult and takes time.

Bitcoin is a digital commodity that has a fixed supply. There can only ever be 21 million bitcoins mined into existence, as per the Bitcoin protocol.

Advantage	Bitcoin	Gold
Low Volatility		✔
History		✔
Liquidity	✔	✔
Supply Limit	✔

Will Bitcoin Be Worth More Than Gold?

At the time of writing, the market cap of Bitcoin is about $1 trillion. The market cap of gold is estimated to be about $10 trillion. That means Bitcoin would have to rise by a factor of roughly 10x before reaching parity with the market for gold.

While such a thing may sound fantastic, it’s not out of the realm of possibility. Five years ago, the market cap of Bitcoin was only $7 billion. At $1 trillion, Bitcoin has grown by a factor of almost 50x during that time.

If recent trends were to continue, it could be possible that Bitcoin reaches or exceeds the market cap of gold in the years to come.

Is Bitcoin a Good Investment?

In terms of returns, Bitcoin has been the best-performing asset of the last 12 years by a wide margin. Bitcoin has also been the best-performing asset nearly every year since its creation (with the exception of 2014 and 2018).

However, when mentioning Bitcoin’s impressive gains, one must also mention the extreme volatility Bitcoin has also experienced, along with the exchanges that have been hacked, and stories of people losing the private keys to their Bitcoin forever. These risks are worth paying attention to.

Is Gold a Good Investment?

Long-term investors might consider gold a good investment, thanks to its low volatility and longevity. It’s a relatively low-risk investment. Generally, gold appreciates in lockstep with inflation, which is why it is considered a safe asset. But gold’s very stability may make it less desirable for short-term investors who hope to turn a quick and hefty profit.

The Takeaway

There are many nuances to the gold vs. cryptocurrency debate, but it’s important to remember that it doesn’t have to be a debate at all—investors are free to choose both. The real decision might be in choosing what percentage of a portfolio to allocate to each asset to maximize returns and minimize risk. And as always, those decisions depend on the individual investor.

Photo credit: iStock/Olemedia

May

2021

Cloud Mining: What is Bitcoin Cloud Mining?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Cloud mining is a way to mine cryptocurrencies like Bitcoin and Ethereum without investing in expensive, energy-intensive computer hardware and software. This article will explain the need for Bitcoin cloud mining, how it differs from traditional mining, and more.

We will explore:

•  What is Traditional Cryptocurrency Mining?
•  What is Bitcoin Cloud Mining?
•  Why Crypto Mining is Important
•  Is Bitcoin Cloud Mining Worth It?
•  Types of Cloud Mining
•  Getting Started with Cloud Mining

What is Traditional Cryptocurrency Mining?

First, a brief recap of how Bitcoin mining works: Bitcoins are created and released into the blockchain network through a process called mining. Mining involves using computing power to solve complex mathematical equations which help to verify previous Bitcoin transactions on the blockchain. Miners earn Bitcoin as a reward for helping to keep the network running. This same process is also used to mine other mineable crypto such as Ethereum.

The computing equipment and software required for mining can be both expensive and energy intensive—which is why many mining companies set up in cooler regions of the world that also have low energy costs.

What is Bitcoin Cloud Mining?

Another way to mine Bitcoin and other mineable cryptocurrencies is through cloud mining. Cloud computing includes services such as databases, software, file storage, server space, and processing which users access via the cloud. Many cloud computing services charge based on usage, similarly to paying for use of utilities like water or electricity.

With cloud mining, a person can rent cloud computing power instead of running their own local machines. This lets people participate in mining remotely by opening an account and going through a simple set-up process. Bitcoin cloud miners join a pool of miners, also known as a “mining pool,” which rents a certain amount of hashing power used to mine Bitcoin. Hashing power is the amount of computing power used to solve algorithms in the Bitcoin mining process. The individuals in the mining pool split the profits depending on how much hashing power each of them rented.

The lower costs and easy set up process make this an attractive choice for many, but it is no guarantee as to whether mining will be profitable.

Why Crypto Mining is Important

The mining process is key to maintaining and securing the Bitcoin blockchain. It keeps track of all Bitcoin transactions that take place, making sure there are no instances of double spending—where the same Bitcoins get sent to more than one address, allowing someone to spend the same amount twice. The mining verification process is one benefit of the blockchain system. It eliminates some problems that paper money has, like counterfeiting—because if someone hands a merchant a counterfeit bill and walks away there isn’t much that can be done.

Is Bitcoin Cloud Mining Worth It?

The major upside to cloud mining is that it eliminates the costs, time, and expertise associated with setting up a mining operation. Customers can earn a profit from partaking in cloud mining with very little upfront effort. They also avoid having to listen to noisy mining equipment and keeping electronics (and the home or business in which it’s located) sufficiently cool.

However, there are also downsides to cloud mining. The cloud mining space has had its fair share of scams. Customers signing up for a cloud mining account don’t have much way of knowing whether the mining operation really exists, and it could shut down at any moment. As with any potential investment, it pays to do some research before signing up: check industry news sites and forums to see what cloud services get good customer feedback, and which ones have been outed as scams.

Also, the return on investment for cloud mining is longer than simply buying and selling cryptocurrencies. Customers have to invest an upfront sum of money and then wait months or years for that investment to pay off.

Pros of Cloud Mining	Cons of Cloud Mining
• No equipment, set up, or maintenance costs • No technical knowledge required • No noise or heat • No ongoing maintenance • No need to continue buying new equipment • No risks of fire	• Potential for mining company to be a scam • Less choice of equipment or mining specifications • Mining company could go out of business • Long ROI

Types of Cloud Mining

There are two major forms of cloud mining.

Hosted Mining

The most popular type of cloud mining is hosted mining, where customers rent or buy mining equipment that remains in the cloud mining company’s facilities. The mining company handles all the set up and maintenance of the equipment. Since the company can scale up their operations, this brings the costs of energy and storage down, but customers have to pay the lease fee as well as paying for the maintenance services the company provides. Generally, there is a large upfront cost when getting started with hosted mining, but after that the ongoing costs go down.

Leased Hash Power

In mining, a good hashrate is key. Another type of cloud mining is leased hash power, where customers rent hash power, or computing power, from a mining company (also known as a mining farm), for a certain amount of time. The customer then gets a share of the crypto profits that the mining company earns. This type of cloud mining tends to be more popular for types of cryptocurrencies other than Bitcoin.

Getting Started with Cloud Mining

The first step in getting started with cloud mining is to find a reputable company. Forums and reviews can help suss out which companies are scams and which are real. It’s important to note that scam mining services will often advertise on industry sites, forums, and subreddit channels. If there is an advertisement but no information or positive reviews of the company, it might be a red flag.

The next step is to compare costs and options between different mining services. Some may charge higher fees or may have a larger upfront investment requirement. Things to look at include:

•  Price per GH/s (1,000,000,000 hashes per second) or TH/s (1,000,000,000,000 hashes per second)
•  Service fees (these may be ongoing or upfront)
•  Time to ROI (if the upfront investment is large, it may not make sense to sign up since it will take too long to see an ROI)

Once you decide on a cloud mining service, it’s as simple as creating an account, deciding how much to invest, and waiting to see how your investment pans out.

The Takeaway

Cloud mining offers some advantages over traditional Bitcoin and crypto mining. Notably, an individual doesn’t have to invest in expensive, energy-sucking computer equipment and software, or find a place to house it. But just because cloud mining is easier in some ways, doesn’t make it a sure thing in terms of an investment.

What Are Currency Hedged ETFs?

Why Do Investors Use Currency-Hedged ETFs?

How Do Exchange Rates Impact Investment Returns?

How Does Currency Hedging Work?

Static Hedging

Dynamic Hedging

The Takeaway

How is Bitcoin Valued?

What is the Value of 1 Bitcoin?

What Affects the Price of Bitcoin?

1. Sentiment

2. Mining

3. Money Supply

4. The Network Effect

The Takeaway

What Does Network Effect Mean?

What Is a Network Effect?

How Does the Network Effect Work?

What are Businesses with Network Effects?

Communications Networks

Marketplaces

Social Networks

Cryptocurrency

The Takeaway

Bitcoin vs. Gold: What’s the Better Investment?

Is It Better To Invest in Gold or Bitcoin?

Bitcoin vs Gold: Pros and Cons

Volatility

History

Liquidity

Supply Limit

Will Bitcoin Be Worth More Than Gold?

Is Bitcoin a Good Investment?

Is Gold a Good Investment?

The Takeaway

Cloud Mining: What is Bitcoin Cloud Mining?

What is Traditional Cryptocurrency Mining?

What is Bitcoin Cloud Mining?

Why Crypto Mining is Important

Is Bitcoin Cloud Mining Worth It?

Types of Cloud Mining

Hosted Mining

Leased Hash Power

Getting Started with Cloud Mining

The Takeaway

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