Jan
10
2022
A Guide to Play-to-Earn Crypto Games

A Guide to Play-to-Earn Crypto Games

By | Growing Wealth, invest, Investing | Comments Off on A Guide to Play-to-Earn Crypto Games

Until recently, video games could only reward players inside the game and its ecosystem. But now developers are exploring new ways to monetize digital value created within the gaming universe.

Thanks to cryptocurrency and non-fungible tokens (NFTs), some new monetary models have emerged in the gaming space. Some of these models allow gamers to potentially make a profit just by playing their favorite games. These are referred to as play-to-earn games.

What Are Play-to-Earn Games?

Play-to-earn crypto games offer players the potential to acquire certain digital items that could have real monetary value. These usually come in the form of NFTs or a cryptocurrency token. The tokens can then either be sold to other players in the game or sold in an outside marketplace.

How Do Play-to-Earn Games Work?

Play-to-earn games use a business model that rewards users with cryptocurrency in exchange for playing the game.

Gamers are given virtual items within the game, along with the ability to increase their value through actively playing. Thanks to the advent of non-fungible tokens (NFTs), in-game assets can be defined by a unique blockchain marker. This allows for digital items that have value in the gaming universe (for example: weapons, spells, skins, virtual property, etc.) to have a single owner and even to be assigned a monetary value.

By participating in the digital economy that exists within the game, players can create value for themselves, other players, and the game’s developers. In return, they can be rewarded with various digital assets. These could include additional in-game items, new characters with variable scarcity, or some kind of cryptocurrency token.

The main concept at work in play-to-earn NFT games is that players can be rewarded for the time and energy they put into the game.

Most Popular Play-to-Earn Games

Play-to-earn crypto games provide some kind of financial incentive for players. There could be ways to make money inside the game by either acquiring items that come in the form of NFTs that have resale value on a dedicated marketplace, or by earning different types of crypto by performing certain actions.

Here are a few popular play-to-earn crypto games of 2021, as reported on Crypto Potato .

Axie Infinity

Axie Infinity was partially inspired by the Tamagotchi craze of the late 1990s. Tamagotchis were small, keychain-sized digital “pets” — devices that users could take care of as they matured.

In Axie Infinity, players can raise, collect, breed, and battle token-based creatures called Axies. The digital creatures can take many different forms — there are over 500 available body parts grouped into different categories according to how rare they are. Categories include:

•   Common

•   Rare

•   Ultra-rare

•   Legendary

Each Axie is a non-fungible token (NFT) with its own unique attributes. Users can upgrade their Axies and trade them for cryptocurrency.

The native token of the Axie network is called Axie Infinity Shards (AXS). AXS can be staked or used to participate in the game’s governance.

In addition, there’s another cryptocurrency called Small Love Potion (SLP), which can be earned by playing Axie Infinity. This crypto is an ERC-20 token hosted on Ethereum. SLP can be used to breed new Axies. The cost to breed a new Axie begins at 100 SLP but goes up with each subsequent generation. Axies can be bred up to 7 times.

The Sandbox

The Sandbox combines NFTs and decentralized autonomous organizations (DAOs) to create a digital world with a large gaming community. In a virtual world, players can create and exchange different digital assets inside the game.

There are two different tokens in The Sandbox. The native token, SAND, is an ERC-20 token with a limited supply of 3 billion. The other token, LAND, is an NFT with a supply of 166,464 and can be used for hosting games, building housing, creating multiplayer experiences, and more.

Pros and Cons of Play-to-Earn Games

Here are some pros and cons of play-to-earn games.

Pros

1.    It’s fun. Video games are made for entertainment, and players who enjoy a particular game will likely welcome the chance to make some real money in the process.

2.    It’s new. Pay-to-earn games represent a new frontier in technology and gaming. Current players get to be the first to experience what may become a standard model for many more games in the future.

Cons

1.    There are fees. These platforms take fees when players sell digital items. For example, Axie Infinity takes a 4.25% marketplace fee when players sell characters to other players.

2.    Potential for volatility. Most of these tokens are still relatively small, so their prices can rise or fall quickly. This could pose problems for those looking to profit from play-to-earn games.

3.    There is a learning curve. Those unfamiliar with how crypto works, how to use digital wallets, or how NFTs work will want to educate themselves before getting involved. Users have to interact with the existing crypto ecosystem outside of the game if they want to participate and have a shot at making money.

How Much Income Do People Make From Play-to-Earn Games?

The amount of income from play-to-earn games can vary, but for most players, it’s unlikely to allow them to quit their day jobs.

Income potential depends upon variables like the game in question and its current popularity, demand for any NFTs or tokens offered, and the current state of the crypto market in general. While some NFTs earned in games have sold for hundreds of dollars, so far this isn’t the norm.

Players who spend more time in the game may have better odds of earning more, but there’s no guarantee due to the other variables mentioned.

That said, some people in developing countries (where the U.S. dollar is more valuable than the local fiat currency) have managed to make enough of a regular income with play-to-earn games to replace their unemployment benefits.

The Takeaway

In the past, the only way to monetize anything video game-related was to sell an account. In games like World of Warcraft, for example, some new players might be willing to pay for an account that has established characters that are already at high levels and have advanced items.

Today, newer pay-to-earn games are part of the growing metaverse, a term used to collectively refer to all aspects of a burgeoning virtual reality universe.

FAQ

Which games can you play to earn NFTs or cryptocurrency?

There are many play-to-earn games, including Axie Infinity and The Sandbox.

Are play-to-earn games lucrative for the player?

It can be hard to say for certain since this is a relatively new phenomenon. In general, only the most dedicated players are likely to amass any significant funds. There’s also a factor of luck involved in how in-demand the earned items happen to be in a given moment.

One important factor in how lucrative pay-to-earn can be is the value of the token or NFTs in question. If the tokens rise in value relative to Bitcoin or a user’s local fiat currency, then even a small amount of cryptocurrency could lead to large payouts for players. On the other hand, if demand is low, users could spend a lot of time playing these games without earning much.

Are there free blockchain games?

Some blockchain games will require an initial investment. This can vary depending on the game. Axie Infinity requires new players to purchase three Axies, which costs around $600.

There are a variety of different blockchain games that can be played for free, but most of them are less popular.

Photo credit: iStock/blackCAT

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

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

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

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

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

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Jan
10
2022
What Is a Ledger Wallet? Do I Need One for Crypto?

What Is a Ledger Wallet? An Overview

By | Growing Wealth, invest, Investing | Comments Off on What Is a Ledger Wallet? An Overview

Ledger is a brand of crypto hardware wallets. They were responsible for bringing the first hardware wallets to market.

In the years since Ledger’s debut, many other wallet makers have hit the scene. But the Ledger name is still synonymous with secure crypto hardware wallets. The company derives its name from blockchain technology. Understanding the question “what is a crypto ledger” sheds light on why the company chose this name.

What Is a Crypto Ledger?

The term “crypto ledger,” or simply ledger, refers to the public ledger of transactions recorded on the blockchain. These transactions are recorded in the form of Bitcoin addresses. Whenever someone makes a transaction on the Bitcoin blockchain or any other blockchain, the transaction is recorded in the blockchain ledger along with the relevant information. This includes the time the transaction occurred, the amount sent, the sender and recipient’s addresses, and the current number of network confirmations.

A new blockchain begins with something called a “genesis block.” This is a manufactured block to start things off because no transactions have occurred yet. From that point on, transactions are grouped into additional “blocks,” with each block being added to the one that came before it. Subsequent blocks form a “chain,” giving rise to the term blockchain. A blockchain is, therefore, a public ledger of transactions.

Ledger, the company, is a leader in the cryptocurrency hardware wallet space. In 2014, they released the first such wallet to the general public.

Recommended: Cryptocurrency 101: A Beginner’s Guide

How Does a Ledger Wallet Work?

First, a brief answer to the question “what is a cryptocurrency wallet”: Wallets are where people send and receive crypto. Hot wallets hold private keys online while cold wallets (such as hardware wallets) hold keys offline. Hot storage vs. cold storage in crypto is an important distinction to make.

Ledger wallets are designed for newer users. Getting started is rather easy. The wallets require a separate application, also made by Ledger, to work. This app, called Ledger Live, lets users interact with their hardware wallet on a desktop or laptop computer.

The display of a Ledger crypto wallet has two parts: the small screen on the device itself and the Ledger Live app on a computer or mobile device. Most users’ actions take place in the app, although pushing one or both small buttons on the device itself is required to confirm some actions, like sending transactions.

The buttons are also used to navigate between the different cryptocurrency wallets. Each wallet is referred to as its own app within Ledger Live. For each crypto they want to manage, users have to install the appropriate app first.

What Are the Different Types of Ledger Wallets in Crypto?

Ledger makes two different wallet types:

1.    Ledger Nano S

2.    Ledger Nano X

Ledger Nano S

The Nano S has become one of the more well-regarded crypto hardware wallets to date. That said, it only has enough memory for about three apps at a time. That means users who want to work with more than three cryptocurrencies will have to repeatedly uninstall and reinstall new apps.

For example, say someone holds Bitcoin, Litecoin, and Ethereum. If they also want to use Dogecoin, they will have to uninstall the Litecoin app and install the Dogecoin app. Any Litecoin balance will still be held on the wallet, but to access it and send transactions, the Litecoin app will need to be reinstalled, which would require uninstalling an existing app.

Apps for different cryptocurrencies take different amounts of memory, so the potential number of installed apps may be higher than three. While limited currencies can be managed at one time, the list of Ledger-supported crypto is 1,800 coins long.

Ledger Nano X

The Nano X is the newer, upgraded version of the Nano S. Both wallets work with the Ledger Live app, and function in generally the same manner. However, the Nano X has a few extra features and allows for the storage of many more crypto apps at once.

While the Nano S supports only 3-7 apps at a time, the Nano X supports up to 100. Ledger Nano X users can connect to the app via mobile devices as well, thanks to the Nano X’s Bluetooth compatibility.

The Nano X can also run off of battery power and connect to a mobile device via Bluetooth. All of these extra features and upgraded functionality help explain why someone might choose the more expensive Ledger Nano X over the Nano S.

Why Consider Getting a Ledger Wallet?

The biggest reason to consider getting a Ledger wallet is for the additional security. Holding crypto in a hardware wallet results in greater security for two main reasons:

1.    Coins can be held offline in cold storage.

2.    Private keys are held by the individual.

Holding coins in cold storage means the private keys aren’t connected to the internet, so there’s no way for hackers to access them. While a hardware wallet generally has to be connected to an internet-connected device to send transactions, when not doing so the wallet will be completely offline.

Holding the private keys yourself means there’s no need to trust a third-party like an exchange. If an exchange gets hacked, and there’s no insurance policy, then users could be left empty-handed. This might be why those who hold large sums of crypto choose to make the investment in a hardware wallet like those made by Ledger.

Let’s take a closer look at how hardware wallets, and wallets made by Ledger specifically, come with increased security for long-term storage of cryptocurrency.

Ledger Hardware Wallet Security

Ledger wallets come with the following security features:

1.    24-word backup recovery seed phrase

2.    PIN

3.    Certified Secure Element (CC EAL 5+) hardware

When setting up a new wallet, users have to create a PIN that will be used to access the wallet. A seed phrase is also provided.

This 24-word string can be used to restore the balances held on a wallet. It’s best to keep that phrase somewhere safe and never store it digitally. Anyone with access to the seed phrase can steal the private keys, and therefore the coins, from your wallet. The seed phrase and PIN come standard with most hardware wallets.

Ledger uses something called Secure Element chips. Chips like these are also used to protect credit cards, SIM cards and passports. Ledger wallets are certified as being secure by an independent third-party.

There are different degrees of Evaluation Assurance Level (EAL), and Ledger has achieved the level EAL 5+. There are only two levels higher than EAL 5. According to Ledger , they are the only company that makes hardware wallets that have earned this level of security certification.

The Takeaway

A Ledger wallet for digital currencies can be used to hold crypto in a more secure manner. Cold storage is considered to be the ultimate in blockchain security measures.

While hardware wallets like those made by Ledger come with increased security for crypto, they also require greater user responsibility. Using a hardware wallet means you hold the private keys to your crypto, rather than them being held on an exchange. If you make a mistake like losing your PIN and backup seed phrase, the crypto held on that wallet will be gone forever. There’s nothing that Ledger or anyone else will be able to do to help.

That’s why investors holding a small amount of crypto might not need a crypto wallet like Ledger. For some people, a trusted third-party custodian like an exchange might be the best option.

Photo credit: iStock/Free Life Design

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

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

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

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

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

SOIN1021411

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Jan
04
2022
What Is a Bull Put Credit Spread? Definition and Example

What Is a Bull Put Credit Spread? Definition and Example

By | Growing Wealth, invest, Investing | Comments Off on What Is a Bull Put Credit Spread? Definition and Example

The bull put credit spread, also referred to as bull put spread or put credit spread, is an options trading strategy. In a bull put credit spread, an investor buys one put option and sells another. Each set of options has the same underlying security and the same expiration date, but a different strike (exercise) price. The strategy has limited upside and downside potential.

Investors employing a bull put credit spread receive a net credit from the difference in option premiums. The strategy seeks to profit from a modest increase in price of the underlying asset before the expiration date. The trade will also benefit from time decay or a decline in implied volatility.

Recommended: 10 Important Options Trading Strategies

How a Bull Put Credit Spread Works

In a bull put credit spread, the investor uses put options, which give the investor the right – but not the obligation – to sell a security at a given price during a set period of time. For that reason, they’re typically used by investors who want to bet that a stock will go down.

To construct a bull put credit spread, a trader first sells a put option at a given strike price and expiration date, receiving the premium (a credit) for the sale. This option is known as the short leg.

At the same time, the trader buys a put option at a lower strike price, paying a premium. This option is called the long leg. The premium for the long leg put option will always be less than the short leg, since the lower strike put is further out-of-the money. Thus, the trader receives a net credit for setting up the trade.

The difference between the strike prices of the two sets of options is known as the “spread,” giving the strategy its name. The “credit” in the name comes from the fact that the trader receives a net premium upfront.

Recommended: What Is a Protective Put? Definition and Example

Profiting from a Bull Put Credit Spread

In a properly executed bull put credit spread strategy, as long as the value of the underlying security remains above a certain level, the strategy produces a profit as the difference in value between the two sets of options diminish. This reduction in the “spread” between the two put options reflects time decay, a dynamic by which the value of an options contract declines as that contract grows closer to its expiration date.

As the “bull” in the name indicates, the strategy’s users believe that the value of the underlying security will go up before the options used in the strategy expire. For bull put credit spread investors, the more the value of the underlying security goes up during the life of the strategy, the better their returns, although there’s a cap on the total profit an investor can receive.

If the underlying security drops under the long-put strike price, then the options trader can lose money on the strategy.

Recommended: How to Trade Options

Maximum Gain, Loss, and Break-Even of a Bull Put Credit Spread

Investors in a bull put credit spread strategy make money when the value of the underlying security of the options goes up, but the trade comes with limited loss and gain potential. The short put gives the investor a credit, but caps the potential upside of the trade. And the purpose of the long put position – which the investor purchases – protects against loss.

The maximum gain on a bull put credit spread will be obtained when the price of the underlying security is at or above the strike price of the short put. In this case, both put options are out-of-the-money, and expire worthless, so the trader keeps the full net premium received when the trade was initiated.

The maximum loss will be reached when the price of the underlying security falls below the strike price of the long put (lower strike). Both put options would be in-the-money, and the loss (at expiration) will be equal to the spread (the difference in the two strike prices) less the net premium received.

The breakeven is equal to the strike price of short put (higher strike) minus net premium received.

Example of a Bull Put Credit Spread

Here’s an example of how trading a bull put credit spread can work:

Bob, a qualified investor, thinks that the price of XYZ stock may increase modestly or hold at its current price of $50 over the next 30 days. He chooses to initiate a bull put credit spread.

Bob sells a put option with a strike price of $50 for a premium of $3, and buys a put option with a strike price of $45 for a premium of $1, both expiring in 30 days. He earns a net credit of $2, the difference in premiums. And because one options contract controls 100 shares of the underlying asset, the total credit received is $200.

Scenario 1: Maximum Profit

The best case scenario for Bob is that the price of XYZ is at or above $50 on expiration day. Both put options expire worthless, and the maximum profit is reached. His total gain is $200, equal to $3 – $1 = $2 x 100 shares, less any commissions. Once the price of XYZ is above $50, the higher strike price, the trade ceases to gain additional profit.

Scenario 2: Maximum Loss

The worst case scenario for Bob is that the price of XYZ is below $45 on expiration day. The maximum loss would be reached, which is equal to $300, plus any commissions. That’s because $500 ($50 – $45 x 100) minus the $200 net credit received is $300. Once the price of XYZ is below $45, the trade ceases to lose any more money.

Scenario 3: Breakeven

Suppose that on expiration day, XYZ trades at $48. The long put, with a strike of $45, is out-of-the-money, and expires worthless, but the short put is in-the-money by $2. The loss on this option is equal to $200 ($2 x 100 shares), which is offset by the $200 credit received. Bob breaks even, as the profit and loss net out to $0.

Related Strategies: Bear Put Debit Spread

The opposite of the bull put credit spread is the bear put debit spread, also known as a put debit spread or bear put spread. In a bear put spread, the investor buys a put option at one strike price and sells a put option at a lower strike price – essentially swapping the order of the bull put credit spread. While this sounds similar to the bull put spread, the construction of the bear put spread results in two key differences.

First, the bear put spread, as its name implies, represents a “bearish” bet on the underlying security. The trade will tend to profit if the price of the underlying declines.

Second, the bear put spread is a “debit” transaction – the trader will pay a net premium to enter it, since the premium for the long leg (the higher strike price option) will be more than the premium on the short leg (the lower strike price option).

Bull Put Credit Spread Pros and Cons

There are benefits and drawbacks to using bull put credit spreads when investing.

Pros

Here are the advantages to using a bull put credit spread:

•   The inevitable time decay of options improves the probability that the trade will be profitable.

•   Bull put credit spread traders can still make a profit if the underlying stock price drops by a relatively small amount.

•   The timing and strategy for exiting the position are built into the initial trades.

Cons

In addition to the benefits, there are also some disadvantages when considering a bull put strategy.

•   The profit potential in a put credit spread is limited, and may be lower than the return if the investor had simply purchased the security outright.

•   On average, the maximum loss in the strategy is larger than the maximum gain.

•   Options strategies are more complicated than some other forms of investing, making it difficult for beginner investors to engage.

The Takeaway

Bull put credit spreads are bullish options trading strategies, where the investor sells one put option and buys another with a lower strike price. That investor can make money when the value of the underlying security of the options goes up, but the trade comes with limited loss and gain potential.

If you’re ready to start trading options, check out SoFi’s options trading platform. It’s user-friendly, thanks to the platform’s intuitive design, and it offers a library of educational resources about options. Investors can continue to read up on options through the available library of educational resources.

Trade options with low fees through SoFi.

Photo credit: iStock/Ridofranz

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN0921377

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Dec
28
2021
What Are Flash Loans & How Do They Work?

What Are Flash Loans & How Do They Work?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Are Flash Loans & How Do They Work?

Flash loans are a type of loan that crypto traders may use to facilitate the buying and selling of different types of cryptocurrency on an exchange. They make use of smart contracts to issue the loans – and the trades they enable – instantly.

What Is a Flash Loan?

Flash loans are a form of uncollateralized (or, unsecured) lending some decentralized finance (DeFi) networks and protocols make available to investors.

Flash loans are loans — they involve a lender loaning money to a borrower, with the expectation that they’ll get paid back. But there are some important distinctions. Namely, flash loans utilize smart contracts, or digital agreements cemented into place on a blockchain network.

Also, flash loans encapsulate the entire transaction — from borrowing to paying back — in one single, instant transaction at any time when you’re trading crypto.

While they’re available on multiple platforms, flash loans began as through Aave , a lending platform built on and enabled by Ethereum. As of December 2021, Aave had issued more than $5 billion in flash loans, including some for hundreds of millions of dollars, too.

Recommended: Crypto Lending: Everything You Need to Know

How Do Flash Loans Work?

If you’re not a developer or have a limited technical background, here’s what you should know: Smart contracts lay out the terms of the loans, and then actually perform the trades with the borrowed funds for traders. It all happens in a flash.

From a technical perspective, a flash loan builds a contract on the blockchain that acts as a request to borrow funds. That requires some advanced knowledge — you may only be able to do it by tapping your developer knowledge and writing some code. There are also tools that can allow people to use flash loans without coding.

Essentially, flash loans are meant to be an easy, low-risk way to borrow money to try and make profitable trades in the crypto markets. If a trade is profitable, the trader pays a 0.09% fee on the gains. If it is unprofitable (or the conditions in a smart contract otherwise aren’t met), the funds go back to the lender.

Recommended: Blockchain in Finance: What Does it Mean for Fintech?

Why Do People Use Flash Loans?

When getting a traditional loan, there are a lot of hoops to jump through: You usually need collateral of some type, for one, and there’s a review of your creditworthiness and approval process. Flash loans require fewer time or resources.

By removing those obstacles and making money available cheaply and instantaneously, borrowers can take a more nimble approach to trading and investing in crypto.

Perhaps the most popular use of flash loans is to try and scalp a profit to take advantage of small arbitrage discrepancies in different types of crypto across various exchanges. Again, within the traditional lending model, there likely wouldn’t be time to take advantage of those discrepancies. But flash loans make it possible.

Recommended: How to Get a Bitcoin Loan

Are Flash Loans Still Available?

Even though flash loans aren’t yet very accessible, they already have a few interesting uses. Some of them involve “regular” IOUs that are collateralized in some way. You can pay debts with existing collateral or even swap assets if you need to.

Pros and Cons of Flash Loans

While there are benefits to using flash loans as a crypto trader, there are also some drawbacks to this relatively new technology that it’s important to consider.

Flash Loans: Pros and Cons
Pros Cons
Instantaneous Still a developing product
Don’t require collateral Subject to exploitation
Designed to avoid defaults Not widely used outside crypto

Defaulting on a Flash Loan

Because of the lending mechanics, it’s almost impossible to actually default on the loan. Thanks to the magic of smart contracts, the answer, in a nutshell, is that everything essentially “resets.”

Because a smart contract will consider the transaction complete when the borrower has repaid the lender, a borrower defaulting on a flash loan means that the smart contract cancels the transaction. In effect, the transaction reverses itself, and the money would go back to the lender.

What is a Flash Loan Attack?

Flash loans are a lending mechanism, and they have their weaknesses. One such weakness is that bad actors can engage in a “flash loan attack,” which is more or less what it sounds like — an attempt to exploit the lending mechanism, potentially for profit.

Flash loan attacks can take many forms. Since a flash loan requires the loan to be repaid before the completion of the contract, a flash loan attack may find a way to change the value of the cryptos they’re trading, essentially tricking a smart contract into thinking the loan has been repaid, when it has not.

Again, this is just one relatively simple example of a flash loan attack, but in the recent past, it’s been an effective one.

The Takeaway

Flash loans may or may not be a part of your crypto investing strategy. You may be at a point where you’re still asking “what is cryptocurrency, exactly?” — rather than figuring out ways to borrow quick money to make money through arbitrage.

FAQ

Here are answers to some other flash loan-related questions:

What does “flash loan” mean?

To recap, flash loans get their name because they’re executed instantaneously. They’re done “in a flash.”

Are flash loans risk-free?

No, flash loans are not risk-free. While the lending mechanism that powers a flash loan ensures that they’re difficult, if not impossible to default on, there are security issues at play (flash loan attacks.) That risk, however, mostly falls on lenders, who are the ones doling out potentially millions of dollars in unsecured loans.

What is a flash loan exploit?

A flash loan exploit is an action taken to capitalize on a loophole or shortcoming in the flash loan lending mechanism. A flash loan exploit aims to circumvent lending protocols and safety measures, and allow a bad actor to potentially trick the network into thinking they had repaid a flash loan that they, in fact, had not.

Are flash loans legal?

Yes. But things could change in the future as it’s likely that the crypto space will become more regulated.

Photo credit: iStock/masterzphotois

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.

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Dec
18
2021
What Is the Put/Call Ratio?

What Is the Put/Call Ratio?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is the Put/Call Ratio?

The put to call ratio (PCR) is a mathematical indicator that investors use to determine market sentiment. The ratio reflects the volume of put options and call options placed on a particular market index. Analysts interpret this information into either a bullish (positive) or bearish (negative) near-term market outlook.

The idea is simple: the ratio of how many people are betting against the market versus how many people are betting in favor of the market, should provide a gauge of the general mood investors are in.

A high put-call ratio is thought to be bearish (because more investors are taking short positions) while a low put-call ratio is thought to be bullish (because more investors are taking long positions). Investor Martin Zweig invented the put-call ratio and used it to forecast the 1987 stock market crash.

What are Puts and Calls?

Puts and calls are the most basic types of options contracts. Options contracts give holders the right, but not the obligation, to buy or sell a specific number of shares of a given security by a certain date (the expiration date) at an agreed upon price (the strike price). For both puts and calls, one options contract is usually for 100 shares of the underlying security.

The seller of an option is also sometimes called the writer. Options writers receive a fee, called a premium, in exchange for the risk of having to buy or sell shares when the holder of the option chooses to exercise their contract.

There are many factors that influence an option’s premium, and many ways to calculate the value and the risk of options, including the Black-Sholes, trinomial, and Monte Carlo simulations.

Those interested in trading calls and puts and other options strategies may want to research the details further with our options trading guide.

For now, we’re concerned with the basics of call vs. put options so we can better understand the put-call ratio and what it means.

Puts

A put option (or “put”) gives its owner the right to sell a certain number of shares at a predetermined price by a certain date. Investors may also refer to puts as “short positions” because they represent bearish bets on a security’s future.

An investor who buys a put has the option to sell the stock at some point leading up to the expiration date of the contract. Investors may use puts in a variety of ways within the portfolio. For example, a protective put allows an investor who already owns the underlying asset to benefit even if the price of that stock asset goes down.

Calls

A call gives its owner the right to buy a certain number of shares at a predetermined price by a certain date. Calls are also referred to as long positions because they represent bullish bets on a security’s future.

An investor who buys a call has the option to buy the stock at some point leading up to the expiration date.

Recommended: Popular Options Trading Terminology to Know

What Is Put Call Ratio?

The put-call ratio is a measurement of the number of puts versus the number of calls traded on a given security over a certain timeframe. The ratio is expressed as a simple numerical value.

The higher the number, the more puts there are on a security, which shows that investors are betting in favor of future price declines. The lower the number, the more calls there are on a security, indicating that investors are betting in favor of future price increases.

Analysts most often apply this metric to broad market indexes to get a feel for overall market sentiment in conjunction with other data point. For example, the Chicago Board Options Exchange put-to-call ratio is one of seven factors used to calculate the Fear & Greed Index by CNN Business.

The put-call ratio can also be applied to individual stocks by looking at the volume of puts and calls on a stock over a certain period.

Recommended: Buying Options vs Stocks: Trading Differences to Know

How to Calculate the Put-Call Ratio

The put-call ratio equals the total volume of puts for a given time period on a certain market index or security divided by the total volume of calls for the same time period on that same index or security. The CBOE put call ratio is this calculation for all options traded on that exchange.

There can also be variations of this. For example, total put open interest could be divided by total call open interest. This would provide a ratio for the number of outstanding puts versus the number of outstanding calls. Another variation is a weighted put-call ratio, which calculates the dollar value of puts versus calls, rather than the number.

Looking at a put call ratio chart can show you how that ratio has changed over time.

Put-Call Ratio Example

Suppose an investor is trying to assess the overall sentiment for a stock. The stock showed the following volume of puts and calls on a recent trading day:

Number of puts = 1,400

Number of calls = 1,800

The put call ratio for this stock would be 1,400 / 1,800 = 0.77.

How to Interpret the Put-Call Ratio

A specific PCR value can broadly be defined as follows:

•   A PCR of less than 1 implies that investors are expecting upward price movement, as they’re buying more call options than put options.

•   A PCR of more than 1 implies that investors are expecting downward price movement, as they’re buying more put options than call options.

•   A PCR equal to 1 indicates investors expect a neutral trend, as purchases of both types of options are at the same level.

However, while PCR has a specific, mathematical root, it is still open to interpretation, depending on your options trading strategy. Different investors might take the same value to have different meanings.

Contrarian investors, for example, typically believe that the majority is wrong. The best move is to act contrary to what others are doing, in this view. If everyone else is buying something, contrarians believe it might be a good time to sell, or vice-versa. A contrarian investor might therefore perceive a high put/call ratio to be bullish because it suggests that most people believe prices will be heading downward soon.

Momentum investors believe in trying to capitalize on prevailing market trends. “The trend is your friend,” they might say. If the price of something is going up, it could be best to capitalize on that momentum by buying, in this view. A momentum investor could believe the opposite, and that a high PCR should be seen as bearish because prices could be trending downward soon.

To take things a step further, a momentum investor might short a security with a high put-call ratio, hoping that since most investors appear to already be short, this will be the right move. On the other hand, a contrarian investor could do the opposite and establish a long position, based on the idea that what most people expect to happen is the opposite of what’s actually coming.

The Takeaway

The put-call ratio is a simple metric used to gauge market sentiment. While often used on broad market indexes, investors may also apply the PCR to specific securities. Calculating it only involves dividing the volume of puts by the volume of calls on the market for a security.

The put-call ratio is one factor you might consider as you start trading options. A platform like SoFi’s allows you to get started with options trading, thanks to its intuitive and user-friendly design. Investors can also reference a library of educational resources about options.

Trade options with low fees through SoFi.

Photo credit: iStock/PeopleImages

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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