Jan
07
2023

Guide to Bitcoin Halving

By | Growing Wealth, invest, Investing | Comments Off on Guide to Bitcoin Halving

“Bitcoin halving” refers to an event that happens every four years when the block rewards for Bitcoin miners get cut in half. This reduces the supply of new bitcoins by 50%.

The crypto halving process was built into the Bitcoin protocol to ensure that Bitcoin would be a good store of value by remaining a deflationary currency. Read on to learn more about halving, why it matters, and the effect it has on Bitcoin’s value.

What Is Bitcoin Halving?

Bitcoin halving — also referred to as “the halvening,” in some instances — is a periodic event where the number of new Bitcoins that enter circulation as a result of crypto mining is reduced by half.

Bitcoin halving occurs once every four years, and as time goes on, the potential rewards for mining become less and less — while, in theory, helping to maintain Bitcoin as a store of value.

For example, when Bitcoin was first introduced, miners could mine as many as 50 Bitcoins every ten minutes. But since then, after several halvings, rewards have been reduced to 6.25 Bitcoins. Other types of cryptocurrencies may use other methods for maintaining value, including coin burning.

How Does Bitcoin Halving Work?

Halving Bitcoins is, as mentioned, built into the Bitcoin blockchain network’s protocol. It is, in a sense, a feature of the system, or a critical component to how Bitcoin works.

By decreasing mining rewards every four years or so, the network made it more enticing for early adopters to start mining early. That is, since the rewards were relatively high early after Bitcoin hit the market, more miners were likely interested in getting involved. But as the rewards are reduced with time, more miners compete for those rewards.

This adds more hashing power to the network, and also ensures that the market isn’t flooded with Bitcoin all at once.

Bitcoin Mining 101

To better understand halving, it may help to have a basic understanding of crypto mining — the process by which new Bitcoins are created. The Bitcoin network functions in a way that requires no centralized planning or authority. People can send value to each other peer-to-peer, for a small cost.

On the network, “mining” facilitates transactions. Bitcoin “miners” are computers that process transactions for the network. They verify that transactions are valid and keep the network secure. In exchange, miners receive new Bitcoins as they are created as rewards.

Bitcoin transactions form groups known as “blocks.” Each block gets attached to all the previous blocks, forming what’s known as a blockchain. A new block gets created once every ten minutes or so, and miners compete to “find” the next block and earn its rewards, with the miners who put in the most work rewarded with new coins.

Miners can also team up and participate in mining pools, which effectively means that miners are pooling their resources to earn reward.

The most recent halving occurred in 2020, which set the reward for finding the next block as 6.25 Bitcoins. This won’t change until the next halving, which will happen sometime in 2024. This is critical to know, especially if you’re actively investing in Bitcoin, as it could have market repercussions.

Recommended: How Many Bitcoins Are Left?

When Does Bitcoin Halving Occur?

Bitcoin halving happens approximately once every four years. The first halving occurred in 2012, when the block reward was reduced to 25 BTC per block from the original 50 BTC per block. Subsequent halvings dropped the reward from 25 BTC to 12.5 BTC, and then to 6.25 BTC. The next halving will set the reward at 3.125 BTC.

By constantly reducing the supply of new currency, the theory is that Bitcoin will remain a deflationary currency, rather than an inflationary one.

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Why Does Bitcoin Halving Happen?

Again, the logic behind halving is that it allows the system to have a set schedule for introducing new BTC into the market, and a set limit for new coins (as well as the total 21 million overall Bitcoin limit). By sticking to a set schedule, Bitcoin can avoid an overabundance problem, and retain value.

Given that there’s no regulatory body that can change that schedule, politics or economic pressure have no effect on the overall amount of BTC in circulation — something that differs when discussing fiat currencies.

Who Chose the Bitcoin Distribution Schedule?

In order to retain its value, a new currency must have a limited supply and be difficult to create. Bitcoin’s creator, Satoshi Nakamoto – whose identity remains a mystery — made the decision to halve Bitcoin’s block reward every four years, according to the project’s original whitepaper.

Halvings have occurred in the following years, with the block rewards being reduced as follows:

•   2012: 25 Bitcoins

•   2016: 12.5 Bitcoins

•   2020: 6.25 Bitcoins

When is Bitcoin halving next? As mentioned, the next halving will occur in 2024, when the block reward will be reduced to 3.125 Bitcoins.

Is Bitcoin Halving a Good or Bad Thing?

Bitcoin halving has its upsides. It has been said that halving is one of the reasons Bitcoin still has value.

When Bitcoin was created, it was the advent of a form of currency that has been created that is profoundly deflationary, and has a fixed supply limit (only 21 million bitcoins will ever exist).

Some say that Bitcoin is the “hardest” money ever known, meaning that Bitcoin is hard to create and has a limited supply. In this sense, Bitcoin is sometimes compared to gold or other precious metals.

Gold also has to be mined and has a scarce supply. This is why Bitcoin is sometimes referred to as “digital gold,” but Bitcoin is not correlated with the price or supply of gold, nor is it considered a precious metal. There is, however, a crypto on the market called “Bitcoin Gold,” which, again, is not the same as actual, out-of-the-ground gold.

Recommended: Bitcoin vs. Gold

Does Halving Bitcoin Have Any Effect on Its Price?

Historically, the price of Bitcoin has increased in the 18 months following a halving. After the first halving occurred in 2012, Bitcoin hit a record high (for the time) of more than $1,000 in November 2013. In April of that year, before the halving, Bitcoin was trading at less than $50.

The second halving occurred in 2016. In December 2017, Bitcoin prices hit a record high of nearly $20,000, up from less than $1,000 in January of that year. And since the halving in 2020, Bitcoin prices increased to more than $60,000 — though they have fallen significantly since then.

After the price increase there is often a retreat, sometimes resulting in drawdowns as large as 90%. The price then begins appreciating slowly leading up to the next halving, and the cycle tends to repeat. This is an oversimplified version of events but it offers a general sense of how halving Bitcoin has impacted prices historically.

That said, past performance does not always indicate future results. Plus, markets move for a variety of reasons, from geopolitical issues and macroeconomic events. Cryptocurrencies can, at times, be correlated with broader financial markets, so it’s hard to pinpoint whether halving was the exact cause of any price increase.

Recommended: Next Bitcoin Bull Run

The Takeaway

Bitcoin halving refers to an event when the amount of Bitcoins miners receive in exchange for processing transactions is cut in half, occurring once every four years. The most recent halving was in 2020, and the next one will happen in 2024.

Halving is a fundamental part of Bitcoin’s network, and as a feature of that network, is what makes some people believe that Bitcoin is unique as a store of value. But the halving can and does have an effect on its price, too, which is something investors should keep in mind.

FAQ

Does Bitcoin halving increase the price?

Historically, Bitcoin prices have risen after a halving event. But there are numerous other factors that affect Bitcoin’s price, and it’s difficult to say that the halving itself has caused values to increase.

How often is Bitcoin halved?

Bitcoin halving occurs roughly once every four years. The most recent halving event was in 2020, and the next one will be in 2024. They will continue to happen on that schedule until the supply of Bitcoin is exhausted.

Is Bitcoin halved?

Yes, Bitcoin is halved, at a schedule of roughly once every four years. The halving process is built into the Bitcoin network’s protocol, as designed by its creator(s).

Photo credit: iStock/happyphoton

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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.
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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.

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.

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.
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Dec
16
2022
How to Short Bitcoin in 2021

How to Short Bitcoin in 2023

By | Growing Wealth, invest, Investing | Comments Off on How to Short Bitcoin in 2023

It’s possible to short Bitcoin using a handful of different strategies. And as the crypto markets remain tumultuous, knowing how to short Bitcoin and other cryptocurrencies can be useful to investors.

Shorting is a way of profiting from an asset’s falling price. Volatile assets like Bitcoin can provide an opportunity for this type of trading. But be warned: Short selling is a more advanced trading strategy as it requires exact timing and can involve much more risk than just buying or selling something. Here, we’ll cover how to short sell Bitcoin, some places it can be done, and what risks to keep in mind.

Can You Short Bitcoin?

Yes, it is possible to short Bitcoin. Shorting Bitcoin is effectively the same as shorting a stock, as an investor is making a bet that the asset will lose value.

There are a handful of different ways that an investor can choose to short Bitcoin. Generally, the idea behind shorting is that you would borrow a certain amount of Bitcoins, and sell them at their current price. Then, in the future, you’d purchase Bitcoins to repay the loan — at which point, theoretically, the price would have dropped. So, you’d be paying back the loan with Bitcoins that were cheaper than the ones you borrowed.

You would then profit off of the difference between the two prices when the Bitcoins were sold and repurchased. It’s similar, in some ways, to cryptocurrency arbitrage.

The benefit to shorting Bitcoin is that it allows investors to generate a profit in a down market. The drawback is that shorting involves more risk and is more complex than just buying or selling something.

💡 Take a step back: Learn more about Bitcoin, its origins, and how it works.

Example of Shorting Bitcoin

Here’s how shorting Bitcoin may look in a practical sense:

You anticipate that the price of Bitcoin will fall in the coming days or weeks. So, you plan to short sell five Bitcoins. You borrow those Bitcoins, and sell them for, say, a total of $100,000 ($20,000 each). Two weeks later, the value of Bitcoin has fallen 20%, and BTC is now trading at $16,000.

You would then repurchase the five Bitcoins you sold, spending a total of $80,000 ($16,000 each). You repay the lender the five Bitcoins, and pocket the difference. Effectively, by shorting, you’ve netted $20,000.

How to Short Bitcoin: 5 Different Ways

There are several different methods for shorting Bitcoin. Here are some of the most popular among crypto investors.

Shorting Bitcoin on Exchanges

Perhaps the most straightforward way to short Bitcoin would be to create an account on a crypto exchange that offers this feature. These exchanges make it easy for users to borrow Bitcoin, sell it short, then buy it back at a lower price. Some exchanges that allow for this include Kraken, Bitmex, Bitfinex, eToro, and Binance.

But note that not all exchanges allow users to short crypto. In that case, they may have to turn to other methods to short Bitcoin.

Does Coinbase Allow Shorting?

Coinbase users asking the question “can you short cryptocurrency” will find that the answer is no.

Shorting Bitcoin with Futures Contracts

A futures contract is an agreement between two parties to buy or sell something at a certain price on a specific date. These can be used to trade Bitcoin, and Bitcoin futures contracts have been around for several years now. Using futures, a trader can short Bitcoin by buying a contract with a lower Bitcoin price at some point in the future.

Again, this would help an investor profit if they were anticipating a fall in Bitcoin’s price. They could then exercise the contract and purchase Bitcoin at a lower price than market value. It’s important to keep in mind, though, that futures are an advanced trading method and come with high risk.

Shorting Bitcoin with Options Contracts

Options are similar to futures in that they are both forms of derivatives — financial instruments that derive their value from an underlying asset.

Options contracts give holders the option, but not the obligation, to buy or sell an asset at a certain price during a specific period of time.

There are several different options trading strategies out there, too.

Bitcoin put options could be used as a way to short Bitcoin. At the time of purchase, an investor only has to risk the premium (essentially, a purchasing fee) for buying the option contract, which is typically a small amount. Still, options are complex and can lead to large losses for traders unsure of what they’re doing.

Shorting Bitcoin with Leveraged Bitcoin Trading

There are some financial intermediaries that offer leveraged trading products like spread betting and contracts for difference (CFDs). These might be the riskiest of all possible ways to short sell Bitcoin, because they involve making leveraged bets.

Leverage involves betting with more money than you actually have. This can lead to increased gains for positive-yielding trades, but can also lead to investors losing much more than they risked, and falling into debt when trades don’t go their way.

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Short-Selling Strategies for Crypto

When engaging in sophisticated trading methods like shorting, it’s a good idea to have a plan going in. Making trades without some kind of strategy or plan is more akin to gambling than serious investing.

When it comes to short selling, the goal is to be as certain as possible that prices won’t rise in the near-term, since this could lead to substantial losses. Therefore, it’s important to recognize when bullish factors are not present in the market, rather than only looking for bearish factors that are present.

Here is a list to consider when considering to short sell Bitcoin using different shorting strategies.

Technical Analysis

There are many different ways to use technical analysis (TA) to find shorting opportunities. Some common indicators include:

•   Relative Strength Index (RSI): This indicates when an asset might be overbought or oversold. A reading above 80 is thought to indicate overbought conditions, meaning prices could fall soon.

•   Bollinger Bands: These indicate when an asset is poised for a big move in one direction or the other. If Bollinger Bands tighten to a narrow range on a chart during a time when other bearish developments are occurring, prices could be getting ready to head lower.

•   Moving Averages (MAs): When they cross each other in certain ways, moving averages can indicate bearish or bullish sentiment. For example, when the 50-day MA moves above the 200-day MA, this is referred to as a “golden cross,” and is thought to be bullish. Conversely, when the 200-day MA moves below the 50-day MA, this is referred to as a “death cross,” and is thought to be bearish.

Sentiment Analysis

This method is less formal. It involves trying to gauge the market’s overall mood, or market sentiment. For instance, there are some websites that aggregate the total amount of negative and positive tweets about different cryptocurrencies. While this is not an exact science by any means, it’s thought that the values of assets tend to rise in price when there’s more positive social media chatter about them.

Again, this isn’t an exact science, and market sentiment can often be wrong. With that in mind, tread carefully when trying to read the minds or moods of the market.

Fundamental Analysis

Using fundamental analysis for Bitcoin looks a little different than using fundamental analysis for stocks and other assets. Here are a few key metrics to keep in mind when it comes to Bitcoin.

•   How’s the network activity? Are there a lot of new users coming into the market, creating wallets and buying coins? If so, this could be a bullish signal.

•   What are miners doing? Are miners holding coins or selling them right away? When miners hold coins, it means they think prices are going to rise, indicating bullish sentiment. It could be helpful to understand how bitcoin mining works in this regard, too.

•   Are coins moving toward or away from exchanges? Many crypto-oriented media outlets often report on the volume of coins leaving or entering exchanges. When people move large amounts of crypto off exchanges, it means they plan on holding for the long-term, which could be bullish.

If one or more of these bullish factors are present, it might not be the best time to try to short Bitcoin.

When Should You Consider Shorting Bitcoin?

In the simplest terms, investors who are willing to assume the risks associated with short-selling should do so when they think that an asset’s value will fall. It may be helpful to think of shorting as “making a bet against,” and as such, if you were under the impression that Bitcoin’s value was going to decline in the days, weeks, or months ahead — after doing lots of research, of course — that might be the time to short it, if it aligns with your investment objectives and risk tolerance.

Conversely, if you were anticipating Bitcoin’s value rising in the future, perhaps because it is currently undervalued by the market, you would not short it. Instead, that may be the time to engage a buy-and-hold investing strategy in an effort to earn a return.

Is Shorting Bitcoin Risky?

Shorting anything involves substantial risk. Perhaps the most important thing that investors should understand about shorting is that it can result in unlimited losses.

This can occur because there’s no upward limit on the price of Bitcoin. After having entered a short position, traders take a loss if the underlying asset goes up. The more the price rises, the more losses pile up. In this way, an investor who is short Bitcoin can lose all of their investment quickly if the price doesn’t retreat. This risk can be hedged using a stop-loss, which will automatically close out a trade at a specific price level.

The Takeaway

Investors can short Bitcoin, but it’s often an involved and complicated process. Not to mention risky — short-selling any asset is generally riskier than other investing activity, and it can be difficult to turn a profit even for experienced traders. But by shorting on exchanges through margin, or using futures and options contracts, intrepid crypto investors can short Bitcoin.

Photo credit: iStock/MUUSU

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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.
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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.

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.
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Nov
21
2022
5 Bitcoin Scams to Avoid in 2021

7 Bitcoin Scams to Avoid in 2023

By | Growing Wealth, invest, Investing | Comments Off on 7 Bitcoin Scams to Avoid in 2023

The crypto market is rife with fraud, and Bitcoin scams are very common. While crypto itself may be relatively new in the financial world, many of the more common rackets involving cryptos use old school tricks and common deceit to achieve their goals. These can involve fake exchanges, social engineering scams, and more.

Almost all types of fraud — be they Bitcoin scams or run-of-the-mill phishing attempts — are rooted in a schemer’s ability to gain a victim’s trust. Many crypto investors can be easily swayed by hype and con artists, too, which means they need to remain vigilant when considering investing in Bitcoin or other cryptos. Here are some of the more common Bitcoin and cryptocurrency scams, some things to look out for, and what to do if you fall victim to one of them.

Common Bitcoin Scams to Avoid

1. Fake Cryptocurrency Exchanges

One way to attract potential crypto investors who are eager to get in on the action? Create a cryptocurrency exchange — even if it isn’t real.

Fake crypto exchanges exist, and in some cases, have been used to scam investors out of their money. For fraudsters, it can be as easy as luring crypto investors with the promise of free Bitcoin or another crypto to get them to sign up for the exchange. Then, after making an initial deposit, victims may find that none of it was real, and they’ve been bilked out of their deposit.

As for how to avoid these fake exchanges? Sticking to the known, established crypto exchanges is a start. Think twice before creating an account with a new or unfamiliar exchange, and be sure to do some research to make sure it’s above board before making any moves. Refer to industry sites and newsletters, message boards and forums, and other reputable sources of information to find out more about an exchange’s credentials and reputation.

And it never hurts to remember the age-old adage: If it sounds too good to be true, it probably is.

2. ICO and Fake Cryptos

If you’re familiar with buying IPO stocks, then ICOs should ring a bell. ICO stands for “initial coin offering,” and is similar to an IPO. It’s when a new coin or crypto makes its market debut. That’s sure to attract some attention, right? That’s what fraudsters think, too. And it’s why some people looking to invest in ICOs may fall victim to a fake ICO scam.

An ICO scam might work like this: A fake ICO is teased, asking investors to pony up some cash to get in early. Money is exchanged, but the ICO never occurs, and investors never get their money back.

These types of scams are common. So much so that the U.S. Securities and Exchange Commission (SEC) even published a website that simulates them, only to lead you to educational tools when you try to invest, instead of stealing your money.

As with any investment, it is a wise idea to do your research before putting money behind a crypto ICO. Try to find out as much as you can about the company in question — from sources other than itself or the tease that first grabbed your interest. And take advantage of tools like the ones provided by the SEC or groups like FINRA, to help build some background knowledge about what you’re investing in.

3. Social Engineering Scams

Many of the same tactics used in money scams or to con people out of their personal information are used in the crypto sphere, too. That includes things like hacking, social media scams, phishing attempts, and more.

For instance, crypto investors may get an email asking them to update their password or personal information on a crypto exchange — a phishing attempt, which is meant to trick users into providing their credentials. With that information, a fraudster could, potentially, gain access to an investor’s holdings and liquidate them.

The numerous types of social engineering scams mean that investors need to be extra judicious when being asked to reset their passwords or in their interactions in social media.

4. Ponzi Schemes

Ponzi schemes are very similar to pyramid schemes. They are, in essence, a game of hot potato, with investors who’ve been involved for a longer period of time being paid with the proceeds and investments from newer investors. It’s a common scheme in financial circles that has found its way to the crypto world.

The government has gone after Ponzi schemers in the crypto community, and that includes those that use Bitcoin to lure in fresh investors. In fact, government regulators say that they root out and prosecute many Ponzi scheme cases every year, which includes those involving cryptocurrencies.

One typical red flag indicating a Ponzi scheme (or nearly any type of fraud): the promise of investing your money at no risk to you with the guarantee of huge profits.

5. Pump-and-Dump Bitcoin Scams

For investors who are even somewhat familiar with the stock market, “pump-and-dump” should be a familiar term — especially after the Gamestop headlines of early 2021.

A pump-and-dump scheme involves a number of traders or investors buying up an asset (say, Bitcoin for example, or a penny stock) which causes its value to increase. Then, with values high, they sell it all off — or “dump” it. Investors who bought in during the initial run-up are often caught underwater as a result.

Naturally, this same play can be run with cryptocurrencies. Government regulators, such as the U.S. Commodity Futures Trading Commission (CFTC), have warned that pump-and-dump schemes can be particularly effective in the crypto sphere, and warn investors to do their homework before making any investment decisions.

6. Rug Pull Scams

A rug pull is a type of scam that is similar to ICO scams, in that a hyped up crypto project ends up being vaporware — it doesn’t actually exist. It may be common to see a crypto “aped” on social media or in crypto circles by founders or developers in an effort to gin up interest and get investors on board.

Then, the developer or creator simply disappears with investors’ money. In other words, investors have had the rug pulled out from under them. It doesn’t take much for a scammer to gin up hype, especially if they’re something of a showman, so these types of scams are somewhat prevalent in the crypto space.

7. Man-in-the-Middle Scams

A man-in-the-middle scam or attack involves a third party intercepting information between an investor and their exchange, or another investor. The scammer is able to gain access to sensitive information, like passwords or wallet keys, and use them to swipe your assets.

Scammers can pull these scams off by intercepting wireless internet signals and some technical trickery. They’re not the most common scams, but many investors may be at risk nonetheless.

How to Spot a Bitcoin Scam

As mentioned, most Bitcoin scams are age-old tricks used in many other areas of the financial world. As such, there are some common red flags to keep an eye out for.

Big Promises

If a project or crypto is promising massive returns on your investment, your radar should be going off as a possible scam. This is true for other types of scams as well, but in order to generate a large pool of potential schemes, a scammer needs to get people’s attention — by making big promises. If they do, tread carefully.

Scammers Often Request Up-Front Crypto Payments

It’s relatively uncommon that you’d be asked to pay upfront with cryptocurrency for a good or service. As such, this can be a common refrain from scammers. And if they take your money (or Bitcoin) and run, you’ll have little or no recourse. So, if someone asks you to send them Bitcoin with promises of delivering later, use caution.

Appeals to Emotion

A common tactic scammers use is to appeal to someone’s emotions — this is why dating scams are so common. If you find yourself growing close to someone (or believing that you are, anyway) and they start asking you to send them crypto for one reason or another, it could be another sign that you’re being scammed.

Ways to Protect Yourself from Bitcoin Scams

Given that there are a lot of people out there trying to swipe your Bitcoin, here are some ways to protect yourself from Bitcoin scams.

Stick to Known Exchanges

The crypto space is largely unregulated, and as such, there can be a lot of questionable exchanges and platforms out there. While you can create accounts and trade on many of them, it may be best practice to stick to ones that are well-known or generally well-regarded.

There are many bigger exchanges out there that are popular among traders and investors. You can easily look some of them up, too. This isn’t to say that a smaller exchange is a scam, necessarily, but your odds of falling victim are likely higher on a small, unfamiliar exchange than you are on a larger one.

Do Your Homework

It should go without saying, but before you sign up for an exchange or invest in a cryptocurrency of any kind, do some research. There should be supporting materials out there (white papers, etc.) or reviews to take a look at, so do some digging around to see what other people are saying before diving in yourself.

Tread Carefully

Aside from doing some research, you should always exercise a level of caution when investing. For instance, if you’re getting emails from a crypto founder or someone else in the space, always check the sender address on emails like this — one riddled with typos or oddball fonts is likely to be a fake.

It’s important to be careful on social media, too. Imposter social media accounts may contact you and ask for investments or deposits, only to take your money and run. A good rule of thumb? Go with your gut, and don’t trust social media accounts — it’s all too easy for bots or others to create fakes.

What to Do if You’ve Fallen Victim to a Bitcoin Scam

If you do fall victim to a Bitcoin scam — which is entirely possible, as many people do — there may not be much you can do to get your money back. Again, since crypto is still outside the scope of most government regulators, your assets or money may be as good as gone.

You can, and perhaps should, report it, however. You can report crypto fraud to the Federal Trade Commission (FTC), the CFTC, the SEC, the Internet Crime Complaint Center (IC3), and you can also consider lodging a complaint with the exchange on which you were scammed — is applicable.

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The Takeaway

Bitcoin scams, and those involving other cryptocurrencies, are very common. They can take numerous forms, too, such as rug pulls, fake ICOs, and even Ponzi schemes. You can take measures to protect yourself, however, and learn to recognize a scam when you see one. A good rule of thumb is that if something sounds too good to be true, it usually is.

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2022
What Are Decentralized Stablecoins?

Decentralized Stablecoins: Types and How They Work

By | Growing Wealth, invest, Investing | Comments Off on Decentralized Stablecoins: Types and How They Work

What Are Decentralized Stablecoins?

Decentralized stablecoins, like any type of stablecoin, are cryptocurrencies that have a value pegged to a particular external asset, such as a national fiat currency like the U.S. dollar, or a commodity. In theory, being pegged to a real-world asset helps prevent volatility.

What makes decentralized stablecoins different from centralized stablecoins is that they have full transparency and they are non-custodial, meaning a company or centralized party doesn’t control them. Any collateral that backs the stablecoin is transparent to users, so they know it really exists.

Decentralization allows for a trustless and secure system in which a centralized party can’t tamper with the supply of the coin or pretend they have assets to back the coin that they really don’t. Instead, smart contracts and algorithms automatically control the coin’s supply.

There are a few different types of decentralized stablecoins. In this article we will look at the different types, and the pros and cons of this type of crypto asset.

The Need for Decentralized Stablecoins

Stablecoins were created as a crypto version of traditional currencies, which are typically backed by central banks and governments, and often pegged to real-world assets like cash or commodities (e.g. gold or silver).

As a result many stablecoins have a 1:1 ratio with fiat currencies like the U.S. dollar or the euro. So, are all stablecoins decentralized? No, most are still centralized.

Understanding Stablecoins

Stablecoins were launched so that traders could keep funds in an exchange to keep them available for trading, and have them in a stable asset that wouldn’t change in value.

Prior to the creation of stablecoins, any time a trader sold a coin they would have to move their money back into a fiat currency, and sometimes even move it off the crypto exchange completely, making it really inconvenient for day traders.

The emergence of stablecoins helped traders cope in periods of volatility, since they could move funds into a stablecoin temporarily, until they were ready to go back into the crypto market.

That said, having a form of crypto pegged to tangible assets (like fiat currencies) with real-world value hasn’t been a complete success. In fact, the stablecoin market has been plagued with allegations of fraud and other malfeasance, including questions of whether some coins actually had sufficient reserves.

With Decentralized Stablecoins Came More Security and Transparency

In order to make stablecoins more secure and transparent, decentralized stablecoins are being developed. (In order to understand why this is important, it helps to know what decentralized finance is, aka DeFi, and how it’s challenging traditional finance.)

Stablecoin values are kept stable through a process of controlling their circulating supply. With many stablecoins, this is done by the issuing company that created the coin. With decentralized stablecoins, this is typically accomplished using algorithms.

When the value of a decentralized stablecoin moves higher or lower than the value of its underlying asset, the algorithm adjusts the supply — sometimes by burning or removing coins — to bring it back to the desired 1:1 ratio.

Thus, decentralized stablecoins are considered trustless. Much of the reason traders are attracted to crypto is the ability to transact without middlemen and centralized parties. Therefore, stablecoins are heading in the direction of decentralization — which is how most cryptocurrencies work.

How Decentralized Stablecoins Work

Decentralized stablecoins use algorithms and smart contracts to control the supply of the token to maintain its stable value. If the price of the stablecoin starts veering up or down from the value of the asset it is pegged to, then the supply of the stablecoin can be adjusted to get the price back to where it should be.

With normal stablecoins this is done by the issuing centralized party. Ultimately, decentralized stablecoins could be created that aren’t backed by any external asset — which is basically what algorithmic stablecoins are. But it’s hard to put together a list of decentralized stablecoins right now.

Uses of Decentralized Stablecoins & the Need for Them

Decentralized stablecoins have similar uses to regular stablecoins. Day traders can easily move funds between crypto and stablecoins if they want to avoid volatility or wait to make another purchase. They provide a secure and efficient way to transfer funds almost anywhere in the world, and in some cases users can earn interest on them as well.

5 Types of Decentralized Stablecoins

What is a decentralized stablecoin, exactly? There are several types of decentralized stablecoins that provide different functionality and security for users. Below are the main types available on the market today:

1. Elastic Supply Chains

What Are They?

Most decentralized stablecoins fall within the category of elastic supply chains. These coins use automated contracts with user incentives to stabilize the value of the coin so it stays pegged to the external asset.

How Do They Work?

This type of decentralized stablecoin uses an elastic supply monetary policy. When the value of the stablecoin falls below the value of the pegged asset, stablecoin owners are incentivized to keep holding the stablecoin because they earn a high interest rate on it.

When the value of the stablecoin goes back up, the interest rate earned goes down. To earn interest, users have to lock up their coins until the value of the stablecoin goes back to the value of the pegged asset.

When the value of the stablecoin rises above the pegged value, the supply of the stablecoin is increased, and vice versa.

One risk with this type of decentralized stablecoin is that users will choose to sell off their coins instead of staking them. When this happens, the value of the decentralized stablecoin no longer matches the value of the pegged asset, and users lose trust in the stablecoin.

Examples

•   Ampleforth

•   BitBay

•   Kowala

•   NuBits

•   Xank

•   Ndau

•   StableUnit

2. Collateralized-Debt Positions

What Are They?

Decentralized stablecoins that use Collateralized-Debt Position (CDP) systems involve user-deposited collateral and smart contracts to maintain the value of the coin.

How Do They Work?

First, a stablecoin user deposits collateral into a smart contract. Then they are loaned stablecoins equal to the value of the collateral they deposited, and they pay interest on the loan. Basically the users loan money into the pool backing the coin and by doing so they enable the coin to exist so they can use it. This is similar to the way fiat currency works using fractional reserve banking systems. However, unlike the fiat system, decentralized stablecoins are generally fully backed or over-collateralized. This is important to know when buying and selling cryptocurrencies.

Examples

•   MakerDAO

•   Alchemint

•   Augmint

3. Self-Collateralized Stablecoins

What Are They?

Self-collateralized stablecoins are similar to CDP coins, except that the collateral users deposit is crypto instead of fiat currency. Also, users of these coins don’t always have to pay interest on their loans.

How Do They Work?

First, users deposit collateral that was generated by blockchains or smart contracts. Then they receive a loan of stablecoins equal in value to the amount they deposited.

Examples

•   Sweetbridge

•   Bitshares

•   Synthetix

4. Bond Redemption Coins

What Are They?

This type of decentralized stablecoin uses a bond exchange system to keep the coin price stable.

How Do They Work?

For example, Basis is a stablecoin pegged to the value of the U.S. dollar. When the value of Basis dips beneath $1, Basis users burn their Basis tokens and in exchange they receive Basis Bonds. Once the price of Basis goes back up to $1, users can exchange their Basis Bonds back to Basis coins.

There are 25 different bonds that Basis users can choose from, and they earn $0.2 for each Basis coin they burn. Conversely, when the price of Basis goes over $1, new Basis coins are created and sent to holders of Basis Shares until the price goes back down to $1.

Examples

•   Basis

5. Collateral-Redemption Coins

What Are They?

Collateral-redemption coins are similar to CDP-based coins in that stablecoins are created when users deposit collateral into a pool. However, CDP coins require users to receive stablecoins for all of the collateral they deposit, and they must pay interest on the loan.

Collateral-redemption systems let users just receive a portion of funds from their deposited collateral without paying any stability or penalty fees. Also, collateral-redemption systems let users deposit many different types of tokens into the smart contract collateral pool.

How Do They Work?

For example, let’s say a user deposits $200 worth of Bitcoin and $200 worth of ETH. They then receive 400 stablecoins. After that, they deposit just 9 stablecoins and take out $5 worth of ETH and $4 worth of Bitcoin from the collateral pool of the stablecoin’s smart contract. The 9 stablecoins that are deposited are burned so that the coin keeps a constant collateral-to-debt ratio.

Examples

•   Reserve Protocol

Pros and Cons of Decentralized Stablecoins

There are several upsides to decentralized stablecoins but they have some downsides as well.

Pros

 Cons
Increased transparency Many decentralized stablecoins are only partially decentralized and are still in an experimental phase of development.
Cuts so equal number of pros and cons There is a risk that a stablecoin will have a price meltdown
Increased security If the value of the external asset tanks, so will the stablecoin
More efficient than other stablecoins at maintaining value, so losses are potentially less Many decentralized stablecoins are not yet widely adopted. There’s a chance that they won’t exist long term or won’t have high liquidity
There have been legal challenges with issuing stablecoins that are solved with decentralized stablecoins Traders can earn interest on some stablecoins

Multi-Currency and Single-Currency Coins

Some stablecoins are backed by one particular fiat currency, while others are backed by a basket of currencies. For instance, Libra’s original goal was to release a stablecoin backed by 30 different fiat currencies. However, they then shifted their plan to say they might still create a multi-currency asset, but it would be backed by single-currency stablecoins.

Investing in Crypto

Stablecoins are just one of many types of crypto individuals can buy. They are a useful tool for day traders who want a convenient way to keep funds in exchanges and avoid volatility, but stablecoins have been fraught with problems. Decentralized stablecoins are still evolving, and could someday change how crypto is traded.

FAQ

Is USDT a decentralized stablecoin?

USDT, also known as Tether, is one of the first stablecoins and it is pegged to the U.S. dollar. It is not a decentralized stablecoin. It was the first fully centralized stablecoin and is managed by Tether Limited.

Are there any truly decentralized stablecoins?

There are a handful of stablecoins that claim to be fully decentralized, including: DAI, EOSDT, DeFi Dollar (DUSD), and GHO (a multi-collateralized stablecoin launched this year by AAVE). But it’s safe to say that decentralized stablecoins still face certain challenges in terms of transparency and maintaining a stable 1:1 value.

Is Bitcoin a stablecoin or not?

Bitcoin is not a stablecoin; it’s the oldest and largest form of cryptocurrency on the market. Bitcoin’s value is not pegged to the value of an external asset, but rather is determined by market forces, like any other crypto.

Photo credit: iStock/akinbostanci

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.

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