Stock Market Today: Stocks Finish Lower as Traders Mull Recession Odds

The potential for the U.S. to slip into recession was the topic du jour Monday as stocks kicked off the week with a wobbly, uneven session.

Over the weekend, former Goldman Sachs chief Lloyd Blankfein told CBS’ Face the Nation that recession was “a very, very high risk factor.” That opinion was met by a number of other calls Monday morning.

Wells Fargo Investment Institute, for instance, says “our conviction is that the chances of an outright recession in 2022 remain low” but believes odds are growing that 2023 could see an economic contraction. UBS strategists say the chances are different depending on where you look – their global economists say “hard data” points to a sub-1% chance of recession over the next 12 months, but the yield curve implies 32% odds.

“There’s no crystal ball to predict what’s next, but historical trends can come into play here. With the [S&P 500] closing 15% below its weekly record, there’s only been two times in the past 60-plus years that the market didn’t fall into bear territory after a similar drop,” adds Chris Larkin, Managing Director of Trading at E*Trade. “This doesn’t mean it’s bound to happen, but there is room for potential downside.”

Larkin says to keep an eye on major retail earnings this week – which will kick off in earnest with Walmart’s Tuesday report – to get a pulse check on the American consumer.

Sign up for Kiplinger’s FREE Investing Weekly e-letter for stock, ETF and mutual fund recommendations, and other investing advice.

Monday itself was a fairly quiet affair. Exxon Mobil (XOM, +2.4%) and Chevron (CVX, +3.1%) were among a number of plays from the energy sector (+2.7%) that popped after U.S. crude oil futures jumped another 3.4% to $114.20 per barrel.

Twitter (TWTR, -8.2%) shares dropped after Tesla (TSLA, -5.9%) CEO Elon Musk spent the weekend questioning how much of Twitter’s traffic comes from bots. Wedbush analyst Daniel Ives said the move feels more like a “‘dog ate the homework’ excuse to bail on the Twitter deal or talk down a lower price.” TWTR stock has now given up all its gains since Musk announced his stake in the social platform.

The major indexes finished an up-and-down session with mostly weak results. The Dow Jones Industrial Average managed to eke out a marginal gain to 32,223, but the S&P 500 declined 0.4% to 4,008, while the Nasdaq Composite retreated 1.2% to 11,662.

Also worth noting: Warren Buffett’s Berkshire Hathaway will file its quarterly Form 13F soon. Check back here tonight as we examine what Buffett has been buying and selling. 

stock chart for 051622stock chart for 051622

Other news in the stock market today:

  • The small-cap Russell 2000 closed out the session with a 0.5% dip to 1,783.
  • Gold futures gained 0.3% to settle at $1,814 an ounce.
  • Bitcoin was off 1.6% to $29,551.92 (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
  • JetBlue Airways (JBLU, -6.1%) ramped up its hostile takeover attempt of Spirit Airlines (SAVE, +13.5%) on Monday, urging SAVE shareholders to vote against a buyout offer from fellow low-cost air carrier Frontier Group Holdings (ULCC, +5.9%). JBLU last month offered to buy Spirit Airlines for $33 per share – a premium to the $21.50 per share ULCC offered in February – but SAVE’s board of directors rejected the bid citing concerns over regulatory approval. JBLU followed up in early May with an “enhanced superior proposal,” including paying a $200 million, or $1.80 per SAVE share, reverse break-up fee should regulators block the deal.
  • Warby Parker (WRBY) fell 5.3% after the eyeglass maker reported a loss of 30 cents per share in its first quarter. This was much wider than the per-share loss of 3 cents the company reported in the year-ago period and missed the consensus estimate for breakeven on a per-share basis. Revenue of $153.2 million also fell short of analysts’ expectations. WRBY did maintain its full-year revenue guidance of $650 million to $660 million. “We remain cautiously optimistic on shares as WRBY continues to show ability to grow the top line, open new stores, and is recession resistant as a lower cost option for non-discretionary spend,” says CFRA Research analyst Zachary Warring (Buy). “We see the company leveraging SG&A to become profitable in the second half of 2022.”

Check Out Europe’s Dividend Royalty

If you’re seeking out more stable opportunities amid an uncertain U.S. market … well, the rest of the world is admittedly looking pretty shaky, too. But that doesn’t mean there aren’t a few morsels worth a nibble. 

BCA Research notes that while there’s negative news around the globe, “European benchmarks already discount a significant portion of the negative news.” And looking ahead, inflation there is expected to peak over the summer “as the commodity impulse is decelerating” – that should help stagflation fears recede and help European shares.

Graham Secker, Morgan Stanley’s chief European and U.K. equity strategist, chimes in that his firm remains “overweight [European] stocks offering a high and secure dividend yield.”

We’ve previously highlighted our favorite European dividend stocks, which on the whole tend to produce higher yields than their U.S. counterparts.

But we’d also like to shine the spotlight on Europe’s twist on an American income club: the Dividend Aristocrats. The S&P Europe 350 Dividend Aristocrats have somewhat different qualifications than their U.S. brethren, but in general, they’ve proven their ability to provide stable and growing dividends over time.

Read on as we look at the European Dividend Aristocrats.

Source: kiplinger.com

Margin Trading vs Futures: Compared and Explained

Trading crypto on margin in the spot market is different from using futures to control crypto positions. Margin trading involves using money borrowed from a broker to go long or short crypto. With futures, traders can post margin as collateral to take on large long or short positions on contracts with a specific delivery date. Another type of crypto futures contract, perpetual futures, does not come with a delivery date, but it comes with daily fees.

It’s important for crypto investors to understand the fundamental concept of margin vs. futures. Though there are key differences between trading margin vs. futures, there are also similarities between them, and pros and cons to consider. If you recognize how futures vs. margin trading operates, then you can better decide which of these investing strategies — margin vs. futures — to use when building a cryptocurrency portfolio.

Margin vs Futures

Margin vs. futures feature many similarities, but there are also differences to consider. Analyzing both can help you know if these trading techniques could work with your investing style and tolerance for risk. You might decide to have a margin or a futures account, one of each, or neither.

Similarities

Futures vs. margin trading share some characteristics. For one thing, both methods would allow you to control more of a crypto position than would trading the cash, or spot market, using only your equity. The futures market and a margin account simply go about it differently. Both might entice prospective market participants with potentially big quick gains, but losses can be dramatic too.

It is important to remember that cryptocurrencies are usually much more volatile than stock market indexes. So if you trade with margin or futures, you could expect to see fast movements (either up or down) in your profit and loss numbers.

Differences

As we said earlier, identifying the differences between trading with margin vs. futures could help determine the best investing strategy for your risk tolerance and return objectives. For starters, futures trading requires a good faith deposit to access contracts, often with quarterly maturity, while a crypto margin account lets you leverage the spot market. The futures market might require that you pay closer attention to liquidity — that is, how easily you can trade while still receiving a competitive price.

With a crypto margin account, liquidity is generally not a problem in the spot market; knowing how much you can borrow might be the greater issue to consider. Because the spot market is perpetual, you also must determine for how long you want to own a coin. With futures, by contrast, expiring contracts set a limit on how long you can hold a position; however, you may bypass this by using perpetual futures.

It’s also important to analyze is the premium over the spot price that you are paying or are being paid. Further, trading on an unregulated platform or one with a sketchy reputation could result in possible liquidity failures or liquidation.

Similarities Differences
Margin and futures offer the chance to trade large positions with a small amount of capital Using margin requires paying a broker interest on your loan
Both can result in large and fast losses Futures trading requires a good-faith deposit
With perpetual futures, you can keep an open position indefinitely, similar to how the spot market works, but you also might owe The futures crypto market can experience premiums to spot prices

Margin vs Futures Trading in Crypto

Knowing the differences between margin and futures, as well as the similarities, goes a long way toward protecting yourself from unforeseen risks when trading crypto. You can find out more about crypto trading specifically in SoFi’s Guide to Crypto for Beginners. What’s more, you can learn about other ways that margin trading and futures differ and overlap in the crypto world. For now, here are several key points to consider:

Trading Crypto With Margin Trading Crypto With Futures
Incurs daily expenses via interest owed on borrowed funds Quarterly futures contracts can avoid fees and might be better for long-term holders
Liquid spot prices help ensure a fair price when buying and selling Futures’ basis can fluctuate
It is common to trade with between 3x-to-0x leverage Often higher leverage is employed than with margin trading

Investing and Trading Crypto With SoFi

Trading cryptocurrency on margin, and using futures contracts (including perpetual futures) to control crypto positions are commonly used, through advanced, trading methods.

Each has its own advantages and risks. While crypto margin trading offers exposure to the spot market using borrowed funds, trading with crypto futures lets investors deposit margin as collateral to control large positions for future delivery.

All it takes is at least $10 to buy and sell crypto on SoFi. You can earn a bonus of $10 in Bitcoin by doing so. A benefit of cryptocurrencies is that you can trade outside of standard stock market hours, as the crypto market is open 24/7. SoFi takes security seriously and uses a variety of tools to keep investors’ crypto assets safe.

Start trading crypto today on SoFi Invest.

FAQ

Are margin trading and futures the same?

Margin trading and futures trading are two different trading techniques. It’s key to understand both approaches before using them because they are considered advanced. Margin accounts usually involve traders opening crypto positions with borrowed money. You can control more capital with your portfolio, which allows you to leverage positions. You can experience amplified gains and losses with margin trading, so it is riskier than trading without leverage.

Futures contracts work differently in that they are binding agreements where you agree to buy or sell an underlying asset at a pre-specified price in the future. You can go long or short futures depending on your directional wager. With crypto trading, futures are often quarterly or perpetual contracts.

Do you need margin to trade futures?

You need margin to trade futures. Margin in futures trading refers to a good faith deposit used as collateral to open positions. It does not involve borrowing money from a broker, so there is nothing to repay, but you might owe funding rate fees when you own perpetual futures. Your futures account collateral also represents your maintenance margin — a minimum amount of equity needed to continue trading.

What are futures contracts and how do they work?

While margin traders participate in the spot crypto market, futures traders place trades on assets to be delivered in the future. You can think of futures vs. margin as a difference in the price of crypto in the spot market versus futures prices at some point later. Participants in the crypto futures market speculate on the future price of a coin.

You can use leverage in the futures market — some exchanges allow a leverage ratio of as much as 125:1 — using margin as collateral to open positions. Crypto futures might trade at a large premium to the spot market, and it might take a long time to exit a futures position at a competitive price.


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.
*Borrow at 2.5% through 5/31/22 and 5% starting 6/1/22. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Photo credit: iStock/FG Trade
SOIN0322018r

Source: sofi.com

Effective Tax Strategies for the Present and Future

Did you get a surprise when you filed your taxes this year? It’s common for taxpayers to be caught off guard – either owing more than anticipated or receiving an unexpected refund. Though most taxpayers are relieved once taxes are filed, many have little understanding about how to manage their tax situation to enhance their savings and investment strategies.

Many find the process of managing taxes too daunting and simply react to taxes resulting from savings and investment decisions, rather than implementing strategies to minimize their taxes beforehand.

 In 2020, many investors overreacted during the pandemic and, fearing market volatility would erase investment gains, sold appreciated investments, subjecting them to increased taxes. Others sold assets in 2021 and incurred taxes because they suspected a proposed tax increase would push capital gains rates from 20% into tax rates of 37% or more, though ultimately there wasn’t political support to pass such tax increases.  

To avoid these types of reactive, knee-jerk approaches to decisions, you need a comprehensive tax strategy in place. Once equipped with appropriate strategies – such as those outlined below – taxpayers can adapt their savings and investment decisions and consider taxes as part of the equation.

Savings and Income Tax Advantages

Planning for taxes is meaningful because they influence other overarching financial decisions, including what we purchase, where we live and work, and when and where we can retire comfortably.  Managing taxes effectively requires looking at short-and long-term factors, primarily around savings and spending, investments and legacy planning.  Often taxes can be lowered depending how much is saved and what savings vehicles are used.  Current income tax rates affect our ability or willingness to save – especially in light of incentives offered by qualified retirement plans. For instance, investing in a 401(k) or an IRA can reduce current taxes and provide tax-deferred investment growth until assets are distributed.  Alternatively, a Roth IRA or a Roth 401(k), may result in greater current tax payments but permit tax-free growth and tax-free distributions when funded with after-tax dollars. 

Choosing between those alternatives requires looking at the overall situation.  An investor in the 24% income tax bracket, for example, who contributes $10,000 to a pre-tax 401(k) plan can save $2,400 in federal taxes, lowering the net overall investment “cost.” A designated Roth 401(k) or Roth IRA, assuming savings at the same $10,000 level, would not provide any current income tax break, but would allow the account owner to later take withdrawals tax-free, provided other parameters are met (e.g., five-year account period and/or meeting other restrictions).

Individuals should compare taxes saved through savings deferral at their current tax rate with those rates likely to apply once tax-deferred assets are to be withdrawn. For example, a married couple or individual with a marginal 24% tax rate who expect to be subject to much higher taxes in retirement (current highest marginal tax rates are 37%), caused by income from a pension or from other sources, may want to pay taxes on income now, and invest the after-tax dollars to produce tax-free distributions later to avoid paying taxes at higher rates.  Alternatively, those expecting income to level off or be reduced once they withdraw funds may be better off with a tax-deferred 401(k) allowing them to retain current income.

Naturally, the situation can change over time, so tax-saving strategies should be revised as circumstances change.

Managing Taxable Investment Accounts

Effectively managed brokerage accounts and other non-qualified, taxable accounts may incorporate a prudent tax-loss harvesting strategy coordinated by investment and tax advisers.  Long-term investors can take advantage of lower capital gains taxes from tax loss harvesting when selling investments to cover current expense and withdrawal needs and particularly when buying and selling investments as part of their long-term investment rebalancing to maintain a desired asset allocation and to keep their portfolio diversified.  

Investment rebalancing usually involves selling appreciated assets and purchasing others at more attractive prices to meet their investment objectives. In the process, selling appreciated assets can increase capital gains taxes. As appreciated assets are sold, investors can find opportunities to also consider selling other investments currently valued at less than their purchase cost, which can be due to temporary market volatility or other reasons related to the individual holding(s).  Selling assets at a loss enables investors to capture a tax benefit.  In effect, it allows them to offset any capital gains incurred from selling the appreciated assets.

Consider, for example, an investor who purchases individual publicly traded stocks. For simplicity, let’s assume 100 shares of a stock were purchased over one year ago at $200 per share (total acquisition price of $20,000) and are sold at a price of $150 per share, (total sales price of $15,000). Ignoring any cost of the sale, it generates a $5,000 long-term capital loss (long-term only when the position was sold after a one-year holding period) which can be used to offset other current year taxable capital gains when other investments are sold at market prices greater than their cost. In situations where total annual losses from all sales exceed gains – e.g., there are not sufficient gains to completely offset total losses – up to $3,000 of such loss can be used to offset ordinary income in the current year. To the extent losses exceed $3,000, (by $2,000 in the example), investors can “bank” those excess losses to offset future gains, which can be carried over only until death under the current law and regardless of whether capital gains tax rates increase in the future.

A careful approach to loss harvesting should be guided by tax and investment professionals to avoid mistakes when managing capital gains and repositioning investments. Savvy investors can use volatile market periods to make strategic investment maneuvers, through selling to capture their available losses, and may consider repurchase of the same or similar position (the same position may be acquired only after 30 days to avoid wash sale rules).  Complications by way of higher taxes can arise from violating wash sale tax rules that effectively disallow a loss if the same security or securities are repurchased within 30 days across various accounts owned by an investor.

In summary, using a tax-effective strategy that looks through a current and future tax lens can keep your savings and investing decisions on the right path for financial success.

The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

Senior Wealth Strategist, BNY Mellon Wealth Management

As a Senior Wealth Strategist with BNY Mellon Wealth Management, Kathleen Stewart works closely with wealthy families and their advisers to provide comprehensive wealth planning services.  Kathleen focuses on complex financial and estate planning issues impacting wealthy families, key corporate executives and business owners.

Source: kiplinger.com

Now You Can Own Bitcoin in 401(k)s. Should You?

Fidelity Investments just made a major splash by announcing they will allow trading in Bitcoin in the 401(k) plans they administer starting midyear.

This makes Fidelity the first major plan provider – though almost certainly not the last – to allow trading in Bitcoin. News was scant as to whether other major cryptocurrencies such as Ethereum would eventually be allowed in Fidelity 401(k) accounts. For now, the focus is on Bitcoin.

Fidelity is the largest player in 401(k) plans by a country mile, with more than $2.4 trillion in plan assets. So, the introduction of Bitcoin into a 401(k) is a big deal and opens vast new pools of liquidity to investment in the blue-chip cryptocurrency.

But before you start licking your chops, there are a couple questions to consider.

Will Bitcoin Be Available in My 401(k)?

A 401(k) plan might look like a brokerage account, but they are managed, administered and regulated very differently. Remember: 401(k) plans are the primary savings vehicle for millions of Americans, and as such, the government regulates them not all that differently than it does traditional pension plans.

The Employee Retirement Income Security Act of 1974 (ERISA) sets the rules here, and it requires that the plan have a sponsor, an administrator and a fiduciary. The sponsor creates the plan, the administrator handles the day-to-day management, and the fiduciary ensures that the plan is being run in the best interests of the participants. (Often your employer or a related party will fulfill one or all of these roles).

None of these are generally Fidelity’s job. Fidelity role is that of a plan provider and custodian. They control the basic infrastructure that makes a 401(k) plan possible. They create accounts for plan participants and handle the buying and selling of investments.

But importantly, Fidelity doesn’t choose what investments are available in your company’s plan. That’s the fiduciary’s job. Fidelity can make Bitcoin available on its platform, but it’s up to your plan fiduciary to decide whether having cryptocurrency in your 401(k) is in the best interest of you and other participants, or whether to offer you other nontraditional investments, for that matter.

Plan fiduciaries tend to be stodgy and conservative. It’s their job to be a sober voice of reason. So, not every fiduciary is going to be in a hurry to make Bitcoin available as part of their 401(k) plans.

Especially not when the government is giving it a leery eye.

“The Department of Labor says it expects to open an investigation of plans that offer participants investments in cryptocurrencies,” says Joy Taylor, Editor of the Kiplinger Tax Letter. “It will ask fiduciaries to demonstrate how they met their required duties of prudence and loyalty when choosing a cryptocurrency investment option for plan participants.”

Indeed, days following the announcement, a Labor Department official sounded the alarm.

“We have grave concerns with what Fidelity has done,” Ali Khawar, acting assistant secretary of the Employee Benefits Security Administration, told The Wall Street Journal.

In short: If your employer’s plan is held at Fidelity and you want to buy Bitcoin within your 401(k), you might have to give your HR department a little nudge.

And if your employer’s plan is held anywhere other than Fidelity … well, for right now, you’re still out of luck.

Should You Buy Bitcoin in a 401(k)?

“Can” and “should” are two very different things.

Your tax-deferred retirement dollars are precious. Given their ability to compound tax-free over time, a dollar in your 401(k) plan is more valuable than a dollar in a taxable account. You don’t want to be reckless with that particular pool of money. 

That said, let’s say that you believe in cryptocurrencies and that you consider Bitcoin an important long-term piece of your asset allocation. Holding that Bitcoin allocation in your 401(k) isn’t a bad idea.

The tax regime surrounding cryptocurrency is still very much a work in progress, and if you’ve ever had to report crypto gains or losses on your tax return, you’re no doubt well aware of how burdensome the recordkeeping can be. If you’re committed to owning Bitcoin, then owning it in a tax-deferred account certainly makes your life easier come tax filing season.

Even then, basic common sense should apply here. Don’t buy more Bitcoin than you should simply because you can. You don’t want to put your retirement at risk in what is still very much a new asset class.

But if you’ve determined a prudent amount to own, then holding Bitcoin within your 401(k) can be a smart way to do it.

Source: kiplinger.com

Does a Year Make a Difference? How to Know Whether to Retire Now or Later

senior making a decision
Syda Productions / Shutterstock.com

This story originally appeared on NewRetirement.

In some cases a year can make a huge difference. Think back to 2019. It was certainly different than 2020 (to say the least). But sometimes years go by and not all that much has changed. Knowing when to retire is a huge decision. It can be easy to put it off a year and then again another year.

Do those years really make a difference in the grand scheme of things? The answer largely depends on your perspective, but the answer is yes. Our choices about when to retire — even waiting just a year — impact both our financial as well as our emotional well-being.

Current and Future Value of Your Decision

Older couple thinking about their long-term investments
ESB Professional / Shutterstock.com

When figuring out when to retire, you need to think about both the present and your future. What does delaying retirement net you now? What does it mean to your future?

For example: If you retire earlier, can you still afford your future? If you delay retirement, can you be more financially secure without regretting the extra year working?

Let’s take a look at what the real differences are when you delay your retirement one year. What about if you wait another five years or longer?

1. Your Time

Grandparents spend time with their grandchildren at home on a sofa
Monkey Business Images / Shutterstock.com

Your time is your most valuable resource. And, let’s face it, how you spend your time gets increasingly more important as you age. You have fewer years ahead of you and you want to make the best use of them.

You should probably consider time as an important component in your when-to-retire decision-making. What does delaying retirement for a year or more mean if you value your time?

If you are happy, fulfilled, and are finding meaning in your work, then there is probably no need to rush to retirement. However, if there are other ways to spend your time that you think are more important, then you might want to prioritize retirement sooner rather than later.

Ashley Whillans, an assistant professor at Harvard Business School, writes about how to think about and value your scarcest resource, your time, in her book, “Time Smart: How to Reclaim Your Time and Live a Happier Life.”

She became interested in the value of time after observing that people don’t spend money for optimum happiness.

Here is what she said on the NewRetirement podcast, “If people are not spending one resource that’s so precious in our lives, money, in a way that promotes happiness, I’m sure that they’re probably not optimizing the way they spend their time, either. And we also became really interested in trying to understand the trade-offs that we make between time and money.”

She advocates taking time seriously. “So I do hear from a lot of my MBAs, a lot of the executives I chat with, saying, ‘Well, once I get this title, once I hit this number in the bank, then I can start focusing on what I would like to do with my time. But it’s not until I achieve this title or achieve this amount of money in the bank that I’m really going to take time seriously.’”

How do you value your time? How can you use that valuation to inform your decision of when to retire?

2. Your Pension, If Applicable

enciktepstudio / Shutterstock.com

If you have a pension, waiting a year can make a HUGE difference between vesting into income or not. For most pension holdings, when they qualify for income is the most pivotal factor for when to retire.

This could be a million-dollar decision. Don’t retire before you get your pension.

3. Social Security: A Decision That Lasts Longer Than a Year

Older worker with money
Elnur / Shutterstock.com

There are a few considerations to think about with regards to delaying retirement and what that means for your Social Security retirement income.

First, you can retire from work and delay the start of Social Security. And if this is your decision, then when you retire might not have appreciable financial considerations.

However, if you need to start Social Security right away after you retire and you haven’t yet turned 70, then you may take a financial hit. Depending on your Social Security earnings and how long you live, the difference between starting Social Security at age 62 and age 70 can be a $500,000 decision in lifetime value.

But, what is the difference of just delaying the start of Social Security for one year?

Examples:

Higher Earner: Let’s say you are a relatively high earner and will be earning the maximum Social Security benefit available. If this is true, then your monthly benefit at your Full Retirement Age (66 for most people) would be around $3,100. If you were to delay for a year, then you could boost your monthly benefit to around $3,300. That is a $200 monthly and a $2,400 a year difference. The boost would result in almost an extra $50,000 over a 20-year retirement.

Average Earner: What about someone more average? Does delaying a year still make a big difference? The average Social Security benefit at Full Retirement Age is $1,500. Delaying the start for two years boosts monthly income by an extra $200. That is a $2,400 a year difference and would result in an extra $48,000 over a 20-year retirement.

So, delaying retirement a year can indeed make a big difference in Social Security income because it is a decision that impacts you not just in one year, but over your lifetime.

4. Work Income (and Related Expenses, Savings, and Needed Withdrawals)

older worker whose job was affected by the coronavirus crisis
Gustavo Frazao / Shutterstock.com

Retirement and retirement planning depends on a variety of inter-related levers: your income, expenses, how much you save, and how much you withdraw from savings will all be impacted whether or not you have work income.

Keep reading for some estimates of what delaying retirement by a year might mean with regards to work income:

The Income

Senior man with money
aerogondo2 / Shutterstock.com

Let’s start with the obvious. Delaying retirement gives you an extra year of income. And that is no small chunk of change at probably $50,000 or more, perhaps much more.

Retiring early simply means that you aren’t banking that money or are able to use it for living expenses (and you need to pay for life somehow).

Withdrawals

Stealing money
esthermm / Shutterstock.com

Work income enables you to delay making withdrawals to cover expenses. And, this delay enables the money to stay invested and continue to grow. So, the value of delaying a year can be equal to whatever you would have taken out of savings PLUS your returns on that money.

Many people withdraw about 4% of their savings a year, and the average retirement savings for someone in their 60s is around $200,000.

So, with those averages, delaying that withdrawal for a year would net you $8,000 plus however much your money might appreciate. (The appreciation might be $1,500 over 20 years at a 6 percent return.)

Expenses

Potstock / Shutterstock.com

When you are working, you might have higher (or lower) expenses than when you retire — depending on your personal situation.

You’ll want to think about commuting costs, lunches out, fancy coffee on your way to work, and your wardrobe — well, if we ever get out of the pandemic anyway. And, if you choose to retire, you’ll want to carefully consider if your expenses will go up or down. Many people find that they spend a lot more after retirement. Explore best ways to budget for retirement.

However, the biggest potential factor with regard to expenses and when to retire might be where you live. If you intend to relocate after retirement, this can be a pretty massive financial factor. Buying and selling a home is a big decision, and timing those transactions can mean big swings in value.

Expenses can’t be easily generalized — delaying retirement a year might result in a higher or lower burn rate. So, let’s just call it even. (But we really recommend that if you are considering when to retire, do detailed personalized planning so that you can feel confident with your decision.)

Savings

Mirco Vacca / Shutterstock.com

First, do you know how much savings you need to have the retirement you want? If you don’t have enough and an extra year or more in the workforce could get you there, then keep working.

But maybe you want an extra cushion or to leave behind a bigger financial legacy. Working longer could potentially enable you to contribute greatly to savings.

Extra savings — especially if you are able to do catch-up savings — can be a great use of an extra year in the workforce. You are allowed to save up to $33,000 in tax-advantaged accounts after the age of 55 (as of writing). (And, those savings might appreciate $6,500 over 20 years.)

Work Benefits

workplace benefits
Rawpixel.com / Shutterstock.com

Many workplaces offer benefits in addition to salary. Health insurance and 401(k) matching are notable big-ticket items that should be considered if you’re debating whether you should delay retirement a year.

If you are retiring before you are eligible for Medicare at 65, then you may face huge out-of-pocket insurance costs. And, if your employer offers 401(k) matching, then you will be walking away from that cash.

Health Insurance: Fidelity estimates that out-of-pocket costs for health care are just shy of $12,000 a year.

401(k) Matching: The most common employer match is 50 cents on the dollar of up to 6 percent of your salary. So, at a $150,000 salary, an employer might be adding $4,500 to your retirement account (assuming you saved at least $9,000).

Does Delaying Retirement by a Year Really Make a Big Difference?

Questioning senior
Krakenimages.com / Shutterstock.com

Yes. Delaying retirement by a year can be meaningful. But, the reality is entirely dependent on your personal situation. Without counting appreciation on the additional savings, here is how it adds up:

Social Security: A year could mean a $0–$500,000 difference. Let’s take a modest example and say it costs you $50,000

Pension: (Because few people have a pension, and almost no one would retire before they vest, we’ll leave it out of this summation.)

Work Income: $50,000+

Work Benefits: $16,500 ($12,000 for health insurance and $4,500 for employer match)

Delayed Savings Withdrawals: $8,000+

Savings Contributions: $33,000 (if you can max out catch-up contributions)

Your Time: As the TV commercial used to say, PRICELESS

There is a huge range for what delaying your retirement for just one year might cost you — but it is safe to say that $100,000–$200,000 is a conservative estimate, except that your time really is priceless. At a minimum, it has some value to you that should offset whatever you might gain from working longer.

You can use the NewRetirement Planner to run scenarios for what delaying retirement a year — or moving it up five years — might mean to you. Just remember to balance the financial side of the equation with how you really want to be spending time.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Decentralized Finance (DeFi) Decoded: What Is This Blockchain Tech?

@media (max-width: 1200px) body .novashare-buttons.novashare-inline .novashare-button-icon width: 100%; .novashare-inline .novashare-button .novashare-button-block background: #000000; .novashare-inline .novashare-button .novashare-border border-color: #000000; .novashare-inline .novashare-button .novashare-inverse color: #000000;


Dig Deeper

Additional Resources

Cryptocurrency was built on the idea of decentralization. The blockchain technology itself that powers the Bitcoin network was purpose-built to be powered by independent operators so that no central authority could govern it.

Decentralized finance is one of the most popular innovations to come from cryptocurrency, allowing anyone to transact on the blockchain directly. Decentralized finance (DeFi) apps allow users to connect their digital wallets and access financial services, such as crypto trading and lending. 

Read on for a breakdown of DeFi, what it is, how it works, and the most popular cryptocurrency in the DeFi space today. We’ll also cover some of the risks to consider before investing in and using DeFi platforms.


What Is Decentralized Finance (DeFi)?

Decentralized finance (DeFi) refers to the applications and networks that allow users to exchange cryptocurrency for goods and services on a decentralized blockchain. These transactions are typically managed by smart contracts, which are programs that govern financial transactions on the blockchain.


Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)
Get Priority Access

Although that may sound complicated, the real-world use cases of DeFi are much simpler. 

Users can connect their digital wallet to an application and choose to trade, lend, borrow, invest, or make a purchase with the crypto in that wallet. This activity can range from purchasing a non-fungible token (NFT), to transferring crypto to another user, to playing a decentralized online game, to depositing crypto to earn interest.

There are many use cases for decentralized finance. Here’s how it works:


How Decentralized Finance (DeFi) Works

DeFi uses peer-to-peer networks of computers and servers (known as “nodes”) to process transactions and host applications (such as a lending application). Users interact with these applications with a digital wallet that carries a compatible cryptocurrency. 

DeFi applications are specifically built to be decentralized, relying on node operators and validators to confirm transactions and secure the network. The distributed nature of DeFi means that there is no central governing authority to regulate the applications, but is instead a “trustless” system that uses smart contracts and a blockchain ledger to automate and secure transactions.

It’s easier to understand DeFi when comparing it to how traditional banking systems work. 

When someone wants to borrow money from a bank, they need to prove their creditworthiness, provide detailed financial statements (including income and debt), and may be required to provide proof of collateral to secure the loan. There may be a down payment required, and a written agreement on payback terms and conditions that both parties sign. 

In DeFi, when applying for a loan, a user can deposit their cryptocurrency as collateral (such as Bitcoin), select how much they wish to borrow against that balance, and the funds are instantly transferred to their digital wallet. Repayment typically happens at the borrower’s convenience, and the interest charged is simply added to the user’s debt balance over time. 

DeFi removes banks from the middle of financial transactions. Money transfers, borrowing, lending, and crypto trading happens in an automated fashion.

Here’s how the blockchain and smart contracts are designed to facilitate DeFi applications:

The Blockchain

The blockchain is a public distributed ledger that processes and validates cryptocurrency transactions. When a transaction is processed, a record of that transaction is created and multiple other users verify the transaction to confirm it is valid. 

The transaction is added to a block on the network, where multiple transactions are stored in sequential order. After the transactions within a block are completely validated, the block is closed, and placed in sequential order just after the previous block.

This continuous chain of blocks makes up the blockchain, which cannot be altered, or it breaks the chain and invalidates the entire blockchain. All this data is encrypted and validated by independent parties, ensuring no bad actor or central authority can alter the blockchain.

DeFi applications are built on this blockchain, and all transactional activity uses the native blockchain of the application to record the activity. For example, if you use a decentralized exchange based on Ethereum like Uniswap to trade crypto, your transactions are all recorded on the Ethereum blockchain.

Yes, this sounds complicated. But you, as a user of DeFi apps, are simply connecting your digital wallet and interacting with an app. The blockchain manages all the data in the background.

Smart Contracts

Smart contracts are programs that automatically execute transactions on the blockchain when certain conditions are met. 

For example, when a user of a DeFi lending application deposits cryptocurrency, a smart contract executes to automatically start paying interest to the user. Or, when executing a trade on a decentralized exchange, a smart contract automatically executes the trade at the agreed-upon price without a broker acting as a middleman.

There are infinite uses of smart contracts, and DeFi applications continue to find innovative ways to program smart contracts into their applications. They are the foundation of how DeFi apps function, and are used by most modern blockchains.


DeFi Applications

DeFi applications are the heart of decentralized finance and are built to allow users to buy, sell, and trade crypto, as well as perform other financial transactions, such as borrowing and lending. Here are a few examples of DeFi apps:

  • Borrowing. Users who want to borrow against their crypto holdings can connect to a decentralized lending platform, deposit their crypto holdings as collateral, and borrow against those holdings. Users can borrow cryptocurrency up to a certain percentage of their collateral value, but can also be automatically liquidated if the value of their collateral drops too much.
  • Lending. Crypto lending platforms allow users to borrow crypto, but on the flip side, users can deposit crypto to earn interest on their holdings. Users can deposit stablecoins to earn high interest rates, and the lending platform will lend out those coins to borrowers. This is how many use DeFi to earn passive income.
  • Decentralized Exchanges (DEXs). A decentralized exchange is where users can trade crypto directly from their digital wallet. You can connect your wallet and select which crypto you want to trade. Buying and sellers are automatically matched to facilitate the transaction, and the DEX charges a small fee to pay for liquidity and transaction costs.
  • Derivatives. Users can trade derivatives on DeFi applications, which are cryptocurrencies that are tied to the value of real-world items, such as a stock market index fund. DeFi apps use an “oracle” smart contract that ties in value data from real assets and attaches that value to a cryptocurrency or contract to allow users to trade derivative products. 
  • NFTs. Although not technically an application, non-fungible tokens (NFTs) are essentially a serial number for digital assets, such as artwork and metaverse items. These items are recorded on the blockchain, giving users verifiable ownership of a unique item. These items can be purchased on exchanges or traded within DeFi applications.

There are a growing number of DeFi applications as the space continues to evolve at a rapid pace. Time will tell how these applications will expand and impact the financial world.


Pros and Cons of DeFi

DeFi is exciting, innovative, and sometimes confusing. With so many applications and use cases being launched on a weekly basis, it is hard to keep up with the growth of this space. And while this creativity is sparking changes in the financial world, there are definite risks involved in DeFi. Here are a few awesome things about the space, as well as some concerns to be aware of:

Pros of Decentralized Finance (DeFi)

DeFi allows users to access financial services in a fast, unmoderated way. With around the clock functionality, lightning-fast transactions, and minimal fees, DeFi offers many advantages over traditional banking systems. Here are a few features that make DeFi great:

  1. 24/7 Availability. DeFi is decentralized and hosted on networks that are available 24 hours a day, seven days a week. With no governing authority to stop trading and transaction processing, users can transact whenever they want without waiting days for approvals and market availability.
  2. Low Fees. In general, DeFi offers low fees to process transactions, typically charging less than 1% of the total transaction. Compared to fees upwards of 4% for companies like PayPal, this is a major discount for services.
  3. (Partially) Anonymous. Although transactions are recorded on a public ledger and are traceable through the blockchain, users do not have to verify their identity or sign up for any account with any personal information to use DeFi applications. This allows a certain level of anonymity when transacting within DeFi apps.
  4. Fast Transactions. DeFi is fast and is getting faster as networks and protocols are continually upgraded. Users can get approvals for DeFi loans instantly, and transactions can be processed in just seconds.

Cons of Decentralized Finance (DeFi)

Although DeFi is rapidly changing the world of finance, there are some risks involved. Namely, scammers and hackers are in the business of trying to access the enormous amount of wealth being transacted within DeFi applications. Network fees can also fluctuate, causing a sharp spike in prices for transactions. 

Here are a few risks of DeFi to be aware of:

  1. Scams. Unfortunately, with lack of regulation comes an influx of scammers and criminals trying to steal your money. Billions of dollars were scammed from DeFi users in 2021 alone, and the number is rising. Stolen digital wallet private keys and “rug pulls” (newly-issued tokens that become worthless) are two common types of these scams.
  2. No Insurance. While DeFi is unregulated by design, this means most DeFi applications do not have any consumer protections, including insurance. If you transfer your coins to the wrong digital address or an application gets shut down while it holds your tokens, you cannot recover any of those funds via insurance.
  3. Liquidations. Specific to lending apps, a liquidation happens when you provide collateral for a loan (say, Bitcoin), and the price of that collateral drops. Because DeFi lending is automated, if the price of your Bitcoin drops below a certain threshold, the DeFi can automatically liquidate your collateral to pay off the loan, leaving you with no collateral left.

There are other risks in DeFi, mostly stemming from the fact that it is unregulated, and anyone can create a DeFi app that looks legitimate, even if it is not. As always, protect your digital wallet private keys and always do your research before connecting your wallet to any DeFi application.


How to Get Started With DeFi

DeFi requires that users connect to applications using a digital wallet with some cryptocurrency in it. To get started, you can download a digital wallet application as an add-on to your browser or as a mobile app. 

Once you have your wallet set up, you will need to purchase crypto and transfer it to that wallet. You can use a crypto exchange to make the purchase, and then transfer the funds to your wallet address.

Once you have the right crypto in your wallet — for example, ethereum (ETH) for use on Ethereum-based DeFi apps — then you can go to the website or application and connect your digital wallet. This allows you to transact on the DeFi app, including borrowing, lending or trading.


FAQs About Decentralized Finance

As a brand-new technology, DeFi can be confusing. Here are some answers to common questions about DeFi to help you get started.

Is Bitcoin DeFi?

Bitcoin is the original DeFi protocol — a decentralized distributed ledger to facilitate peer-to-peer payments without the need for a central bank or processing company. It laid the groundwork for all other cryptocurrency protocols, and created the blockchain.

That being said, in today’s vernacular, Bitcoin is not really known as DeFi. Today the term typically refers to DeFi applications that use smart contracts, which are mostly built on the Ethereum network and a few other blockchains. 

Bitcoin is used as a payment system and is seen as a store of value, but not a DeFi application.

What Are the Top DeFi Coins?

The top DeFi coins are cryptocurrencies that support the underlying networks DeFi applications run on. This includes Ethereum — which hosts a majority of DeFi today — as well as Solana (SOL), Avalanche (AVAX), Cardano (ADA), and Terra (LUNA). These blockchain networks host DeFi applications, and their native cryptocurrencies are well established, worth tens of billions of dollars (or more).

As for DeFi projects that build decentralized applications, some of the top coins include MakerDAO (MKR), SushiSwap (SUSHI), Aave (AAVE), and Uniswap (UNI). These applications boast large daily transaction volumes and billion-dollar market caps.

What Are the Top DeFi Platforms?

There are hundreds if not thousands of DeFi platforms today, with more being launched in rapid fashion. Some of the top platforms are the native blockchains that host DeFi applications. Here’s a few of the top DeFi platforms available:

Ethereum. Ethereum was one of the first blockchain networks to launch smart contracts, and it was developed to allow users to create applications on top of the Ethereum network. There are hundreds of DeFi apps that run on Ethereum, and it is the most popular cryptocurrency outside of Bitcoin.

Solana. Solana is a blockchain platform that promises lightning-fast transactions and extremely low fees. Many DeFi applications have already been built on Solana, including borrowing, lending, NFT marketplace, and trading applications.

Avalanche. Avalanche is another fast blockchain network that offers extremely low fees and quick transactions. It hosts many decentralized exchanges and other DeFi apps, making it one of the top DeFi platforms available today.

Decentraland. Decentraland is a DeFi gaming platform that allows users to buy and sell digital assets for the metaverse, including digital real estate, digital avatar wearables, and names.

These platforms have proven track records and massive valuations, with millions of daily users. 

How Are DeFi Transactions Taxed?

DeFi covers a wide range of financial services, and the taxes on each of these services vary depending on the type of DeFi application you’re using. DeFi taxes will either be classified as income or capital gains, depending on how it is earned.

When earning interest or rewards within a DeFi app, this is typically taxed as income. The same goes for mining crypto or receiving an airdrop of a token.

Buying and selling crypto also incurs taxes, similar to buying and selling stocks. When these transactions happen in DeFi, it is no different. Crypto held for under one year is taxed at short-term capital gains rates, and those held for one year or longer are taxed at long-term capital gains rates.

Overall, taxes of DeFi transactions can get fairly complicated, and it’s best to connect with a tax professional to understand the tax implications of your particular DeFi application use case.

How Will Ethereum 2.0 Impact DeFi?

Ethereum 2.0 is a network upgrade to the Ethereum blockchain, and will allow a much larger number of transactions. This will help lower the cost of network fees on the Ethereum network, as well as speed up transaction times. 

Because most DeFi applications are built on Ethereum, this upgrade will drastically improve the overall performance of DeFi.

Are NFTs DeFi?

Sort of.

Although NFTs themselves are simply tokenized ownership of an asset (physical or digital), NFTs can be traded over the blockchain, making them a DeFi-compatible asset. 

There are NFT marketplaces built on the blockchain that allow trading and listing of NFTs, and NFTs act as a store of value on the decentralized network. NFTs can also be used as collateral for DeFi loans, or “staked” to earn interest on DeFi applications.

So, although NFTs themselves are not DeFi items, they function within the DeFi ecosystem.


Final Word

Decentralized finance (DeFi) is here to stay. There are thousands of applications providing financial services across the globe, and the number of use cases continues to grow exponentially. Investors in DeFi cryptocurrency anticipate this growth, with institutional investors joining at a rapid pace, investing in protocols such as Ethereum and Solana.

DeFi faces quite a few regulatory hurdles in the coming years, with scams on the rise and billions of dollars worth of crypto being stolen on a yearly basis. This is a problem that requires a solution, and authorities like the SEC and FinCEN are starting to get involved. 

Although some view regulation as a bad thing for DeFi, creating a regulatory environment that allows DeFi to thrive while protecting consumers could help boost its popularity even more.

Overall, DeFi is a new technology that marries the blockchain with real-world use cases. Only time will tell how it impacts the world of finance in the coming years.

.kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-table-of-content-wrappadding:30px 30px 30px 30px;background-color:#f9fafa;border-color:#cacaca;border-width:1px 1px 1px 1px;.kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-table-of-contents-titlefont-size:14px;line-height:18px;letter-spacing:0.06px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;text-transform:uppercase;.kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-table-of-content-wrap .kb-table-of-content-listcolor:#001c29;font-size:14px;line-height:21px;letter-spacing:0.01px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;.kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-table-of-content-wrap .kb-table-of-content-list .kb-table-of-contents__entry:hovercolor:#16928d;.kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-table-of-content-list limargin-bottom:7px;.kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-table-of-content-list li .kb-table-of-contents-list-submargin-top:7px;.kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_260d10-0d .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:beforebackground-color:#f9fafa;

Since 2017, Masterworks has successfully sold three paintings, each realizing a net anualized gain of +30% per work. (This is not an indication of Masterworks’ overall performance and past performance is not indicative of future results.)

Masterworks Sidebar 2

Source: moneycrashers.com

Cardano (ADA) Overview – Will It Be the King of Cryptocurrency?

@media (max-width: 1200px) body .novashare-buttons.novashare-inline .novashare-button-icon width: 100%; .novashare-inline .novashare-button .novashare-button-block background: #000000; .novashare-inline .novashare-button .novashare-border border-color: #000000; .novashare-inline .novashare-button .novashare-inverse color: #000000;


Dig Deeper

Additional Resources

For all the excitement around cryptocurrencies, the original and best-known networks today have a few dirty little secrets. 

First, their transaction speeds limit how scalable and efficient they are as their network load increases. Second, they rely on a proof-of-work mining model that incentivizes miners to consume vast amounts of energy to run computer hardware in the pursuit of new coins. 

The newest generation of cryptocurrencies has tried several approaches to resolving these issues. One of the biggest and most successful of these altcoins is Cardano. 


What Is Cardano (ADA) Cryptocurrency?

Cardano is a blockchain and smart contract platform created in 2015 by Charles Hoskinson, the co-founder of Ethereum. It’s a third-generation blockchain platform that incorporated peer-reviewed research into its development in the hopes of avoiding the pitfalls and limitations of earlier blockchain networks like Bitcoin and Ethereum. 


Motley Fool Stock Advisor recommendations have an average return of 618%. For $79 (or just $1.52 per week), join more than 1 million members and don’t miss their upcoming stock picks. 30 day money-back guarantee. Sign Up Now

The Cardano network’s internal cryptocurrency, ADA, is the sixth most popular cryptocurrency by market cap at more than $30 billion. 

History of Cardano

Hoskinson began developing the Cardano blockchain platform in 2015 and finally released it in September 2017. 

The Cardano network takes its name from Italian Renaissance mathematician Gerolamo Cardano. Its native token is named for 19-century English mathematician Ada Lovelace, who created an early digital computer prototype and is considered the world’s first computer programmer.

The Cardano Foundation, a nonprofit based in Zug, Switzerland, oversees and supervises the Cardano network and brand. 

The foundation has partnerships with prominent blockchain developers and engineering companies — like Hoskinson’s IOHK (Input Output Hong Kong) and EMURGO — to help ensure the technology is being developed and promoted as a secure, transparent, and accountable system. It also works with regulators to inform blockchain legislation and commercial standards.

The Cardano development roadmap consists of five phases (eras) named for famous computer scientists and philosophers:

  • Phase 1 (Byron) — Foundation: This era began in 2017 when the first version of Cardano launched.
  • Phase 2 (Shelley) — Decentralization: This era involved the growth and development of the network to include more nodes, ensuring network participants increasingly ran it.
  • Phase 3 (Goguen) — Smart Contracts: This era adds smart contract functionality, introducing the ability to build decentralized applications (dApps) on the Cardano platform. 
  • Phase 4 (Basho) — Scalability: This era focuses on optimizing the network’s performance for widespread adoption, allowing support for growth and applications with high transaction volume. A major feature of this era is the introduction of sidechains, which are separate blockchains that run in parallel and are interoperable with the main Cardano chain. Sidechains can be used to offload work from the main chain to vastly improve the network’s capacity.
  • Phase 5 (Voltaire) — Governance: The final phase of development will introduce systems that make the network self-sustaining, including decentralized voting and treasury systems. Once these systems are in place, Cardano will no longer be managed or supervised because the community will possess the voting rights to determine the future of the network.

The platform’s development is currently at Phase 3, having launched smart contract capability in September 2021.

How Cardano Works

Cardano is the largest cryptocurrency by market capitalization that uses a proof-of-stake (PoS) consensus mechanism called Ouroboros to mine new tokens. Compared to Bitcoin and Ethereum’s proof-of-work (PoW) protocols, which require intensive computing power that consumes massive amounts of energy, Cardano is a greener alternative. 

Cardano’s proof-of-stake mining system involves pools of participants staking an amount of ADA, locking up their currency for a period of time. By holding and staking the tokens, users support the basic function of the network and earn rewards — in the form of ADA — in the process.

The Cardano protocol divides time into time slots, which are currently one second apiece. A lottery selects a participant with staked ADA in each time slot to validate transactions, create transaction blocks, and add new blocks to the Cardano blockchain. The more ADA a user has staked, the greater the odds of being chosen in the lottery and receiving the rewards. 

Cardano and its Ouroboros algorithm are touted as being based on scientific philosophy and peer review. Cardano’s open-source blockchain has undergone the academic peer-review process, whereby scientists and programmers at academic institutions have formally evaluated it. Scholarly research has also informed its development since its inception. 


Pros and Cons of Cardano

Cardano is one of several blockchain networks billed as so-called “Ethereum killers,” designed to outcompete the world’s leading blockchain platform for developers. Unlike many other networks that claim this ambition, Cardano is large enough and has enough developer support to give Ethereum a real run for its money — but it isn’t the king of the hill just yet.

Pros of Cardano

There’s a lot Cardano developers and investors like about the platform, including. 

  1. Fast Transactions (and Scalable). The Bitcoin network processes around seven transactions per second, and the Ethereum network can process around 30 per second, which places some constraints on how scalable these networks are. Cardano can process more than 250 transactions per second today. The sidechains that accompany Phase 4 of Cardano’s development could allow the network to process 1 million transactions per second or more in the future. 
  2. Low Fees. Cardano fees are currently 0.16 ADA per transaction, or about $1 as of this writing. The transaction fees for Bitcoin and Ethereum are often five to 50 times greater, depending on the spot prices of these coins.
  3. Better for the Environment. Cardano’s proof-of-stake protocol requires far less computing power. Thus, it consumes vastly less energy than traditional proof-of-work models other cryptocurrencies employ. 
  4. Strong Development Team. The team developing and building on Cardano is well respected in crypto circles, including its founder, Hoskinson. Having this talented team will be key to launching the succession of promising upgrades that are in the works. 

Cons of Cardano

Despite all its advantages, there are some speed bumps on the road to widespread adoption of the Cardano network and the growth in value of ADA tokens. Consider these primary cons before investing:

  1. Less Name Recognition. Although among the top 10 cryptocurrencies by market cap, and its popularity among developers and cryptocurrency enthusiasts, it lacks the mainstream name recognition of more established coins like Bitcoin and Ethereum. 
  2. Still Under Development. The Cardano protocol is still a work in progress. It remains to be seen how quickly (or whether) its team will be able to develop the platform to its full potential. Some critics say the network was late to get into smart contracts, only releasing this functionality in September 2021. By contrast, this use case was supported by Ethereum upon its launch in 2015.  
  3. Growth Potential Limited by Adoption. Developers must build dApps using this platform over other alternatives like Ethereum for the ecosystem to blossom. Because Ethereum came first, there are many times more projects and dApps currently built on the Ethereum network than there are using Cardano. 

Where Can You Buy and Sell Cardano?

Most large cryptocurrency exchanges support buying and selling ADA tokens, including Binance, Coinbase, and Kraken. But notably, the popular trading platform Robinhood doesn’t yet let users buy Cardano on the platform. 

Not every cryptocurrency exchange is available in the U.S., and availability can even vary by state, so ensure the exchange you’re considering is licensed in the U.S. and available where you live before you sign up. 

When choosing a platform or brokerage, pay special attention to the transaction fees you pay. These vary widely by platform and can really add up.

Depending on whether you want to trade other cryptocurrencies for ADA or exchange fiat currency for the tokens, you’ll want to choose a platform that offers a wide selection of other coins and makes it easy to deposit and withdraw funds.

Finally, if you want to move your Cardano into a secure crypto wallet, choose a platform that allows you to move your crypto holdings offsite (take possession). Many platforms force you to liquidate your crypto holdings before withdrawing your funds.    


Final Word

Cardano is already one of the largest crypto projects around, and it has a bright future as a growing blockchain ecosystem. Its use cases include a host of smart contracts, dApps, and an NFT marketplace that can credibly compete with Ethereum. 

The fact that Cardano is easier on the environment and based on academic peer-reviewed ideas may prove to be the differentiators that allow it to be a more sustainable solution in the long run. With more and more features and expanded interoperability on the horizon, this is one cryptocurrency you don’t want to sleep on. 

.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrappadding:30px 30px 30px 30px;background-color:#f9fafa;border-color:#cacaca;border-width:1px 1px 1px 1px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-contents-titlefont-size:14px;line-height:18px;letter-spacing:0.06px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;text-transform:uppercase;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-listcolor:#001c29;font-size:14px;line-height:21px;letter-spacing:0.01px;font-family:-apple-system,BlinkMacSystemFont,”Segoe UI”,Roboto,Oxygen-Sans,Ubuntu,Cantarell,”Helvetica Neue”,sans-serif, “Apple Color Emoji”, “Segoe UI Emoji”, “Segoe UI Symbol”;font-weight:inherit;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-wrap .kb-table-of-content-list .kb-table-of-contents__entry:hovercolor:#16928d;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list limargin-bottom:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-table-of-content-list li .kb-table-of-contents-list-submargin-top:7px;.kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-basiccircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-arrowcircle .kb-table-of-contents-icon-trigger:before, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:after, .kb-table-of-content-nav.kb-table-of-content-id_055987-a5 .kb-toggle-icon-style-xclosecircle .kb-table-of-contents-icon-trigger:beforebackground-color:#f9fafa;

Source: moneycrashers.com