What Is Fibonacci Retracement in Crypto Trading?

A retracement level is the price at which a stock or cryptocurrency tends to see a reversal in its trend. Fibonacci retracement is a popular tool in technical analysis that helps determine support and resistance levels on a price chart.

What Are Fibonacci Retracement Levels?

Fibonacci numbers are a series where each number equals the sum of the two previous numbers. The most basic series is: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377 etc.

When it comes to technical analysis, investors use Fibonacci Replacement Levels, expressed as percentages, to analyze how much of a previous move a price has retraced. The most important Fibonacci Retracement levels are: 23.6% 38.2%, 50% and 61.8%.

Some analysts refer to 61.8% as “the golden ratio,” since it equals the division of one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179.

The other Retracement levels reflect other calculations: Dividing one number by the number three places to its right equals 23.6%. For example: 8/34 = 0.2352. Bitcoin traders often use 78.6%, which is the square root of 0.618,

Some prefer the 0.618 and 0.382 levels because these are the retracement levels analysts believe are most likely to generate a trend reversal. These levels are considered inflection points where fear and greed can alter price action. When an asset is trending upward but loses momentum, it’s possible that a pullback to the 0.618 price level could result in a bounce upward, for example.

How Does Fibonacci Retracement Work and What Does it Do?

There are several theories as to why the fibonacci retracement works. Some of these include:

•   Fibonacci price levels reflect the effects of extreme fear and greed in the market. To use this to their advantage, traders might buy when people are panicking and sell when others are getting greedy.

•   Fibonacci patterns are often observed in nature as well as in mathematics. For example: fruits and vegetables. If one would look at the center of a sunflower, spiral patterns could appear to curve left and right. Counting these spirals, the total often is a Fibonacci number. If one could divide the spirals into those pointed left and right, then two consecutive Fibonacci numbers could be obtained. Therefore, it’s thought that these patterns may be important in financial markets as well.

•   The law of numbers: If a greater percentage of people practice Fibonacci crypto trading, then the likelihood of its accuracy increases.

At its core, a Fibonacci retracement is a mathematical measurement of a particular pattern. When it comes to Fibonacci in crypto, traders try to apply these patterns to price action to predict future price movements.

Who Created Fibonacci Retracements?

While traders commonly use Fibonacci in crypto today, the number sequences pre-date the invention of cryptocurrency by many centuries. Fibonacci numbers are based on the key numbers studied by mathematician Leonardo Fibonacci (or Leonardo of Pisa) in the 13th century, although Indian mathematicians had identified them previously. He was a medieval Italian mathematician famous for his “Book of the Abacus”, the first European work on Indian and Arabian mathematics, which introduced Hindu-Arabic numerals to Europe.

Formula

In an uptrend or bullish market, the formulas for calculating Fibonacci retracement and extension levels are:

UR = High price – ((High price – Low price) * percentage) in an uptrend market; where UR is uptrend retracement.

UE = High price + ((High price – Low price) * percentage) in an uptrend market; where UE is an uptrend extension.

For example: A stock price range of \$10 – \$20, could depict a swing low to swing high.

Uptrend Retracement (UR) = \$20 – ((\$20 – \$10) * 0.618)) = \$13.82 (utilizing 0.618 retracement)

Uptrend Extension (UE) = \$20 + ((\$20 – \$10) * 0.618)) = \$26.18 (utilizing 0.618 retracement)

If a stock pulls back \$13.82 could be a level that the stock bounces back to reach higher levels than its swing high price, e.g. \$20. In an uptrend, the general idea is to take profits on a long trade at a Fibonacci price extension Level ~ \$26.18.

What Does a Fibonacci Retracement do?

Markets don’t go straight up or down. There are pauses and corrections along the way. To buy stocks in an uptrend, one would look to get the best price possible.

Some traders use Fibonacci Retracement to determine how much a stock could pull back before continuing higher. Traders can use these retracement levels to find optimal prices at which to enter a trade.

A swing high happens when a security’s price reaches a peak before a decline. A swing high forms when the highest price reached is greater than a given number of highs around it.

Swing low is the opposite of swing high. It refers to the lowest price within a timeframe, usually fewer than 20 trading periods. A swing low occurs when a lowest price is lower than any other surrounding prices in a given period of time.

Support and Resistance

Support is the price level that acts as a floor, preventing the price from being pushed lower, while resistance is the high level that the price reaches over time. Analysts often illustrate these as horizontal lines on a graph.

A support or resistance level can also represent a pivot point, or point from which prices have a tendency to reverse if they bounce (in the case of support) or retreat (in the case of resistance) from that level.

Limitations of Fibonacci Retracement

Fibonacci retracements in crypto or other markets may be slightly predictive. But over relying on them can be counterproductive for reasons such as:

•   Fibonacci retracements, like any other indicators, could be used effectively only if investors understand it completely. It could end up being risky if not used properly.

•   There are no guarantees that prices will end up at that point, and retrace as the theory indicates.

•   Fibonacci retracement sequences are often close to each other, therefore it may be tough to accurately predict future price movements.

•   Using technical analysis tools like Fibonacci retracements can give investors tunnel vision, where they only see price action through this one indicator. Assuming that any single indicator is always correct can be problematic.

A Fibonacci retracement in crypto trading could wind up being even less predictive than in other financial markets due to the extreme volatility that cryptocurrencies often experience.

Fibonacci Retracements and Bitcoin

Fibonacci retracements can also be used for trading cryptos such as Bitcoin (BTC), similarly to how they’re used in stocks. In this case, one would use the levels 23.6%, 38.2%, 50%, 61.8% and 78.6% to determine where the cryptocurrency price would reverse.

Crypto prices are very volatile, and leverage trading is common. Leverage is the use of borrowed funds to increase the trading position, beyond what would be available from the cash balance alone. Therefore, it can be important to have some reference as to when the price could reverse, to not incur major losses.

Using the Fibonacci Retracement Tool to Trade Cryptocurrencies

In order to get started with a Fibonacci Retracement Tool, a trader could find a completed trend for a crypto, say, Bitcoin, which could either be an uptrend or downtrend.

Below are some steps on how to use Fibonacci retracement tool:

1.    Determine the direction of the market. Is it an uptrend or downtrend?

2.    For an uptrend, determine the two most extreme points (bottom and top) on the Bitcoin price chart. Attach the Fibonacci retracement tool on the bottom and drag it to the right, all the way to the top.

3.    For a downtrend, the extreme points are top and bottom and the retracement tool could be dragged from the top to the bottom.

4.    For an uptrend or downtrend, one could monitor the potential support levels: 0.236, 0.382, 0.5 and 0.618.

Recommended: Crypto Technical Analysis: What It Is & How to Do One

Fibonacci Retracement Example for Bitcoin

In December 2017, Bitcoin fell from \$13,112 to around \$10,800, within a short timeframe. After that, it rallied up to \$12k twice, but did not break above that level until 2021. That indicates a bearish pattern, as it couldn’t break above its previous high. In technical analysis it is called a double top.

On the Fibonacci tool, the \$12k resistance point coincided with the 50% level of retracement. When the price could not reach this level, it started to fall again. In this scenario, traders using Fibonacci Retracement might consider this a good time to exit a long position or establish a short position. A short trade is based on the speculation that the price of Bitcoin is going to fall.

By February, 2018, the trade materialized as Bitcoin continued its downtrend falling all the way to \$9,270. The short trade would have worked and traders could have realized a profit from using the crypto Fibonacci Retracement tool, although those who managed to HODL for years after that would have made even more.

FAQ

Does Fibonacci retracement work with crypto?

While the Fibonacci retracement tool is traditionally used for analyzing stocks or trading currencies in the forex market, some analysts believe it is also helpful in determining a crypto trading strategy.

How accurate is fibonacci retracement?

In crypto, Fibonacci retracement levels are often fairly accurate, although no indicator is perfect and they are best used in combination with other research. The accuracy levels increase with longer timeframes. For example, a 50% retracement on a weekly chart is a more important technical level than a 50% retracement on a five-minute chart.

What are the advantages of using fibonacci retracement?

Here are some benefits of using Fibonacci Retracement.

•   Trend prediction. With the correct setting and levels, it can often predict the price reversals of bitcoin at early levels, with a high probability.

•   Flexibility. Fibonacci Retracement works for assets of any market and any timeframe. One must note that longer time frames could result in a more accurate signal.

•   Fair assessment of market psychology. Fibonacci levels are built on both a mathematical algorithm and the psychology of the majority, which is a fair assessment of market sentiment.

The Takeaway

The Fibonacci Retracement tool can help identify hidden levels of support and resistance so that analysts can better time their trades. Analysts believe this tool is more effective when utilized with types of cryptocurrency that have higher market-capitalization, like Bitcoin and Ethereum, because they have more established trends over extended time frames.They consider it less effective on cryptocurrencies with a smaller market capitalization.

Whether you use Fibonacci Retracement or other methods to create your cryptocurrency trading strategy, a great way to get started is by opening a brokerage account on the SoFi Invest investment app. You can use it to trade more than a dozen different coins, including Bitcoin, Ethereum, Litecoin, Cardano, and Dogecoin.

Photo credit: iStock/HAKINMHAN

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.
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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What Is a Ledger Wallet? An Overview

Ledger is a brand of crypto hardware wallets. They are among the most trusted in the industry and were responsible for bringing the first hardware wallets to market.

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

What Is a Crypto Ledger?

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

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

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

Recommended: Cryptocurrency 101: A Beginner’s Guide

How Does a Ledger Wallet Work?

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

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

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

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

What Are the Different Types of Ledger Wallets in Crypto?

Ledger makes two different wallet types:

1.    Ledger Nano S

2.    Ledger Nano X

Ledger Nano S

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

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

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

Ledger Nano X

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

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

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

Why Consider Getting a Ledger Wallet?

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

1.    Coins can be held offline in cold storage.

2.    Private keys are held by the individual.

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

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

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

Ledger Hardware Wallet Security

Ledger wallets come with the following security features:

1.    24-word backup recovery seed phrase

2.    PIN

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

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

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

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

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

The Takeaway

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

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

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

Interested in investing in crypto? With SoFi Invest®, you can trade cryptocurrency online from a collection of more than two dozen coins including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Free Life Design

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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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What Are Blockchain Consensus Algorithms?

A crypto consensus mechanism forms the foundation of any blockchain. In 2009, Satoshi Nakamoto invented Bitcoin’s proof-of-work consensus algorithm to secure the Bitcoin network. Since then, several alternative consensus algorithms have been proposed.

The basic idea of achieving consensus on a blockchain is to create a way that everyone can agree that certain transactions are valid. That way, no one can cheat the system by creating fake transactions with money they don’t have, and the same funds can’t be sent twice.

Part of the reason Bitcoin was such a transformative technological innovation is that the proof-of-work method of achieving crypto consensus was the first-ever practical solution to the “double spend problem.”

With previous versions of electronic currency, one of the biggest hurdles programmers struggled to overcome was how to create a scarce digital asset that people couldn’t replicate and that couldn’t be spent more than once without everyone knowing.

Thanks in no small part to consensus algorithms, cryptocurrencies and the blockchain technology that powers them have overcome this problem.

Recommended: Crypto 101: What is Cryptocurrency?

What Is a Consensus Mechanism?

In a system run by one central authority (say, a bank), preventing double spending is simple. One entity manages the ledger of transactions, making sure everything runs smoothly. If Alice wants to give a dollar to Bob, the central manager subtracts a dollar from Alice’s account and adds that dollar to Bob’s account. Payment rails like banks and PayPal use this type of consensus mechanism.

With cryptocurrencies, however, there is no single entity in charge of the system, because it is a decentralized network by design. That makes keeping a record of the ledger of transactions — or, establishing a consensus mechanism — more difficult.

Recommended: What Is Distributed Ledger Technology (DLT)?

Consider Bitcoin, as an example. Instead of a single central server, many thousands of people around the globe run the Bitcoin software. The servers they run are called “nodes.” The nodes must somehow come to the same conclusion regarding what transactions have occurred on the network, or to “achieve consensus.” All the nodes need to be on the same page for the network to function.

How Does a Consensus Algorithm Work?

The way a crypto consensus mechanism works varies depending on the algorithm. But all have the same end goal: to achieve consensus on the network. This requires all nodes to agree on which transactions are valid and which are not. Consensus must be maintained from block to block in an orderly and secure fashion if things are to continue running smoothly.

Many of the potential cyberattacks that target blockchains involve disrupting the process of new block generation in some way. For this reason, it’s important that crypto consensus be achieved in a way that makes it difficult for bad actors to intervene.

Types of Consensus Algorithms

There have been many attempts to improve upon proof-of-work (PoW) algorithms. Proof of stake (PoS) might be the most popular of these, as many of the top cryptocurrencies by market cap today are PoS coins. Other crypto consensus methods like proof of burn or proof of capacity are less well-known and haven’t been tried as much.

Proof of Work

While there are now many different consensus algorithms, proof of work is still the most commonly used. To date, this method has shown itself to be reliable and secure.

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

PoW has shown to be a strong and secure method of achieving consensus. It would require so much computational power to overtake a large PoW network that any would-be hackers would be incentivized to become honest participants in the network instead. In other words, it’s easier and more rewarding to just mine for coins than it is to make any attempts at attacking the network.

Some of the downsides of PoW are that the process takes a lot of energy, it may not scale well, and it can trend toward centralization due to the high costs of new equipment — not everyone will be able to afford to mine. The main benefit of PoW is that it has the longest track record and has proven to be the most secure consensus algorithm. To date, there has never been a successful attempt at disrupting Bitcoin’s block production.

Proof of Stake

Proof of stake is a popular consensus mechanism that can be used by blockchains to verify their transaction history. While miners in PoW networks perform energy-intensive work to mine blocks, validators in PoS commit stakes of tokens to validate blocks.

With PoS, validators take the place of miners. They verify transactions by staking crypto on the network, which involves locking up a certain amount of coins for a set period of time, during which the coins will be unusable. Validators have a chance at being randomly selected to find the next block.

Other validators then “attest” that they also believe the block to be valid. Once enough validators have attested to a block’s validity, the block is then added to the chain. All validators involved in the process receive part of the block reward.

One of the big differences between PoS and PoW is that PoW requires miners to expend energy in the form of electricity to find blocks. PoS requires validators to stake their crypto, or in other words, to deposit money. For this reason, proof of stake is praised for being a less energy-intensive consensus mechanism than proof of work.

On the other hand, a disadvantage of PoS is that it favors the wealthiest token holders (who can stake more tokens) and trends toward centralization.

Proof of Burn

Proof-of-burn (PoB) algorithms employ the process of “burning” tokens to achieve crypto consensus. Burning coins involves sending them to an address from which they can never be recovered. Once sent to a burn address, coins are lost forever.

On a PoB network, people mine crypto by burning coins. The more coins burnt, the greater the reward.

An advantage of PoB is that it takes very little energy. A disadvantage is the question of how supply and demand will play out on such a blockchain. Burning existing coins to receive a reward of new coins seems counterintuitive. A delicate balance would have to be maintained for the system to work long-term.

What is the Bitcoin Consensus?

Bitcoin uses the proof-of-work consensus mechanism. Miners must contribute computing power and electricity to mine what remains of the 21 million bitcoins. Bitcoin mining involves processing transactions for the network, work for which miners are compensated with newly minted coins (the block reward). As of December 2021, each block rewards miners with a total of 6.25 BTC.

What is the Ethereum Consensus?

The Ethereum network also uses proof of work, although developers have been planning a move to proof of stake for some time. This change seems to be delayed each time it approaches, so there’s no telling when exactly it might happen.

The Takeaway

Consensus needs to be reached for a crypto network to know which transactions are valid. Otherwise, anyone could spend the same funds twice or make fake transactions using funds they don’t own.

While there are a number of other ways of achieving consensus, proof of work and proof of stake are the most well-known and widely used for now.

Interested in investing in crypto? With SoFi Invest®, you can trade cryptocurrency from a selection of more than two dozen coins including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Eoneren

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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

A Guide to MekaVerse NFTs

One of the most talked-about and hyped new non-fungible token (NFT) collections of the past year recently hit the market: The MekaVerse NFT collection.

Curious about this new NFT collection? This guide will explain what MekaVerse NFTs are, their history, and everything else you need to know.

Recap: What Is an NFT?

NFT stands for “non-fungible token,” a type of digital asset that typically takes the form of some sort of artwork. One way to think of it is that they’re much like a digital version of a baseball card.

NFTs have unique, identifiable metadata codes, meaning that they cannot be copied, and as such are one-of-a-kind. On the other hand, fungible tokens, like bitcoins, have many copies—they are all the same.

What Is MekaVerse NFT?

The MekaVerse NFT collection (which you can view here on OpenSea ) is a project that launched in October 2021, and it features 8,888 NFTs. The NFTs themselves feature a very specific artwork style, each boasting robots that are commonly known as “Mekas.” These Mekas are inspired by Gundam-style robots, which is itself a fictional Japanese anime franchise that features giant military robots called “mechas.” Each individual Meka has its own, unique story, or lore, that comes with it.

Since NFTs hit the mainstream over the past few years, the MekaVerse collection is perhaps the most-hyped collection release to date. Its Discord server has nearly 180,000 members, and it has more than 250,000 followers on Twitter .

History of MekaVerse

How does a collection of mecha NFTs become one of the most-followed digital asset drops in history? Here’s a brief rundown of the project’s history.

The two main people behind the MekaVerse project are “Matt” and “Mattey,” two European digital and graphic artists. They teamed up with Julien van Dorland, a veteran of the NFT landscape, and in late August 2021, MekaVerse opened social media and Discord accounts to the public to get a look at the NFT artwork.

From there, the hype took off. MekaVerse also started a public raffle that was held in early October, with the winners getting a chance to mint NFTs featuring either one or two Mekas. Those NFTs were then made public on OpenSea, an NFT marketplace. There was massive demand, too, as users registered nearly 173,000 wallets for the raffle.

On October 13, 2021, the complete MekaVerse NFT project was revealed . Sales for MekaVerse NFTs commenced, with sales averaging well into the thousands of dollars, and more than 5,000 individuals becoming MekaVerse NFT owners in the months since.

How Do MekaVerse NFTs Work?

The project’s collection of nearly 9,000 NFTs is designed to capitalize on the “scarcity” aspect of NFTs, and therefore, increase their value. Each individual Meka in the project is a unique, three-dimensional creation, further adding to its perceived value.

The NFT collection is open to traders, collectors, and NFT investors. It’s housed on OpenSea, which is one of the world’s largest NFT marketplaces.

To browse or buy, you can simply go to the MekaVerse NFT collection on OpenSea , and take a look at all of the NFTs that are available. The marketplace has data related to pricing, bidding, and more.

When someone becomes a holder of a MekaVerse NFT, they become a part of the Meka’s corresponding “faction,” and can then gain access to exclusive events on Twitter and Discord.

You can make an offer or buy NFTs on OpenSea, but it’ll require that you use Ethereum, or ETH, to do so. So, before you can actually make the purchase, you’ll need to create an account, get an Ethereum wallet, and attach it to your OpenSea account, so as to facilitate the transaction.

How Much Do MekaVerse NFTs Cost?

Since NFTs are commodities and traded on a marketplace, their prices are in flux. But if you’re looking for a straightforward answer as to how much MekaVerse NFTs cost, here’s one: They aren’t cheap.

As of mid-to-early December 2021, the median price for a MekaVerse NFT was more than \$4,500 (although they’re priced in ETH). But some have sold for much more. Around the time the project launched, some NFTs were selling for hundreds of thousands of dollars.

Negative Sentiment Around MekaVerse NFTs

Every project has its issues and detractors, and the MekaVerse project is no different.

For instance, there were some delays in revealing some of the NFT images, which led to some lost momentum prior to launch. But those concerns were seemingly dwarfed by allegations of fraud, which surfaced on Twitter after the project launched.

In short, some people allege that certain buyers had early access to metadata, giving them an inside look at what images would be contained in certain NFTs — information that wasn’t available to everyone. That means that some buyers could have gotten their hands on high-value NFTs at lower prices, only to see their values shoot up later on.

Finally, there’s also been some criticism of the project due to the seeming lack of uniqueness among the NFT images. Some of the images appear to simply have colors swapped, rather than be a completely different Meka.

The Takeaway

As arguably the most anticipated NFT drop to date, the MekaVerse NFT collection has become very popular, very fast. The MekaVerse team does have a roadmap in place, which includes bringing the MekaVerse into the physical world with clothing and toys. There are also plans to airdrop free NFTs to current holders, which may include “weapons” and “companions” in future online games or events.

The NFT market is still new and full of potential for creators and investors. However, before investing in cryptocurrencies, NFTs, or any other digital asset, it’s important to research and understand the market.
One way to get started investing in digital assets is with SoFi Invest®. Members can trade cryptocurrency online from a selection of dozens of coins like Bitcoin, Ethereum, Dogecoin, Solana, Bitcoin, Litecoin, Cardano, and Enjin Coin.

Get started investing using SoFi Invest.

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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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Source: sofi.com

What Are Flash Loans & How Do They Work?

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

What Is a Flash Loan?

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

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

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

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

Recommended: Crypto Lending: Everything You Need to Know

How Do Flash Loans Work?

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

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

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

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

Why Do People Use Flash Loans?

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

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

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

Recommended: How to Get a Bitcoin Loan

Pros and Cons of Flash Loans

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

Flash Loans: Pros and Cons

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

Defaulting on a Flash Loan

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

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

What is a Flash Loan Attack?

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

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

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

Flash Loan FAQs

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

What does “flash loan” mean?

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

Are flash loans risk-free?

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

What is a flash loan exploit?

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

Are flash loans legal?

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

The Takeaway

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

So, if you’d rather take a more straightforward approach to trading crypto, one great way to get started is with an investment account on the SoFi Invest platform. You can use it to buy and sell crypto such as Bitcoin, Ethereum, Litecoin, Dogecoin, Tether, and other cryptocurrencies right from your phone.

Photo credit: iStock/masterzphotois

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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Source: sofi.com

What Is Mark to Market and How Does It Work?

Mark to market or mark-to-market is an accounting method that’s used to measure the value of assets based on current market conditions. Mark to market accounting seeks to determine the real value of assets based on what they could be sold for right now.

That can be useful in a business setting when a company is trying to gauge its financial health or get a valuation estimate ahead of a merger or acquisition. Aside from accounting, mark to market also has applications in investing when trading stocks, futures contracts, and mutual funds.

But what does mark to market mean and how is it useful to investors? If you trade futures contracts or trade stocks on margin, it’s important to understand how this concept works.

Mark to Market Defined

What is mark-to-market accounting? In simple terms, mark to market or MTM is an accounting method that’s used to calculate the current or real value of a company’s assets. Mark-to-market can tell you what an asset is worth based on its fair market value.

Mark to market accounting is meant to create an accurate estimate of a company’s financial status and value year over year. This accounting method can tell you whether a company’s assets have increased or declined in value. When liabilities are factored in, mark to market can give you an idea of a company’s net worth.

How Mark to Market Works

Mark to market accounting works by adjusting the value of assets based on current market conditions. The idea is to determine how much an asset — whether it be a piece of equipment or an investment — could be worth if you were to sell it now.

If a company were in a cash crunch, for example, and wanted to sell off some of its assets, mark-to-market accounting could give an idea of how much capital it might be able to raise. The company would try to determine as accurately as possible what its marketable assets are worth.

In stock trading, mark-to-market value is determined for securities by looking at volatility and market performance. Specifically, you’re looking at a security’s current trading price then making adjustments to value based on the trading price at the end of the trading day.

There are other ways mark to market can be used beyond valuing company assets or securities. In insurance, for example, the mark-to-market method is used to calculate the replacement value of personal property. Calculating net worth, an important personal finance ratio, is also a simple form of mark-to-market accounting.

Pros and Cons of Mark-to-Market Accounting

Mark-to-market accounting can be useful when evaluating how much a company’s assets are worth or determining value when trading securities. But it’s not an entirely foolproof accounting method.

Mark to Market Pros Mark to Market Cons

•   Can help establish accurate valuations when companies need to liquidate assets

•   Useful for value investors when making investment decisions

•   May make it easier for lenders to establish the value of collateral when extending loans

•   Valuations are not always 100% accurate since they’re based on current market conditions

•   Increased volatility may skew valuations of company assets

•   Companies may devalue their assets in an economic downturn, which can result in losses

Pros of Mark-to-Market Accounting

There are a few advantages of mark-to-market accounting:

•   It can help generate an accurate valuation of company assets. This may be important if a company needs to liquidate assets or it’s attempting to secure financing. Lenders can use the mark to market value of assets to determine whether a company has sufficient collateral to secure a loan.

•   It can help mitigate risk. If a value investor is looking for new companies to invest in, for example, having an accurate valuation is critical for avoiding value traps. Investors who rely on a fundamental approach can also take mark-to-market value into account when examining key financial ratios, such as price to earnings (P/E) or return on equity (ROE).

•   It may make it easier for lenders to establish the value of collateral when extending loans. Mark-to-market may provide more accurate guidance in terms of collateral value.

Cons of Mark-to-Market Accounting

There are also some potential disadvantages of using mark-to-market accounting:

•   It may not be 100% accurate. Fair market value is determined based on what you expect someone to pay for an asset that you have to sell. That doesn’t necessarily guarantee you would get that amount if you were to sell the asset.

•   It can be problematic during periods of increased economic volatility. It may be more difficult to estimate the value of a company’s assets or net worth when the market is experiencing uncertainty or overall momentum is trending toward an economic downturn.

•   Companies may inadvertently devalue their assets in a downturn. If the market’s perception of a company, industry, or sector turns negative, it could spur a sell-off of assets. Companies may end up devaluing their assets if they’re liquidating in a panic. This can have a boomerang effect and drive further economic decline, as it did in the 1930s when banks marked down assets following the 1929 stock market crash.

Mark-to-Market in Investing

In investing, mark to market is used to measure the current value of securities, portfolios or trading accounts. This is most often used in instances where investors are trading futures or other securities in margin accounts.

Futures are derivative financial contracts, in which there’s an agreement to buy or sell a particular security at a specific price on a future date. Margin trading involves borrowing money from a brokerage in order to increase purchasing power.

Understanding mark to market is important for meeting margin requirements to continue trading. Investors typically have to deposit cash or have marginable securities of \$2,000 or 50% of the securities purchased. The maintenance margin reflects the amount that must be in the margin account at all times to avoid a margin call.

In simple terms, margin calls are requests for more money. FINRA rules require the maintenance margin to be at least 25% of the total value of margin securities. If an investor is subject to a margin call, they’ll have to sell assets or deposit more money to reach their maintenance margin and continue trading.

In futures trading, mark to market is used to price contracts at the end of the trading day. Adjustments are made to reflect the day’s profits or losses, based on the closing price at settlement. These adjustments affect the cash balance showing in a futures account, which in turn may affect an investor’s ability to meet margin maintenance requirements.

Mark-to-Market Example

Futures markets follow an official daily settlement price that’s established by the exchange. In a futures contract transaction you have a long trader and a short trader. The amount of value gained or lost in the futures contract at the end of the day is reflected in the values of the accounts belonging to the short and long trader.

So, assume a farmer takes a short position in 10 soybean futures contracts to hedge against the possibility of falling commodities prices. Each contract represents 5,000 bushels of soybeans and is priced at \$5 each. The farmer’s account balance is \$250,000. This account balance will change daily as the mark to market value is recalculated. Here’s what that might look like over a five-day period.

Day Futures Price Change in Value Gain/Loss Cumulative Gain/Loss Account Balance
1 \$5 \$250,00
2 \$5.05 +0.05 -2,500 -2,500 \$247,500
3 \$5.03 -0.02 +1,000 -1,500 \$248,500
4 \$4.97 -0.06 +3,000 +1,500 \$251,500
5 \$4.90 -0.07 +3,500 +5,000 \$255,000

Since the farmer took a short position, a decline in the value of the futures contract results in a positive gain for their account value. This daily pattern of mark to market will continue until the futures contract expires.

Conversely, the trader who holds a long position in the same contract will see their account balance move in the opposite direction as each new gain or loss is posted.

Mark to Market in Recent History

Mark-to-market accounting can become problematic if an asset’s market value and true value are out of sync. During the financial crisis of 2008-09, for example, mortgage-backed securities (MBS) became a trouble spot for banks. As the housing market soared, banks raised valuations for mortgage-backed securities. To increase borrowing and sell more loans, credit standards were relaxed. This meant banks were carrying a substantial amount of subprime loans.

As asset prices began to fall, banks began pulling back on loans to keep their liabilities in balance with assets. The end result was a housing bubble which sparked a housing crisis. During this time, the U.S. economy would enter one of the worst recessions in recent history.

The U.S. Financial Accounting Standards Board (FASB) eased rules regarding the use of mark-to-market accounting in 2009. This permitted banks to keep the values of mortgage-backed securities on their balance sheets when the value of those securities had dropped significantly. The measure meant banks were not forced to mark the value of those securities down.

Can You Mark Assets to Market?

The FASB oversees mark-to-market accounting standards. These standards, along with other accounting and financial reporting rules, apply to corporate entities and nonprofit organizations in the U.S. But it’s possible to use mark to market principles when making trades.

If you’re trading futures contracts, for instance, mark-to-market adjustments are made to your cash balance daily, based on the settlement price of the securities you hold. Your cash balance will increase or decrease based on the gains or losses reported for that day.

If the market moves in your favor, your account’s value would increase. But if the market moves against you and your futures contracts drop in value, your cash balance would adjust accordingly. You’d have to pay attention to maintenance margin requirements in order to avoid a margin call.

Which Assets Are Marked to Market?

Generally, the types of assets that are marked to market are ones that are bought and sold for cash relatively quickly — otherwise known as marketable securities. Assets that can be marked to market include stocks, futures, and mutual funds. These are assets for which it’s possible to determine a fair market value based on current market conditions.

When measuring the value of tangible and intangible assets, companies may not use the mark-to-market method. In the case of equipment, for example, they may use historical cost accounting which considers the original price paid for an asset and its subsequent depreciation. Meanwhile, different valuation methods may be necessary to determine the worth of intellectual property or a company’s brand reputation, which are intangible assets.

Mark-to-Market Losses

Mark-to-market losses occur when the value of an asset falls from one day to the next. A mark-to-market loss is unrealized since it only reflects the change in valuation of asset, not any capital losses associated with the sale of an asset for less than its purchase price. The loss happens when the value of the asset or security in question is adjusted to reflect its new market value.

Mark-to-Market Losses During Crises

Mark-to-market losses can be amplified during a financial crisis when it’s difficult to accurately determine the fair market value of an asset or security. When the stock market crashed, for instance, in 1929, banks were moved to devalue assets based on mark to market accounting rules. This helped turn what could have been a temporary recession into the Great Depression, one of the most significant economic events in stock market history.

Mark-to-Market Losses in 2008

During the 2008 financial crisis, mark-to-market accounting practices were a target of criticism as the housing market crashed. The market for mortgage-backed securities vanished, meaning the value of those securities took a nosedive.

Banks couldn’t sell those assets, and under mark-to-market accounting rules they had to be revalued. As a result banks collectively reported around \$2 trillion in total mark-to-market losses.

The Takeaway

Mark-to-market is a helpful principle to understand, especially if you’re interested in futures trading. When trading futures or trading on margin, it’s important to understand how mark to market calculations could affect your returns and your potential to be subject to a margin call.

Find out how to open an account with SoFi Invest.

Photo credit: iStock/Drazen_

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.
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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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What Is Know Your Customer (KYC) for Financial Institutions?

The meaning of the phrase KYC is “know your customer”. KYC regulations provide a framework for financial institutions to know who their customers are.

Financial institutions need to protect themselves from unknowingly participating in illegal activities. If a criminal is discovered to be using a bank for illicit purposes, such as laundering money, then the bank in question could be held accountable. It’s their responsibility to be aware at all times of who they are serving, so they can prevent themselves from being used for criminal activity.

KYC involves making sure banks and other companies in the financial service sector maintain accurate information about their customers. KYC requirements create a universal standard that financial organizations must comply with to know who their customers are. KYC laws and anti-money laundering (AML) laws often go hand-in-hand.

What Are the Three Components of KYC?

There are three main parts of a KYC compliance framework: customer identification, customer due diligence, and enhanced due diligence. Each phase of the process gets more intensive according to the estimated risk that the potential client might pose.

Customer Identification Program (CIP)

The first of the three main KYC requirements is to identify a customer. Organizations must verify that a potential customer’s ID is valid, real, and doesn’t contain any inconsistencies. The person must also not be on any Office of Foreign Assets Control (OFAC) sanctions lists.

An organization also needs to know if their prospective customer is “politically exposed.” A politically exposed person (PEP), such as a public figure, is thought to be more susceptible to corruption than the average individual, and is therefore considered high-risk, requiring special attention.

As part of their AML/KYC compliance program, all financial institutions are required to keep records of their Customer Identification Program (CIP) as mandated by the Financial Crimes Enforcement Network (FinCEN).
FinCEN works under the guidance of the department of Treasury and is charged with guarding the financial system against illicit activity and money laundering.

The following information will satisfy the minimum KYC requirements for a Customer Identification Program:

•  Customer name (or name of business)

•  Date of birth (not required for businesses)

•  Identification number

For individuals, the customer’s residential address must be validated. US Postal Office boxes are not accepted. Individuals with no physical residential address can use an Army Post Office box (APO), Fleet Post Office Box (FPO), or the residential or business street address of their next of kin.

For business customers, the address provided for know your customer requirements can be the principal place of business, a local office, or another physical location utilized by the business.

The ID number for most individuals will be their social security number or Taxpayer Identification Number (TIN). For business entities, the number will usually be their Employer Identification number (EIN). Foreign businesses without ID numbers can be verified by alternative government-issued documents.

Customer Due Diligence (CDD)

Due diligence includes collecting all relevant information on a customer from trusted sources, determining what the customer will be using financial services for, and maintaining ongoing surveillance of the situation to further verify that customer activity remains in line with recorded customer information.

The goal of this phase of the know your customer process is to assess the risks a potential customer might pose and assign them to one of three categories — low, medium, or high risk.

Several variables — including the customer’s expected cash transactions, the type of business, source of income, and location — will help determine the customer’s risk level.

Other categories for assessing risk include the customer’s business industry, whether they use a foreign or domestic account, and their past financial history. The customer is also screened against politically exposed persons (PEP) and Office of Foreign Assets Control’s (OFAC) sanctions lists.

Enhanced Due Diligence (EDD)

Enhanced due diligence (EDD) involves increased monitoring of customers deemed to be high-risk. This may include customers from high-risk third countries, those with political exposure, or those that have existing relationships with financial competitors.

Conducting enhanced due diligence on high-risk business entities requires identifying all beneficiaries of those entities when they open an account. Customers that are legal entities are those that have had legal documentation filed with a Secretary of State or other state office, and include:

•  Limited liability companies (LLC)

•  Corporations

•  General partnerships

•  Limited partnerships

•  Any other entity created via filing with a state office or formed under the laws of a jurisdiction outside of the US

On May 11, 2018, a new AML/KYC requirement came into effect. This change to KYC laws states that all banking and non-banking firms subject to the Bank Secrecy Act (BSA) must verify the identity of beneficiaries of legal entity customers when they open an account.

Firms must also develop risk profiles and continually monitor these customers. This must be done regardless of what risk category the customer falls into.

Due diligence is an ongoing process and requires financial institutions to constantly update customer profiles and monitor account activity.

What Are the Steps Involved in KYC?

There are five main steps of complying with the know your customer rule. These include:

•  Customer Identification Program (CIP)

•  Customer due diligence (CDD)

•  Enhanced due diligence (EDD)

•  Account opening

•  Annual review

Opening an account and conducting an annual review occur after it has been determined that a customer is eligible for financial services.

The higher risk category a customer falls into, the more often their activities will be reviewed.

What Are the Four Key Elements of a KYC Policy?

KYC compliance involves four key elements. When gathering KYC information, organizations must:

•  Identify their customers

•  Verify that the customer’s ID is true and valid

•  Understand their customer’s source of funding and activities

•  Monitor the activities of their customers

Monitoring of customer activities is an ongoing process, particularly for high-risk clients. Most firms review clients based on their level of risk.

Low-risk clients might only be reviewed once every two or three years, moderate-risk clients every one to two years, while high-risk clients tend to be reviewed once a year or even once every six months.

The Takeaway

KYC, or know your customer, is a regulation that helps financial institutions prevent fraud by their customers. KYC involves constant check-ups and ongoing measures to ensure customer information and account profiles are kept up-to-date.

With the need for KYC compliance growing, and regulations becoming more onerous, an increasing amount of this work is done by automated systems utilizing artificial intelligence. A number of fintech companies have sprung up in recent years to fill this market need.

KYC and AML laws have taken on special importance in the cryptocurrency sector, which has been largely unregulated for most of its existence. More and more companies in the space have begun complying with these types of regulations.

The more investors know, the better equipped they are to make informed financial decisions for themselves. With the SoFi Invest® brokerage, you can build your portfolio by trading your choice of stocks, exchange-traded funds (ETFs), cryptocurrency, and Initial Public Offerings (IPOs), all with minimal fees.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Andrii Yalanskyi

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.
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.
IPOs: Investing early in IPO stock involves substantial risk of loss. The decision to invest should always be made as part of a comprehensive financial plan taking individual circumstances and risk appetites into account.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.

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Source: sofi.com

Good news for those who simply can’t peel themselves away from studying cryptocurrency charts or watching the crypto markets: Crypto trading hours are much more expansive than those of the traditional stock market.

In fact, crypto trading hours are 24-7 — the market never closes. There are some caveats, of course, depending on your individual cryptocurrency exchange of choice. This article will dive deep into crypto trading, when it happens, and how to get in on it.

If you’ve had any experience with other market types, even the stock exchange, you likely already have a good grasp of how crypto trading works. Most people access the market through a crypto exchange, where buyers and sellers can meet and transact assets.

For those buyers and sellers, the exchanges simplify the trading process by showing real-time values for various cryptocurrencies (the actual cryptos on a given exchange will vary), and allow traders and investors to buy, sell, and trade. Of course investors can still spend hours poring over crypto charts, but an exchange streamlines the trading process.

For most end users, it’s pretty much the same process as buying or selling stocks in an online brokerage account.

Recommended: How to Invest in Cryptocurrency

Are There Time Limitations on Crypto Trading Networks?

Though crypto exchanges are similar to services that allow users to buy or trade stocks and other assets, there are some differences. One of the most important differences is time limitations — or, the hours of the day during which transactions can be executed.

If you’re trading assets like stocks, bonds, and ETFs, transactions are executed during the market’s open hours, and to a lesser extent, the after-hours market. That’s generally 9:30 am ET to 4 pm ET, Monday through Friday, and 4 pm ET to 8 pm ET for after-hours trading.

But some assets can be traded 24 hours per day. The foreign exchange(forex) market is an example—traders can swap currencies all day between Monday and Friday. The crypto markets are likewise much looser with trading hours, in that the crypto markets never actually close.

The stock market has set operating hours, from 9:30 am ET until 4 pm ET, Monday through Friday. The markets are closed during weekends and holidays.

Conversely, the crypto markets operate non-stop. That doesn’t necessarily mean that there aren’t certain days or times that are better to trade, of course, since the numbers of traders and overall level of liquidity in the markets can vary. But access to the crypto markets is always open.

So, you can get real-time updates on crypto prices, add some coin to your portfolio, or fine-tune your crypto day-trading strategies at odd hours, on weekends, and on holidays.

Pros and Cons of Crypto Always Being Tradeable

There are some pros and cons to the fact that there are no defined crypto market hours.

For instance, during times when fewer traders are on the market, it can affect crypto exchange liquidity, and make values more volatile (read more about the volatility of Bitcoin). Conversely, the open-ended hours of the market can make it easier to research and execute trades at your convenience.

There are some advantages to the crypto markets always being open. These are the top benefits:

•   Higher potential returns due to bigger market and liquidity

Of course, there are also potential downsides to crypto’s non-stop market:

•   Some exchanges and platforms may limit market access to certain times

•   Higher risks and volatility on certain days and times

•   Lack of regulated market hours means traders could miss big market movements

How Non-Stop Crypto Trading Impacts Institutions

There are some ways in which the non-stop crypto market affects institutions — banks and exchanges, in particular.

The stock market takes a break every day, and every weekend. That gives all the players in the market —individual investors and institutions — a chance to assess and reposition their assets for their next moves. But since crypto trades all the time, there are stretches during the 24-hour day when banks and exchanges are effectively closed, and money isn’t being moved around as quickly or efficiently as it would during business hours.

This can cause lags — if a crypto trader is trying to deposit money into their crypto exchange account to execute a trade at, say, 2 am ET on a Sunday night, that money won’t actually move until the next day. That has the potential to cause some friction in the markets.

In short, there’s a mismatch between the standard business hours of many institutions and the 24-hour nature of the crypto markets, which may have an effect on the markets.

How Do Weekends Affect Crypto?

The crypto markets are volatile, and even more so on the weekends. In fact, crypto values often crash during the weekends for a few key reasons:

•   Less trading volume: A lot of people take the weekends off, and that includes from crypto trading. As such, the volume of trades takes a dip. With lower volume, the trades that are executed (especially big ones) can have an outsized effect on the markets — more so than during times with higher trading volume.

•   Margin trading: Many traders trade crypto “on margin,” meaning that they borrow money to execute trades. And when prices drop, it may trigger a “margin call,” which means those margin traders must repay their loans. That forces traders to try and move some money around, but with banks closed on the weekends, it can make things more difficult, and in effect, potentially cause crypto values to fall further.

•   Hourly mismatches and liquidity: With banks closed on weekends but the crypto markets firing away at all hours, traders may have trouble getting more money into their crypto exchange accounts. This can limit market liquidity, potentially adding yet another systemic and chaotic element to weekend crypto trading.

Are Some Days Or Times Better to Trade Crypto?

There are times and days that are generally more favorable to crypto traders to execute trades. The best times and days to trade crypto is generally “whenever works for you” but research shows that professional traders tend to be more active during weekdays.

Monday tends to be the day when traders historically see the biggest returns when trading, followed by Friday and Saturday. And as for which hours of the day are the most fruitful? Data shows that the markets are busiest around 12 pm ET.

But as with any investing, past performance and trends are no guarantee of future outcomes. There’s no promise that trading during these days or times will translate to bigger returns (or any returns) for an individual trader or investor. It’s also worth keeping in mind that these trends are likely to change with time.

The Takeaway

The crypto markets are a wild, non-stop ride. And because they’re so volatile, it’s best to take a measured approach to trading and investing in crypto. But that said, you won’t be limited by crypto market hours, as you might when trading stocks or bonds, because cryptocurrency trading can occur 24/7, every day of the year.

If you’re looking to invest in cryptocurrency, you can trade cryptocurrency on more than two dozen coins with SoFi Invest®, including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Bitcoin, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/Stefan Tomic

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.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com