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Employee Stock Purchase Plans: The Basics & Taxes

Many public companies offer a qualified Section 423 Employee Stock Purchase Plan (ESPP) as a benefit to their employees. This video will simplify everything you need to know about your ESPP.

The benefits of an ESPP

While on the surface, that may not seem like a big deal, the two things that make this worthwhile are the possibility of a discount and then also a look back provision.

First, from a discount perspective, what that is saying is that rather than buying the stock at \$15 a share instead, you can buy it at a discount of up to 15%. So in our example, we're just going to say that it's a 15% discount and so rather than buying at \$15 a share then you can buy it for \$12.50 a share.

The other possible benefit is the idea of a look-back provision. What the look-back provision is saying is rather than just looking at the price of the stock on the purchase date, it is also going to look back to the stock price on the offering date too.

If you would combine those two benefits, then the way that this would work is that on this purchase date, it's going to compare these two prices, and it's going to figure out what the lower one is. It's going to use that as the purchase price and then also add in that 15% discount. So in this particular example, on the purchase date, rather than buying it for \$15 a share, you can actually get it for \$8.50 a share. Using the example numbers, whenever we have set aside \$6,000, we are buying this stock at \$8.50 a share, but it's actually worth \$15 a share. Then immediately on the purchase date, we already have more than a \$4,500 gain.

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What an ESPP is and how it works

As with a lot of things, I figure the easiest way to describe how an ESPP works is through an example.

So let's talk about how to get into your ESPP. The way that it'll work is really similar to your open enrollment for your employee benefits. Similarly, there'll be an enrollment period that will say, "Hey, if you want to participate in the ESPP for this offering period, then you have to enroll within this window and the decision that you make within this enrollment period is how much of your salary that you want to have put aside for the ESPP stock purchase."

In our example, we have a person, they work for ABC Company, and they make a \$120,000 salary. Then let's say they are electing to enroll and put 10% of their income into the ESPP. Then once you've made that election during the enrollment period, there's going to be an offering date which is going to be the start of whenever the actual ESPP is in effect. The way that it gets funded is once the offering date starts. Then with every paycheck that your company will pay you, they'll also withhold an amount, and they're going to basically put it into an escrow account, into a cash account.

The most common length of a window, that is between the offering date and the purchase date, is six months. So in our example, in this six-month period, 10% will put \$6,000 into your escrow account. After the end of the six-month period, whenever you get to the purchase date, that is when they use the \$6,000 to purchase stock in the company.

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How ESPPs are taxed

The next thing to talk about is the way that it's taxed once you purchase it.

So first, if on the purchase date, if you just decide to sell right away, then the difference between what you actually purchased it at and the value of that stock is going to get taxed as ordinary income. Your cost basis is the value of the stock on the purchase date, so if it goes down, then you can actually take that short-term loss, and it can offset your income. But if it gains any more, then that amount gets taxed as short-term capital gains.

Similar to if you would just buy stock normally, then once you wait a year after you've bought it, that's whenever it switches from short-term capital gains to long-term capital gains.

One thing that is specific as a benefit for qualified ESPPs is the idea of the preferential tax treatment if you can not only hold one year from the purchase date, but then you also are holding it two years from the initial offering date. What happens at that time is that rather than your basis being the price on the purchase date, it will look all the way back to the stock price on the offering date.

So in our example, whenever the stock price has gone up, then you can see that there's a smaller amount that is considered ordinary income, and then there's a larger portion of it that gets taxed at the preferential long-term capital gains rates.

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Deciding when to sell ESPP stock

The next question to answer is deciding when you should sell. One of the main things to think about is how much risk you're willing to take because remember that whenever you've bought it, then you own stock in the company that also gives you your paycheck. So there could be that concentration risk that you'd want to think about.

So if you would sell immediately, then this becomes income, and you know you're locking in that discount and that benefit you have.

If you want to try to stick it out and get these long-term capital gains rates, then you could do that. One of the main things to think about for the decision on whether to try to hold for the two-year period is how did the stock actually do during your offering period. For example, the stock price could have gone up a decent amount, and so holding more than that two-year period, the benefit that it has is more money qualifying as long-term capital gains.

But if it would have stayed flat, then really holding more than that two-year period doesn't really have any added benefit.

Then the strange thing is if the stock price actually went down from the offering date to the purchase date, then holding over that two-year period will mean you're actually worse off if you would hold for past this two-year period.

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My Company Is Going Public: What Happens to My RSUs?

When you work at a private company, and they announce that they will IPO, it can be an exciting time. It's especially true if you also have stock compensation in the form of Restricted Stock Units or RSUs.

First, before we get started, it's essential to understand the basics of RSUs. I did another video on RSU basics that I encourage you to check out first and then come back to this one.

Also, with equity compensation in private companies, there are many different ways that they can be structured. So I'm going to talk about one common way that it's structured, but it might be different for your particular situation. So if you're unsure, then I encourage you to reach out to a CFP® professional that focuses on equity compensation like myself or somebody else.

The problem with RSUs at private companies

As I covered in another video, RSUs are granted to you, and then there's a vesting schedule that is tied to it. In this example, we're going to say we're granted 4,000 RSUs, and then every year, you get 1,000 of them. So in normal circumstances at a public company, whenever this 1,000 would vest, then that would become taxable income to you, and then you have the option of selling the stock, or you could hold it.

But the thing is with a private company, whenever this year goes by and then if 1,000 would vest, then it would be taxable income to you, but you would actually have no way of turning that into cash.

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Owing taxes & champagne problems

How does this look like in practice? With your company saying that they're going to IPO and once that happens, then it's really great news because, after all of these years of your hard work, you're able to turn this bonus into cash.

But then what it also means is, in this one year, that's going to skyrocket your taxable income compared to all of your previous years. Now don't get me wrong, it's still a champagne problem, but it's still no fun to have to pay a  whole bunch of taxes.

One quick clarification is that the actual event a lot of times isn't just the IPO day. It's IPO plus the lock-up period because that lock-up period is saying that, after IPO as an employee, you still can't sell yet. So it's not until after that lock-up period that the actual second trigger happens, and then that would be the date that would be considered taxable income to you.

So here's our situation. Now that your company has IPO'd and you're past the lock-up period, all these RSUs have vested, which means your income for this year has skyrocketed.

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How to plan for the big event

So what can you do to plan for this? First, understand what your tax estimate is going to be and what tax bracket you're going to be in. Now, remember that whenever your RSUs vest, your employer is going to withhold an amount, but usually, that is at 22%. There's going to be a high likelihood that you're going to be in a higher tax bracket than that.

The second thing you can do is try to defer as much income as possible to try to lower your income for the year. So common ways of doing that are by contributing to your 401k pre-tax and contributing into your HSA, and maxing that out. Most importantly is to give this money a job. Remember that whenever this happens, it's going to come to you in a lot of stock in your company. So if you're intentional and you've given it a job, then you can be a lot clearer in making that decision of how much to hold, how much to sell and just cash out, how much to invest elsewhere, and then how much to donate.

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Double-trigger vesting as a solution

So to fix this, a common way that private companies will structure their RSUs is that they'll do something called double-trigger vesting. With double-trigger vesting, the reason why it helps is that, as the name implies, there are actually two things that have to happen in order for these RSUs to fully vest.

1. The first one is time, and that is very similar to "regular" RSUs. If you start working at this company and you're granted these RSUs, then you have to stick around for one year, two years on in order for those to become yours. So that's the first trigger that has to happen.
2. But then where it's different is that there's this second trigger, and it's some event. So in our example, we're going to talk about an IPO and so that IPO will be the second event that will trigger the RSUs to vest.

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Incentive Stock Options: Alternative Minimum Tax Explained!

If you have Incentive Stock Options (ISOs), then you also have to think about the Alternative Minimum Tax (AMT). Otherwise, you may be in for a surprise when you file your taxes!

Before we get too far into this, it's important to understand the basics around incentive stock options and the way they're taxed. I did a previous video that talks about that so it would be helpful to watch this one first:

Once you've watched that one, then I would encourage you to then come back to this one:

AMT credits: What they are and how they work

There's one final thing that's really important, and it's called the AMT credit. In this scenario, whenever you've exercised stock options, and it's caused you to have AMT, this amount can get used as the AMT credit.

Generally, the way that the AMT credit works is that in future years, whenever you're not exercising ISOs, you're still doing these two calculations. In the years that your regular tax is higher than your AMT, your alternative minimum tentative tax, then you can actually use some of this credit to lower your next year's income.

Now it's not as super straightforward as just saying, "Okay, you can just take that \$5,000 and get it all back the next year." So it's possible that it takes multiple years to get that credit back. But the nice thing is that this credit never expires, and so you're able to carry it forward indefinitely until you use it all up.

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The regular tax system

I think the best way to explain AMT and the way that it works is to first walk through the way that your regular tax calculation works.

1. At a high level, you take your gross income, so you just think of that as the money that you make, and then you subtract out any adjustments, which would be things like student loan interest or HSA contributions, or regular IRA  contributions.
3. After that, you subtract out deductions, so that would either be your standard deduction or if you itemize, then that's whenever this gets taken out.
4. Then that number gives you your taxable income. So with your taxable income, this is where the normal math happens where the first bit gets taxed at 10%, then you multiply the next by 12%, and you go up the tax brackets from there.
5. After you do that math, that gives you something called your tentative tax, which then you subtract out credits, so if you have kids, then that's whenever the credits get taken out.

The final number that you get is called your total tax, and that's just how much you owe in taxes.

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The alternative minimum tax system

So with this regular system, what was happening is that there were certain scenarios where people were actually making a lot of money but were able to use this system in a way where they actually didn't have to pay a whole lot in taxes. So in the '60s, the government said, "Hey, we need to figure out a way to close these loopholes." So what they did was they created a whole parallel tax system, and they called that the alternative minimum tax.

Now let's do a real quick version of how the alternative minimum tax works.

1. The way that it works is that you take this taxable income number here, and then you drop it into the top of the AMT calculation.
2. Then they say, "Hey, let's add back either the standard deduction or if you itemize, then add back some of it." So it'll add back like state taxes and local taxes.
3. Then you also add these other things called adjustments and preference items. I put a star here because of what I talked about before with that ISO bargain element, and that's where this gets added here. So that's why you can trigger AMT with your ISOs because there's income here that isn't included in this formula at all.
4. Once you add those back, then there's just this flat amount that you subtract out called the exemption, and then that will give you your alternative minimum taxable income.
5. Similar to the regular tax system, this is where you do the math again, and you multiply it by the tax rates here, although there are just two tax rates with AMT. Then that will give you another number for tentative tax.
6. The last thing that you do is compare your tentative tax on your regular return against your tentative tax in the AMT system. Whichever one is, the higher one is the one that you're going to pay.

Let's walk through this with our example. Let's say that in the regular tax system that whenever we go through this that we get to here, and then our tentative tax is \$30,000. But since we exercise some ISOs and we've carried them over through the year, then that bargain element gets added here. So we'll just say in our same example that we run through this parallel calculation, and then our tentative tax here comes out to \$35,000. Whenever this happens, then you pay whichever one is the higher one. In this scenario, you would pay the \$35,000 dollars, and the way that they would do that is they would just add another five thousand dollars underneath the tentative tax here, and that would be your \$5,000 of AMT.

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How to plan for AMT

Now let's talk about some of the planning opportunities with this.

The first one is if you know that you're going to be exercising ISOs, then you want to know what this number is going to be because otherwise, you could get really surprised by the amount of AMT that you would expect to owe, and you don't want to be caught off guard with that. You'll probably need a tax professional or a financial professional that understands this information to be able to help you with that, but it's good to know that just so that you're not caught off guard.

Then the second planning opportunity is there's actually a way that you can exercise stock options without having to pay any AMT. So let's break this down real quick. Every year you're actually doing both of these calculations; you just might not know it. But in a normal year, whenever you don't have any of these kinds of special things here, then this tentative tax on your normal taxes is higher than your AMT tentative tax.

So let's just say in our example that we have \$30,000 on your normal taxes, and then the AMT tentative tax without any of these adjustments is \$20,000. Well, what that's saying is that you can actually start exercising some amount of ISOs, and you can increase the AMT tentative tax but make sure that it doesn't go over the normal tentative taxes. That way, you can actually do an exercise without paying any sort of AMT.

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AMT and the ISO bargain element

What we're talking about here with AMT, it's about exercising your options and the bargain element. So I'll do a quick explanation of what that is.

If we walk through an example kind of similar to what I did in the last video, assume that we have been granted 1,000 ISOs, and it has a \$10 strike price or exercise price. Then, whenever you actually exercise it, you take the difference between the price, the strike price, and the actual value of it that day that you exercise it. So in our example, we have \$50, and the strike price is \$10, so then the difference between those two is \$40 per share. You multiply that by the 1,000 ISOs that we just turned into stock, and that gives us \$40,000 dollars. That is called the bargain element.

In the last video, I talked about how if you exercise here and then you wait more than a year before you sell it, then there are some tax benefits to that. With the bargain element here, the reason why I'm pointing it out is that if you exercise in a year, but then you don't sell within that same calendar year, then this bargain element gets plugged into the alternative minimum tax calculation.

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Incentive Stock Options: The Basics & Taxes

Incentive Stock Options, or ISOs, can feel pretty complex. This video aims to give a visual breakdown of how ISOs work and how they are taxed in a couple of scenarios.

The three main things to know about ISOs

In order to understand ISOs, there are three main things. First, they are granted to you, then you exercise them, and then you sell them.

So the first important thing is whenever you're given ISOs, they are granted to you and there's a certain date that you're granted them. There are two pieces of information that are really important.

1. First is the number of ISOs that you are granted and so in our example, we're going to say that you are granted 1,000 ISOs.
2. Now the next important piece is what the exercise price is. it's also called the strike price or the grant price. We're going to say that the exercise price is ten dollars per share

Once that happens, then really the next thing for you to do is just stick around at your job because most of the time they are going to have something called a vesting schedule that is tied to these isos so it's saying that you can't actually exercise or sell this stuff until you've stuck around for a period of time. That's called the vesting schedule and so once they have vested then that's whenever you're able to actually act on these isos.

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How to get the tax benefits of ISOs

So how do you how long do you have to wait in order to get that preferential tax treatment?

Well, it's all based on these three dates (grant, exercise, and sell dates).

1. The first thing that you have to do is you have to wait at least a year from the time that you exercise before you sell it.
2. Then the other thing that you have to do is you have to wait more than two years from the date that you sell it and the date that it was actually granted to you.

So in this scenario, let's say we've done this. Let's also say we've lucked out, and, in that period of time, it's actually gone up from \$20 to \$25 per share. So what happens is that the entire amount from the \$10 exercise price to the \$25 fair market value of that stock, all of that gain, gets taxed as long-term capital gains.

Seeing this, you can see the tax benefit of doing this - where you exercise, and then you wait more than a year before you actually sell it. As long as you satisfy these two time periods, then basically what we're saying is that instead of having this being taxed at for example 32% you're getting taxed at 15%. So you can see that there could be a pretty big advantage of waiting that period.

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The drawbacks of AMT

So this all sounds good, right? Well, there is one catch and that one catch, and it's called AMT.

Where AMT comes into play is in the scenario where you exercise, and you have a gain. If you don't sell it within that same calendar year, then this gain is considered a preference item for AMT. So there's a possibility that you actually have to owe a little, and you have to pay taxes on this based on the alternative minimum tax formula.

So, the bad part about that is you're actually paying an extra tax on something where you actually haven't sold it, and you haven't realized any of the money for it. You would have to pay that out of pocket, but the nice thing about it is that you would pay that in this tax year. Then in future tax years, you're generally able to recoup that through AMT credits.

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The decision to exercise

Let's assume that we have passed the vesting period and now we have decisions to make. So the next part is the decision to exercise these options. What exercising means is that we are going to pay this price to turn this option into an actual share of stock.

So in our example, in order to exercise all of these shares, you would be putting up \$10,000 in order to own 1,000 shares of this company's stock. In this case, we're saying that whenever we get to this point that the stock is actually worth \$20,000 per share - It's a good deal because you could pay \$10,000 to buy something that is actually worth \$20,000.

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Selling and taxes

The first option after you exercise is to immediately sell it. The nice thing about that is that you lock in the amount of money that you've made. So from a tax perspective, this \$10,000 that you gained gets taxed as income, so it gets taxed at your tax rate.

On the other hand, another option that you can do with ISOs that helps from a tax perspective is that you exercise it here, but then you actually wait, and you don't sell it yet.

Instead, if you exercise and then wait a period of time before you sell at that later period of time, then there's a possibility that instead of this getting taxed at your in that as ordinary income (at your ordinary income tax rate) then it can get taxed as long-term capital gains.

That could be a difference between being taxed at 32% and instead taxed at 15%, so you can see how there could be a pretty large tax benefit for you waiting, which sounds pretty nice.

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Restricted Stock Units: The Basics & Taxes

Restricted Stock Units, or RSUs, are one of the most common forms of equity compensation for tech professionals. I use an example to explain how RSUs work and a couple of things to think about when deciding what to do with them.

What restricted stock units are and how they work

So first, just doing a quick breakdown of the actual term restricted stock units. First, from the restricted perspective, it's restricted because they have strings attached to them. So that means that whenever you get it then there are actually things that you have to do before they become yours. That's usually tied to a vesting schedule that could either be an amount of time to keep working at the job, it could be performance-based, or it could be a combination of both.

Then the other part of it, the fact that it's a "stock unit," means that it is tied to stock in your company, but it's not actual stock yet. It's just a promise that they are going to give you the stock at a future date as soon as you satisfy the restrictions.

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An example of RSUs and a vesting schedule

Let's do this through an example. Let's say that you've just started a new job and you're working for ABC Company. Then ABC Company has said, "Hey, as a bonus for you coming on, then we are going to grant you 8,000 RSUs in the company." Then in this example, let's say that the restriction is that it's going to be on a four-year graded vesting schedule.

All this part is saying is that in order to get the 8,000 RSUs and turn them into shares of stock then you have to stick around for four years. The fact that it's graded means that you get a certain amount every year. So if you stick around one year then you'll get 2,000 and then another year you'll get another 2,000 until you're there for four years.

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How to think about selling vs holding the shares

The second big question to answer is, "what should you do  now with the rest of the shares that you have?" The way that I like to pose this question to clients of whether to sell or not is to imagine the scenario of instead of your company doing the stock bonus that they actually gave you \$13,000 as a cash bonus.

Then the question is, would you then take that \$13,000, go to your brokerage account, and buy shares of stock in your company. If the answer to that is "No," then that's just another way of saying to go ahead and sell the rest of them right here. If you sell them the date that they vest, then there are no additional taxes due to it because we've already figured out this bonus income tax. Once it invests here, then any taxes afterward is just the same as if you bought it and you had to think about capital gains and capital losses.

Another thing to think about is this idea of "Concentration Risk." That's just a way of saying that you have part of your net worth tied to your company in the form of stock, and then also your paycheck is tied to that company because you're also working for them. So if you want to diversify away from that, then the idea would be to sell the shares of your stock and put that into other investments. You'd still want your stock price to go up because, remember in our example, 2,000 shares have vested, but there's still 6,000 left that are going to vest in the next three years.

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How RSUs are taxed

First, whenever you think about the grant date - 8,000 RSUs granted to you, and then at that time then the company is going to have a certain stock price. But the thing is this the price whenever it's granted doesn't matter because they're just RSUs, and since nothing has vested, then there's really nothing for you to do here, really. The only thing that matters is just seeing the potential of what these things could be valued at as you go along.

So in our scenario, if you've stuck around for a year, then 1/4 of your shares are going to vest on this date, and so you're going to get 2,000 shares of stock on this date. Then this is where it really does matter what the price of the stock is on that vesting date. If you have 2,000 shares that vested here and then it's at ten dollars a share, then from a tax perspective, then what just happened is that you just got a \$20,000 bonus.

Just like a cash bonus, what that means is that this \$20,000 is subject to federal taxes, state taxes, medicare, and social security. Then also, just like with your paycheck then that means that taxes will need to be withheld from this dollar amount.

A very common way that the company will withhold those taxes for you is that they'll take a portion of these shares, and they'll surrender them and sell them in order to withhold the taxes from them. So, for example, in our scenario, if there are 2,000 shares that vested, then they would withhold 500 of those shares to pay for the taxes.

Then the end result of all of that is that you now become the proud owner of 1,500 shares of stock in your company.

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Withholding extra taxes

Then there are two main questions that  you need to answer, and the first one is "do you need to withhold any more taxes?" So what we're really talking about is your company has withheld a certain amount, but it's very common for your for the company to just withhold a standard 22 percent from a federal tax rate.

So if, for example, you're at the 32 percent tax bracket, there's actually another \$2,000 that you should withhold in order to pay taxes on this \$20,000 bonus. Okay, so what we did in order to withhold more taxes, to hold another \$2,000 is that we sold 200 shares and so now we're left with 1300 shares.

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Intro to popular NFT and NFT marketplaces

The post popular NFTs and NFT marketplaces

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What is a fungible token?

At the end of the day, NFTs to me personally is the tokenization of everything so we have fungible tokens and we have non-fungible tokens fungible tokens if we come down to the bottom are our typical ERC 20 tokens or an ethereum token standard that allows for interchangeable tokens that are uniform. They're divisible.

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What is a non-fungible token?

Non-fungible tokens our main standard is ERC 721. It's a new standard on ethereum that gives the possibility to issue unique non-fungible tokens so non-fungible tokens cannot be replaced with another token of the same type.

So you cannot exchange your birth certificate for the birth certificate of another person. They're non-fungible; they are unique and non-divisible so that's the kind of baseline here for NFTs.

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Mapping Crypto with Nat — August 2021 Part 1

The latest in developments in crypto.

Press release:

What is the hottest crypto now?

Our major assets price changes in the last seven days.

Bitcoin at \$46,000 up 15%

Etherium \$3,100 up 23%

Uniswap at \$28 up 30%

Solana at \$40 up 15%

Major categories:

Music, options, and fan tokens are all above 40%.

Automated market makers and Eth 2.0 staking above 30%.

Over the last seven days, there are no categories within Crypto that are negative.

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What are the greatest themes in DeFI right now?

In terms of the greatest themes right now for DeFi in my opinion it is concentrated liquidity and Uniswap. Uniswap still seems to dominate the AMM (automated market making) and DEX thought leadership. And what I mean by that is if I wanted to create a new position, I am able to create concentrated liquidity for my liquidity position. So if I wanted to go to USD ETH for their pool, I could actually set price ranges at which I would provide the capital.

You can see where a lot of the volume is happening right now and if I thought ETH was very bullish, I would probably skew to the higher size and provide liquidity all the way from \$3000 up to \$3700. Rather if I was bearish, I may drop it down to \$1900 or to \$3200 and expect some trading in the high \$2,000s.

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What's the update on the infrastructure bill in congress regarding crypto?

In terms of mainstream news in DeFi a lot of talk of the last couple of weeks about the US infrastructure bill and how broad or narrow the regulation is on crypto operators and it's really around this sentence here. The Pennsylvania lawmakers said the new amendments, which actually came out today I believe, were slowly reaching a compromise that Bitcoin and the Ethereum community can get behind.

The new amendments launched today would exempt software developers, transaction validators, and node operators. Tax reporting requirements should only apply to intermediaries.

So I believe the big theme here is that we want non-custodial people within crypto not to be under these tax regulation laws.

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What's happening with NFTs?

Now outside of DeFi, it has been an NFT summer for 2021 and it's been wild. We can go over to cryptoslam.io for wonderful rankings and analytics on our top NFT collectibles sales over the last 24 hours or 30 days.

We've got Axie Infinity #1, crypto punk's #2, and art blocks #3. With Axie Infinity pumping out about \$31 over \$30 million in sales in the last 24 hours—crypto punk \$6.6 million and art blocks \$6.3 million.

To put that in context, we've been tracking 24-hour sales on cryptoslam for a couple of months now, and certainly, about three or four months ago it was rare to get over \$3 million in 24-hour sales volume and now today we've got over five projects with greater than \$3 million in 24-hour sales volume. For the last three months, Axie Infinity has absolutely skyrocketed and maintained sales above \$20, above \$30 million every day.

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What is Axie Infinity?

Axie Infinity, the play-to-earn NFT game has taken off in the Philippines with even scholarship programs now over there for players to play Axie Infinity full time in the Philippines and earn greater than minimum wage.

And I think people are expecting the play to earn theme to continue in crypto with Axie Infinity certainly having the lead there.

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What is the profile picture revolution?

Cryptopunks is leading the way for what has been dubbed the profile picture revolution.

PFPs have been on fire. There's a lot of different collections that have based themselves off of cryptopunks. Cryptopunks hass 10,000 pixelated punks and they're generative—they were given some baseline attributes and then software was actually able to generate the 10,000 cryptopunks at random. And then because we have a finite collection of 10,000 items with a finite amount of attributes, we can therefore create rarity scores.

I say it's a profile picture revolution in that a lot of people are now using

their punks as their profile picture on social media and it has spurned a lot of other

copies with the most notable being the board ape yacht club. For the last couple of for the last two months, there's been probably one to five new profile picture projects every single day in crypto so it's getting very saturated but you know the whole world needs profile pictures.

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What is the current breakdown in popularity between Bitcoin, Ethereum, and DeFi?

Taking a look at total market cap dominance by single asset, Bitcoins is at 47% Ethereum is at 20% and DeFi is typically around 5%.

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Is Crypto still in a bull market?

We're on trading view looking at the total crypto market cap at \$1.84 trillion. This is down from an all-time high of around \$2.4 trillion in early May. We had a deep deep drop off in late May and it's been kind of slow-rolling the last couple of weeks months until late July. Since then, from July 20th to August 9th crypto's been up only and it's been a nice ride back in the bull market this is in the greater context of the four-year halving that some people expect to culminate in December 2021 based on Bitcoin's four-year halving schedule.

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Greeks with Bryce — What is Delta?

What is Delta? How should we think about it?

Review our lesson on Greeks:

What are Greeks?

So greeks really are just kind of a risk management tool and that would be more for like you know experienced traders. Professional traders especially if you have a portfolio like the risk are extremely important. Um but that's not to mean that just the average investor can't use them—they still can be valuable to them if they know how to use them. Right so one there's a risk they're risk measurements and then two they affect how the options change in price right so you have delta, gamma, theta, rho, vega.

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What does it mean to be short Delta?

If you're short delta you want the stock to go down.

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How can Delta be a rate of change?

It's also the rate of change right. Okay. So if you're looking at any options across any expiration so using the same example right if the stock goes up a dollar and you're long the \$105 strike calls which are 100 delta. Those calls will go up a dollar just like stock goes up a dollar. But if you're looking at the 172 calls and those are 50 delta. If the stock goes up a dollar those calls only go up 50 cents right because it's a 50 delta.

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What does it mean to be long Delta?

Delta essentially is what your directional risk is so if you're quote-unquote long deltas, you want the stock to go up.

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What does Delta teach us about probabilities?

You can think about it as the probability of finishing in the money and um this might help the newer investors and just a way to kind of help you think about what options you might want to buy. What are the chances that this option will finish in the money.

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How does Delta compare to the underlying stock?

If you take it to the extreme let's say we're looking at the Airbnb which is trading 172 and a half right so let's say we look at the \$105 strike calls at the very top right. So that's saying the delta is a 99.6 delta right so let's let's just say it's a hundred right. And a hundred means it's deep in-the-money it's essentially equivalent to the stock underlying so looking at a P/L graph if stock goes up a dollar you're gonna make a dollar.  Same thing with a 100 delta call if that stock goes up a dollar you're gonna make um it's the same thing as being long 100 shares of stock right.

Um, so if you look at-the-money so if you go to the \$172.5. Yeah right so that's a 50 delta right if the stock goes up a dollar and you own stock you're going to make a dollar. If you own the call and stock goes up a dollar you're only going to make 50 cents. It's the equivalent of 50 shares rather than the equivalent of 100 shares.

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Greeks with Bryce — What is Theta?

What is the time optionality and the greek Theta?

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How do you offset time decay on directional bets?

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Introducing Bryce, our Archimedes expert on options trading!

Who are you?

Hey guys, my name is Bryce and I was an equity derivatives trader for about 15 years in Chicago. I started off as a trade assistant on the CBOE floor and worked my way up as a senior trader. I was working at a hedge fund and then went to some smaller prop shops to trade for the final few years.

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Introduction to Crypto Part 2

Let's dive deeper into the fundamentals of this innovative technology.

Resources shown in the video:

what is a decentralized application?

Coingecko is an example of a Web 2.0 application - uses email and password information held in a centralized location/server. Decentralized applications do not keep our information, rather we can connect our crypto wallets to them.

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where can I go to earn interest on my tokens?

Yearn finance is an example of a yield aggregator. Instead of us trying to find the best yields in defi, deposit your assets with yearn they'll do it for you in an automated fashion. We can earn somewhere between 0 to roughly 40% on our tokens with the different vaults here.

We can also check out Aave, which is an application for lending and borrowing. I could lend out tokens I own by depositing it and earn about interest. If I wanted to borrow tokens, I could put up different tokens that I own as collateral and pay interest. All of this lending and borrowing comes straight out of our MetaMask wallet.

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can I / how do I connect my crypto wallet to exchanges/applications on different blockchains?

We can connect our wallets to exchanges and applications that are on different blockchains. PancakeSwap is similar to Uniswap but, if I try to connect my wallet, I get halted because PancakeSwap lives on the binance smartchain; it doesn't live on ethereum like Uniswap. So I actually need to go to my MetaMask wallet and switch blockchains, which I can do right in the browser. Once I switch chains, my MetaMask wallet links up nicely. This also happens when we switch to other applications on different blockchains.

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how do we add tokens to a crypto wallet?

First, we decide what kind of token we want to buy, such as MANA for the application Decentraland. On Coingecko, we can click the little contract address, then up to our Metamask wallet and we can add the token.

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what is yield farming?

Yield farming is a way to generate rewards with our cryptocurrency holdings by adding to liquidity pools.

When we deposit tokens into the liquidity pool on Uniswap, we receive LP tokens that represent our ownership of that liquidity pool. We could take our LP tokens from Uniswap and then deposit them on an application called Badger (app.badger.finance) to earn interest in other types of rewards.

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what is a decentralized exchange?

Gone are the days of the order book. Order books are a way for centralized exchanges on wall street, or any of the major central exchanges of the world like tokyo or london, to keep track of transactions. Centralized exchanges hold funds, have a buy side, and a sell side by which you and I can trade underlying stocks and they house all of the funds. In the decentralized world, you and I provide those funds and the public blockchains track the transactions when we use decentralized exchanges like Uniswap.

There are a myriad of tokens that we can trade that are all compatible with a Metamask wallet and follow the same token standards. Token standards are being created on different blockchains so that if uni swap and then another organization build two different tokens we want them to be compatible so we can do business with each other.

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how do decentralized exchanges provide liquidity?

By decentralizing liquidity for everybody, what are we actually is creating exchanges where you and I can provide the underlying capital by which we and other people can do trades. If you look at our example on Uniswap, by adding liquidity you'll earn 0.3 percent of all trades on the WETH - MANA pair proportional to your share of the pool

Uniswap is the biggest decentralized exchange and they're also called an automated market maker because, instead of a centralized market maker creating a market artificially, we have code, we have al, we have mathematics, and we have you and I providing our liquidity. That's all we need.

To get an idea of how these two tokens create a market, we can head over to uniswap.com and we can actually track our MANA - ETH pair. What you'll notice with uni swap is every asset will also have an ETH pair. So every asset on uni swap has a two-sided liquidity pool and one side of that liquidity pool is ETH. Therefore ETH is our bridge asset between all of these pools.

If I wanted to go from WBTC to USDC, we would have to go from WBTC through ETH and then to USDC.

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Case study: Coinbase IPO due diligence

What are investors looking at when considering an investment in Coinbase?

Coinbase released some impressive Q1 2021 numbers recently. Before deciding whether or not to invest, let's do some due diligence, diving into some of the risks, and make a case for why and why not.

What are the risks?

Before making an investment, we need to consider what is risk and what are the different types of risks we need to consider with this investment.

• There is some uncertainty about how the company plans on using the cash they are generating in a meaningful way. As an investor, this has implications on how we expect the stock to perform. Should we be expecting to receive cash from dividends, high appreciation from growth, or perhaps both?
• Another risk to consider is regarding how long their current high growth rate can be maintained. What might future growth look like for their main business as market makers providing liquidity?
• The last risk we'll consider here is about that the future of Coinbase is dependent on the future of crypto because their revenue is tied to the transaction volume of cryptocurrencies.
• This will be difficult for investors to manage this risk; however there could be some interesting options strategies that might help.

The bull case

After considering the risks, what are some of the reasons to believe we should buy the stock:

• Coinbase just reported very strong profitability measures. While high revenue numbers are important, strong EBITDA margins and Net Income margins address the profitability of the company. The higher these margins, the more cash is being generated that can be given back to investors as dividends or reinvested in the company to increase growth. Revenue and EBITDA multiples are used to measure how well a company is doing and compare them to other companies.
• Not only are they showing profitability, but they are also experiencing very high growth with Q1 2021 revenue being higher than all of 2020
• The high cash flows puts them in a good position to reinvest cash into lots of opportunities for growth through developments of additional products and services in the crypto space.
• Coinbase is much more profitable than other comparable marketplace companies like Airbnb.
• The initial valuations were before the Q1 numbers were released so investors will be trying to determine whether or not these numbers will continue to grow. The strong Q1 numbers make the initial \$100-\$120billion valuations seem reasonable.
• Coinbase diversifies the concentration risk from Bitcoin because other major cryptocurrencies, like Ethereum, don't have the same halving schedule so their prices are likely to be less correlated.

The bear case

After considering the risks, what are some of the reasons to believe we should not buy the stock:

• There is an expectation of high volatility. Crypto investors tend to be willing to invest in companies with even higher multiples, sometimes to triple digits.
• Currently Coinbase has a relatively high take rate of 5%; however, that will likely drop as more competitors enter the market and in order to attract more institutional investors. This makes what they plan to do with that cash flow even more important to maintain their strong growth.
• Investing in Coinbase is indirectly investing in the trading volumes of crypto which is still dominated by bitcoin. Based on historical 4 year halving periods, we can expect trading volumes to be good in 2021 but start seeing declines in 2022 and drying up in 2023.

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Introduction to Crypto Part 1

Start learning the fundamentals of this innovative technology.

Since crypto is natively digital and natively online, we can have our laptops/computers open and follow along while exploring the world of crypto.

To get a sense of the investable markets for cryptocurrencies, let's consider coingecko to be the homepage.

What is bitcoin?

When talking about bitcoin, there are two different things going on:

1. we have the blockchain
2. we have the asset of the blockchain

So in this case, we have the bitcoin blockchain and the asset of the blockchain, BTC (bitcoin), which is the currency that gets traded. Utility tokens are the assets of other blockchains.

Whenever we see blockchain, we can think of a distributed ledger or public ledger; a record-keeping system that keeps the identities of the parties involved in a transaction secure and pseudonymous in a way that is shared without a central administrator.

Bitcoin blockchain was the original technology but has since been improved by other organizations, such as Ethereum, to create more efficient blockchains.

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How do blockchains work?

Here is a great visual resource for understanding how blockchains work, looking at both Bitcoin and Ethereum using the analogy of a bus station:

As shown on the site, Ethereum is much faster at completing transactions, supporting a greater number of applications for complex global commerce.

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What is a smart contract?

Blockchains are often called smart contract platforms because complex financial contracts (or simple ones, like transferring funds on someone's birthday each year) can be encoded into one of the blocks. This gives us greater self sovereignty since we no longer need to rely on a centralized entity, like a bank, to perform the same transaction.

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What does it mean when folks are "building on the blockchain"?

To get a better sense of how people are building on the blockchain and cryptocurrency technology, we can look at it from the perspective of the OSI model.

Without being a developer, we can understand that there are multiple layers: starting with the physical layer (our computer or the phone in our hand) all the way to the last application layer which are apps, much like this one, that we interact with most of the time.

To apply this to the crypto space, the organizations working in first layer include the blockchains and smart contract platforms with multiple layers of middleware solutions, tools and services, until the last layer which would be consumer facing applications that most of us interact with.

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What is decentralized finance?

Remember, blockchains are synonymous with distributed or public ledgers and so they lend themselves to decentralizing finance. Decentralized finance is when our data is owned collectively among us all on decentralized nodes or computers scattered around the world rather than having a bank hold all of the money on centralized servers.

There are varying degrees of decentralization and it will likely take decades to transition into a fully decentralized financial system.

Smart contracts are immutable contracts (like our example of the recurring birthday money) that live on the blockchain and that cost the utility token native to that blockchain in order to change. Changing a smart contract on the Ethereum blockchain will cost ETH tokens.

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How can I buy stuff with crypto?

One of the easiest ways to transact on a blockchain is by using a browser extension which serves as our wallet. These wallets are convenient for adding many different types of tokens that can be used for a myriad of transactions. Keeping a seed phrase allows us to access this wallet anywhere in the world through a browser.

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What are the most important things to consider with this IPO?

1) It's a direct listing where they are raising capital. This makes them the first company to do a direct listing to raise capital under the new SEC rules. In previous high profile direct listings, like Slack and Roblox, didn't raise money for the company. It will be interesting to see how this may or may not affect the IPO price.

2) This is the first company to go public whose business is heavily linked to bitcoin and digital currencies. It will be interesting to see what the public reception will be and how that will translate to the company's valuation.

In a traditional IPO, a company will raise money by selling shares to bankers that then get traded on public exchanges. Dive into this piece in our newsletter for more about what IPOs are and how they work.

In a direct listing IPO, the company sells existing shares held by founders, employees, and early investors to public investors like us without issuing more shares. Check out this post in our newsletter to learn more about what direct listings are and what we need to consider before investing.

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How do retail investors factor in here?

Perhaps not in this IPO but soon, it seems likely retail brokerages will offer retail traders the ability to buy primary shares in an IPO. It seems there is a change in the relationships where many offerings and conversations between banks and companies that were taking place behind closed doors are now moving to be in front of retail. Throughout 2020 and into 2021, retail investors have shown that they have the power and aptitude to do this themselves and that these offerings should be put in front of them.

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What makes this IPO so special?

Raising capital is important for companies going public because it gives them a last bit of cash to push more growth; however, this wasn't available to companies who had done direct listings in the past. The benefit of direct listing for the company was to have a better price when they list compared to a traditional IPO.

What's happening here with Coinbase is shaping up to be the best of both worlds; Coinbase will hopefully get the highest possible price when they raise money by selling new shares to public investors.

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Creating a long call payoff diagram

I'll show you how to make a quick payoff diagram for your call options in less than 5 minutes.

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Creating a long put payoff diagram

I'll show you how to make a quick payoff diagram for your put option in less than 5 minutes.

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Case study: Why investors are excited about Coinbase

What does Coinbase do and why might investors be interested?

Coinbase is an exchange platform for buying and selling many different cryptocurrencies. Since we first spotted a narrative shift for Bitcoin, other public companies, including Tesla, have made large investments in Bitcoin and even intend to adopt it as an acceptable form of payment.

Considering Coinbase is the largest cryptocurrency exchange and their unique direct listing IPO, the company is catching some serious attention from investors.

How does coinbase make money?

Similar to how an exchange works in other financial markets, Coinbase makes money connecting buyers and sellers of various cryptocurrencies. They generate most of their revenue through a take rate for each transaction.

A take rate is simply a percentage of the transacted value - the buyer pays \$1.05 for one BTC, the seller receives \$1.00 for one BTC and Coinbase keeps the \$0.05 difference or 5% take rate.

Future growth

As a result of this revenue model, Coinbase's future growth depends on the adoption of cryptocurrencies. As cryptocurrencies become more popular, transaction volumes will rise, leading to higher revenue growth from take rates.

Additional services, like wallets, are also avenues for future growth as the utility of crypto increases.

In a way, owning shares of Coinbase allows an investor to get exposure to cryptocurrency without having to actually own any. This is particularly attractive for folks who are interested in the crypto space but aren't ready to own coins.

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What other companies do you consider similar to coinbase?

Stripe recently raised money on a \$100billion valuation and many savvy investors saw it as an opportunity to get exposure to some of the top startups. Many emerging companies use Stripe for payment processing. The more revenue that Stripe's customers generate, the more payment processing they need which becomes additional revenue for Stripe.

Similar to how Coinbase's revenue is tied to the transactions of crypto, Stripe's success is tied to the transaction volume of its customers.

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Market makers called the \$CHWY earnings

The next morning follow up with Bryce on my options play with Chewy. Do I decide to lock in my 80% return?

Chewy beat both on revenue and profitability the stock jumped overnight.

The bear case

SELLING OUT (BEARISH)

Hitting the bid means offering what the market makers are currently offering.  This is to execute at a guaranteed price. Offering mid-market (between the bid and ask) often cuts down the ability for market makers to make a big profit. It also doesn't guarantee an execution.

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The bull case

EXERCISING ITM (BULLISH)

Exercising in-the-money happens when I let the options expire in-the-money. For each lot of options, I will result in buying 100 shares of the underlying stock (in this case CHWY) for the strike price. This is good for a long-term bullish bet on CHWY. However, it's important to note that 100 shares of CHWY will increase my margin requirement.

ROLLING UP SHARES (SUPER BULLISH)

Take that \$750 in the value of the position, or over \$400 in profit and lock that in, and then roll it up. Rolling up means you buy a dollar cheap (options that are worth a dollar). So you take some of that \$400 of profit to continue to bet on a bullish run on CHWY. The issue is that cheap options require a much higher break-even and so the stock really has to keep the momentum.

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Expectations were met

Morning price action staying within the at-the-money straddle expected by Market Makers the day before.