Beginner’s guide to cryptocurrency
If you don’t have time to read through the whole article, you can check out a summary below:
- Cryptocurrency is a digital asset that works based on blockchain technology.
- The value of cryptocurrencies is determined by demand, supply and its utility.
- Bitcoin is not the only cryptocurrency available.
- You can purchase cryptocurrencies from crypto exchanges.
In recent years, you might have heard of the terms “cryptocurrency” and “Bitcoin” in financial news or the investing world. What are they and should you invest in them? This topic may appear daunting but let us simplify it with a brief introduction to what could be the future of currencies.
What is Cryptocurrency?
Cryptocurrency is a type of digital asset that is supposed to function as a means of exchange, much like how the money in our wallets works. They work based on blockchain technology - a distributed ledger enforced by a decentralised network of computers – which records economic transactions, balances and account numbers. Blockchain technology also ensures that data is not replicated or copied, thus ensuring that units of cryptocurrency would not be reproduced.
Brief history of Bitcoin
Launched in early 2009 by an anonymous creator who goes by the pseudonym of Satoshi Nakamoto, Bitcoin is the largest cryptocurrency measured by market capitalisation. Only approximately 21 million bitcoins will ever be created, which explains its scarcity and high price. As of February 2021, more than 18 million bitcoins have been mined.
The bitcoin mining process rewards miners with a portion of bitcoin upon successful verification of a block. This process adapts over time. When Bitcoin was first launched, the reward was 50 bitcoins. As of February 2021, miners only get 6.25 bitcoins for every new block mined. While this might seem little, the value comes up to more than US$300,000 as the Bitcoin price was US$58,300 (as at 21 Feb 2021) The reward will continue to halve every four years until the final bitcoin has been mined. Once all bitcoins have been mined, it is likely that miners will be incentivised to process transactions with fees.
While Bitcoin continues to lead the cryptocurrency games in terms of market capitalisation and popularity, other virtual currencies have been sprouting up and garnering attention as well. Some of these, known as “altcoins” or alternatives to Bitcoin, are being endorsed as they have newer features, such as the ability to handle more transactions per second. Common altcoins include Ethereum, Tether, Binance coin, Polkadot and Litecoin.
What determines the value of Cryptocurrency?
Put simply, cryptocurrency’s value depends on 3 factors – its supply(scarcity), demand and its usage(utility). Like many other things, its price is determined based on the market’s supply and demand.
There are several cryptocurrencies available now, with the most popular being Bitcoin. The value of Bitcoin is very volatile as it is a nascent market and many are not sure about how governments around the world would regulate it, or whether its usage will become mainstream one day.
As cryptocurrencies are basically currencies with no single authority that determines its value, there are several implications for those holding cryptocurrencies:
- Cryptocurrencies are not regulated by the Monetary Authority of Singapore (MAS) as they are not legal tender.
- There will not be any legislative protection should you lose money from dealing with digital tokens.
- There is no organisation deciding when to make more bitcoins, keep track of where they are or investigate fraud.
How do I buy or trade cryptocurrencies in Singapore?
The most accessible and common way to buy cryptocurrencies in Singapore is to go through a cryptocurrency exchange. Before you start, you’d need to get a few things ready:
- Personal identification documents for verification
- Payment account/method, which includes credit cards and fund transfers
- Secure connection to the internet (public WIFI is a no-go)
- Phone for two-factor authentication
- Cryptocurrency exchange account
- Secured cryptocurrency wallet to store your cryptocurrency
After buying Bitcoin through an exchange, it is usually sent to your account on the exchange. However, this is not safe as you will lose your cryptocurrency if the exchange goes out of business or if your account is hacked. It is thus important to have a personal cryptocurrency wallet.
A cryptocurrency wallet acts as a safe place for you to store your currency. You’d first need to create a personal cryptocurrency wallet address, after which you can then send the currency from your exchange account to that personal wallet address.
There are two main types of crypto wallets, hot and cold wallet. A hot wallet simply means it operates from devices that are connected to the internet, making it not entirely secure, but easier for transaction. On the other hand, a cold wallet operates offline, which makes it less likely to be compromised over the internet.
Once you have set up your exchange account, transferred funds in and set up your crypto wallet, you can make a purchase over the exchange.
DBS Digital Exchange
DBS announced in December 2020 that it will set up a digital exchange, enabling Institutional Investors and Accredited Investors to tap into a fully integrated tokenisation, trading and custody ecosystem for digital assets.
With the DBS Digital Exchange, DBS will leverage blockchain technology to provide an ecosystem for fund raising through asset tokenisation and secondary trading of digital assets including cryptocurrencies.
As cryptocurrency is considered a nascent type of investment, you should take note of its risk and nuances before making any decision to purchase.
Should I invest in Cryptocurrency?
As with any type of investments, you need to ask yourself if it is aligned with your financial objectives, your financial health, and is worth the risk. Investing in cryptocurrency is highly speculative and the market is largely unregulated. So invest with money that you don’t have immediate need for.
The future of cryptocurrency remains a question mark for now - we do not know if cryptocurrency would be widely accepted in the near future. While certain retailers in the United States are accepting Bitcoins as payments, other countries like India is looking at banning cryptocurrencies and fining anyone who owns them. Thus, you’d need to ask yourself the question – should cryptocurrencies not be accepted widely as expected, would you be able to afford the loss of your investment?
It is prudent to first focus on your core investment portfolio using suitable tools and products. And if you have spare cash after that and you understand what you are doing, you may wish to put some into cryptocurrency. This approach would probably let you sleep with peace of mind and avoid putting all your eggs in one basket, compared to living with the stress of the volatile movements associated with the cryptocurrency markets.
This article is part of a series of articles covering Digital Assets. If you enjoyed the read and want to learn about digital assets in greater detail, do check out the other articles in this series:
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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