Have you heard about Bitcoin?
Of course you have – it’s currently a name that is being thrown around
by investors looking for the next big thing. But do you know that
Bitcoin is just the first of several cryptocurrencies in the market
today? Here’s why you should care about this new investment product:
What are cryptocurrencies?
At the risk of oversimplifying the definition: cryptocurrencies are currencies that have no single authority to determine its value.
Think about it this way: who determines the value of the Singapore
Dollar, the Japanese Yen and the US Dollar? They are ultimately
determined by their respective countries’ treasuries. If the Singapore
Dollar is too strong against the US Dollar, Singapore might see a drop
in exports to the US, since everything is going to cost more. What our
Treasury might do then is weaken the Singapore Dollar so that exports to
the US can continue as usual.
Cryptocurrencies don’t rely on a central authority to determine their
value. Instead, it is determined mainly by demand and supply.
Aren’t currencies also determined by demand and supply? What makes this different?
There are 7 main features of cryptocurrency, and it is these features which make them so valuable today.
1. Security
This is the main feature and where cryptocurrencies get their name
from. It is difficult to hack cryptocurrencies because of the strong
cryptography involved. This means that no one else can use your
cryptocurrency but you, unless your wallet password gets stolen.
2. Anonymity
Cryptocurrency transactions are regarded as anonymous, in the sense
that you send and receive Bitcoin via an address made up of multiple
characters. It is difficult to trace that address to a person’s
real-world identity. So, while there are clear transaction trails, they
are all among anonymous addresses.
3. Irreversible
All transactions with cryptocurrency are irreversible. Once a
transfer is complete, it cannot be undone. This may actually not be a
disadvantage, since it can prevent fraudulent transactions by having a
third-party mediator, similar to how eBay works now.
4. Available to everyone
With regular currencies, there are restrictions. A minor cannot open a
bank account without a parent or guardian’s permission, for example. A
bank might charge exorbitant fees if your account balance drops below a
certain amount, forcing you to close your account with them. With
cryptocurrency, these barriers are non-existent. Cryptocurrency
essentially runs on software than anyone can download for free. However,
you’ll most likely need to use a bank account to fund your
cryptocurrency exchange account or wallet.
5. Fast and Accessible
Not only is it available to everyone, it is also fast and accessible.
Since all transactions are done online, your physical location is
irrelevant. You can send and receive cryptocurrencies without dealing
with exorbitant transfer fees or conversion fees.
6. Controlled supply
One of the most important features of Bitcoin is that there is a
controlled supply. Capped at 21 million, this essentially limits how
much Bitcoin is allowed in the market. Unlike regular currencies, the
central banks can’t keep printing money. Other popular cryptocurrencies
like Ethereum, however, don’t have a fixed supply, but that doesn’t
necessarily mean it’s a bad thing.
7. Not debt-based
Unlike regular currencies, cryptocurrencies do not work on a
debt-based system. Banks essentially “create” money every time they
issue a loan, mortgage, credit card or an overdraft. Imagine if all
customers withdrew their money from a bank at the same time – the bank
would crash because they can’t repay everything they owe.
Cryptocurrencies work more like commodities, where no debt involved.
What is an Initial Coin Offering?
You’ve heard of IPOs? Meet the future – the initial coin offering or
ICO. Essentially, this is crowdfunding (as made famous by Kickstarter)
at its most extreme, with cryptocurrency.
You essentially develop a project and get people to invest in it. Ethereum
for example, a platform that enables developers to build decentralized
applications, has opened up the use of blockchain to potentially disrupt
hundreds of industries.
Because of how new ICOs are, they are less regulated than IPOs or
regular crowdfunding projects. This is both a good and bad thing, as it
could mean a significant influx of funding into a genuine project, or a
loss of hard-earned funds into what is essentially a well-crafted scam.
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WHAT ARE CRYPTOCURRENCIES (and why is everybody talking about them)?
Worthless. Or, rather more commonly, the government loads up on excessive debt, or fails to regulate the massive bets that financial institutions make to generate profits, and the system teeters on the brink of collapse, as was the case during the Great Recession of 2008.
This risk is what underpins the arguments in support of precious metals and the creators and users of cryptocurrencies. Trading Opportunity If central banks can create money from thin air, why can’t anyone else? Cryptocurrencies have no central authority, they’re not tied to countries and they don’t carry any liability or counterparty risk.
They do not require banks as intermediaries, so there are no exchange rates, bank fees or other variables that drain value, as when fiat money moves between accounts.
The platforms that hold your Bitcoins do not use them while they sit in your account to generate profits for themselves (and risk for you), as banks do.
When you transfer a cryptocurrency, the platform will not hold onto it for three days after removing it from your account (even though it can be transferred in an instant), make money from it — and then charge you for the privilege. Neither do account-holders have to undergo a lengthy application or verification process.
The systems are anonymous. There is, of course, a flipside. In many respects, there is no difference between the Singapore dollars you hold in your bank account and a Bitcoin you hold in an electronic wallet. Both carry a value that can be exchanged for goods and services, and that value changes as perceptions fluctuate.
The difference is that the fluctuations of the Singapore dollar are kept in check by the authority that backs them. Because Bitcoin and Ethereum are not backed by a central authority or subject to any recognized macroeconomic or geopolitical forces, prices are volatile, which is why they have been seen up to now as an exotic investment.
They present a risk to owners, because nobody wants to hold their savings in a currency that can lose a quarter of its value overnight.
However, that does mean cryptocurrencies present an opening for derivatives traders, for whom volatility equals opportunity. "Will cryptocurrencies present an opening for derivatives traders, for whom volatility equals opportunity?"
WHAT ARE CRYPTOCURRENCIES (and why is everybody talking about them)?
Worthless. Or, rather more commonly, the government loads up on excessive debt, or fails to regulate the massive bets that financial institutions make to generate profits, and the system teeters on the brink of collapse, as was the case during the Great Recession of 2008.
This risk is what underpins the arguments in support of precious metals and the creators and users of cryptocurrencies. Trading Opportunity If central banks can create money from thin air, why can’t anyone else? Cryptocurrencies have no central authority, they’re not tied to countries and they don’t carry any liability or counterparty risk.
They do not require banks as intermediaries, so there are no exchange rates, bank fees or other variables that drain value, as when fiat money moves between accounts.
The platforms that hold your Bitcoins do not use them while they sit in your account to generate profits for themselves (and risk for you), as banks do.
When you transfer a cryptocurrency, the platform will not hold onto it for three days after removing it from your account (even though it can be transferred in an instant), make money from it — and then charge you for the privilege. Neither do account-holders have to undergo a lengthy application or verification process.
The systems are anonymous. There is, of course, a flipside. In many respects, there is no difference between the Singapore dollars you hold in your bank account and a Bitcoin you hold in an electronic wallet. Both carry a value that can be exchanged for goods and services, and that value changes as perceptions fluctuate.
The difference is that the fluctuations of the Singapore dollar are kept in check by the authority that backs them. Because Bitcoin and Ethereum are not backed by a central authority or subject to any recognized macroeconomic or geopolitical forces, prices are volatile, which is why they have been seen up to now as an exotic investment.
They present a risk to owners, because nobody wants to hold their savings in a currency that can lose a quarter of its value overnight.
However, that does mean cryptocurrencies present an opening for derivatives traders, for whom volatility equals opportunity. "Will cryptocurrencies present an opening for derivatives traders, for whom volatility equals opportunity?"
Want to learn more about cryptocurrencies and ICOs? Follow us
as we go through a series of 4 articles exploring popular
crypocurrencies like Bitcoin and Ethereum, as well as derivatives like
CFDs.
This article was sponsored by IG,
the world’s No.1 CFD provider (by revenue excluding FX, 2016). All
views, opinions and recommendations expressed in the article are the
independent opinion of MoneySmart and do not in any way reflect the
views, opinions, endorsements or recommendations, of IG Asia Pte Ltd
(Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes
only and does not constitute any form of investment advice nor an offer
or solicitation to invest in any financial instrument. No
responsibility is accepted by IG for any loss or damage arising in any
way (including due to negligence) from anyone acting or refraining from
acting as a result of this information or material.
^Important Notice:
Cryptocurrencies are not legal tender currency and the trading of
derivatives on Cryptocurrencies are currently not covered under any
regulatory regime in Singapore. Consequently, investors should be aware
they may not have the full protection offered by the Securities and
Futures Act (Cap. 289). Please ensure that you are fully aware of the
risks and if in doubt consult an independent financial adviser. For more
information on Cryptocurrencies, please refer to the following website
for more information: MoneySense – Virtual Currencies.
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