Cryptocurrency: A Beginner’s Guide
Is investing in cryptocurrency better than investing in the stock market? Since the days of COVID-19, the price of Bitcoin, the #1 cryptocurrency by market cap has seen a massive tenfold increase in value. To put that into perspective, if you held $100 worth of bitcoin in December 2019, it would rise to be $1000 in value right now, at the time of writing.
Before you go ham on the idea of selling your belongings and dumping every dollar you own into Bitcoin or any coin you see has potential, hold your horses. Allow us to give you a brief explanation of cryptocurrency and how it works first.
So what is cryptocurrency? It is a digital asset designed to work as a medium of exchange (like money) wherein individual coin ownership records are stored in a ledger in a computerised database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. Seems overwhelming? Let’s break it down.
Bitcoin is the first decentralised cryptocurrency and was created shortly after the 2008 financial crisis, where the blame was placed on the major banks’ shoulders. A group of programmers under the pseudonym “Satoshi Nakamoto” questioned the need for a bank or a third party in order for two different people to send money to each other without doing it physically in cash.
Bitcoin was then designed to create a mechanism where individuals can send tokens of monetary value to each other, without needing a bank or a third party to validate that transaction.
You might be wondering, how then is this transaction validated in the first place? Well, in comes blockchain technology.
Blockchain is simply blocks of critical information linked together via a digital chain. It’s essentially a way of storing information. It is the digitisation of human trust. By removing human error from any transactional process and thus preventing any sort of fraud from taking place, blockchain technology has taken great leaps and bounds from the conception of Bitcoin.
Think of a big excel sheet that everyone can see. Once a record has been put there, it can NEVER be changed. So there’s no way for anyone to say that the money didn’t go here or there, as everyone can see that giant excel sheet and the transaction that has taken place. If I were to send you a single Bitcoin, the entire blockchain would be informed that I sent you one Bitcoin. And once this is verified, this transaction is stamped FOREVER. The above figure demonstrates the blockchain process (rather simply).
This makes it one of the most traceable data records. In the same way Facebook uses the internet to enable users to connect with each other on a site, cryptocurrency uses blockchain technology to enable users to send tokens of monetary value to each other securely.
Blockchain technology is not just used for cryptocurrency. It can be used for any sort of record keeping, like medical records or surprisingly even criminal records. Anything that requires a ledger would benefit from the existence of blockchain technology.
Alternate cryptocurrency, more commonly known as altcoins, is an alternative form of bitcoin. Any coin that isn’t Bitcoin is an altcoin. Think of altcoins as businesses. Each altcoin is different and has different goals.
For example, Ethereum, launched in 2015, the second biggest cryptocurrency in terms of market cap. It is an open-source, blockchain-based, decentralised software platform used for its own cryptocurrency, ether. It enables Smart Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control, or interference from a third party.
Ethereum is not just a platform but also a programming language called Solidity (similar to C++ or Java), running on a blockchain, helping developers to build and publish distributed applications.
Smart Contracts and Distributed Applications?
To put it simply, a smart contract is a computer program designed to automatically execute or document events and actions according to the terms of a contract or an agreement. Sometimes, these contracts can be legally binding.
Distributed Applications, on the other hand, are programs that run on more than one computer and communicates through a network.
Initial Coin Offerings
Back in 2017, there was a craze over something called ICO, or initial coin offering. Similar to an IPO (initial public offering), which is a process companies undertake to trade on public stock exchanges or “go public”, these coins undergo an ICO to get listed on major cryptocurrency exchanges. They usually release a white paper that will go along with it. It’s important to note that cryptocurrency is still largely unregulated and that an ICO is not official nor does it follow the stringent regulations of an IPO.
By definition, a white paper is a report or guide that informs readers concisely about a complex issue and presents the issuing body’s philosophy on the matter. It is meant to help readers understand an issue, solve a problem, or make a decision.
Cryptocurrency exchanges are like stock exchanges. They enable a user to buy and sell certain cryptocurrencies that they deem fit to be listed. One such example would be Binance. I’m sure you’ve seen their advertisements somewhere before, perhaps online. Other exchanges include Crypto.com, or even Coinbase.
Some cryptocurrency exchanges are regulated by governments. For example, the Monetary Authority of Singapore (MAS) passed the Payment Services Act in 2019 in order to improve consumer protection and confidence in the use of e-payments. It also brings the regulation of digital assets under its oversight. The Act came into effect on 28 January 2020.
Under this Act, the following restrictions apply:
The maximum balance you can hold in a stored wallet is S$5,000.
The maximum amount you can spend from your stored wallet is S$30,000 annually, within a rolling year.
You will not be able to make any local ATM withdrawals through any cards
Singapore is famous for its love for acronyms, but there are some acronyms in cryptocurrency that are important to know. Refer to this list for more information.
Before investing in any sort of cryptocurrency, treat it like a business, ask yourself questions like:
What’s the coin about?
What does it do?
What is it fixing?
Why is it a business problem?
Do they have a good marketing team or staff team?
These questions are important. They serve as a rough guideline on whether a particular cryptocurrency is worth investing in.
When you’re ready to buy a particular coin or if you just want to convert some of your investment portfolio into Bitcoin, create an account on an exchange, and go through with the verification process. Soon, you’ll be ready to buy your very first cryptocurrency!
Day Trading vs. HODL-ing
Some people choose to day trade cryptocurrency, whereas others prefer the long-term game of HODL-ing their coins. If you’ve read the list of acronyms above, you’ll know that HODL is a deliberate misspelling of the word hold, and it essentially means buying and holding their coins long term.
Either method can be an effective investment strategy if you have done your own research.
Is blockchain technology the future?
Yes, and for very good reasons. Other than creating a traceable data ledger, blockchain technology can be used for secure sharing of medical data, cross border payments, anti money-laundering tracking systems, supply chain and logistics monitoring, and even voting. The possibilities with blockchain technology are endless, and the only limit to it is one’s own creativity.
Disclaimer: The information provided by hive.tech serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any investment product. The writer may have a vested interest in the investment products mentioned.
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