What are Cryptocurrencies and Why is Everyone Talking About Them?
This post was written in collaboration with IG. While we are financially compensated by them, we nonetheless strive to maintain our editorial integrity and review products with the same objective lens. We are committed to providing the best recommendations and advice in order for you to make personal financial decisions with confidence. You can view our Editorial Guidelines here.
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.
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.
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.
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.
Want to learn more about cryptocurrencies and ICOs? Follow us as we go through a series of 3 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.
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.