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What is Bitcoin and How Does It Work?

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Peter Lin

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Everyone loves a new way to make money, and cryptocurrencies are the latest popular bandwagon that people are jumping on. Why? Because Bitcoin and other cryptocurrencies have experienced a huge increase in value over the past couple of months.

But just like you wouldn’t dive into a swimming pool before making sure it’s filled with water, you should know as much as you can about Bitcoin before taking the plunge.

 

What is Bitcoin?

Bitcoin is the first and arguably the most famous cryptocurrency in the world right now.

Don’t know what cryptocurrencies are? We covered them in the first article in this series. Quickly summarised, they are currencies that have no centralised authority, and the value therefore isn’t determined by one single authority.

How it actually works can be a little technical, so bear with me.

Think of Bitcoins like online gold. “Miners” are “rewarded” with Bitcoins by using their computer processors to solve complex mathematical functions and verify Bitcoin transactions.

The supply of Bitcoins is limited, and it’ll get harder to “mine” Bitcoin over time. This controlled supply ensures that the value of Bitcoin doesn’t get affected by inflation or by , unlike a country’s currency, which can devalue drastically if a significant amount of money is printed.

“Miners” can then sell Bitcoin on exchanges, just like a foreign currency exchange. It is these trading transactions that cause the value of the Bitcoin to rise or fall against a regular currency.

 

How Can We Use Bitcoin?

You can earn, buy and sell Bitcoin just like you would any other currency, but these transactions are all anonymous, secure, fast and accessible. Because of these reasons, you can essentially use Bitcoin to buy and sell items anywhere in the world without needing to be charged exorbitant fees for currency conversion or transferring money from bank to bank.

If someone is selling something for say… 1 Bitcoin (that’s worth about S$7,500 at today’s rate), you could easily go to one of many online wallets, exchange S$7,500 for 1 Bitcoin, and then contact the seller. This way, by reducing the number of currency exchanges, you don’t end up paying extra fees.

However, most Singaporeans would probably use bitcoins for trading and speculation. This is not surprising. After a really long lull between 2013 and 2016, Bitcoin began gaining value very suddenly this year, and that’s why all the attention is back on it.

Just to put it in perspective, at the start of the year, Bitcoin was priced at S1,200. That’s a 500% increase in less than a year.

 

Why is there a sudden spike in the value of Bitcoin?

It actually has a lot to do with the rise of another cryptocurrency platform, known as Ethereum. We’ll talk more about this in the third part of this series. In a nutshell though, Ethereum pioneered a new way to view cryptocurrency, the same way dotcom companies in the 1990s pioneered a new way to do business.

Whether this spike in value is the start of a bubble, or truly the creation of new wealth, remains to be seen.

 

So how can I jump on the Bitcoin bandwagon in Singapore?

It’s actually an interesting time for cryptocurrencies here in Singapore. Firstly, there was some fake news revolving around Singaporean tycoon Peter Lim, who was supposedly promoting Bitcoin as the best way to make money here. Lim has since quickly come out to disavow any endorsement.

Secondly, banks in Singapore have closed accounts of several companies dealing with Bitcoin and other cryptocurrencies. One of the most prominent of these companies, local company CoinHako, acknowledged that due to banks’ concerns about potential money laundering or crime, it would take a while for Bitcoin and other cryptocurrencies to earn confidence.

One such way would be for the Government to step in, though this could take a while. As with all new tech-related innovations, our Government has always kept a watchful eye but has largely been supportive of such technology.

 

What does this mean for those wanting to trade in Bitcoin in Singapore?

While CoinHako is currently unable to accept SGD exchanges in the near future, you can still use other US-based platforms like Coinbase. Ironically, though, because of the need to exchange currencies from SGD to USD, you might end up still being slapped with the very transaction fees you were trying to avoid.

However, if you consider this the start of a newfound appreciation for cryptocurrencies, then you should get onboard and ride the wave before it gets higher.

 

So, is it worth it to get on the Bitcoin bandwagon now?

Speculation on cryptocurrencies like Bitcoin is extremely volatile right now, and it’s showing no signs of steadying yet. The good news is, you can speculate in Bitcoin without actually having to trade in it, thanks to investment products known as Contract for Difference or CFD.

When you trade in CFDs, you don’t actually buy the underlying asset. As a result, you’re not looking for stability. You’re hoping that the asset’s value remains volatile, because that’s how you earn from CFDs. And the way Bitcoin is right now, the opportunity for profit is very high. Though, of course, you should always consider the risks before jumping into any investment product.

Want to get a head start on learning more about cryptocurrencies? Understanding volatility is one important part of trading cryptocurrencies and you can find out more at IG’s Volatility Seminar that’s free for all!

IG Markets Cryptocurrency ethereum

Want to learn more about Bitcoin, cryptocurrencies and ICOs? Follow us as we go through a series of 3 articles exploring popular cryptocurrencies like 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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Peter Lin

I am the poster boy for reinventing one's self. I've been a broadcast journalist, technical writer, banking customer service officer and a Catholic friar. My life experiences have made me the most cynical idealist you'll ever meet, which is why I'm also the co-founder of a local pop culture website. I believe ignorance is not bliss, and that money is the root of all evil only if you allow it to be.