A keen investor's guide to cryptocurrency (2021)

Cryptocurrency is having its day in the sun, as investors take advantage of the market’s momentum. Here’s everything you need to know about this virtual currency before you purchase your first coin.

For more than a year now, you would’ve been bombarded with cryptocurrency news. It’s also safe to say that this digital asset would’ve snuck into conversations with your friends and family. And who could blame them?

Cryptocurrency prices have been on a warpath ever since early-2020 and the bull run isn’t slowing down anytime soon.

For instance, Bitcoin needed just two months to double in value after hitting a low of US$4106.98 (S$5,500) on March 8, 2020. Add another 10 and it would go on to trade at a high of US$61,683. And that’s just one coin’s worth.

If Papa John’s Pizza kept the 10,000 received as payment for two pies in 2010, it can wipe out its current debt in one fell swoop.

Ironically, it’s easier than ever to invest in cryptocurrency, with more secure wallets and a greater number of exchanges globally. Even DBS has joined the fray, setting up a cryptocurrency exchange for institutional and accredited investors.

Retail investors can heave a sigh of relief, because that’s not the only option available in Singapore.

Here’s everything you need to know about investing in cryptocurrency, from A(ave) to Z(illiqa).

What is a cryptocurrency?

As its name suggests, a cryptocurrency is a digital currency. Unlike traditional currencies like the US dollar or Japanese Yen, most cryptocurrencies are decentralised. Firstly, this means that no single entity can control them.

Secondly, transparency and security are much greater as you can see the exact quantity that has been produced and is currently in circulation.

Cryptocurrencies were originally created as a medium of exchange to securely pay for goods and services, but they serve another purpose today as stores of value. Bitcoin is seen by many to play that role well, given that it is inherently finite and sees a dwindling supply annually.

Throw in other cryptocurrencies that are either similar in nature or aiming to strengthen their case as mediums of exchange, and you have yourself a budding market for investors.

How do I start investing?

Despite the dizzying heights that Bitcoin and its brethren have reached, there’s actually no better time to start investing in cryptocurrency. Just 1.3 per cent of the world’s population are cryptocurrency users, highlighting that the market is still in its infancy.

Although investing in cryptocurrency is much easier now, you’re still going to need a few tools before you start hodl-ing.

First and foremost, you need an account on a cryptocurrency exchange. The king of the hill here would be Binance, which has the highest daily trading volume by far and supports over 300 cryptocurrencies. Unfortunately, the exchange doesn’t support SGD deposits.

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On the bright side, you can bypass this by using your multi-currency bank account to make a USD transfer.

If you’d like to avoid the hassle of doing this, you’re in luck. Singaporean exchange Coinhako allows for local bank transfers and supports over 20 cryptocurrencies.

Ditto for New York-based Gemini, whose American and Singaporean platforms have the added benefit of letting you earn interest on your holdings.

Secondly, you might want a cryptocurrency wallet. Cryptocurrency exchanges are highly secure these days and cryptocurrencies themselves are designed to prevent counterfeiting, but it doesn’t hurt to have an extra layer of security.

The best option would be a cold wallet, letting you store your cryptocurrency offline via a specialised USB device or sheet of paper (seriously).

Here are several that you can consider:

Best cryptocurrency cold wallets

What cryptocurrencies can I invest in?

Choice overload is a gross understatement when it comes to cryptocurrency because there were over 4,000 being circulated as of January 2021. However, it’s not feasible to invest in most of these due to their lack of traction in the market.

The following are some of the more lucrative coins that you can invest in, but do your due diligence before you take the plunge.

1. Bitcoin

You can’t talk about cryptocurrency without mentioning Bitcoin. The granddaddy of all coins was first brought to life in 2008 and is currently viewed as digital gold.

In fact, it’s ‘mined’ like actual gold and is currently just as scarce. Close to 19 million out of a possible 21 million Bitcoins have been ‘mined’ and every coin that follows will take longer to hit the market.

Key financial indicators include a current market cap of over $1.3 trillion, an all-time high that’s close to $86,000, and daily trading volume of approximately $60 billion.

Not only is it currently the most valuable cryptocurrency, it’s also the most widely accepted. Whether you’re buying a self-driving electric car or paying taxes in Switzerland, Bitcoin has you covered.

2. Ethereum

Ethereum, on the other hand, is a very different beast. Currently regarded as the most versatile cryptocurrency, it was launched in July 2015 as a way for individuals to build decentralised applications and serves a variety of other purposes today.

Yes, you can create NFTs from the Ethereum blockchain too. And unlike Bitcoin, Ethereum does not have a maximum supply, throwing scarcity and comparisons to gold out of the window.

Key financial indicators for Ethereum include a current market cap of over $400 billion, an all-time high exceeding $3,600, and daily trading volume of over $43 billion.

Ethereum will also be receiving an upgrade soon, changing its model to a Proof of Stake one. This is a win-win move, as it will be more energy-efficient and equitable for miners.

3. Cardano

Cardano might seem diminutive when compared to Bitcoin and Ethereum, but this cryptocurrency was created with an ambitious goal in mind. Its founders wanted to create technology that improved security, transparency, and fairness.

This translates into easy verification of a product’s authenticity and an individual’s educational certificates, amongst other uses.

For the financial side of things, Cardano’s current market cap is more than $50 billion. As for its all-time high, it hit $2.06 in mid-April 2021. Finally, daily trading volume averages out at over $3 billion.

The maximum supply of this cryptocurrency is 45 billion coins and just over 70per cent has been mined so far.

Is cryptocurrency trading the only way to invest, then?

Akin to equities, you don’t need to go through the hassle of actually trading cryptocurrencies to invest in them.

For Bitcoin, the Grayscale Bitcoin Trust (GBTC) and Osprey Bitcoin Trust (OBTC) are available for purchase via an online brokerage platform. There’s no need to sign up with a cryptocurrency exchange as the funds themselves are the ones managing the Bitcoins.

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Alternatively, you can invest in cryptocurrency or blockchain companies. American cryptocurrency exchange Coinbase debuted on the Nasdaq at US$381 in April 2021 via a direct listing.

Nasdaq-listed electronic signature frontrunner DocuSign has been dabbling in blockchain technology since 2015 and has been trading at over US$200 since August 2020.

Finally, you can mine cryptocurrencies to generate coins. However, the environmental costs are grave, depending on the cryptocurrency that you choose. And because you’re competing with other miners, you’ll need a custom-made computer.

Unfortunately, the most crucial component costs over $1,000 and it isn’t readily available as gamers and miners are clamouring for it.

What are the risks of investing in cryptocurrency?

It’s widely known that there aren’t any risk-free investments in the world, even for safe-haven assets. Remember when gold was trading at just US$34,000 per kilogram in 2015?

Cryptocurrency is no different, being a highly volatile asset due to its relative youth. Sharp price movements within a single day are still par for the course.

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Then there’s the issue of realising the gains you’ve made. Selling your now-valuable coin requires you to undergo a multi-step process, much like buying it in the first place. From there, you’re subjected to transaction fees and (possible) foreign exchange rates.

Finally, there’s the perennial issue that cryptocurrency faces: its inherent worth. For shares, they largely reflect a company’s performance. For commodities, they are daily necessities and have already been traded for centuries.

Cryptocurrency might be seeing real-world applications grow as more established companies accept it, but they can easily drop it in an instant too.

If you have a conservative risk appetite and need more time before investing in this newfangled asset, you can consider safer vehicles like robo-advisors in the meantime.

In conclusion

Cryptocurrency has been the buzzword for investors across 2020 and 2021. Despite questions still surrounding its inherent worth, experts have recently quelled worries by citing its US$2 trillion market cap. It’s hard to imagine an asset of this size just disappearing in an instant.

And with dominant payment network firms Visa and Mastercard getting onboard, there’ll be many more opportunities for real-world use. This is great news because it highlights the growing stability of cryptocurrency.

And now that you know how to start investing in it, you might not want to spend your virtual coins on junk food and computer parts just yet.

This article was first published in SingSaver.com.sg. All content is displayed for general information purposes only and does not constitute professional financial advice.