A Layman Explanation On What To Know Before Trading Cryptocurrencies Like Bitcoin & Ethereum

This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, 2016). All views expressed in the article are the independent opinion of DollarsAndSense.sg

Our lunchtime conversations at DollarsAndSense usually revolve around financial topics. This ranges from property, investing, insurances and of course, CPF matters.

With cryptocurrencies being a hot topic in recent months, it’s no surprise that more and more people are getting curious about it. While the buzz surrounding cryptocurrencies have brought in a lot more investors and traders, not everyone understands the dynamics of how cryptocurrencies work, and more importantly, the factors that will make it a sustainable currency in our digital world.

What Exactly Is A Cryptocurrency?

Basically, cryptocurrencies refer to digital currencies. This is money that is entirely created, transacted and stored online.

Unlike fiat currency, which is legal tender issued and backed by the local government that issues it (e.g. USD, Euro, SGD), cryptocurrencies are not issued by any government. Hence, cryptocurrencies are viewed as a type of decentralised money, meaning is not owned or controlled by any government.

Understanding How Cryptocurrencies Work

To better understand this, let’s first look at how regular currencies work.

In Singapore, we primarily use the Singapore Dollar. It’s a legal tender accepted for transactions within Singapore. We can carry the physical cash with us, or have it stored, in Singapore Dollars, in our bank accounts to make transactions.

When we pay using a cashless method such as Nets or EZ-Link, the amount we spend is directly deducted from our bank account or stored value in the card and paid to the retailer. This is done electronically with no physical cash exchanged.

Cryptocurrencies work in a similar way as the money in our bank account. It appears as a number in our cryptocurrency digital wallet and we can’t carry it around like we carry cash. However, depending on the extent of acceptance of the cryptocurrency, we could use it to pay for products or services that we purchase, both online and offline.

The ability to pay for a purchase is an important characteristic of cryptocurrencies that investors and traders should not ignore.

Money As A Means Of Payment

Whether it’s fiat currency, commodity money or cryptocurrency, the more universally accepted a type of currency is, the more valuable it naturally is.

Let’s take shell money as an example. For those of you who may not be aware, shell money (i.e. sea shells) were once commonly used as a means of payment in many parts of the world.

Imagine if we were to head back to those old days. Suddenly, a few pieces of seashells can buy you a meal at the hawker centre, used to pay for your taxi rides and even to purchase your HDB flat.

It’s clear that if we were to accept it as means of payment today, seashells will immediately become valuable. You will see people rushing to the beach to “mine” these seashells, just like how people mine Bitcoin and Ethereum.

Similarly, a large extent of the rise of value of certain types of cryptocurrencies lies in it being accepted as a means of payment. In recent years, Bitcoin has started gaining acceptance as a payment method for many big brands such as Expedia, Microsoft and Dell.

Read Also: Commodity Trading: What Is Commodity Trading And How Does It Work?

Blockchain Technology

Blockchain technology plays a huge role in cryptocurrency. It’s not easy to understand how blockchain technology works so the best way to explain is to use an analogy.

Rai Stones: A Huge Stone That Acts As Money In Micronesia

Rai stones are a type of stone money that were once used among locals in Micronesia.

Source

From the outset, Rai stones seem a strange choice to be used as a form of money because not only were these big stones difficult to keep for their owners, some of them were impossible to be moved as they were too heavy.

However, this made it easy for ownership of each stone to be passed on from one person to another, without the need for any physical movements. This works well as long as everyone on the island knew who owned each stone.

For example, Adam can transfer one large Rai stone he owns to Ben in exchange for a boat. Everyone on the island is made aware of this exchange between Adam and Ben. They now know that Ben owns the large Rai stone that used to belong to Adam.

If Ben decides to use it to buy a house from Charlie, Charlie can accept it as payment knowing that Ben is now the owner of that Rai stone and has the right to transfer the ownership to him. Again, everyone on the island is made known of this transaction, and now accept that Charlie is the new rightful owner of the Rai stone.

Blockchain technology for cryptocurrencies work in a similar way. In each and every cryptocurrency, there is a secured historical record of each transaction recorded on the blockchain ledger kept by different people. This helps ensure transparency of the system, as the ledger keeps track of the transaction history of each cryptocurrency in the system.

How To Invest & Trade Cryptocurrency

There are a few ways you can get exposure to cryptocurrencies like Bitcoin and Ethereum.

One way is to open a cryptocurrency virtual wallet. There are many virtual wallets around the world that you can use. Features to look out for when opening a virtual wallet includes anonymity, security and of course, ease of accessibility.

Do note that as cryptocurrencies are not legal tender in Singapore, the Monetary Authority of Singapore (MAS) does not regulate them, nor the wallets that store them. Hence in the unlikely (but possible) event that hackers are able to access these virtual wallets, investors may have limited recourse on any losses they incur.

Open A Trading Account For Cryptocurrency

Another way to gain exposure would be to trade cryptocurrencies through Contract For Differences (CFDs). Rather than to own these cryptocurrencies, traders can speculate on its future prices by opening a CFD position. Leverage is typically employed when CFDs are used.

Read Also: What Is Leveraged Trading And How Does It Work In Singapore?

To trade cryptocurrencies using CFDs, you need to open a trading account with a broker that offers it. One such broker in Singapore is IG, which is one of the only brokers in Singapore that offers CFDs on cryptocurrencies.

Traders can choose between two of the most popular cryptocurrencies, Bitcoin and Ethereum, and can take either long or short positions, depending on how they expect prices to move. There is no need to open a virtual wallet.

If you are new to trading either Bitcoin or Ethereum, we strongly suggest that you open a demo account first to get familiar with the products that you intend to trade. Be aware as well on factors that will affect these products such as government regulations, wider acceptance and technological advances that may adversely affect its price either positively or negatively.

Read Also: Thinking Of Trading Bitcoin? Here are 10 Things You First Need To Know Before Starting

For tomorrow’s investors, find out why everyone is talking about cryptocurrencies in this free e-book published by IG, written in partnership with Bloomberg. Download your free e-book now.

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 DollarsAndSense.sg 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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