Cryptocurrencies: Here's Everything You Need To Know

Crypto, crypto, crypto…

Where do I even start?

If you’re reading this article, you might’ve heard of the term ‘cryptocurrency’ either from friends or the news.

With Singapore announcing its ambitions to become a global crypto hub, along with the news of cryptocurrency donations being accepted by the Ukraine government,

Cryptocurrencies are no longer some niche internet meme thing that we can dismiss as a trend.

So for all those new to cryptocurrencies, here’s what you need to know about them!

TL;DR: What are Cryptocurrencies?

• A digital asset that functions as a decentralised alternative to ‘normal’ money
• A cryptocurrency’s value is determined by demand and supply factors
• Cryptocurrencies can be bought on exchanges and mined using software

Cryptocurrencies are still relatively new in the financial world but are gaining traction in recent years with some companies and even governments accepting cryptocurrencies as forms of payment. However, it is still considered a speculative and high-risk investment.

The Limitations of ‘Normal’ Money (Fiat Money)

Everyone is familiar with the Singapore Dollar (SGD), which is fiat money issued by the central government.

It is ‘legal tender’ and traded based on trust in the government. Fiat currencies have the following characteristics:

• It is issued by the government
• Monitored by a central authority. In Singapore, this is the Monetary Authority of Singapore.
• Unlimited Supply: The government or those who have access to money can print as many as it wants (think Money Heist)

Do note that these are the theoretical characteristics of Fiat Money. In Singapore, the money supply is managed by the MAS, and there is a limit to it. However, it is possible to have an ‘unlimited’ supply of fiat money, especially in corrupt governments that print an excess amount of money. 

However, therein lies a couple problems with fiat money:

1. It is centralised – You have a central authority that controls and issues it. In this case the government or central bank.
2. It is not limited by quantity – The government or central bank can print as much as they want whenever needed and inflate the money supply on the market.

With the advent of online banking, money today is digital, and this gives rise to problems such as ‘double spending‘, where there is a risk that a digital ‘dollar’ is being replicated to make more money.

The solutions banks use today are a ‘centralised’ solution involving a ledger in a computer that keeps track of all transactions.

However, this means that there is a HUGE reliance on the central bank in being accountable for your money.

This may give rise to issues such as corruption, mismanagement of funds, and giving away the control of your money to a government or bank.

For countries without a strong central authority, this poses a problem as the value of fiat money can be manipulated.

What Is Cryptocurrency?

Cryptocurrencies avoid the big issue that fiat money has:

They are digital currencies that are secured by cryptography and are generally not issued by any central authority.

This means that cryptocurrencies cannot be counterfeited, double-spent, or manipulated by any one person or entity.

Moreover, cryptocurrencies exist on decentralised networks based on blockchain technology, ensuring that all transactions are transparent and kept in check by lots of computers.

Just like traditional currencies, cryptocurrencies function as a means of exchange, or as a store of value. 

Here is a quick comparison between Fiat Money and Cryptocurrencies:

How Is The Value Of Cryptocurrency Determined?

Broadly speaking, a cryptocurrency’s value hinges on economics where its price is determined by demand and supply.

Generally, when demand for the cryptocurrency increases faster than supply, the price of a cryptocurrency goes up and vice versa.

There are many other factors as well but that’s an article for another day.

With that, let’s go into what affects the demand and supply of cryptocurrencies.

Demand

Trustworthiness

Why is Bitcoin the biggest cryptocurrency by market capitalisation right now?

This can be explained by the Lindy effect and the Network effect.

The Lindy effect argues that for a non-perishable object, its life expectancy increases with how long it has lasted.

As the longest-running cryptocurrency in existence, Bitcoin has withstood the test of time, amidst fears in its early days that it could be hacked or have its technology fail.

Therefore, as the Lindy effect suggests, Bitcoin’s value will trend upwards as it continues to prove itself.

Popularity

On the other hand, the Network effect makes Bitcoin more valuable as more and more people adopt Bitcoin.

The value of cryptocurrencies ultimately depends on the number of people willing to use them as a means of exchange.

For Bitcoin’s case, as more people accept Bitcoin, the more valuable it is for someone looking to spend Bitcoin.

Competition Between Cryptocurrencies

Since Bitcoin, however, there are new crypto projects and tokens popping up every day.

Some of these projects are based on the latest technology and offer more utility by improving on the current limitations of older cryptocurrencies. Other cryptocurrencies such as Dogecoin have become what is known as “meme coins” that are built on hype.

For context, social media posts by Elon Musk sent Dogecoin prices surging by 600% in just one week.

When more users hop onto new cryptocurrencies, the demand for existing cryptocurrencies is hence siphoned away.

Accessibility

Aside from the popularity of cryptocurrencies, accessibility is also a huge factor.

Let’s say that you are keen to buy a particular altcoin (alternative cryptocurrency to Bitcoin). However, you find out that it is not available on major crypto exchanges.

This increases the barrier of entry and discourages you from buying it.

In some countries, governments have banned cryptocurrencies altogether, which impacts demand for cryptocurrencies directly as it is illegal to use them.

Supply

Scarcity

With most cryptocurrencies, there is a limited supply in circulation, which forces the price of the assets to increase with more adoption.

On the other hand, some cryptocurrencies like Ethereum have a virtually unlimited supply, but developers have designed the ecosystems in a way to artificially limit them.

Cost of Production

Some cryptocurrencies like Bitcoin and Ethereum, rely on a proof-of-work system. In other words, powerful computers are needed to produce new coins and verify transactions.

This translates to production costs behind cryptocurrencies which increases as equipment and electricity costs rises.

Types Of Different Cryptocurrencies In The World

While Bitcoin is widely seen as the pioneer, there are other forms of cryptocurrencies traded around the world as well. Here’s a non-exhaustive list of cryptocurrencies being traded around the world:

How Do I Own Cryptocurrencies?

Anyone can own cryptocurrency. Even your grandparents! There are two ways to do this:

1. Buy cryptocurrencies on crypto exchanges with your SGD or fiat money.
2. Mine for cryptocurrencies with a mining rig and software.

Buying Cryptocurrencies in Singapore

Generally, you can buy cryptocurrencies through various cryptocurrency exchanges such as Gemini or FTX.

On these exchanges, you can buy cryptocurrencies directly with your SGD or fiat money.

For a more in-depth guide, you can refer to our Cryptocurrency buying guide that we wrote:

Cryptocurrency Mining

Cryptocurrencies can be described as ‘gold in digital form’ where cryptocurrencies are the ‘gold’ and the mining software used to mine for cryptocurrencies are the ‘pickaxes’.

To mine for cryptocurrency, you’ll need a powerful computer and the appropriate software.

For gamers with a solid graphics card, cryptocurrency mining could be an option for you. However, you’ll need to factor in electricity costs to determine if it’s a profitable income stream.

You can also lend your PC’s computing power to miners on sites such as GamerHash and generate passive income from there.

These days, however, specialised mining rigs with higher hash rates are needed to mine cryptocurrencies such as Bitcoin as it becomes increasingly competitive to mine.

While you still can mine Ethereum and other currencies with gaming GPUs, profits margins are slim as mining becomes less viable in the future, especially once Ethereum shifts from a proof-of-work to a proof-of-stake system.

Should I Invest In Cryptocurrencies?

As with any investment, you should not invest in something that you’re not familiar with, so I would encourage you to read beyond this article if you are interested in cryptocurrencies.

Due to their speculative and volatile nature, cryptocurrencies are considered high-risk investments.

Here are some risks you should consider before investing:

• Market Volatility – Purely dependent on demand and supply that is independent of any real-world asset or medium.
• Cryptocurrency Scams – A lot of them sound too good to be true.
• Regulatory Issues – Because the asset class is rather new, governments and banks have yet to form a coherent fiscal policy for them. Therefore, there’s always a risk that their taxation status, trading rules, or even outright legality, could change overnight.
• Lifespan – Since everything is new, it’s incredibly difficult to know which of these coins have realistic, mainstream, or long-term potential.
• Consumer Protection – Unlike traditional banks, cryptocurrency doesn’t have any official safeguards or insurance.
• Risks of Market Manipulation – Crypto is a largely unregulated space and is prone to market manipulation.
• Margin of Human Error – inputting an incorrect order or losing your private keys may be a problem for first-time investors as well.

Investing in cryptocurrency comes in a few ways:

• Holding the cryptocurrency and hoping it goes up in price before selling.
• Earn interest by lending your cryptocurrency.
• Staking your cryptocurrency and earning rewards.

Should you decide to invest in crypto after you’ve done your research, the general consensus among crypto investors is to only invest a maximum of 5% – 10% of your investment portfolio.

Disclaimer: The information provided by Seedly 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 investments products mentioned.