Understanding cryptocurrency as a Singapore investor

You might have heard of Bitcoin, but did you know that there are about 6,000 cryptocurrencies in existence as of August 2021? The global crypto market cap crossed USD $2 trillion on 16 Aug 2021, with Bitcoin accounting for more than 50%, followed by Ethereum, Tether, Binance Coin, Polkadot and Cardano accounting for close to half a billion dollars.

If you are a Singapore investor interested to know more about cryptocurrencies but are not quite sure where to begin, here’s a guide to help you get started.

What are cryptocurrencies?

Cryptocurrencies are digital assets that are encrypted and stored using distributed ledger technology like blockchain. Crypto transactions are verified peer-to-peer using a decentralised network of computers. This means all transactions are tracked accurately on a permanent ledger, providing for increased transparency.

A brief history: Cryptocurrencies vs Traditional fiat currencies

The demand for an alternative to traditional fiat currencies was instigated by the 2008 Global Financial Crisis, which left many people in a cloud of distrust and frustration with their banks and governments at having little say in how they’d like to preserve the value of their hard-earned money.

Traditional currencies, which are regulated by respective government bodies, operate on a centralised ledger, and are often not transparent. As such, the value of fiat currencies can often be subject to political positioning or central bank’s monetary policy, and prone to human manipulation and corruption.

Shortly after in 2009, Bitcoin was introduced as what most regard as the first cryptocurrency. Running on a distributed ledger system meant crypto transaction records were shared, public, and immutable, which combatted key issues presented by traditional fiat currencies.

Key differences between crypto and stocks

Bitcoin was first created with the intention to be used exactly like money, but to date, it is still uncommon to use crypto to pay for goods and services. With predominant use of crypto as an investment vehicle, many investors equate or compare crypto to stocks. Here are some ways in which they differ:

Store of Value vs Ownership

Cryptocurrencies function as a store of value, and crypto investors tend to hold crypto in hopes that it will increase in value over time, and this increase in value can be redeemed upon selling the crypto. In contrast, stocks represent ownership of a company which you believe will increase in value in the future, and some stocks also pay out dividends to stockholders.

Financial intermediaries and Issuance

Stocks are issued and backed by respective companies, and the number of stocks which are distributed are dependent on the company. On the other hand, cryptocurrencies do not have one fixed way of issuance, and can be issued by anyone through processes like mining,  initial coin offering (ICO) process, and gradual issuance over time.

Market Maturity

Stocks have been traded for centuries, while the first crypto Bitcoin was only first established slightly over a decade ago. This makes the young crypto market very attractive for investors as there is huge potential upside from this largely unregulated space. However, this is accompanied by much higher risk and volatility, amplified by uncertainty brought about as new regulations start to surface.

Trading Hours

Crypto exchanges are open for trading 24/7, while stock exchanges are open on weekdays, with 3 stock trading sessions - namely the regular market, after-hours market, and pre-market. Trading times typically adhere to the respective market’s local timezone.

2 key types of cryptocurrencies: Coins and Tokens

Investors typically look to cryptocurrencies as stores of value, but understanding the nature of what your crypto can do is important. Functionally, there are two broad categories of cryptocurrencies - coins and tokens.

Coins are cryptocurrencies that are primarily used as money, and exist to be a store of value. These include Bitcoin (BTC), Ethereum (ETH) and Litecoin (LTC). Each of these digital coins are based on their respective blockchain networks, and are mostly distributed as incentives for miners.

Tokens on the other hand, are smart contracts that make use of blockchains, mainly the Ethereum blockchain. Compared to coins, tokens have a wider range of functionalities, and are usually created, distributed, sold and circulated through a crowdfunding exercise known as an ICO. Tokens also do not function as incentives for blockchain miners like coins do. Some common tokens include stablecoins and non-fungible tokens.

Stablecoins

Despite what its name might suggest, stablecoins are not coins, but tokens built on top of smart contract blockchains with their value pegged to a stable currency, like USD or SGD. The creation of stablecoins introduced more utility for crypto users, and provided the option for earning interest without the volatility one might experience with other coins. Popular stablecoins include Tether (USDT), Binance USD (BUSD), and USD Coin (USDC). Besides those that are pegged to a fiat currency, there are other types of stablecoins like commodity-backed stablecoins and algorithm stablecoins.

Non-fungible tokens (NFTs)

Most tokens are fungible, which means each token is entirely indistinguishable from the next. In contrast, non-fungible tokens are completely unique blockchain-based tokens that virtually store collectibles such as art or music. NFTs allow for fractional ownership of assets, which means the average person can now access, own and invest in a portion of unique assets. The highest price paid for an NFT sold to date is $69 million for an art piece by artist Beeple.

What can you do with cryptocurrency?

Buying and trading crypto

Most investors looking to get their feet wet might choose to buy units of cryptocurrencies, or take advantage of crypto’s volatility and trade on price movements. Buying crypto means you pay for and own the asset in full, while trading allows you to gain greater exposure by taking a leveraged position on price. However, be cautioned that price fluctuations in crypto are often violent and unpredictable, and trading crypto could mean both magnified gains and magnified losses.

Lending crypto

Some crypto exchanges allow you to earn interest on your crypto by lending it, either as a fixed or flexible loan. Fixed loans typically provide higher interest in exchange for locking away your crypto for a set period of time, much like a traditional Certificate of Deposit. Flexible loans allow you to withdraw your crypto at any time, but return much lower interest. Currently, stablecoins return the highest interest rates, between 5-25% on most exchanges. Coins on the other hand, tend to return a lower annual percentage rate of around 1-3%.

Lending crypto also comes with the risk of the exchange getting hacked, or by violent price drops of the network.

Staking crypto

While crypto lending allows users to lock up their coins and passively earn interest on them, crypto staking helps secure the network and pays users with new coins.

Crypto staking is an alternative for crypto mining, but instead of machines competing to solve a puzzle, one node is chosen from a network of participating nodes to perform the validation work required to forge the next block on the blockchain. When complete, validators of the node will be rewarded. Usually, the larger the stake, the higher the chances of the node being chosen. Unlike crypto mining, crypto staking does not require special software or much electrical power, but staking rewards are smaller compared to mining.

To stake your crypto, you will need some assets that you are willing to lock away for a period of time in a node. Much like crypto lending, the disadvantage with crypto staking lies with having your crypto squared away for a period of time, which means you will be unable to withdraw your assets to sell if the crypto market faces great volatility. Additionally, crypto staking also bears the risk of the exchange getting hacked.

How to invest in cryptocurrencies in Singapore?

Cryptocurrency exchange platforms

If you are unfettered by the issues above and are wondering where you can get started, you can buy and trade cryptocurrencies through crypto exchanges, such as

FTX, Kucoin, Gemini, Coinbase, and Crypto.com. When choosing your crypto exchange, consider the following factors:

• Trading fees
• Types of coins offered by the exchange
• Ease of depositing, withdrawing and exchanging between cryptocurrency and Singapore dollar

Some of these platforms like Coinbase also offer lending and staking options. However, there are platforms like Hodlnaut, Celsius and BlockFi that specialise in providing cryptocurrency interest accounts.

Update: As of 12 November 2021, Singaporeans are no longer able to purchase or trade crypto on Binance.com due to MAS regulations. Huobi will also be ceasing operations in Singapore, and will be closing all Singaporean accounts by 31 March 2022. Singapore-based users are strongly encouraged to withdraw all their assets from Huobi before then.

Given that these platform closures can occur at any time, it is crucial for Singapore-based investors to keep abreast of news on platform regulation changes.

Cryptocurrency mining stocks

Another way to gain exposure to crypto is to purchase cryptocurrency mining stocks like BitFarms, RIOT, and CleanSpark. Bitcoin mining stocks are very sensitive to bitcoin’s price movements - when bitcoin gained 270% over the course of a year, miners like RIOT announced a 901% return. If you are planning to purchase crypto mining stocks, be prepared for amplified financial risks when bitcoin value falls.

ETFs with blockchain and crypto exposure

If you want to gain exposure to crypto without buying any directly off a cryptocurrency exchange, or prefer to incorporate more diversity into your crypto portfolio, consider ETFs which focus on companies that utilise or invest in blockchain technology, such as Amplify Transformational Data Sharing (BLOK), Siren Nasdaq NexGen Economy (BLCN), and First Trust Indxx Innovative Transaction & Process (LEGR). The first Bitcoin-linked ETF (BITO) also launched recently on 19 October 2021. These ETFs are available on US stock exchanges.

Other ETFs to consider are those with material bitcoin exposure, mainly ARK Next Generation Internet ETF and GrayScale Bitcoin Trust.

Read more about our take on BITO here.

Regulations: Is Cryptocurrency legal in Singapore?

In 2019, the Monetary Authority of Singapore (MAS) launched the Payment Services Act, which regulates cryptocurrency, or digital payment tokens (DPT) service providers for money-laundering and terrorism financing risks. More recently in Jan 2021, MAS announced the Payment Services (Amendment) Bill, which requires any entity that facilitates the transmission, exchange or custody of cryptocurrencies to be licensed and comply with a wider set of rules and regulations. One such consequence of the Payment Services Act is that crypto exchanges now have to impose a stock limit of $5,000 for individual accounts.

As a crypto investor in Singapore, note that the crypto landscape is largely unregulated for retail investors. This means you will be offered little protection or recourse if you fall prey to a crypto-related scam or from callous crypto investments, so practice caution and prudence when investing in cryptocurrencies.

Should you invest in cryptocurrency?

There is no doubt that cryptocurrencies are gaining in popularity among retail investors and institutions. For example, PayPal users in the US can now buy, sell, hold, and spend cryptocurrencies, JPMorgan’s bitcoin fund for its clients is slated to roll out as early as this summer, and household names like DBS launched Asia’s first direct crypto offering for private banking clients in May 2021, and announced that it would be providing an ecosystem for fundraising through asset tokenisation and secondary trading of digital assets including cryptocurrencies.

While the future of cryptocurrency seems promising, here are some issues you should consider before making your first crypto purchase.

Three key issues with cryptocurrencies

An asset, currency, security… or something else altogether?

Crypto is the first non-correlated asset class since equities in the 1600s, shared Catherine Wood, founder and CEO of ARK Investment Management. There has been much debate surrounding the classification of cryptocurrencies, and consequently the regulations surrounding crypto. While there has been a smattering of regulations for cryptocurrencies, a clearer outlook for crypto will be paved when clearer guidelines have been defined globally.

High volatility

Crypto has seen vast swings in prices over the years, more recently from heightened regulatory pressures or a tweet from Elon Musk. Bitcoin suffered a 30% drop from its record high in mid-April this year, and crypto trading volume fell 43% in June following China’s crackdown on the sector. If you are thinking of buying crypto, its high volatility is definitely something to consider before allocating your funds.

Negative environmental impact

The energy consumption of cryptocurrency mining has been cause for concern among environmentalists. As the price goes up, the algorithms to create new blocks on proof-of-work blockchains like Bitcoin become increasingly difficult, leading to greater energy consumption. While some purport that close to three quarters of Bitcoin’s energy needs come from renewable sources, these figures have been highly contested.

Three things to consider before investing in cryptocurrencies

As a digital wealth advisor committed to making it easier for you to build long-term wealth, consider these three things when deciding if you should invest in cryptocurrencies.

Risk appetite

Cryptocurrencies are high-risk investments, so it is important to assess your risk appetite. If you are generally risk-averse, crypto might not be for you. If you would still like to dabble in cryptocurrency, consider waiting for cryptocurrency ETFs managed by global fund managers to become available in the Singapore market.

Financial goals

Consider your financial goals, such as setting up an emergency fund, saving up for a family, or building your retirement nest egg. If you require short-term liquidity or are cash-tight, remain focused on achieving your financial goals first before making allocations to crypto.

Investment horizon and strategy for cryptocurrencies

If you have spare cash after taking the above financial goals into consideration and would like to start investing in crypto, decide your investment horizon and strategy for cryptocurrencies, such as buying and holding on to cryptocurrencies for the long-term or trade crypto aggressively in the short term.

Frequently Asked Questions

• Should Singaporeans invest in Bitcoin?
• How much money do you need to invest in Bitcoin?

There is no minimum amount of money needed to get started investing in Bitcoin. The minimum investment in Bitcoin is 1 Satoshi, which is equivalent to 0.00000001 Bitcoin or SGD $0.00063 (as of 17 Aug 2021, where the price of Bitcoin was SGD $62,624.16). Since the minimum investment is so low, the bar is set more so by the crypto exchange you are planning to purchase Bitcoin from.

• Would Bitcoin be adopted worldwide in the future?

According to crypto.com's July 2021 study, global cryptocurrency adoption has doubled since January 2021, reaching 221m users worldwide. The rate of cryptocurrency adoption also seems to be accelerating rapidly, from 9 months for 65m to 100m users, to 4 months for a jump from 100m to 200m users. It is indeed possible that Bitcoin be adopted worldwide in the future; however, the rising popularity of altcoin adoption has been cannibalising on market share of established cryptocurrencies like Bitcoin.

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Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund. 

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