In the first edition of our beginner’s guide to blockchain and cryptocurrency, we laid down the basics of this emerging technology. Now, it’s time to get you ready to enter the space.
Cryptocurrency has emerged as an appealing asset class over the past few years. “Blue chip” coins such as Bitcoin and Ethereum showed their resilience through the pandemic, coupled with the ability to bounce back after sharp falls. In 2020, Bitcoin outperformed stock market indices such as the Dow Jones as well as safe haven assets like gold.
More recently, crypto has demonstrated its utility during times of crisis. In March 2022, Ukraine raised almost US$100 million in cryptocurrency to help combat the Russian invasion. Although it had become extremely difficult and time-consuming to send fiat currency in and out of the country, transacting in crypto remained simple as ever.
Given these utilities, there are a number of reasons why you might choose to buy crypto today: for easy cross-border transfers, to diversify your portfolio, hedge against inflation, or even speculate on market upturns and downturns.
However, before creating a wallet and signing up with any crypto platform, it’s important to first understand how the market works.
As the recent market crash has shown us – with the downfall of projects such as Celsius and Terra – crypto products aren’t as well-regulated as traditional financial instruments. Losses can arise not just from market movements, but also mismanaged investment platforms.
To prevent retail investors from falling victim, the Monetary Authority of Singapore (MAS) is being very selective when issuing licences for companies to offer crypto services in Singapore.
While such regulations will help make the crypto space safer, consumers still have the ultimate responsibility to protect their investments.
In partnership with Luno’s education hub, Luno Discover, here’s our humble, no-hype guide for the ultimate beginner on how you can keep your funds secure and minimise risk when entering the world of cryptocurrency:
Developing the right mindset
There’s a fine line between gambling and investing, and it mostly comes down to your decision-making process.
With crypto, it’s easy to be lured in by the hype. Every other day, it seems there are coins that have doubled or tripled their value. That being said, it’s important to remember that they can crash just as easily. Earlier in January, the overall crypto market cap fell by US$205 billion in a span of just 24 hours.
Since there’s no way to tell which coin Elon Musk will tweet about next, buying in with such hopes isn’t a valid investment strategy.
How to actually DYOR
Rather than assessing a cryptocurrency’s potential to go viral, investors should research fundamentals instead, starting with a project’s whitepaper which can be found on its official websites.
- What purpose does this coin serve?
- Who are the people behind this project?
- What does the business model look like and is it sustainable?
- What does the project roadmap look like?
While doing this research, it’s important to consult a variety of sources to get the full picture. Anyone can make a website with a promising roadmap, but these claims shouldn’t be taken at face value. It is wise to cross reference and get a multi-faceted perspective before investing your hard-earned money.
Investors should look at credible information sources – such as Luno Discover – to find out more about the cryptocurrencies which they’re interested in.
Along with this, it’s a good idea to look out for ask-me-anything (AMA) sessions or Twitter Spaces hosted by project teams. Asking questions and hearing the team speak about their ideas can help gauge their legitimacy.
Finally, joining communities dedicated to cryptocurrency, like Luno’s Telegram channel, can be another way to interact with other like-minded investors, keep updated on the latest news and learn about different projects in the space.
Doing research will help minimise investment risk, but it won’t eliminate it altogether. For example, with the LUNA crash, we saw a well-established crypto project – one of the top 10 by market cap – lose almost all of its value within a matter of days.
These cases can be tough to predict and even experienced investors can get caught out by them. Similar to stocks, you should only invest an amount which you are willing to lose in crypto.
Now that we have you in the right mindspace of always knowing what you are investing in, it’s time to look into the different investment options available in the crypto market.
Which cryptocurrencies should you buy?
Although the first cryptocurrency, Bitcoin, was created for the transfer of value, cryptocurrencies have since evolved to have a number of other utilities as well.
Among the top five coins by market cap (as of this June) – often classified as ‘blue chips’ – there’s Ether (ETH), which was designed to facilitate smart contracts. Developers are free to build their apps on the Ethereum blockchain, while using Ether to pay transaction fees.
Then, we have Binance Coin (BNB), which entitles users to discounts on trading fees when using the Binance crypto exchange.
There’s also USD Coin (USDC), a stablecoin that has its value pegged to the US dollar. Since the value of one USDC always remains close to US$1, holders are exposed to much less price volatility than with other crypto coins. Converting to USDC can help users lessen their exposure to crypto risk without forcing them to exit the space altogether.
“Blue chips” are well-established coins which tend to be less volatile than emerging crypto projects. They generally have a large pool of buyers and sellers, meaning any action taken by a single investor isn’t likely to have much effect on the price of the coin. While this minimises downside risk, it also reduces the potential for exponential gains.
Those with a higher risk tolerance might consider cryptocurrencies with a lower market cap. These could include reputable projects such as Solana or Cardano, both of which have positioned themselves as competitors to Ethereum’s smart contract ecosystem.
The apps built on top of these blockchains often have their own cryptocurrencies – referred to as crypto tokens – which users can also invest in. For example, Uniswap is a decentralised crypto exchange built on the Ethereum blockchain. It has its own token, UNI, which gives holders the right to vote on future updates to the app.
There are a number of such apps which operate on blockchain technology, offering a range of utilities in areas including decentralised finance (DeFi), blockchain gaming, and the metaverse.
Finally, those looking to make extremely risky plays can go off in search of even smaller cryptocurrencies. These tend to be newly launched and not yet listed on popular crypto exchanges. Such coins have a lot of room for growth given their low market cap; however, this comes paired with a lack of liquidity. Since the coins aren’t well known, the buyer pool is small and the coins can be tough to offload.
Some small cap projects offer real utility while others might simply be based on internet memes or viral trends. Either way, these are some of the riskiest investments to be made in crypto, and they often don’t pay off. Since the inception of cryptocurrency, almost 2,500 coins have failed out of an estimated 10,000 which have been in existence.
Much like you’d divide your traditional investing portfolio between assets such as stocks, bonds, and real estate – all of which come with varying levels of risk – the same can apply to crypto. Ultimately, your risk tolerance and investment strategy will go a long way in deciding which coins you choose to buy.
Choosing the right platform
After completing your research and creating an investment strategy, the final step is to actually choose a crypto platform. There are a number of platforms available for users in Singapore, but the choice must be made carefully.
Hacking is a prevalent issue in the crypto space, with over US$1.2 billion stolen in the first quarter of 2022. Crypto exchanges have often been targeted by hackers as they store a large amount of funds in their respective wallets.
Apart from hacks, there have also been cases where exchanges have mismanaged funds and blocked withdrawals, due to their lack of liquidity.
Many try to look for the cheapest fees when searching for a platform, but the cheapest may not mean the best. To avoid taking on additional risks that aren’t readily apparent, new investors should look into the platforms’ security track records – their security measures, history of hacks, and methods of storing funds – before opening an account.
Currently, several platforms are operating under exemption from the Payment Services Act (PSA), while the MAS stringently reviews their application to be licensed in the country. To have an extra layer of confidence, consumers should choose an exchange that has either received a licence, or obtained an in-principle approval for one.
For users looking to buy crypto using fiat (i.e. domestic or foreign currency), such as USD or SGD,…