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Cryptocurrency 101: Digital currencies soar in value, but subject to wild price swings

Digital currencies like bitcoin have soared in value but they are subject to wild price swings, so investors should prepare for a rocky ride

Digital currencies like the bitcoin were once the preserve of programmers, geeks and digitally-savvy traders but they have made it to the mainstream, grabbing headlines for their soaring prices, flash crashes and more.

The numbers around these currencies can be baffling to most of us. Take a Bloomberg report last week about a cryptocurrency trader - who is known only by a string of numbers - whose US$55 million (S$75 million) on paper in the digi-currency ethereum became US$283 million in just over a month, a 413 per cent profit.

Wild swings like this are - and will be - the norm for cryptocurrencies, say experts, so anyone investing in them is in for a rocky ride.

But that in turn will attract risk-takers, so it is best to get a handle on just what this quirky corner of the finance world is all about.

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CRYPTOCURRENCY BASICS

"Cryptocurrency is a form of digital currency that uses cryptography to allow for the peer-to-peer exchange of value, without a third party such as a bank or a remittance company," notes Singapore University of Social Sciences (SUSS) Professor David Lee, whose areas of interest include digital currency and blockchain technology.


ST ILLUSTRATION: JASTER NGUI

He notes that Satoshi Nakamoto - either an actual programmer or a group of them using the name - invented the bitcoin so people can transfer value or currency among peers who do not necessarily trust one another, using a public ledger that is transparent to everyone.

The Financial Times explains: "When people invest in the bitcoin, the money is going into the underlying technology - known as blockchain - not the payment instrument itself."

It refers to the blockchain as "essentially a giant record book of all bitcoin transactions; it is to the bitcoin what the Internet is to e-mail".

And it is described as a decentralised network where every bitcoin transfer is verified, processed and written down, and comes with potential "to make economic interactions cheaper, faster and more secure".

CRYPTOCURRENCY TYPES

INVESTING IN UNDERLYING TECH

When people invest in the bitcoin, the money is going into the underlying technology - known as blockchain - not the payment instrument itself.

THE FINANCIAL TIMES, saying the blockchain is "essentially a giant record book of all bitcoin transactions".


ASTRONOMICAL RETURNS

To put things into perspective, an investor who had invested just US$1,000 back in 2010 could have cashed out nearly US$51 million today.

MR SACHIN MITTAL, head of telecom, media and technology research at DBS Group Research, on the bitcoin, the most famous, valuable and oldest cryptocurrency.

Mr Sachin Mittal, head of telecom, media and technology research at DBS Group Research, says the bitcoin is the most famous, valuable and oldest cryptocurrency, although there are around 800 others.

Mr Yusho Liu, co-founder of CoinHako, which helps people buy and sell cryptocurrencies, notes that almost 48 per cent of the global cryptocurrency value is held in bitcoin while ethereum holds about 40 per cent of the market share.

CRYPTOCURRENCY VALUES

Cryptocurrencies have come under the spotlight, with huge gains made by the bitcoin and ethereum, notes Mr Mittal.

The value of the bitcoin shot up about 155 per cent within the first six months of this year. A bitcoin was worth US$2,539 on July 10 this year, compared with five US cents in July 2010. "To put things into perspective, an investor who had invested just US$1,000 back in 2010 could have cashed out nearly US$51 million today," notes Mr Mittal.

Ethereum has risen 2,775 per cent, from US$8.39 to US$241 since the start of this year.

Many argue that the bitcoin and other cryptocurrencies have no intrinsic value and may be a perfect vehicle for forming a bubble, Prof Lee adds.

"To put it into perspective, with a US$40 billion market capitalisation for the bitcoin and US$100 billion for total cryptocurrency, this investible class is minute, compared with US$66.8 trillion for listed equity and US$48.2 trillion for gold."

However, he stresses: "Cryptocurrency is a very complex investment instrument. I would not advise anyone who has no knowledge of cryptocurrency to get involved at all.

"To start off, there are a lot of videos, books and papers written about the subject. One may also join Access - the Singapore Cryptocurrency and Blockchain Industry Association - to attend its talks and programmes to learn about cryptocurrency and the blockchain industry."

A version of this article appeared in the print edition of The Sunday Times on July 16, 2017, with the headline 'Cryptocurrency 101'. Print Edition | Subscribe