02 Nov 12 Things You Should to Know Before Buying Bitcoin
The crypto economy, defined by Coinbase (NASDAQ: COIN), is an open financial system built upon crypto.
Amid the rapid innovation, it can be hard to keep up with the pace of changes.
Yet, several notable companies have already made their first moves when it comes to buying cryptocurrencies.
Electric car maker, Tesla (NASDAQ: TSLA), for instance, invested US$1.5 billion in bitcoin in the first quarter of this year.
Not to be outdone, electronic payment provider Square (NYSE: SQ) has also poured a total of US$230 million into bitcoin starting from late last year.
Visa (NYSE: V), on the other hand, paid US$150,000 for a “CryptoPunk” non-fungible token (NTF) avatar.
As you can tell, the new terms created to define a growing industry are dizzying.
Thankfully, Coinbase published a useful glossary of crypto economy terms that are typically used in the space as part of its public filings.
So, before you consider some cryptocurrencies for your portfolio, you may want to familiarise yourself with the terms being used, and what they mean.
As you can tell from the Visa example, cryptocurrencies are not the only thing you can buy in the crypto economy.
The broader term to use is “crypto assets”, which includes cryptocurrencies, non-fungible tokens, stablecoins, and security tokens.
The terms below are taken from Coinbase’s S1 filing which you can find here.
Crypto asset (or ‘token’): Any digital asset built using blockchain technology, including cryptocurrencies, stablecoins, and security tokens.
Stablecoin: Crypto assets designed to minimize price volatility. A stablecoin is designed to track the price of an underlying asset such as fiat money or an exchange-traded commodity (such as precious metals or industrial metals). Stablecoins can be backed by fiat money or other crypto assets.
Security token: A crypto asset that is a security. This includes digital forms of traditional equity or fixed income securities, or may be assets deemed to be a security based on their characterization as an investment contract or note.
Non-fungible tokens (NTFs): An NFT is a crypto asset where each token is unique. An NFT can be used to authenticate ownership of digital assets such as artwork, music recordings, and virtual objects such as pets.
Interestingly, Monetary Authority of Singapore (MAS) Chairman Tharman Shanmugaratnam said that there may be a role for crypto in the future, honing in on the utility of stablecoins as a means for cross-border money transfers.
And then, of course, there are bitcoins, which sit on Tesla and Square’s balance sheet.
Types of cryptocurrencies
Bitcoin is the first cryptocurrency to be invented.
Today, the two most popular crypto currencies are bitcoin and ethereum. Here’s how Coinbase describes these popular terms:
Bitcoin: The first system of global, decentralized, scarce, digital money as initially introduced in a white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto.
Cryptocurrency: Bitcoin and alternative coins, or ‘altcoins’, launched after the success of Bitcoin. This category of crypto asset is designed to work as a medium of exchange, store of value, or to power applications and excludes security tokens.
Ethereum: A decentralized global computing platform that supports smart contract transactions and peer-to-peer applications, or “Ether,” the native crypto assets on the Ethereum network.
For context, the two cryptocurrencies accounted for 55% of the trading volume at Coinbase for the first six months of the year.
Storing your digital assets
Storing your cryptocurrencies and crypto assets safely is a challenge.
There is a unique address where crypto assets can be sent or stored. To access that address, you will have a private key which is akin to a bank account password.
Address: An alphanumeric reference to where crypto assets can be sent or stored.
For instance, the crypto asset address for Satoshi Nakamoto, the original author of Bitcoin’s white paper, is 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.
Private key: Each public address has a corresponding private key that is cryptographically generated. A private key allows the recipient to access any funds belonging to the address, similar to a bank account password.
Crypto assets are typically stored in a wallet, which can be hardware or software. Notably, there is a distinction made between wallets that are connected to the internet (hot) and those that are not (cold storage).
Wallet: A place to store public and private keys for crypto assets. Wallets are typically software, hardware, or paper-based.
Hot wallet: A wallet that is connected to the internet, enabling it to broadcast transactions.
Cold storage: The storage of private keys in any fashion that is disconnected from the internet. Common cold storage examples include offline computers, USB drives, or paper records.
Source: Coinbase’s website
For its part, Coinbase stores 98% of its customer funds offline (“cold storage”).
The private keys to the funds are split, encrypted, and distributed geographically.
Get Smart: A rapid rise and volatility
On the local front, DBS Group (SGX: D05) has received approval from MAS to provide digital payment token (DPT) services earlier this month.
Singapore’s largest bank had earlier signalled its intent to launch a digital exchange that will feature the four most established cryptocurrencies, namely bitcoin, ethereum, bitcoin cash and XRP (Ripple).
DBS will not be alone in its efforts.
Singapore Exchange Limited (SGX: S68), or SGX, will be taking up a 10% stake in DBS’ new digital exchange.
Elsewhere, SGX also partnered with cryptocurrency market data provider CryptoCompare to launch crypto indices.
As Singapore lays the groundwork to become Asia’s crypto hub, MAS is keeping an open mind on the use of cryptocurrencies.
However, MAS chairman Tharman also said that these digital assets will need to be regulated and are not ready to replace legal tender. He warned that the cryptocurrencies remain volatile and speculative in nature.
Disclosure: Chin Hui Leong owns shares of Coinbase, Singapore Exchange, and DBS Group.