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The Monetary Authority of Singapore (MAS) requires us to provide this risk warning to you as a customer of a digital payment token (DPT) service provider.
Before you pay your DPT service provider any money or DPT, you should be aware of the following.
1. Whether your DPT service provider is licensed by MAS to provide DPT services or not, please note that this does not mean you will be able to recover all the money or DPTs you paid to your DPT service provider if your DPT service provider business fails.
2. You should not transact in the DPT if you are not familiar with this DPT. Transacting in DPTs may not be suitable for you if you are not familiar with the technology that DPT services are provided.
3. You should be aware that the value of DPTs may fluctuate greatly. You should buy DPTs only if you are prepared to accept the risk of losing all of the money you put into such tokens.
Before you dive into how Bitcoins work, you need to understand that Satoshi Nakamoto's Bitcoin white paper was published on on 31 October 2008, a month after the Lehman Brothers collapsed. The birth of Bitcoin has largely been considered an anti-establishment reaction by Nakamoto. He wrote in his white paper that financial institutions suffer from trust issues (banks have all the power to close your savings account, or may lose your money and collapse anytime). So, isn't it better if a group of randomised people came together to regulate our money in a peer-to-peer network?
What is Bitcoin exactly and what does it look like? You may have seen Bitcoin represented by a gold coin before... but it really isn't a coin. Just like the fiat money in your bank account that exists as a string of digital numbers (e.g. $66,974.77), Bitcoin is also just a series of alphabets and digits (e.g. 000000000019 d6689c085ae 165831e934 ff763ae 46a2a6c172 b3f1b6 0a8ce26f - without the spaces).
Remember BitTorrent's file sharing system? That's pretty similar to how Bitcoin works - only instead of sharing movies and mp3 songs, the Bitcoin file sharing community is sharing a public ledger (you could think of it as a giant excel sheet of all Bitcoin transactions). Yes, everyone who's connected to the network can see and verify transactions. That helps the community to prevent any counterfeiting or double spending (which is traditionally done by staff in banks). Benefits of a peer-to-peer network include transparency and security since its decentralised.
So, what's the Bitcoin blockchain? You could think of the blockchain as the technology behind Bitcoin's peer-to-peer system. The blockchain allows back-end miners all around the globe to send data to each other, verifying Bitcoin buy-sell transactions that are happening in real time (e.g. Elon Musk just bought some Bitcoins. The transaction turns up on the ledger. Miners around the globe work to verify that this transaction is legitimate. Legit? They add it to the blockchain formally.
Bitcoin mining is commonly understood as the creation or minting of new bitcoins. However, a more accurate explanation would be this - bitcoin mining is a transaction verification process. Mining helps to verify all the real-time bitcoin buy, sell, and transfer transactions and confirm that they are legitimate. Once the transactions have been verified (or what is commonly known as "mined"), the transaction will be added to the blockchain (the public transaction statement or records of all bitcoin transactions). Here's a brief overview how Bitcoin mining happens:
Before they can start mining, Bitcoin miners first need to get their hands on specific hardware called ASIC (application-specific integrated circuit) miners that were built to "mine" bitcoins. These hardwares basically have higher hash rate - meaning they can generate more guesses per second to complete the equation that has been given to miners based on the transaction's data. You could technically complete this equation by hand on a piece of paper, but these ASIC miners can generate these guesses way faster.
Once the equation has been completed by the fastest miner (usually bitcoin farms with the most ASIC miners), the miner will receive two payments - a reward in bitcoins, and fiat currency for transaction fees. How much reward do miners get? The reward decreases (halves) over time - in 2009, it was 50 BTC, then 25 BTC, 12.5 BTC, and now it is 6.25 BTC. As a result, the question of profitability hangs over the bitcoin mining industry.
The Bitcoin system operates on the SHA-256 algorithm created by the United States' National Security Agency in 2001. A hash serves to scramble any transaction information (input) into a standardised format (output) so that it can be indexed in a public ledger, for instance. Sounds like encryption? Yes, it is similar. However, encrypted information can be decrypted but hashed data can't be reversed (great for things like your digital signature so they can't be forged).
One of the key benefits of Bitcoin is its decentralised network and the security it offers. That means that Bitcoin's ledger (entire statement of transactions) is not controlled by a company or one person. Instead, numerous people around the globe are constantly sharing and working on Bitcoin's public ledger. As of Nov 2021, there are 12,419 nodes (a connected computer) on the Bitcoin network.
When Satoshi Nakamoto published the Bitcoin whitepaper in 2008, Nakamoto specifically referenced the trust issues that consumers have when it comes to financial institutions. Later, in 2009, Nakamoto left a similar message in the genesis block, "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." True to these messages, Bitcoin remains decentralised, out of any government's regulations or reach – removing any chances of authorities freezing your accounts.
Another key advantage of Bitcoin is the anonymity it offers – recipients of merchants will not be privy to your personal information when you make a transaction with them. Instead of names or personal IDs, users are identified by public keys. Of course, if you were to leak your public key somewhere, you can be easily identified that way as well.
Even though Bitcoin was designed to be a payment system, it has never been widely accepted or adopted by global online merchants in its decade-long history. Bitcoin's slow adoption rate is largely attributed to its volatile value and other barriers of entry such as the complexity of Bitcoin itself.
The decentralised nature of Bitcoin has it that governments and financial authorities such as banks can't regulate or control the transactions that happen. However, the lack of any institutional regulation meant that Bitcoin earned itself a bad reputation for its involvement in illicit activities. Also, many Bitcoin and cryptocurrency users have, in recent years, had their crypto wallets hacked and emptied – but neither can they can't lodge police reports nor can the authorities do anything much about it since the crypto space is not regulated.
A major disadvantage of Bitcoin is its extremely volatile value. Take for example, in the dramatic months of April and May 2021, the price of Bitcoin hit a record high of US$64,829 before plunging to a low of US$30,000 - fuelled by Tesla and Elon Musk's numerous courting, and China's crackdown on cryptocurrencies.
Bitcoin's day-to-day prices are notoriously volatile. The months of April and May 2021, for instance, saw Bitcoin prices break ceilings - only to plunge barely a month later. Why? Many attribute the volatility to cryptocurrency's young market, relatively smaller market cap, and inexperienced investors who are still grappling with the concept of crypto.
Although Bitcoin's decentralised blockchain technology deems security as one of its key features, the risk of an orchestrated hack by a majority group of Bitcoin miners could still theoretically happen. Dubbed the '51% attack', a hack could be planned between 51% of the miners to invalidate the Bitcoin protocol's transactions and security. In fact, 51% attacks have happened to Bitcoin's forks such as Bitcoin SV and Bitcoin Gold.
Cryptocurrencies remain an unregulated grey area for most countries, such as the US and Singapore. Legal implications such as taxes, cryptocurrency payments, and even the use of unlicensed online cryptocurrency exchanges may arise - such as Singapore's move to ban Binance (US)'s activities in Singapore Dollars (SGD) from 26 October 2021.
The safest place to store the bitcoins you've purchased is a hardware wallet - a literal thumb drive or external hard disk-like wallet where you can transfer your bitcoins' private keys. A hardware wallet is completely offline, meaning all online hacking risks would have been removed.
In your search for a bitcoin wallet, you will definitely come across the term "cold storage". Cold storage refers to wallets that are not connected to the digital world, aka offline. So, yes, hardware wallets are cold storages. Otherwise, there are some companies that offer cold storage options, such as Gemini.
A hot wallet basically refers to any crypto wallets that are online. Your wallets on Binance Singapore, Coinhako, Gemini, or even Crypto.com are by default hot wallets. Hot wallets give you the liquidity and option to instantly trade your cryptocurrencies. Likewise, all the bitcoins that you store in your hot wallets are at risk of being hacked and taken from you. Do remember that all bitcoin transactions are irreversible - so you will never get them back the moment you've been hacked.