I’ve been receiving queries on investing in Crypto and DeFi recently, probably thanks to my recent portfolio review and my lessons learnt from DeFi articles.. I decided to save a lot of my time explaining stuff to people individually by penning down the core basics for you guys. Do let me know if anything’s unclear.
Risk Warning: Crypto is a giant minefield and dangerous AF. Do not read further if you are not willing to take on the numerous risks in Crypto.
Below is a overall diagram of the typical fund flows necessary to invest in crypto.
Depending on your preferred path / coins you wish to invest in, you will need to set up certain accounts / buy certain stuff. I broadly classify them into 2 routes:
- Using centralised exchanges (CEXs) / custodial services
- Using decentralised exchanges (DEXs) / non-custodial services
Each route has its advantages and disadvantages. I obviously prefer the DEX route. I’ll explain why in a while.
Investing using CEXs / Custodial services
Most beginners should be comfortable with investing with CEXs and custodial services as the experience is similar to using online banking / investing platforms.
What you will need
Multi-currency Bank Account
This is like duh. You need a way to store, send and receive your fiat currency to crypto exchanges. You should at least have a USD and SGD account as most overseas exchanges accept USD deposits.
I’m personally using my DBS Multiplier account to send and receive USD as DBS doesn’t charge when I TT USD to my tokenisers. Any USD account will do here. If you guys have better options, feel free to suggest them in the comments.
Fiat-to-Crypto Exchange Account
Fiat-to-Crypto Exchanges are basically exchanges that accept fiat aka cash deposits to exchange for crypto. In Singapore, the easiest way to buy common crypto like BTC and ETH is using Binance SG and Coinhako.
Do note that Singapore has crippling limits on the amount of money you can invest in crypto (anything less than $30k per annum is fine) using these methods.
To use these services, you also need to set up an Xfers account. The fund flow here is to send SGD to Xfers, which Binance SG is linked to and uses for crypto purchases.
An alternative approach is to use tokenisers like Circle and Paxos to exchange fiat for stablecoins. Stablecoins are essentially coins that are pegged to the price of a certain currency. Most stablecoins peg themselves to 1 USD per token.
The benefit of using this approach is due to larger available fiat limits.
I personally use Circle to mint USDC. The fund flow here is to send USD to Circle / Paxos, where you will exchange 1 USD to 1 USDC / PAX. From here, you can transfer these stablecoins out to crypto exchanges to exchange for the crypto you wish to invest in.
Crypto-to-Crypto Exchange Account
Crypto-to-Crypto exchanges are needed for more obscure or uncommon coins. This is because Fiat-to-Crypto exchanges tend to only offer common coins.
As such, if you wish to invest in these coins, you need to transfer your coins from Fiat-to-Crypto exchanges / tokenisers to crypto-to-crypto exchanges to be exchanged for the specific coins you wish to buy.
Currently, the only CEX i use a lot of is Binance.com. Do note that Binance SG and Binance.com are separate platforms and you need to set up 2 accounts.
Binance.com has a lot of coin options at the moment. If they dont offer the coin you are looking for, look for the exchange with the trading pair you’re looking for and set up an account.
Investing using DEXs
Investing using DEXs is more advanced and can be more complicated than investing using CEXs as the UI for DEXs are sometimes not as intuitive. Recommended for crypto investors willing to put in the work to learn.
Things you need
A lot of the stuff you need for CEXs are still relevant when investing using DEXs. The main differences are:
- you need to get a personal wallet, which is the main place you hold your crypto, instead of letting CEXs have custody of them.
- you use CEXs mainly for cross chain swaps. This is because currently there are few cross chain bridges in DeFi. Once trades are complete, you withdraw and hold your crypto in your wallet.
- your main focus is to interact with DeFi smart contracts to trade and invest.
There are 2 types of crypto wallets – Software and Hardware Wallets.
Software wallets tend to have better support and user interfaces like mobile apps. The key weakness of software wallets is that your crypto is held on a device that can be hacked or lost like a computer or mobile device.
This is why hardware wallets are the gold standard for security and why you should get one if you intend to invest large sums (>$5k) in crypto.
Other useful things to have
There are a few useful quality of life or security measures you can get for yourself.
- Password Manager – Password managers are useful to generate complex passwords to log into your CEXs. I personally use Dashlane.
- Brave Browser – Privacy browser to reduce exposure to ads and malware.
- Metamask – A Chrome / Brave extension to quickly and easily interact with DeFi smart contracts on Ethereum blockchain. It serves as a software wallet but also a convenient interface with your hardware wallet.
I will elaborate about DeFi in future posts.
Pros and Cons
There are pros and cons to using the various routes to invest in crypto
- Customer support – Can be useful if you mess up
- Easy to use – Using these platforms are similar to using your internet banking platforms
- Coin curation – You trust that some due diligence has been performed by the CEX before they decide to list a certain coin
- Custodial risk – As the crypto is held by the exchange, you are exposed to
the whims and fanciesthe policies set by the exchange. One day they may request more KYC on your account. Another they may disable your account due to “suspicious activity”. You may find difficulties in trying to withdraw your crypto.
Additionally, you have no visibility over whether an exchange actually has the crypto that they say you own on the platform. They may simply be trading IOUs on the back-end with no actually crypto backing it. This creates issues when you wish to withdraw the crypto.
This risk can be huge if you are using a less reputable exchange.
- Security risk – This is self explanatory in light of the various hacker attacks on various crypto exchanges over the years. Exchanges are prime targets for hackers and represent a security risk for your crypto.
- Custodial risk – As the crypto is held by the exchange, you are exposed to
- Direct ownership – You manage and own your crypto in your own wallet, no custodial risks involved.
- More secure – It is more secure to hold your crypto in hardware wallets that do not have internet connectivity.
- Exposure to DeFi – While CEXs have listed a lot of DeFi coins recently, simply trading them on an exchange does not give you the full suite of functionality provided by the various DeFi protocols.
- Complexity – You will need to self-manage your investments, navigate websites that may not be user friendly and avoid various pitfalls on your own with no customer support. Practical understanding of usage is important.
Why I choose the DEX route
To me, the pros vastly outweigh the cons. As someone willing to slowly research and learn how to play in this sandbox, having direct ownership and control over my crypto is way more important than ease of use. The DeFi space is where all the opportunities are anyway, so the DEX route made sense.
And there you have it, a complete summary of what you need to embark on crypto investing. Depending on your level of competency and willingness to put in the work to explore the cryptoverse, you will choose the various paths into starting your first crypto investment.
For most people, investing using CEX platforms is the easy and potentially safer way to go. However, given the (in my opinion) massive drawbacks of using CEXs, using the DEX route is the way to go.
If you’re willing to put in the work to understand the rapid innovation happening in the DeFi space like me, the DEX route is definitely a more rewarding way to invest in crypto.
Risk Warning: Crypto is a giant minefield and dangerous AF. This article is for informational purposes only and does not constitute financial advice. Please seek a financial advisor before deciding on whether you should invest in crypto as part of your portfolio.