10 Common Misconceptions About Cryptocurrencies
Over the years, you have most likely heard of one of the following misleading or vague claims relating to the cryptocurrency space or distributed-ledger technology (DLT). Some of these hold water; others are mostly nonsensical. Let’s begin.
1) “Cryptocurrencies are a scam”/ “They are used by criminals”
Whilst the $14 billion lost from scams in the sector hit a new record in 2021, in relative terms, this only accounted for 0.15% of the total transaction volume in the sector in 2021, a drop from 0.62% the previous year.
Two things to consider here:
— Overall transaction volume in the crypto market more than quintupled 2020 levels to hit $15.8 trillion, a new record;
— Many crypto commentators and media sources that quote the illicit activity within this sector conveniently ignore money laundering and general clandestine activities around the globe; this is estimated to be between $800 billion and $2 trillion (between 2 and 5 % of global GDP respectively). Even at the lower end of this range, it dwarfs the $14-billion sum roughly 57-fold.
I admit the presence of notable crypto Ponzi schemes such as OneCoin, BitConnect and others have tarnished the space, but it is ignorant to disregard several scams that exist outside of the cryptocurrency space. Most* industries have both good and dodgy operators, let’s not forget that.
*Of course, there are also certain sectors that are just downright evil.
Despite the claims that crypto is used for illegal activity, it is often greatly exaggerated.
2) “Blockchain is great, Bitcoin is bad”
Much of the negative sentiment surrounding Bitcoin appears to stem from scams, horror stories of people losing thousands of BTC due to carelessness, people being held ransom and forced to promote a crypto to regain access to an account, etc. However, besides failing to acknowledge the information in point 1, crypto critics also disregard the fact that Bitcoin (and in later years, other cryptocurrencies) have generated immense wealth for both ordinary people and long-term entrepreneurs, such as the Winklevoss Twins, Michael Saylor and Mike Novogratz.
To the defence of said sceptics, the overwhelming amount of wealth various millionaires and billionaires have obtained from bull markets has also rapidly dwindled in times of bear markets that have followed. Nonetheless, the overall asset class still shown overall growth, eclipsing $2.5 trillion in circulating market cap last November.
The “Bitcoin = bad, blockchain = good” claim is very misleading and superficial. Bitcoin is an example of a permissionless (public) blockchain that offers transparency, allowing anyone to run a node and contribute to the network, whereas permissioned (private) blockchains also exist; the latter being exclusive and often favoured by major, centralised entities such as corporations. Each system has its purpose for specific applications: a corporation would be unlikely to relinquish control of its blockchain network, potentially disseminating sensitive information to competitors. On the other hand, the permissionless nature of Bitcoin, Ethereum, Cardano and other major blockchains provides a welcome alternative to historically centralised processes in our society, particularly in regards to payments.
3) “It cannot be used for everyday purchases”
Several major companies across the world accept Bitcoin and/or another crypto as a form of payment. One entity in particular that appears to be embracing these digital assets is PayPal, which, at present, is permitting its clients to buy, sell, hold and convert Bitcoin, Ethereum, Litecoin and Bitcoin Cash. As of August 2022, this service is available in the USA and the UK, but in due course, I expect this to expand across continental Europe, to Canada, parts of Asia and then other regions worldwide.
It is significantly easier and cheaper to send several million dollars’ worth of BTC, ADA, XRP (and eventually ETH, as fees still remain relatively high) as opposed to transacting in fiat currencies. Moreover, cryptocurrencies and DLT in general has improved since Bitcoin and crypto first garnered widespread attention back in 2017.
Factoring in all of this, coupled with the expectation that an increasing number of merchants spanning multiple facets of commerce will accept at least one type of cryptocurrency, I have to call BS on this one, in many ways. Strictly speaking, this argument is partially true, but is sounding more ridiculous as more companies accept crypto payments over time.
4) “Crypto is controlled by governments”
This is misleading in two major ways:
— Regulations to ban or restrict trading, mining, staking of such assets with a country’s borders does not mean the country possess control of a given blockchain or cryptocurrency. This is (perhaps) one major reason why the Chinese Government detests Bitcoin, let alone all related decentralised assets. Remember, via DLT, multiple sets of records are disseminated across various computers around the world in real-time; there is no central server to compromise or turn off to halt a blockchain.
— People have incorrectly referred to central bank digital currencies (CBDCs) as being another form of cryptocurrency, using the two terms interchangeably. In reality, cryptocurrencies that are actually decentralised (e.g., Bitcoin, Ethereum, Cardano) are not issued or controlled by any state (or similar body) unlike the former.
5) “It has no intrinsic value”
There is a plethora of articles fiercely arguing both in favour of and against the intrinsic value claim for Bitcoin, let alone cryptocurrencies in all. More appear to be supporting the ‘no intrinsic value’ argument, but some of these commentators also doubt that fiat currencies have intrinsic value as well.
Hence, assuming that this were the case, this begs the question, does this whole argument about intrinsic value really matter when it comes to Bitcoin/crypto in general?
I would argue yes and no, but predominantly no, because the inflation rates across multiple nations (especially the USD in recent times; more in that in point 6) instils little confidence in the numerous fiat currencies used in these places. Gold, whilst a useful and valuable metal for its chemical properties, is neither portable or useful for conventional transactions (let me get my pick as I chip off some fragments of gold from my ingot…). Much of its dollar value is derived from what we, as a society, collectively agree on to be its market value.
Money in general is a social construct (like much of the current economic arrangement), and having collective faith in the system, just like the trust people assign to the governments managing their national currency. I have never heard an individual tell me that they have contemplated the presence or absence of intrinsic value with regular money; very few people actually care about this notion.
2022 inflation rates so far across multiple countries worldwide. Collectively, this represents more than half of the global population at present.
So how do people trust Bitcoin? Simple. Based on the security, consistency and transparency of the network, due to the blockchain technology underpinning the asset. Its scarcity, portability, decentralised nature, utility as a store of wealth and for transactions (slow at present for the latter, but just wait until the lightning network or similar layer-2 solution is fully deployed) offers a lot of confident in this novel system versus the status quo.
6) “Bitcoin/cryptocurrency is just a fad”
Now that many crypto haters have not succeeded in decimating the industry (well, not yet at least, if it were to occur), some of them will insist that crypto has no meaningful purpose and will not serve much of a role in our society.
It is rather insulting to make this claim, implying that the current system functions well overall. When there are 1.4 billion people still excluded from the conventional financial system (down from 1.7 billion in 2017) including in developed countries such as the United States (7.1 million individuals in 2019), in tandem with the dwindling value of the dollar in recent years (and decades), as depicted in the infographic below.
It is rather rich to criticise Bitcoin when the current system when the USD has significantly devalued in recent decades; over $3 trillion of money printing 2020 alone does not help the situation.
On top of this, crypto plays a priceless role in helping people convert their local currencies, some of which have been rendered useless due to hyperinflation, such as in Venezuela, Argentina, Zimbabwe and other places. Coupled with El Salvador and the Central African Republic being the first two nations in the world to adopt Bitcoin as form of legal tender, and more that could potentially follow suit, I do not see crypto as some superficial fad.
7) “Bitcoin is dead”
FFS, here we go again.
If cats have nine lives, then they have nothing on Bitcoin, which is apparently died and come back to life over 460 times (and counting). Multiple media outlets have covered this matter, in addition to a useful website titled Bitcoin is Dead that has aggregated over 380 articles reporting on this topic. With all due respect, there is always the possibility that Bitcoin could be replaced with superior crypto assets in the future and fade into obscurity, but this still remains to be seen.
Yes, there have been major corrections. The price is down considerably since its all-time high (ATH) of about $69,000 back in November 2021. However, its fundamentals are strong, and for perspective, it is still beyond its 2017 ATH of just under $20,000 reached in December.
As per obituaries for all crypto assets combined, well, I guess people have lost count…
8) “Bitcoin/crypto is bad for the environment”
This has to do with Proof-of-Work (PoW) cryptos that derive most of their energy from non-renewable sources of energy, particularly in countries with a lack of environmental standards for their power station.
This assumption disregards the increasing emphasis placed on aiming to reduce the carbon emissions of the overall Bitcoin network (particularly for mining operations) without compromising the blockchain’s security, which relates to its hash rate.
Besides this, thinking of the general crypto market most (relatively) newer cryptos such as ADA, BNB, LINK, DOT adopt the more energy-efficient proof-of-stake consensus mechanism for their respective blockchains. On the other hand, older crypto assets such as BTC, LTC, DOGE and XMR and ETH utilise PoW, which involves mining.
In regards to the latter, Ethereum (ETH) is in the process of fully migrating from PoW to PoS in the phenomenon known as The Merge. It is anticipated to reduce the system’s energy consumption by an enormous amount, ~99.95%.
The abovementioned transition towards cleaner energy sources, shift from mining to staking for Ethereum, and propensity towards supporting more staking-related cryptos still seems to be ignored by hardcore environmentalists. None of these recent publications or sites makes reference to PoS cryptos, The Merge, decarbonising Bitcoin, or, above all, the energy requirements of the legacy financial system, both with managing fiat and gold as a currency and store-of-value respectively.
Despite mixed figures relating to energy usage in these sources, and genuine concerns about environmental impacts associated with this industry, it is naïve to simply ignore such the eco-footprint of the current financial system, and what has been done so far (or being proposed) to reduce CO2-e emissions in the crypto sphere.
Specifically with Bitcoin, concerns about its environmental emission are warranted and more needs to be done to curb carbon emissions associated with the foundation crypto, as addressed by this Time piece. However, the issue I have with blanket claims about crypto being bad for the environment is that it disregards what work is being done to address these issues, and paints all blockchains and assets with the same brush.
There is more I could cover here, though I will address this in a designated article about this topic down the track.
9) “It is easy to lose funds”/ “Exchanges can get hacked” / “Crypto wallets are unsafe”
Valid arguments raised in reference to exchanges, but this can be readily overcome.
It is important to make the distinction between custodial and non-custodial wallets. For the former, you are relying on an exchange or similar wallet provider to manage your funds and keep them safe. However, you are at the mercy of the exchange’s safety mechanisms and competence of its security department (or lack thereof) to safeguard your funds from hackers, 24/7.
Whilst there are exchanges that are relatively safer than others, most reputable crypto commentators would advocate for a non-custodial wallet. These come in multiple forms, but the most common ones include:
— using a hardware wallet (such as a physical Ledger or Trezor device);
— opting for an encrypted keystore file to save onto a device;
— a paper wallet (very archaic nowadays and not the most efficient, but some people still use these).
These allow you to have full control of the private keys to then access your crypto assets, anytime, anywhere. Mind you, with the power of having full autonomy over your funds comes great responsibility. You need to keep your wallet and recovery seed secure, otherwise your assets could be permanently lost.
In regards to exchanges getting hacked, Ledger has provided a timeline of some of the most renown exchange hacks over the years.
Check out this article for general and crypto safety tips to stay safe when online.
10) Too much focus placed on Bitcoin, Ethereum (and until recently, ‘Ripple’)
I have left this one towards the end as it is not really a misconception. Rather, it is a reflection of the lack of understanding and disinterest most of society has towards this asset class, let alone DLT. A portion of this also relates to outdated knowledge people have of digital assets (“How is that Ripple crypto going nowadays?”).
An online survey of over 3,800 Germans found that, whilst most of them were ‘aware’ of this asset class and concept, approximately 9% of them owned such digital assets at the time, with a similar percentage having previous owned crypto. Out of this population minority, I question how many of them had a sufficient understanding of these digital assets, their underlying technology, use cases, collaborations, etc.
Most people in the general public seem to have an understanding (rudimentary at best) of only Bitcoin, Ethereum, and in recent years, an alternative to these two in the form of ‘Ripple’, which is actually XRP.
I acknowledge that BTC and ETH combined, have represented ≥60% of the circulating market cap of the entire space for several years now. Notwithstanding this, it does a disservice to the entire space by disregarding other digital assets in this realm, particularly many reputable ones in the top-50 (BNB, ADA, LINK, DOT, etc.).
In summary, the crypto industry will have its fair share of critics for years and decades to come. As was the case with the early days of the Internet and social media, the media will play some role in influencing the rate of adoption for blockchain technology.
Whilst it remains to be seen whether or not cryptocurrencies and DLT will have a profound and sustained influence in multiple facets of society, I believe it is a matter of when, not if, especially with the number of industries this technology is anticipated to disrupt in the coming years.
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