Central myths about cryptocurrencies
Investment and technology news has been flooded with articles about cryptocurrencies over the past few years. Every time Bitcoin and altcoins experience a sharp rise or drop in price, mainstream media roll out headlines proclaiming either the death of cryptocurrencies or a bright future in finance. Such drama, as well as the narrative of some articles, has formed numerous myths about cryptocurrencies and how they are used. Besides, the crypto market is nascent and some aspects may be misunderstood by beginners that also contributes to the spread of various misconceptions.
Myths can be confusing and become a deterrent for many people. But before taking some statements on faith, you need to make sure that they are relevant. If you’re considering investing in cryptocurrencies, then you may want to make sure you are aware of any potential myths.
Cryptocurrencies are a bubble and have no value
Perhaps, this is one of the most popular myths about cryptocurrencies since their value is not backed by a commodity like gold or fiat currency like USD (apart from stablecoins). Because of this, some people believe that cryptocurrencies are only applicable for speculation and are prone to constant market bubbles appearing.
This statement is only partially true. While Bitcoin and altcoins are sometimes bought for speculative purposes, this does not mean that cryptocurrencies themselves are a bubble. Like other assets, the crypto prices are a reflection of the supply and demand ratio. On the supply side, cryptocurrencies rely on maths (you know, a thing that has been around for longer than most countries exist). For example, Bitcoin has a clear algorithm for reaching the maximum supply that makes the asset increasingly scarce. So if demand remains the same, only this aspect could already cause a rise in prices.
But the demand for cryptocurrencies is not stable, causing price fluctuations. The crypto market does not stand still and is constantly evolving, making it more accessible to institutional and retail investors that increase potential demand. For instance, the crypto boom in 2021 is associated with a few factors: increased interest in cryptocurrencies from large investors, the DeFi sector growth, Bitcoin halving, lowering the purchasing power of the USD due to pandemic, etc.
Crypto market development is one of the reasons why numerous cryptocurrencies have been recovering even after a sharp drop in prices and a deep correction. Bubbles can form in any market — dotcoms in 2000-2001, real estate in 2007-2008. But if the market has repeatedly overcome such periods and showed even greater performance, then this already indicates its viability. The crypto market has some peculiarities of young markets — small liquidity, high price volatility — but as demand and liquidity grow, prices may stabilize.
Cryptocurrencies are used only for illegal activities
Cryptocurrencies offer a certain amount of anonymity and because of that, they gained a reputation for being used for illegal activities. This anonymity stems from blockchain which is ironically the same technology that ensures transparency of all transactions. So anonymity in the blockchain is not absolute. There are some cryptocurrencies designed for anonymous transactions but they make up less than 1% of the crypto market capitalization.
Although there were records of cryptocurrencies being used in the dark web in the early days, they were still used much less frequently than cash. According to various researches, only 0.34–0.5% of crypto transactions are related to illegal activities.
While these analyses are not flawless, it is still a clear indicator that the majority of crypto buyers use them for legitimate purposes. In turn, a lot of crypto exchanges adhere to AML/KYC policies in order to monitor transactions and coins that have been involved in illegal activities and prevent money laundering.
Cryptocurrencies are too bad for the environment
Such narrative is mainly applied to Bitcoin and Ethereum that use the Proof-of-Work algorithm for their operation. This algorithm implies mining which in the current scale of Bitcoin and Ethereum networks requires a large amount of computing power. It makes the process energy-intensive but determining the environmental impact of cryptocurrencies would be problematic.
First, many cryptocurrencies use more energy-efficient consensus algorithms like Proof-of-Stake instead of Proof-of-Work. Secondly, the Bitcoin miners, which consume the most energy, often use renewable energy sources. According to various sources, renewables account for 40-70% of all Bitcoin mining. That is why the Cambridge researchers concluded that the environmental impact of Bitcoin is currently negligible.
Sustainable energy sources are getting cheaper every year and it benefits Bitcoin miners who are constantly striving to increase profits by reducing electricity costs. Also, demand from miners may drive further renewables innovations. In the case of Ethereum, there won’t be any miners soon because the network is switching to the Proof-of-Stake algorithm.
Cryptocurrencies are only for tech-savvy people
Many potential investors are intimidated by the technological nature of cryptocurrencies. All these concepts of blockchain, mining, fork, algorithm, consensus seem to be something incredibly complex and incomprehensible. In reality, it is enough to have basic knowledge of cryptocurrency if you want to buy and use it.
Let’s take a look at bank cards as an example. Do you know how data is read from a bank card when interacting with the payment terminal? Or how does magnetic stripe or NFC work? Probably not. And it is unlikely that the lack of this knowledge prevents you from paying with your card.
The same applies to cryptocurrencies. You can buy Bitcoin or Bitcoin Cash (BCH) with a card in a matter of seconds, and then store it in your wallet or pay for something. To send transactions, you need to remember the basic principle: enter the destination address, commission, and wait for transaction confirmation on the blockchain (for some cryptos there can be some extra information required).
Anyone can buy a cryptocurrency — just determine the goal and understand the potential risks and benefits to make a well-informed decision about what to buy.
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