In the world of cryptocurrencies, it can be difficult to separate fact from fiction. As Bitcoin and other digital currencies have grown exponentially over the past decade, so too have the myths about Bitcoin and the cryptocurrency industry in general. This is a frustrating situation for prospective investors trying to do their homework thoroughly, as all these misconceptions can make it very difficult to find accurate, impartial information on the benefits and risks of cryptocurrencies.
If you’re thinking about investing in cryptocurrencies, or even if you’re simply a curious observer interested in learning more about this new financial sector, read on for a look at the facts behind some of the most persistent cryptocurrency myths.
MYTH: Digital currencies are mainly used for illicit purposes.
One of the most pervasive myths about Bitcoin and other digital currencies is that they are mainly used for illicit-even criminal-activities rather than legitimate purposes. Certainly, it’s easy enough to assume that the anonymity and decentralization that cryptocurrencies offer (and, indeed, that are two of their most important elements) are primarily intended to appeal to people with questionable goals in mind. However, this is to overlook the fact that anonymous, decentralized financial transactions are valued and used just as much by law-abiding individuals, to say nothing of the fact that fiat currencies are also used for illicit purposes without having doubts cast on the integrity of the currency itself. In fact, it is the US dollar that is used the most around the world for money laundering purposes-not Bitcoin!
MYTH: Cryptocurrencies are a scam.
The possibility of fraud is always a risk, however slight, with just about any investment opportunity, and cryptocurrencies are no exception. However, this doesn’t mean that all digital cryptocurrencies are nothing more than a potential scam; it simply means that prospective investors should do their due diligence carefully and cautiously to sift out dubious investment opportunities from genuine ones. Again, the fact that fraud may be a risk with cryptocurrencies-just as it is in the traditional financial landscape-doesn’t render the entire industry fraudulent.
MYTH: Digital currencies are not environmentally friendly.
Many critics of digital currencies are quick to point out that cryptocurrencies (specifically, the mining operations that produce them) are bad for the environment. But the critical follow-up question to ask here is: relative to what?
It’s certainly true that the many, many mining rigs around the world require huge amounts of computing power, which, in turn, needs significant electricity input. However, the environmental impact differs depending on how the electricity in question is generated. Recent studies have shown that at least 39 percent of Bitcoin mining activities are powered by renewable energy. Perhaps it’s more accurate to say that the carbon footprint of cryptocurrencies is a challenge in need of a solution, just as it is for all kinds of entities, from FedEx to TikTok. Also, Bitcoin’s energy usage also makes it more secure, and energy consumption is not equivalent to carbon emissions. For example, one unit of hydro energy will have much less environmental impact than the same unit of coal powered energy.
MYTH: Bitcoin is losing its power.
As the original cryptocurrency in an industry that seems to be all about the next new thing, Bitcoin has faced rumors that it’s losing its dominance of the cryptocurrency sector for almost as long as it’s been around. However, this myth can be easily debunked by pointing out a few simple facts: Bitcoin still accounts for nearly half the total value of all cryptocurrencies in existence, and the thousands of digital currencies that emerged after Bitcoin did so with no obvious impact on Bitcoin’s price. Additionally, in just the past 6–12 months, various big-name entities have embraced and accepted Bitcoin, including large banks and brokerages, and notable hedge fund and other asset managers, and even famous CEOs (Elon Mush of Tesla) and sovereign governments (El Salvador). Other nations are expected to follow El Salvador’s lead.
MYTH: Cryptocurrencies will displace the dollar.
Many sources, from the Financial Times to the chief global strategist at Morgan Stanley, have suggested that Bitcoin could pose a significant threat to the supremacy of the US dollar. To understand why this is a misconception, even one held by experts, it’s helpful to look at what backs these two different currency types. Cryptocurrencies, on the one hand, are backed only by the faith people have in their value. The US dollar, on the other hand, is backed by the US government. Given that investors still trust the dollar, even when times are difficult, it seems truly unlikely that cryptocurrencies will seriously challenge the primacy of the US dollar as a store of value. It is more likely that a few leading cryptos will become stores of value themselves, or hedges against inflation akin to the more traditional dollar hedges such as gold and silver. In fact, many analysts expect Bitcoin prices to rise over time, due to a flow of money out the dollar and into Bitcoin, which has a strictly limited number of units, unlike the dollar, which is printed at increasingly alarming rates, with no real backing either.
MYTH: Cryptocurrencies are a temporary trend.
Interestingly, claims that cryptocurrencies will displace the US dollar exist alongside parallel claims that cryptocurrencies are nothing more than a fad that will fade away. As always, the truth lies somewhere in between these two opposing myths.
At the moment, it’s not yet clear whether specific cryptocurrencies will prove to be permanent investment vehicles, but there’s no doubt that digital currencies have brought transformative and irreversible changes to the financial landscape. As the technology matures and central banks and governments around the world conduct experiments with their own forms of official digital money, it seems clear enough that the underlying principles of cryptocurrencies are not going away any time soon. The blockchain technology that underpins cryptos is powerful and secure. Even if nations begin to issue their own digital currencies, there may be plenty of room for non-governmental cryptocurrencies to exist and prosper right alongside.
Originally published at http://robertryerson.com on August 10, 2021.