5 Myths About Cryptocurrencies
As with any new investment area, cryptocurrencies such as Bitcoin have prompted potential investors and analysts to raise many questions. In the past couple of years, digital currencies have experienced significant boosts in popularity; nonetheless, there are persistent untruths, myths, and rumours about the crypto space and specific coins and tokens in particular.
Despite existing for over a decade now, there remains a significant amount of disinformation, misinformation, and mythology surrounding digital assets. We take a look at these myths and see if there is any truth to them.
Digital Currencies Are Mainly Used for Illicit Activities
One of the oldest and most pervasive myths about digital currency is that it is primarily used for criminal purposes, easily avoiding detection from the authorities. This is partly based on misunderstanding; while it’s true that digital currencies can be used by those with nefarious intention, it still remains more transparent than some traditional financial systems and cash.
The confidentiality reputation of Bitcoin — the most famous cryptocurrency — is unrivalled, with all transactions recorded in an unforgeable public ledger: The blockchain. The anonymity crucial to most cryptocurrencies has given life to the myth that it is largely exploited by those engaging in dubious enterprises.
Criminals though, could quite easily use fiat currency for their activities instead, and more often do. Analysed research patterns of the flow of money on the Bitcoin network has revealed that while there was indeed a period where most Bitcoin activity was concentrated in black markets such as Silk Road, today illegal activity occupies only a mere fraction of the total flows.
It’s a false narrative. Behind the smoke and mirrors, a Chainalysis report found that criminal activity fell from 2.1% to just 0,34% of all cryptocurrency transaction volume from 2019 to 2020.
Digital Currencies Have No Value
Many sceptics believe that cryptocurrencies have no intrinsic value as they are not backed by a commodity such as gold. Yet, most fiat currencies are not backed by a commodity either. This idea exists that cryptocurrencies are a fad, and they will simply disappear, but this couldn’t be further from the truth. Cryptocurrencies do not need to be supported by a commodity to hold value.
Fait currency obtains value from being government-issued and relies entirely on agreements to enable individuals to exchange it for goods and services of a similar value. Its value is agreed upon by all parties involved.
Cryptocurrencies are essentially the same. Though the government does not issue them, there is an agreement in place between willing buyers and sellers. This creates demand and supply and allows it to be exchanged for value in the real world.
According to the principle of scarcity, when a commodity is limited in nature, its value will fluctuate with time due to supply and demand trends. Bitcoin falls into the same category as a commodity as a limited digital currency, with a production limit of only 21 million Bitcoin. Ethereum, the second-largest cryptocurrency, will soon follow suit in limiting its supply with its EIP 1559 update scheduled for July.
Digital Currencies Are Not Safe and Secure
Another misconception is that cryptocurrencies aren’t secure. Yes, there are crypto hungry hackers out there, and some major hacks have taken place, but these security flaws have mainly been exploited on exchanges and forked networks.
Blockchain technology by design is secure; the Bitcoin blockchain, for instance, is a tamper-proof network that is virtually unfeasible to hack. The use of hash functions to record every transaction and data on blockchain networks and broadcasting it to all network participants means it’s practically impossible to overwrite or manipulate the records.
Cryptocurrency advocates pinpoint the lack of a central point of failure as an added security advantage. In the case of hackers compromising certain users, the overall network will always remain secure. Blockchain’s security is attracting global attention, with even the U.S military looking into building a cutting-edge cybersecurity platform.
Companies can use three different encryption methods to mitigate security risks. These include symmetric encryption, asymmetric encryption and hashing.
Symmetric encryption is also known as private-key cryptography or a secret key algorithm. This requires the sender and receiver to have access to the same key. This method is most effective for closed systems, which are less vulnerable to third-party intrusion.
Asymmetric encryption, or a public-key cryptography, uses two mathematically linked encryption keys; one for encryption and the other for decryption.
The final method, Hashing, generates a distinctive signature of fixed length for a data set or message. Each message has its unique hash, making minor changes to the information easily trackable. Data encrypted with hashing cannot be decoded or reversed back into its original state. Therefore, hashing is used strictly as a method of verifying data.
There is Only One Huge Blockchain in Place and in Use
There is no one singular blockchain. There is, in fact, one blockchain for each cryptocurrency. Each cryptocurrency is coded differently and therefore has its own blockchain, which records transactions by adding a new ‘block’ of information specific to its ‘chain’ every 10 minutes.
However, blockchains also vary in nature based on their intended purpose and industry. Some are public, while others are private. They can also be open or closed-sourced.
Let’s give you an example: Bitcoin strives to be digital cash, whereas Ethereum allows developers to build peer-to-peer applications that don’t require intermediaries and operate on top of its blockchain, much like the internet. Their use cases are very different. Therefore, you can’t undertake a Bitcoin transaction on the Ethereum blockchain, as these different blockchains do not interact with one another. It would be like trying to pay for dinner in the US with British currency. The restaurant won’t be too impressed and will expect you to exchange your currency for settling the bill.
Governments Will Kill Bitcoin with Regulation
The truth is regulation could help increase the adoption of Bitcoin. The world remains divided about Bitcoin and cryptocurrencies’ classification. The implications of decentralisation spark many debates globally on how it could and should be regulated by governments.
It’s true that in Nigeria, India, Russia, and Belarus, Bitcoin is getting the cold shoulder from the government. Recent bans in India and Nigeria may have fuelled mistrust in their respective governments but have not deterred the rest of the world from continuing to trade.
In the U.S., Canada, and most of the West, the situation is very different. For instance, the top U.S. securities regulator now teaches a course on cryptocurrencies at MIT. So, we can see direct governmental support emerging for the crypto industry.
It’s essential to view the regulation of cryptocurrencies not as a death knell but as a necessary step in the industry’s development. Throughout history (the prohibition era in America), we have seen that attempting to ban something tends to increase black market activity for it and piques public interest even more. We’ve also observed that a complete lack of regulation can be equally problematic.
There are other myths to bust in the crypto space as the rumour mill continues to turn, but we hope we have debunked the most common misconceptions about digital currencies for you. Our aim: To bring to light that digital currencies don’t serve mainly for illegal operation; digital assets do indeed hold intrinsic value; regulation could be positive for Bitcoin adoption; blockchain technology is secure; and each cryptocurrency has its own blockchain.