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Debunking the Top 5 Myths About Cryptocurrencies

Why it matters to you:
The cryptocurrency market is shrouded in myths and misconceptions for most people. This often hinders a proper understanding of the new market and prevents gaining the huge benefits of early investment in new cryptocurrency assets and blockchain technology.
Myth 1: "Cryptocurrency is not backed by anything."Myth 2: "Cryptocurrency is a Ponzi scheme."Myth 3: "Cryptocurrency is only used by criminals."Myth 4: "The cryptocurrency market is a bubble."Myth 5: "It's too late to invest in cryptocurrency."

The revolutionary nature of inventions often leads to many questions, misunderstandings, and even misconceptions for the average user. The Internet, mobile communications, many medical technologies—just about every major development has been shrouded in myths for years. Cryptocurrency is no exception: you still hear "only criminals use it!" or "bitcoin is a Ponzi scheme!" But these statements are not true. 

Myth 1: "Cryptocurrency is not backed by anything."

One of the main arguments proposed by cryptocurrency critics centers on its lack of intrinsic value. They claim that cryptocurrency is supposedly not backed by anything, and people buy it as a form of speculation—only to sell it later at a higher price.

However, the facts indicate the contrary:

Fact #1: Miners spend money to mine new coins (e.g., in the bitcoin network). It varies according to different conditions, primarily the local costs of electricity, rent, and maintenance. The mining costs can be calculated as an average, including a  break-even point. This figure shows the actual cost of cryptocurrency production, excluding market factors (supply and demand), as well as the minimum production cost of a cryptocurrency.

Fact #2: Modern fiat currencies have no intrinsic value. Before 1944 the gold standard monetary system prevailed when currencies were pegged to a fixed quantity of gold and could be exchanged for gold. Nowadays, the value of currencies depends on states' policies, global financial stability, and supply-and-demand market factors.

Fact #3: Fiat currencies are inflationary by nature because governments can print money that isn’t backed by anything—at their own discretion. This voluntary money printing dilutes a currency’s purchasing power. This is precisely what happened during the 2020 Pandemic when the U.S. Federal Reserve printed money to prop up the bond market to prevent an economic downturn, causing record inflation in the U.S. in 2021.

On the other hand, many crypto projects are deflationary in nature. For example, Bitcoin economics has several deflationary mechanisms. The maximum supply of the first cryptocurrency is limited to 21 million coins. Moreover, the number of new Bitcoins that miners obtain drops by 50% every four years, which results in a diminishing supply. This process is called halving. The last halving took place in May 2020. 

Cryptocurrencies have even more intrinsic value than fiat currencies

Myth 2: "Cryptocurrency is a Ponzi scheme."

Another well-known myth is that cryptocurrencies are Ponzi schemes. According to the SEC definition, a Ponzi scheme is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors. 

However, cryptocurrency is not a Ponzi scheme, as we can see when comparing key features of both systems:

  • Centralized management. Ponzi schemes are founded and ruled by a company that can collapse, leaving clients with literally nothing. Cryptocurrencies are the absolute opposite and are managed in a decentralized way.

  • The promise of enormous returns. Ponzi schemes promise high rates of return to attract new users. Cryptocurrency projects promise no returns; the growth of token prices occurs only on exchanges.

  • The product issued by a Ponzi scheme is unlimited. Conversely, many cryptocurrencies are limited in their supply.

  • Ponzi products are usually useless and have no value. In comparison, cryptocurrency projects solve quite specific economic problems and have intrinsic value.

  • Ponzi schemes collapse when the investor base stops replenishing. On the other hand, cryptocurrency projects can exist without an influx of new users or even without a core team, as we can see with Dogecoin.

Myth 3: "Cryptocurrency is only used by criminals."

Since critics are constantly trying to create a negative narrative around cryptocurrencies, many people think it is used by criminals or those trying to hide their financial activity. There are even some officials, bankers, and representatives of big corporations who share this view. 

In the past, when the cryptosphere was just beginning to develop, the percentage of transactions involved in criminal activity was indeed high. Every year, however, the field is becoming more regulated. Now it is often easier for criminals to use cash than bitcoins, as statistics confirm. According to Messari and the U.N. Office on Drugs and Crime report, by 2019, for every dollar in bitcoin spent on the darknet, $800 is laundered through fiat money.

For every dollar in Bitcoin spent on the darknet, $800 is laundered through fiat money

Bitcoin has long ceased to be a means of payment for a narrow circle of people. Now, the capitalization of the crypto market is about $2.84 trillion (as per 11th of November 2021). And the first cryptocurrency is bought by public companies such as MicroStrategy, Tesla, Square, etc. 

The assertion that crypto is only useful for criminals is debunked by the fact that the largest U.S. banks (Goldman Sachs, JPMorgan, and others) allow their clients to work with cryptocurrency. This indicates a high demand for digital money, not as a speculative product but also as a store of value.

Myth 4: "The cryptocurrency market is a bubble."

Another extremely well-known myth around cryptocurrencies is that it is a financial bubble, and the market is about to burst. Crypto is often called a "bubble" and is even compared to the tulip mania—the process of mass speculation on flowers in the Netherlands. However, such a comparison is irrelevant as the cryptocurrency industry has existed for quite a long time. In particular, the BTC network has been in operation since January 2009, that is, for more than twelve years. Accordingly, the asset has lasted this entire period and regularly shows new all-time high prices and user records.

Another argument is the so-called "dot-com bubble" of the early 2000s. The Internet as technology went through a huge bubble back then, and many investors' expectations simply did not match reality. Internet companies' stock prices plummeted, but many of the world's leading companies began to rise just after the bubble burst. As a result, many analysts believe that technology and financial instruments can go through "local bubbles" in their development, which happened with cryptocurrency in 2013 and 2017.

Myth 5: "It's too late to invest in cryptocurrency."

Bitcoin is already 12 years old—Dogecoin is 8, Ethereum is 7. But does all that mean that it is too late to invest in cryptocurrencies? Or have major growth cycles already passed in 2013, 2017, and 2020? 

No one can say for sure what the price of cryptocurrencies will be even tomorrow, but investing is not trading; here, you can wait. An investment horizon is long-term. This was the strategy followed by early investors in Paypal, Alphabet, Amazon, and Facebook.

However, the cryptocurrency industry is still in its infancy, and growth opportunities are still ahead. It is sufficient to compare the cryptocurrency market's capitalization with other financial sectors.  The total capitalization of the cryptocurrency market is $2.84 trillion—a notably small figure compared to other markets. 

Comparing the cryptocurrency market capitalization against other financial markets’ capitalization.

The cryptocurrency market has reached its current capitalization over the past ten years, mainly due to independent technological development and the interest of retail investors. However, it may have much more growth ahead due to four important factors:

  • Government regulation

  • Big tech crypto adoption

  • Institutional investment

  • Retail investor capital

As a result, the current figures in the region of $3 trillion can be easily surpassed, and by 2025, market capitalization due to the influx of funds of institutional and retail investors may exceed dozens of trillions of dollars. 

The cryptocurrency market is still at an early stage of development and adoption. Many technological solutions are yet to come, and large companies are just starting to enter the market. But for most people, this market is still shrouded with unfounded myths and misconceptions that prevent them from taking advantage of the opportunity to invest in an entirely new technology and market.

Published: Nov 23, 2021
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