Cryptocurrencies are the exciting future for the financial market. It’s a new industry, hence attracting investors and traders from all walks of life across the globe.
This article serves as a beginner’s guide to understanding cryptocurrency and its utility.
There are many myths about these digital assets due to the fast pace of evolution and their diversified nature. A sharp rise in some cryptocurrency prices has also attracted scammers to the industry.
Hence, this article aims to provide valuable insights about cryptocurrencies and demystify the myths surrounding them.
What is Cryptocurrency?
Cryptocurrency or crypto is a decentralized digital asset.
- It is a virtual currency.
- Its underlying technology is supported by blockchain, proofed with a high-level encryption model.
- Secured via cryptography.
- It differs from fiat currency as no central banks are governing it
- Transactions are on a peer-to-peer basis.
- Stored in digital wallets.
Bitcoin was the first cryptocurrency; today, there are many more. Blockchain technology has found broader use in the form of multiple projects built using it.
Let’s look at some of them-
Examples of Cryptocurrency
It is the most famous cryptocurrency. It is now even accepted by a few governments as a legal tender, for instance, in El Salvador.
We can buy it in the whole or infraction. The most significant advantage is that the transactions on the bitcoin network are highly secured. The identity of users is undisclosed. Bitcoin mining is done using a Proof-of-Work mechanism.
It is the second most popular cryptocurrency after the Bitcoin blockchain. It is also the second-largest in terms of market capitalization.
Ethereum blockchain came into existence in 2015, and it has its native coin called ETH. It was the first to introduce the concept of smart contracts to the ecosystem.
It is a decentralized, open-source platform, and it is the most popular one on which developers build their projects.
Litecoin was founded in 2011.
It is a Bitcoin fork, i.e., it is created from a source copied from Bitcoin. In other words, it is mainly similar to Bitcoin but cheaper and faster.
Transactions on Litecoin are on a peer-to-peer basis. It uses a mathematical algorithm to validate transactions and does not require the government to validate transactions.
This payment protocol is a real-time gross settlement system that provides a smooth experience while performing international transactions.
The advantage of this distributed ledger system is that it can keep a check on all kinds of transactions. It was founded in 2012, and the company behind Ripple has worked with many banks and financial institutions.
Cryptocurrencies: Myths and Facts
Now that we understand the basics let’s decode some of the myths and facts around cryptocurrencies.
Digital currencies are only used for illegal purposes
Terrorist funding and money laundering is of utmost concern for governments worldwide.
The reality is that money in any form and time, whether past, present, or future, is prone to attract criminal and malicious intentions. For this reason, it is natural to think that cryptocurrencies are used for illicit activities.
As per reports, in 2020, the world saw a drop in cryptocurrencies-related illicit activities. It fell to around 0.34 percent out of the total number of crypto transactions.
Different countries are taking different routes to curb such activities. Some have taken the extreme step of banning cryptocurrencies; however, such countries are losing out on the crypto wave.
The government agency closely looking at these crimes in the US is the National Cryptocurrency Enforcement Team (NCET).
Digital Currencies Have No Value
The first Bitcoin transaction was to buy a Pizza! Of course, you can buy a lot more with one Bitcoin. Its market value has gone up multifold. It’s a myth that it does not have value.
If you want to know more, go back to the history. Over centuries, money has changed forms, starting from seashells to metals to fiat currency to now Bitcoin.
It justifies the criteria to be recognized as money. It’s a store of value, and it is scarce, can be split into units, and can be used across spaces.
The actual edge of Bitcoin is that it removes the need for intermediaries, hence maintaining its real value and has US dollar utility. On the other hand, Fiat currency is backed by governments that have the power to deflate a currency’s value.
Even though the Ethereum blockchain is right now the building block for non-fungible tokens, DeFi, and many more projects and that is where it derives its value from.
Many corporate organizations, small enterprises, individuals, and even governments have started accepting Bitcoin.
Cryptocurrencies are Not Secure
Cryptocurrencies are very secure, as tampering with data is not possible.
They use blockchain technology to encrypt the distributed ledger system, and therefore it is even more difficult to hack or break the chain.
Verifiers validate all the information before it is carried to the new block. Moreover, the encryption model makes it difficult to ‘steal’ any data stored in a block.
The only possible potential leakage area is at the storage point, i.e., the wallets. These wallets have multiple safe methods which are utilized to secure currency transactions.
For instance, cold storage, i.e., keeping your crypto asset keys outside of exchanges. In this case, you would send only the amount you want to use for a transaction to the hot wallets via secured connections.
Cryptocurrencies Are Harmful to the Environment
Environmental impact is one of the biggest criticism Bitcoin has, as it requires a large amount of energy to validate the transactions. Bitcoin mining employs a Proof-of-Work consensus mechanism which in turn requires energy.
The energy usage depends on the power plant the energy is drawn from. If it is a fossil fuel-based power plant, it is a concern. If it is based on sustainable or renewable energy, it is no concern.
Multiple other currencies are working on the Proof-of-Stake concept, which does not require energy consumption. Ethereum, which is one of the top cryptocurrencies, is moving from PoW to PoS mechanism.
Cryptocurrencies Are a Scam
Cryptocurrencies are certainly not a scam as a concept. There are serious currencies and project-driven crypto assets in play.
However, as cryptos have gained popularity, scammers have found their way into the industry like in any other system you would find such scammers.
There have been many initial coin offerings with no actual project underlying them. Investors have been rug-pulled in the past few years by scammers in various fraudulent schemes.
But now, with a couple of such scams, there is increased awareness. Investors are more educated to conduct due diligence before making financial decisions and investing in any project.
Cryptocurrencies Are Real Money
Cryptocurrencies tick all the points of being real money but are still not considered a legal tender by many governments.
Few world-recognized financial authorities and agencies as listed below consider it as ‘money’:
- International Monetary Fund (IMF)
- Internal Revenue Service (IRS)
- Financial Industry Regulatory Authority (FINRA)
- Federal Accounting Standards Board
Accountants, as of now, are advised to consider cryptocurrency as an intangible asset. Retailers, individuals, and organizations accept it as a currency or a medium of exchange for buying/selling products.
Cryptocurrencies Will Substitute Fiat Money
To date, it is tough to say whether cryptocurrency can replace fiat currency.
We still have to adopt the concept of unrestricted virtual currency at a universal level. Further, this shift has to be massive and triggered altogether.
It is unclear how its inflationary trends would be controlled at this stage. Moreover, the governments will not let go of the control over currency so quickly.
Governments will lose out on the taxes or their source of revenues if they accept cryptos as legal tender. Even the social schemes that run on government money will dry up.
Cryptocurrencies Are a Passing Fancy
Cryptocurrency is the future, and the future is full of uncertainties and opportunities. It takes time to shape up and come in proper form.
The same course is with cryptocurrencies. However, things are moving faster with Defi applications and blockchain in many other industries.
The movement has started wherein the governments are trying to introduce their virtual currencies. On the industry side, big techs are trying day and night to infuse the use of real and digital world assets. NFTs have found increased usage by many organizations.
What can Cryptocurrencies be Used for?
Cryptocurrencies are slowly and steadily being used to replace the physical mode of cash transactions or bank transfers. Even ATM withdrawals are possible for cryptocurrencies. You can buy things as petty as toothpicks to as big as cars.
Looking from an industry perspective:-
Technology and e-commerce sites
Nowadays, e-commerce and information technology companies breathe on cryptocurrency transactions. Major players include
Several significant corporations contemplate accepting Bitcoin or other cryptocurrencies in exchange for their products or services. Looking at the numbers, thousands of organizations in the United States are using bitcoin and other cryptocurrencies.
We can easily say virtual currency has spread its arms to luxury companies such as
- Patek Philippe
- Frank Muller
As per estimates, the luxury market is expected to reach $ 1.5 Trillion by 2025. The first piece of physical art, “Love is in the Air,” was sold for US$12.9 Million using crypto.
That makes it more important for luxury brands to accommodate cryptos into their payments system.
Several insurance companies have started using cryptocurrencies as a mode of payment for buying premiums. Low transaction fees are involved in crypto payments, which benefits the users and the insurance companies.
Moreover, it gives them an edge over other companies who are not using Bitcoins.
Some big players who have started accepting cryptos include
- AXA Switzerland
- Premier Shield Insurance
- Atupri Health, Metromile
- Universal Fire & Casualty Insurance Co, etc.
Why is it Good to Invest in Cryptocurrency?
The main attraction point in investing in any cryptocurrency is the potential returns it can offer. Look at how the value of Bitcoin and Ethereum has grown over the years. Likewise, many more such cryptos provide potentially high returns. For example, one can invest in existing crypto, an initial coin offering, NFTs, or a DeFi project.
But before investing in any underlying project, the investor must assess the project’s potential. Even try to cross-check any scam attached to it.
Cryptocurrency is Very Similar to a Traditional Currency
In today’s world, financial transactions are carried out using both currencies. However, we can not say that they are similar.
The government backs the fiat currency. In contrast, cryptocurrency gets its value from the blockchain utility.
It is essential to understand that fiat money is equivalent to government debt at a macro level. When the government falls short of money, it prints new currency and issues it to the public.
Fiat currency has no intrinsic value. Cryptocurrencies are not based on debt; they derive their value from being an effective medium of exchange.
It is Nearly Impossible to Forge Cryptocurrency
The very reason cryptocurrency came to the world was security and transparency.
Cryptocurrencies are formed with blockchain technology which entails data stored in blocks that each network member verifies. Everything is available on the digital platform and open to all for viewing. Hence, making it practically impossible to forge the transaction history.
The currency’s value will fall if some verifier does not confirm or reject a given transaction appropriately, leaving little margin for the scammer to do scams.
It’s impossible to forge cryptocurrency; however, some scammers come up with too good to be true projects with tall claims. Naïve investors fall into the trap and lose their money.
Transactions in cryptocurrency are (mostly) private
There are two kinds of cryptocurrencies- public and private.
Public cryptos that run on public ledgers are the ones in which the history of transactions can be traced. But the identity of the people doing the transactions remains anonymous.
Private blockchains are the ones in which it is not possible to trace either the transactions or the person’s identity. In both cases, users get the privacy of at least all the transactions.
Examples of public cryptocurrencies include Bitcoin and Ethereum. Some popular private cryptocurrencies include
- Horizon, etc.
Cryptocurrency Security Increases with Time and Value
The industry and investment community is still understanding cryptocurrency and its underlying technology- blockchain.
Hacking is complicated and technical and requires ample time as well as money. A smaller blockchain network is highly prone to be hacked. More giant and huge distributed ledgers like Bitcoin or Ethereum are almost impossible to hack.
The best example of this is the Bit fury case which happened with Bitcoin.
Safety Tips When Investing in Cryptocurrency
Everyone today wants to invest in cryptocurrencies due to the strong returns given by several of them.
However, it is always good to have appropriate information while planning your investments to make a sound decision.
Here are some tips for investing in cryptocurrencies safely.
Research is the core of every new investment. It’s even more critical, especially when buying new crypto units from several cryptocurrency exchanges available today.
As the technology is new, investment advice from a financial advisor or an expert is the best option. It is always good to read the reviews before starting any investments.
Understand How to Keep Your Digital Currency Safe
The safety of cryptocurrency depends on how the transaction is stored. You can choose to keep your crypto assets on exchanges or in wallets.
There are multiple kinds of digital wallets that you can use to secure your assets. The main question that one needs to address is which form of wallet will be most beneficial for cryptocurrency work.
Diversify Your Investment Portfolio
Never putting all the eggs in one basket is a famous saying, and the same goes for the cryptocurrency market.
There are multiple blockchains such as Bitcoin, Ethereum, Litecoin, Solana, Cardano, etc. Hence, one must plan the investment strategy accordingly while investing your hard-earned currency.
Prepare for Volatility
The cryptocurrency industry is still in a nascent stage and highly volatile. So many new investors are investing in it without really understanding the fundamentals. The regulations around the same are also evolving.
It is prudent to conduct research on any crypto you’re investing in and be conservative at the start.
The article is a beginner’s guide to understanding cryptocurrencies and provides valuable insights into common myths. We are also trying to tell you how valuable cryptocurrencies are. How are they different from the fiat currency.
The purpose of this article is also to educate beginners and, at the same time, clear some common misconceptions about the currency.
This article sheds light on some myths and establishes facts which are as follows-
· Cryptocurrencies are not just used for illegal activities; it is a legitimate market
· Digital currencies do have value
· They’re secure
· Not all cryptocurrencies are harmful to the environment
· All cryptos are not a scam
· Crypto satisfies the criteria of ‘money’ by leading financial bodies
· Difficult to say if cryptos will replace fiat money
· Crypto is the future, not a fad