The popularity of cryptocurrency has grown by leaps and bounds since Bitcoin was first launched in 2009. The crypto ecosystem, however, can be slightly complicated for a regular person to understand. Add to that the various controversies surrounding cryptocurrency and you get various rumors and myths circulating about digital currencies.
Here, we examine some such widespread Bitcoin myths and examine whether they have any merit or not. This will help you in deciding whether it is something you want to invest in or not.
Top 7 Crypto Myths
#1 Cryptocurrency Is Only for Illegal Activities
A persisting myth about cryptocurrency is that it is exclusively used for illicit activities. While it is true that cryptocurrency has been used for money laundering and other less-than-legal purposes, the risk is largely overblown.
According to Chainalysis’ Crypto Crime Report 2022, the growth of legitimate crypto usage has far outweighed the growth of crypto use for criminal activities. Transactions with illicit addresses were only 0.15% of total crypto transaction volume in 2021 even though the raw volume reached its highest level ever.
#2 Cryptocurrency Does Not Have Any Value
Many people believe that cryptocurrency does not have any real-world value. But the truth is that value is subjective. What might be valuable to one person might be garbage for another. How an asset is perceived by society is important for establishing its value. Bitcoin is a great example of this phenomenon.
Further, Ethereum’s native Ether(ETH) token has demonstrated its utility for companies developing products based on the Ethereum blockchain and smart contracts. It, therefore, has value for investors and enterprises utilizing this technology.
#3 Cryptocurrencies are Bad for the Environment
Verification of transactions on a blockchain network requires huge energy and computational power. Especially because some cryptocurrencies like Bitcoin employ heavily energy-intensive consensus mechanisms like Proof-of-Work(PoW). The environmental impact of digital currencies is, therefore, a valid concern.
However, these days, many new cryptocurrency projects have become conscious of their environmental footprint and have taken steps to address this. Ethereum, for example, has shifted to the less energy-intensive Proof-of-Stake(PoS) protocol with the Ethereum 2.0 upgrade. Many other crypto projects are also taking steps to limit their carbon footprint.
Therefore, while the environmental impact of crypto mining is a concern, it would be wrong to say that the industry is not taking steps to address this problem.
#4 Cryptocurrency is a Scam
While it is true that the unregulated nature of the crypto market makes it more prone to scams and frauds, cryptocurrency in itself is not necessarily a scam. In fact, people have been using it for cross-border transfers and many merchants have also started accepting crypto payments. Bitcoin ATMs are also a thing in several places.
Scamsters might try to entice you into investing in a fraudulent project but knowledge and awareness can help you avoid becoming a victim to such crypto-related scams.
#5 Cryptocurrency Transactions are Completely Anonymous
The blockchain technology that has been used to develop cryptocurrencies is a public ledger that records all transactions. While crypto transactions do provide better privacy, it is a myth that they are absolutely anonymous. In extreme cases, users and their information can still be identified.
Hence, while cryptocurrency offers enhanced user anonymity, it does not guarantee a hundred percent anonymity.
#6 Cryptocurrency and Bitcoin are the Same Thing
Bitcoin is the first and certainly the most popular cryptocurrency. However, they are definitely not synonymous. Bitcoin is just one cryptocurrency. CoinMarketCap lists over 9,000 different cryptocurrencies. Ether(ETH), Litecoin(LTC), and Tether(USDT) are some examples of cryptocurrencies that are not Bitcoin.
#7 All Stablecoins are Linked to USD
Stablecoins combine the positive aspects of cryptocurrency and fiat currency. They are often linked to traditional currencies such as the USD, Euro, or Yen to maintain price stability. Therefore, people believe that all stablecoins are tethered to assets like the USD. The popularity of stablecoins like USDC and USDT has further cemented this myth.
In reality, not all stablecoins are backed by a real-world asset. Instead of being linked to fiat currencies, some of them rely on an algorithm mechanism to maintain price stability. These algorithms increase or decrease the supply of the stablecoin as per market demand to counter price volatility.
Why is Crypto So Risky?
Crypto is risky because it is a volatile and largely unregulated asset. They are not backed by any government or central bank and, hence, their value is determined purely by market forces. Therefore, the value of a cryptocurrency goes up and down dramatically.
Further, if its value goes down, there is no guarantee that it will rise again unlike a fiat currency where the central bank or government may intervene to maintain the currency’s value.
Cryptocurrency transactions are also permanent. They cannot be reversed unless the receiver sends back the money. Therefore, there is no way to recover your assets if they are lost in a cyber attack or fraudulent scheme.
Crypto traders do not have the same kind of protections that holders of other financial instruments possess. Authorities cannot do much to help recover the funds which makes cryptocurrency trading a risky venture.
What to Avoid in Crypto?
While we just dispelled certain myths regarding cryptocurrency, their volatility and the risk involved in crypto trading is certainly not a myth. There are some common mistakes that can easily turn your crypto trading venture into a colossal disaster. Some such things to avoid in crypto are:
Not Doing Your Research
You should never avoid doing your own research when it comes to cryptocurrency. The crypto world is largely unregulated and is, hence, rife with scams and frauds. Therefore, you should always verify the credibility of a crypto project instead of jumping on the hype train. Being cautious will cost you nothing but a bad investment based on misinformation can bring you huge losses. Proper research is, hence, something that is non-negotiable when it comes to cryptocurrency.
Giving In to FOMO
Social media is a powerful medium for marketing all kinds of products including cryptocurrency. Constant shilling of a particular cryptocurrency by celebrities and social media influencers can certainly induce a feeling of FOMO among investors. However, an investment decision based on hype and FOMO can cost you dearly if the project turns out to be a scam.
Emotional investing is always a bad idea and you should conduct due diligence before putting your money into any cryptocurrency.
Concentrating on One Particular Token
The age-old wisdom of “do not put all your eggs in one basket” also applies to cryptocurrency. Diversification is just as important for your crypto portfolio as your other investments. The crypto market is a highly volatile one and concentrating your investment on one particular token makes you more vulnerable to market uncertainty.
Hence, you should take care to diversify your portfolio and keep a mix of stablecoins and more volatile tokens to maintain a balance.
Not Securing Your Crypto Wallet
Your crypto wallet is where you store all your crypto assets. Therefore, it is important to choose a reputable wallet and ensure its security to protect your cryptocurrency. Safeguarding your private keys and recovery phrases are basic security measures you should take.
Use cold wallets for long-term holdings and hot wallets for daily transactions. Also, you should double-check the wallet address while making a transfer as crypto transactions are irreversible.
Ignoring Fees and Taxes
Do not ignore the fees and transaction costs incurred while buying and selling cryptocurrency on a crypto exchange. They may not seem like much but the expenses can quickly pile up and affect your profit/loss from crypto investments.
Further, you should be aware of the capital gains and other taxes imposed by various countries on crypto transactions. India, for example, imposes a 30% tax on gains from virtual digital assets and an additional 1% TDS on payments above the specified threshold limit.
As cryptocurrency is still an emerging asset form, there are various myths circulating about it. This article is an attempt to debunk such myths and provide proper information about the purpose and functioning of cryptocurrency. Clearing up the confusion regarding them is important to help people make informed investment decisions.
That said, cryptocurrency remains a risky asset type that often witnesses dramatic price fluctuations. It is a relatively new technology that is largely unregulated which makes it crucial to undertake any investment only after doing your due diligence.