Top cryptocurrency myths: Busting common misconceptions and understanding the facts

Cryptocurrencies have surged in popularity since their inception in 2009. However, due to their complex and somewhat obscure nature, various myths and rumors have emerged surrounding these digital assets.

Here are some of the most common cryptocurrency myths, along with a factual analysis to help you discern their validity.

Best cryptocurrency myths

1. Digital currencies are solely for illegal activities

A long-standing misconception about digital currencies is that they are primarily utilized for illicit purposes. While it's true that digital currencies have been utilized by individuals and criminal organizations for illegal activities, the same can be said for traditional forms of money throughout history.

According to Chainalysis, a company that aids in investigating cryptocurrency-related crimes by analyzing blockchain data, the proportion of cryptocurrency transactions associated with illicit activities decreased in 2021 (per their latest report) to 0.15% of all cryptocurrency transactions. Among these, 82% were attributed to cryptocurrency scams.

Governments and the global community are taking action against the criminal use of cryptocurrencies. Many countries have implemented measures to combat money laundering and terrorism financing through cryptocurrencies. Agencies and task forces have been set up specifically to address these issues.

In the United States, for example, the National Cryptocurrency Enforcement Team (NCET) investigates and prosecutes criminal activities involving cryptocurrencies.

2. Digital currencies have no intrinsic value

The concept of value is subjective, with individuals, communities, or societies attributing value to different objects. When Bitcoin was first introduced in 2009, it was valued at thousandths of a cent. Over time, its value increased significantly, reaching $69,000 per Bitcoin in 2021. This demonstrates that societal perception plays a crucial role in determining the value of an asset.

Ethereum, the blockchain platform behind the cryptocurrency ether (ETH), serves as the foundation for non-fungible tokens (NFTs), decentralized finance (DeFi) applications, and other technological advancements in digital asset ownership. While ETH may not have the same dollar value as Bitcoin, its utility and potential make it valuable to companies developing financial products and services on the Ethereum blockchain using smart contracts.

Investors and businesses are increasingly holding cryptocurrencies for various purposes, including finance, investment, and venture capital. For example, Galaxy Digital Holdings is a financial services and investment company with around $2.0 billion in crypto assets under management as of July 2022.

3. Cryptocurrencies lack security

The fundamental technology supporting cryptocurrencies is blockchain, a distributed database secured with encryption that is highly resistant to tampering. Each transaction is recorded in blocks, with previous transaction data encrypted within new blocks. This chain of blocks continues to grow, and automated verifiers must agree on the validity of the recorded information. The combination of encryption, linked blocks, and consensus mechanisms makes altering blockchain information to "steal" cryptocurrency nearly impossible.

However, the vulnerability lies in how cryptocurrency is stored and accessed, such as through cryptocurrency wallets or centralized exchanges. While it is generally safe to transfer cryptocurrency between users, the platforms and software used to store and access it can be vulnerable to hacking or manipulation.

There are highly secure practices you can adopt to protect your cryptocurrency. One approach is to store your crypto asset keys offline in cold storage, keeping them off exchanges. When you need to use your cryptocurrency, transfer the desired amount to your hot wallet using a secure, wired connection on a non-mobile device, such as a personal computer.

4. Environmental impact of digital currencies

There are valid concerns regarding the environmental impact of digital currencies. Some cryptocurrencies use a consensus mechanism that requires substantial computational power and energy to validate transactions. Bitcoin, for example, has seen a surge in popularity and value, leading to the emergence of large mining operations that consume significant amounts of energy.

These mining farms require considerable energy to power the mining rigs, resulting in a total network energy consumption comparable to that of some small countries. However, the environmental impact largely depends on the energy sources used by the mining operations and their impact on the power grid.

If mining operations primarily rely on fossil-fuel-powered grids, the environmental impact includes excess carbon emissions for a digital asset with uncertain future benefits. Conversely, if mining operations are predominantly powered by sustainable energy sources, the environmental impact is reduced.

Bitcoin mining operators have even gone as far as acquiring previously shuttered fossil fuel plants to power their operations. This development raises new concerns for environmentalists and countries striving to reduce their carbon footprints in the coming decades.

5. Cryptocurrency scams

While cryptocurrencies have gained acceptance as a legitimate means of exchange at numerous retailers and among individuals, there are ongoing efforts by governments to regulate them. Most cryptocurrencies are not inherently malicious and do not contain programming or code intended to defraud users.

Nevertheless, scams targeting cryptocurrency users do exist. For instance, some initial coin offerings (ICOs), unregulated fundraising activities for new cryptocurrency projects, have turned out to be fraudulent. In other scams, individuals might attempt to trick users into accepting unverified transactions or impersonate government officials demanding cryptocurrency payments for alleged debts.

While it's impossible to completely eliminate the risk of falling victim to a scam, being knowledgeable and aware can significantly reduce the likelihood.

6. Cryptocurrencies are legitimate money

The International Monetary Fund defines money as a store of value, unit of account, or medium of exchange that is widely accepted and can be translated into prices. Cryptocurrency, according to the Financial Industry Regulatory Authority (FINRA), is a digital representation of stored value through cryptography.

The Internal Revenue Service (IRS) considers cryptocurrency as "convertible" currency, meaning it has an equivalent value in traditional currency. Therefore, transactions involving cryptocurrencies are subject to taxation, and any capital gains or losses from holding them must be reported on tax filings.

While the Federal Accounting Standards Board and Generally Accepted Accounting Principles have not provided specific guidance on accounting for cryptocurrencies, accountants have been advised to treat them as intangible assets with an indefinite life and to measure these assets at cost rather than market value.

Bitcoin, Ether (ETH), and other cryptocurrencies are widely accepted by many vendors as payment for goods and services. Additionally, many cryptocurrency exchanges allow you to exchange your cryptocurrencies for legal tender.

7. Cryptocurrencies as replacement for fiat currency

Cryptocurrencies are a relatively recent innovation compared to fiat currencies, which have been in use for centuries. Fiat currency, believed to have been first issued by China around 1,000 CE, is widely utilized by many developed countries.

For cryptocurrencies to replace fiat currency, widespread adoption would be necessary, with people choosing it over the familiar and understandable money they currently use. However, if cryptocurrency establishes itself as a stable store of value and medium of exchange, it could potentially replace fiat currency. If more merchants start pricing their goods and services in cryptocurrency and more people use it for transactions, a shift could occur.

Nevertheless, governments and authorities are unlikely to relinquish fiat currency easily. They rely on the existing system of controls to collect taxes and finance government initiatives and services. Without tax revenue, essential social programs could be in jeopardy, and government funding for various projects could diminish.

Moreover, the decentralized nature of cryptocurrency would eliminate the ability to control inflation through traditional monetary policies. The sophisticated tools employed by central banks to manage inflation, unemployment, and economic growth have been developed over a century. The complete decentralization of money with cryptocurrency would have unpredictable effects on an economy. Since blockchain technology and cryptocurrency lack inherent mechanisms to influence inflation, employment, or economic growth, new monetary policies and tools would need to be devised.

8. Cryptocurrencies are a passing trend

At one point, computers, the internet, and email were considered niche interests appealing only to a small group of tech enthusiasts. Today, they are integral to modern life. It's challenging to predict where cryptocurrencies will stand in the future, but the technology they've introduced and the innovations they've sparked are likely to continue evolving and improving.

Decentralized finance applications are gaining traction, attracting the attention of both financial institutions and consumers. Governments are exploring the implementation of legally recognized cryptocurrencies tied to more stable assets. Some companies are making significant investments in Bitcoin and other cryptocurrencies.

Tech giants are also exploring ways to merge the physical and digital realms, leveraging blockchain technology and non-fungible tokens (NFTs) to create new possibilities. NFTs can represent any asset, real or virtual, with assigned value, hinting at a future where cryptocurrency plays a role in blending the digital and physical worlds.

Why might investing in cryptocurrency not be advisable?

Cryptocurrency is currently undergoing price discovery, a phase in which its value is determined by various factors such as supply and demand, societal acceptance, investor sentiment, economic conditions, and more. Given its status as a relatively new technology, some consider it an unreliable investment for long-term growth and stability. Nonetheless, there are differing opinions, with some viewing it as a favorable investment.

Is cryptocurrency a hoax?

Cryptocurrencies are gaining acceptance among numerous merchants and retailers, attracting investors who view them as part of their investment portfolios, and prompting governments to deliberate on regulatory approaches. These factors affirm the legitimacy of cryptocurrencies, dispelling any notions of them being a hoax.

What are the reasons behind concerns about the safety of cryptocurrency?

The safety of cryptocurrency is subjective and hinges on factors such as knowledge, purpose of use, and security measures. With proper controls, it can be as secure as fiat currency in a bank. However, without caution, it can be as risky as hiding money under a doormat next to a house key.