Cryptocurrencies have experienced significant growth in popularity since they were first introduced in 2009. They are somewhat obscure in nature and difficult to understand; this confusion brings about myths and rumors regarding these digital currencies.
In no particular order, here are some of the most common cryptocurrency myths, accompanied by an examination of facts to help you decide whether there is any truth or falsehood to them.
- Nearly all cryptocurrency transactions are used for legal activities.
- Cryptocurrencies have value to some people and are secure if appropriate security steps are taken.
- By definition, cryptocurrencies are money, but not "real" (as in physical or backed by governments) money.
- Cryptocurrencies may not just be a fad; there are many use cases being explored and developed that suggest otherwise.
#1 Digital Currencies Are Only Used for Illicit Activity
One of the oldest and most pervasive myths about digital currencies is that they are most commonly used for illicit activity. While it's true that digital currencies have been used by individuals with nefarious goals in mind, as well as by criminal organizations, the same could be said of any form of money used throughout history.
According to Chainalysis—a company that assists investigators in cryptocurrency crimes with blockchain data analysis—the number of cryptocurrency transactions related to illicit activities fell in 2020 (the latest report) to 0.34% of all cryptocurrency transactions. Out of this small number of transactions, 54% consisted of cryptocurrency scams.
Most cryptocurrency transactions are conducted with legitimate and legal intentions.
It's important to note that governments and the international community are cracking down on cryptocurrency uses by criminals and organized crime. Many countries have adopted cryptocurrency anti-money laundering and countering the financing of terrorism measures; agencies and teams have been established to combat the use of cryptocurrencies in these illegal activities. For instance, in the U.S., the National Cryptocurrency Enforcement Team (NCET) investigates and prosecutes criminal cryptocurrency uses.
#2 Digital Currencies Don't Have Value
Value is a subjective concept—a person, community, or society may place value on an object that another puts in the recycle bin. For example, the first cryptocurrency, Bitcoin, was valued shortly after its launch in 2009 in thousandths of a cent. Its popularity continued to rise, and in 2021, it reached $69,000 per Bitcoin. Its rise in value demonstrates that how an asset is percieved by a society is essential in establishing whether it has value.
Ethereum, the blockchain ecosystem that powers the cryptocurrency ether (ETH), is the building block for non-fungible tokens, decentralized finance applications, and other technological advancements in ownership of digital assets. ETH may not have the dollar value that Bitcoin does, but its utility and potential give it much more value to a company developing financial products and services that use the Ethereum blockchain and smart contracts.
Investors and enterprises have begun holding cryptocurrencies for uses in finance, investment, venture capital, and many others. For example, Galaxy Digital Holdings is a financial service and investment company with close to $2.9 billion in crypto (digital) assets under management.
Cryptocurrency dollar value appears to fluctuate following consumer and investor sentiments, supply, demand, and economic circumstances—similar to many other assets or currencies.
#3 Cryptocurrencies Aren't Secure
The key technology behind cryptocurrency is the blockchain. A blockchain is a distributed database secured with encryption techniques and technology that is very difficult to break. As transactions are entered into the blocks in the blockchain, previous transaction information is recorded in the new blocks and encrypted.
The chain continues to build on each previous block, and a community of automated verifiers has to agree that the information recorded in the transactions is valid. The encryption, linked blocks, and consensus mechanisms make it nearly impossible to change information in the blockchain to "steal" cryptocurrency.
The weakness lies in how cryptocurrency is accessed and stored, such as in cryptocurrency wallets or centralized exchanges that facilitate transactions. It is entirely possible to send cryptocurrency from one user to another without worry, but the platforms and software used to store and access it can be hacked or tampered with.
Contrary to popular belief, cryptocurrency mining is not the process of creating a token—it is the process of validating transactions and creating new blocks in the blockchain. Cryptocurrency is the reward given for opening a new block.
There are some very safe methods you can use to ensure your cryptocurrency is safe. For instance, you can keep your crypto asset keys off the exchanges and in cold storage. When you want to use it, transfer only the amount you want to use to your hot wallet through a secure, wired connection on a non-mobile device like a personal computer.
#4 Digital Currencies Are Bad for the Environment
There is good reason to be concerned about the impact digital currencies have on the environment. Some cryptocurrencies employ a consensus mechanism that uses computational power and large amounts of energy to verify and validate transactions. One token, Bitcoin, has become more popular and valuable as time has passed; large mining operations emerged to take advantage of the rise in popularity and corner the cryptomining market.
Each of these mining farms requires massive amounts of energy to power the mining rigs, adding up to a total network energy consumption equaling that of some small countries. However, the environmental impact greatly depends upon the source of energy the mining operations are drawing upon and the impact their energy use has on the power grid.
If the mining operations are drawing most of their electricity from fossil-fuel-powered grids, then the impact is excess carbon pollution for an intangible-yet-valuable item whose future and benefits to humanity are uncertain. On the other hand, if mining operations are powered mostly by sustainable energy, the environmental impact is lower.
Not all cryptocurrencies use energy intensive mining for validation. Cryptocurrency and blockchain technology are ever-evolving, with some taking steps to reduce their environmental footprints.
Bitcoin mining operators have also purchased previously shut-down fossil fuel plants to power their operations. This causes new concerns for environmentalists and countries who are struggling to reduce their carbon footprints in the next few decades.
#5 Cryptocurrencies Are a Scam
Cryptocurrencies have become an accepted means of exchange at many retailers and merchants. People are accepting them in personal transactions, and governments are working to find ways to regulate them. Most digital currencies have no programming, code, or malicious artificial intent that works to take money from you.
However, people have created scams to try and trick you out of your cryptocurrency or money. For example, there have been many initial coin offerings—unregulated fundraising for new cryptocurrency ventures—that turned out to be scams. In other cryptocurrency scams, someone might try to get you to accept unverified transactions, or call you pretending to be government officials and ask you to pay your debts in cryptocurrency.
You can find information about cryptocurrency and other scams on the Federal Trade Commission's Consumer Information website.
While it's impossible to eliminate the chance that you will be the victim of a scam, knowledge and awareness can help you reduce the chances of it happening to you.
#6 Cryptocurrencies Are Real 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. The Financial Industry Regulatory Authority (FINRA) defines cryptocurrency as a digital representation of a stored value through cryptography.
The Internal Revenue Service views cryptocurrency as "convertible" currency—one that has an equal value in "real" currency. Transactions in cryptocurrency are taxed, and capital gains or losses from holding them must be reported on your tax filings.
Lacking guidance from the Federal Accounting Standards Board and Generally Accepting Accounting Principles, accountants have been instructed to account for cryptocurrencies as intangible assets with an indefinite life and to measure any crypto assets at cost rather than value.
Many vendors accept Bitcoin, Ether (ETH), and other cryptocurrencies in exchange for products—you can also exchange your crypto for legal tender at many cryptocurrency exchanges.
Whether an asset is legal tender does not influence whether it is considered to be money by financial authorities and regulators.
Cryptocurrency is not physical or recognized as legal tender by most governments; however, it meets the definitions of money published by four recognized and official financial authorities.
#7 Cryptocurrencies Will Replace Fiat Currency
Cryptocurrencies are relatively new, while fiat currencies have been around for centuries. China is generally thought to have issued the first fiat currency around the year 1,000 CE. Many developed countries use this type of currency.
For cryptocurrency to replace fiat currency, people would have to adopt it en masse over the money they are used to and can understand. However, once value and purchasing power is established, it is possible that it could happen. If merchants began posting prices in cryptocurrency and more people began using it to purchase goods and services, it might start a trend.
However, governments and officials will not let go of fiat currency lightly because of the established system of controls in place for collecting taxes and funding government-sponsored programs and services. Without the collection of taxes, social programs that people depend upon will disappear, and other government funding could dry up.
If cryptocurrency became fiat's replacement, it is unclear how its inflationary trends could be accelerated or slowed—it could take decades to find solutions.
Moreover, there would be no way to control inflation through monetary policies due to the decentralized nature of cryptocurrency. The modern tools used by central banks to combat inflation and unemployment while boosting economic growth have taken over 100 years to develop. The complete decentralization of money through cryptocurrency would have unknown effects on a country's economy. Because blockchain technology and cryptocurrency do not have any built-in tools for influencing inflation, employment, or economic growth, new monetary policies and tools would need to be created.
#8 Cryptocurrencies Are a Fad
At one time, computers, the internet, and email were considered interesting only to a small crowd of tech fans—they are now staples of modern personal and work life. It is tough to predict where cryptocurrencies will be in the next few decades; however, the technology they introduced and the products they inspired will likely continue to be developed and refined.
Decentralized finance applications are taking shape, gathering the interest of financial institutions and consumers. Governments are exploring ways to implement legally-recognized cryptocurrencies pegged to an asset that is more stable in price, and some businesses are investing heavily in Bitcoin and altcoins.
Tech giants are researching ways to fuse the real and digital worlds, using blockchain technology as a building block for this fusion with non-fungible tokens created for anything imaginable. Tokens can be created for any asset and value assigned to them; the virtual and real worlds are being directed onto a collision course, and cryptocurrency is likely to be involved.
Why Is Cryptocurrency Not a Good Investment?
Cryptocurrency is still in its price discovery phase, where an asset fluctuates until its value is established by supply and demand, society, investors, the economy, and many other factors. It is also a relatively new technology, so some view it as a non-reliable investment for long-term growth and stability. However, others believe it is a good investment.
Is Cryptocurrency a Hoax?
Cryptocurrency is accepted by many merchants and retailers, investors are buying it as part of an investment strategy, and governments are debating how to deal with them. It is safe to say that cryptocurrencies are real and not a hoax.
Why Is Cryptocurrency Not Safe?
Whether cryptocurrency is safe or not depends on your perspective, how much you know about it, what you want to use it for, and how you control it. It can be as safe as fiat currency in the bank with the proper controls; used without care, it can be as safe as placing money under the doormat to hide it beside the house key.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.